In the face of mortgage rates soaring to their highest levels in over two decades, Better Home & Finance, a mortgage origination firm, took a bold step into the public market via a merger with a special purpose acquisition company (SPAC), Aurora Acquisition Corp. The deal, which completed on Tuesday, saw shares and warrants of the combined entity go live under the tickers “BETR” and “BETRW,” respectively, on Thursday. This move effectively means Better has taken over Aurora’s stock listing, with the latter ceasing to exist.
The primary drive behind this merger, according to Better CEO Vishal Garg, is the pursuit of funding. The company secured $565 million in capital, largely in the form of convertible notes from SoftBank affiliates. Garg expressed his optimism about the growth prospects for Better, especially as interest rates normalize. However, the timing of this public debut amidst rising mortgage rates prompts caution among investors.
Better Home & Finance Goes Public Despite Rising Mortgage Rates
Despite the highest mortgage rates in more than two decades, mortgage origination company, Better Home & Finance, has decided to go public through a special purpose acquisition company (SPAC) merger with Aurora Acquisition Corp. Hence, investors are advised to approach this new stock with caution.
The SPAC Merger
The merger resulted in Better effectively taking over Aurora’s stock listing, with shares and warrants of the combined company starting to trade under the tickers "BETR" and "BETRW". As a consequence, Aurora will cease to exist. The primary motivation behind this merger is to secure additional funding. Better’s CEO Vishal Garg noted that the company secured $565 million in capital, with a significant portion in convertible notes from SoftBank affiliates. This funding will be utilized to further develop Better’s loan origination platform and enhance efficiency.
Better’s Unique Selling Point
Better claims it offers mortgages that are 0.45 percentage points lower than other originators, with a 24-hour turnaround from application to commitment letter. This is made possible by its "supervised learning engine" that matches customers to the most appropriate loan product by analyzing customer data against rules for different types of mortgages.
Valuation and Stock Performance
Based on Aurora’s final closing price of $17.44, Better was valued at an impressive $14 billion. This valuation comes despite the company only generating $383 million in revenue last year and incurring a loss of $889 million. Upon the commencement of trading, the number of shares outstanding jumped from around 9 million to 802 million, leading to significant dilution. Consequently, the stock price plummeted at the opening bell, closing at $1.15, a 93% drop, and a market capitalization of around $922 million.
The Journey So Far
The journey to the merger has been challenging, with the original agreement to merge in May 2021 being amended five times. The current rate environment has also not been favorable to mortgage originators. The rapid rise in rates in 2022 caused a significant drop in mortgage origination volume. Additionally, Better had to manage controversies and undertake significant layoffs. Despite these challenges, the company remains optimistic about its growth prospects, especially when interest rates normalize.
The SPAC Boom and Current Mortgage Market
SPAC mergers have become less common compared to their boom in 2020 and 2021. Meanwhile, mortgage demand has also declined from its peak levels in 2020 and 2021, which has affected the earnings of publicly traded originators. However, some mortgage originators have recently gained momentum despite expectations of a decrease in mortgage value originated this year.
Takeaways
This SPAC merger and subsequent public listing of Better Home & Finance come at a challenging time for mortgage originators. The high mortgage rates and declining demand present significant risks. However, Better’s unique selling point and its significant funding could provide it with a competitive edge. Investors, however, should tread carefully given the volatile state of the mortgage market and the significant dilution of shares following the merger. The performance of Better’s stock will continue to be influenced by these market conditions and its ability to sustain its growth strategy amidst these challenges.
