Sindeo closure a hard lesson on disruption
Mortgage lending has proven to be a tough industry for new companies to make waves in, and the sudden shutdown last week of San Francisco mortgage startup Sindeo helps show why.
Sindeo was one of more than two dozen startups seeking to streamline the cumbersome mortgage application, origination and closing process. Despite having what many described as top-flight technology and executives, it took down its website Tuesday night and replaced it with a brief note saying it had “made the difficult decision to wind down Sindeo.”
It didn’t say why, but a note from CEO Nick Stamos to investors obtained by Housing Wire said an investor who had committed to fund it tacked on a last-minute requirement to close the deal that it couldn’t meet. “My subsequent efforts to secure emergency bridge financing from this investor and others were also not successful,” he wrote.
Stamos said the company laid off 61 of its 70 employees Tuesday, keeping a small team to deal with loans already in process.
According to CB Insights, Sindeo had raised $25.5 million from investors including Renren, the Chinese social networking company.
Sindeo was a mortgage broker, which means it originated loans for others, but did not fund them itself. Its website formerly said it offered access to “40+ lenders & 1,000+ loan programs to best meet your specific needs and goals” and “closings in as few as 15 days.”
Borrowers, it said, could apply for a loan on a smartphone, tablet or desktop computer and get a preapproval letter in just five minutes. Unlike other companies offering only automated service, Sindeo also had human advisers whose pay was based not on commission but on “customer satisfaction.”
Eric Boyenga, whose South Bay real estate firm had a marketing partnership with Sindeo, had more than 20 clients who got mortgages through Sindeo. “The technology behind it was great. They had really top talent,” Boyenga said. But “the whole tech industry is tightening a bit. All you hear about is Google, Amazon, Facebook and Apple. If you look at the startups, investors wanted to see a higher return, faster.” With Sindeo, “they weren’t seeing what they were looking for.”
Getting a mortgage is a time-consuming process that involves shopping for a loan; choosing from various rates and terms; filling out an application; submitting pay stubs, tax returns and financial statements; waiting for approval; and, finally, closing the loan.
It is highly regulated by federal and state governments and requires coordination with appraisers, title companies, county recorders’ offices and investors, who buy most loans.
Mortgage-tech companies are attempting to save people time and money by letting them shop and apply online and either upload their documentation or give the mortgage company permission to pull it directly from employers, financial institutions and the IRS. But it’s still a herculean task.
A true digital mortgage “lets consumers run the loan from application to funding from any device, with the choice of working on their own or having a loan adviser jump in at any time — and enabling the lender to have a fully documented loan that passes all rules and regulations from both lawmakers and investors,” said Julian Hebron, an executive vice president with RPM Mortgage.
On top of hiring engineers and attorneys, “you need a huge investment in customer acquisition. In the end, it proved to be too much for Sindeo, and it will prove too much for the other mortgage disruptors.”
To compete, a company needs lending, technology, regulatory and marketing infrastructure, Hebron said.
The company that has all four is Quicken Loans, the nation’s largest nonbank mortgage lender and the third biggest overall after Wells Fargo and Chase, according to Inside Mortgage Finance.
Quicken makes loans directly to borrowers, traditionally over the phone. In early 2016, it launched Rocket Mortgage, an all-digital loan whose ads are hard to miss. In 2016, Rocket accounted for $7 billion of the company’s $96 billion in loans.
About two-thirds of those getting Rocket loans are buying rather than refinancing and about half are Millennials, said Regis Hadiaris, Rocket Mortgage product lead at Quicken.
He said Rocket customers are closing loans in as few as nine days for refis and 16 days for purchase mortgages. That compares with an industry average of 45 days.
“Because of the complicated nature of the industry, we took a very deliberate path to roll it out,” Hadiaris said. “We had a public (test) in 2013. We kept learning and adding to it.”
The question facing the industry, he said, is, “Will the large established companies with scale become innovative, or will the smaller, new entrants be able to scale?”
To succeed, “you need a lot more than a frontend user interface or mobile app. People’s financial lives are complicated. Mortgage underwriting is complicated. Building simple technology that lets people do this on their own is like putting someone who doesn’t know how to fly in the seat of a 747.”
That may be true, but it won’t stop companies from trying to break into the industry, which originated almost $2 trillion in mortgages last year.
CB Insights identified 25 “mortgage startups transforming the mortgage industry.”
Unlike Sindeo, which was purely a broker, some are mortgage banks that initially fund the loans they make, although they quickly sell most or all of them. They include Lenda and Clara Lending (both in San Francisco), and Better Mortgage (New York).
Lenda and Clara both distance themselves from Sindeo. “As a broker, you can’t control the price. You can’t control the speed” at which loans are closed, said Jason van den Brand, CEO of Lenda. “You can build something snazzy on the front end and give it to whoever you are brokering it to. But they could take two months to get it done. This is a business where time is money. We control the entire process.”
Others are businessto-business companies that provide software to mortgage originators who want to provide a digital experience. They include Blend (San Francisco), Roostify (Burlingame) and Cloudvirga (Irvine).
The industry is “so big and so complicated” that if you try to disrupt it all at once “you will probably die of indigestion,” said Blend CEO Nima Ghamsari. That’s why his company is focusing on one area. Sindeo, he said, “tried to disrupt it all at once.”