Profile: Blend Labs, Inc ("BLND")

July 3, 2021 | Updated | In this Premium Service edition of The Institutional Risk Analyst, we look at impending IPO of Blend Labs, Inc. (BLND), a new entrant into the mortgage space that promises “to bring simplicity and transparency to financial services.” The S-1 filed with the SEC includes a great deal of hopeful fluff about “data-driven journeys from application to close.” The document has all of the right words. But what does BLND actually do to earn money? And is it really worth 10x book value in an IPO?

Simply, BLND provides a service of processing loans, but not taking interest rate and/or market risk. Simply stated, BLND facilitates borrowers completing a loan application. If this reminds you of our recent note on Upstart Holdings (NYSE:UPST) (“Upstart Holdings: Victory for AI? Or Not...”), you are correct. A capital light overlay that is part lead generator and part marketplace, BLND’s software sits atop different banks and service providers in a cloud-based suite of apps. Lot's of frosting, but not much cake.

The company has some heavy hitters from the world of mortgage finance in senior leadership, but the rest of the team has a tech pedigree rather than experience in loan processing operations.

We seem to recall some talk about blockchain coming from company’s founder, but no more. Founder and CEO Nima Ghamsari held forth on the benefits of blockchain for BLND as late as 2018 during an IMN conference, but it is interesting to note that three years later, the term does not appear in the S-1.

Last month, Forbes reported that Ghamsari was given a potential $10.9 billion compensation package, giving you some idea of the ambitious valuation that Goldman Sachs (NYSE:GS) and Allen & Co plan for the IPO.

To say that BLND has made the loan application process a commodity would be a reasonable assessment and they should be able to make money, albeit with a very low margin. Sound familiar? Perhaps we can think of BLND as a sub-servicer a la Cenlar FSB, except in this case a sub-servicer for loan applications instead of payments.

According to Crunchbase, BLND has raised about $700 million in private equity Blend’s IPO filing comes three months after the startup raised $300 million in a Series G round led by Coatue and Tiger Global in January, Barron’s reports. The fintech was valued at $3.3 billion with the last round, a statement said.

Blend announced the acquisition of Title365 from Mr. Cooper (NASDAQ:COOP) on Mar 15, 2021 for $422 million. It is important to note that the acquisition of Title365 has not closed yet, creating a bit of a mess in terms of the company’s financials. And did we mention that COOP is retaining a minority stake in Title365?

For 2019 and 2020, Title365 revenue was $105.3 million and $212.1 million, respectively. The acquisition is subject to regulatory approvals and is expected to close in the second or third quarter of 2021. But Ghamsari seemingly is in a big hurry to go to market and plans to list the company before the Title365 deal is actually done.

“Title365 will be integrated with our software platform, which enables financial services firms to automate title commitments and streamline communication with consumers and settlement teams,” BLND proclaims. “Together we will enable our customers to accelerate the title, settlement, and closing process at scale for mortgages, home equity lines of credit, and home equity loans.”

The table of contents for the financials for BLND and Title365, which are carved out of the disclosure from COOP, are shown below. We doubt most financial professionals, much less retail investors, will be able to comprehend this presentation of BLND's financials.

BLND has been losing money steadily and it is not clear that this model will grow its way to profitability given the low margins for such services. Also, buying a title company at this stage of the game, funded with debt and right before an IPO really begs the question about the whole business model. If the software and ecosystem created by BLND is so valuable and has such leverage, then why are we buying a title insurance underwriter? The financials from BLND’s S-1 are shown below.

The $422 million in consideration to be paid for Title365 includes about $390 million in goodwill, half of which represents the insurers customer relationships. Needless to say, we tend to treat such intangible assets as an expense in drag. Investors should ask a similar question about this "asset."

Another question to consider: Why is COOP selling Title365 if it is such a great business? The folks who run COOP are pretty sharp, thus again we wonder just what makes buying Title365 compelling for investors in BLND as a mortgage/fintech story? Obviously having BLND pay a multiple of book for Title365 was a great deal for COOP.

If buying a loan processor with a captive title company does not get you very excited, then your instincts serve you well. While this can certainly be a steady business given strong industry volumes, it is hardly worth a $3 plus billion valuation much less multiples of that amount.

The IPO will feature a two-tier ownership structure, with Ghamsari retaining explicit control over the company with 40:1 super voting shares. “Mr. Ghamsari will be able to determine or significantly influence matters submitted to our stockholders for approval even if he owns significantly less than 50% of the shares of our outstanding capital stock on an as-converted to Class A common stock basis,” the S-1 states. “Mr. Ghamsari’s concentrated control could discourage others from initiating a potential merger, takeover, or other change of control transaction that other stockholders may view as beneficial.”

Bottom line is that operations professionals in the industry tend to like BLND CEO Ghamsari on a personal basis, but have little good to say about the product offering. As with other new era lending and mortgage servicing platforms we have examined over the past several years, BLND seems to be heavy on promises and techno babble, but relatively light when it comes to delivering operational and financial benefit in an industry where expense management is always Job 1. One former user of BLND told The IRA:

One key complaint we’ve heard from multiple issuers is that the members of the BLND team are impressive technologists, but they do not know mortgage operations. BLND reportedly is comfortable with super easy, plain vanilla processing tasks, but throw a twist into the mix and the technology reportedly stumbles. Anyone familiar with bank and nonbank lending knows that every loan is different, thus AI systems cannot be too brittle or they break.

More significantly, there is the question of the ROI once you interrupt your operations to add the BLND offering to your platform. Like MOST of the new era tech solutions being thrown at lenders today, the market is getting to a point where by the time you pay the fees, endure the down time and eat unexpected integration costs, you are not saving all that much money any more.

As one industry operations veteran told The IRA: “The ROI is not really worth the time and investment to adopt. It is only a matter of time before Ellie Mae or Black Knight Empower just copies what Blend does and builds everything into their LOS.”

We agree with the cautious assessments we’ve heard from a number of market participants. Like Square (NYSE:SQ) and other providers of new solutions into legacy markets where lender are displaced, the market for loan processing and servicing systems is highly concentrated and inhabited by some aggressive and implacable competitors.

Having observed the behavior of industry incumbents such as Ellie Mae and Black Knight (NYSE:BKI), we fully expect BLND to be targeted by the hyper-aggressive sales teams of these two incumbents.

BKI, of note, trades at 4.5x book or several times the multiple of most of its customers with the exception of Rocket Companies (NYSE:RKT) at just shy of 5x today and CoreLogic (NYSE:CLGX) at 7.5x. Of note, CLGX just acquired ClosingCorp, Inc. which "streamlines the quoting and ordering of critical settlement services needed to originate and service a home loan, eliminating friction, cost and risk." Sound familiar?

Our mortgage surveillance group sorted by price/book is below.

Source: Bloomberg

To believe the happy talk from BLND and their advisors regarding the prospective IPO, you need to believe that this software provider is worth 10x book. Is BLND worth more than RKT, or entrenched data monopolies and solution providers such as BKI or even CLGX? No, we’ll hit the bid on that trade right now.

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