Update: Blend Labs Inc.

December 6, 2024 | Over the past several months, we have watched with a combination of amazement and incredulity as Blend Labs (BLND) followed the GSEs to the top of our mortgage finance group, at least in percentage terms. BLND is “a leading origination platform for digital banking solutions,” which is a fancy way of saying that they facilitate mortgage lending. 

BLND is a little over $5 vs the 2021 high of $21, but the markets have very short memories. One of the things that concerns us about recent moves in the equity markets is that the price changes in dollars are smaller and smaller relative to the past five years. BLND illustrates this trend. The percentage gains and related volatility are being driven higher by funds and other market participants desperately seeking alpha.

In the first nine months of 2024, BLND lost $42 million vs $148 million in the same period a year earlier. Revenue was essentially flat and much of the improvement came about due to sharp reductions in operating expenses.  BLND took $80 million or about 40% out of operating expenses, including sharp reductions in R&D and marketing. 

Blend Labs | Q3 2024

"We’re observing renewed optimism in the mortgage industry," BLND states in its earnings announcement. "Our pipeline has been strong throughout the year, and bringing on Pentagon Federal Credit Union as a new customer highlights the momentum we’re seeing in our mortgage business because of this enthusiasm."

The paragraph below illustrates the lengths to which BLND has gone to reduce expenses and present its “non-GAAP” financials. 

“Abandoned and terminated facilities costs. In the third quarter of 2024, we abandoned our headquarters in San Francisco, California and early terminated our office lease in Omaha. We exclude costs related to abandoned and terminated leases as these costs related to a one-time strategic business decision, are non-recurring or short-term in nature and are not reflective of our ongoing operations.”

BLND is generating operating leverage via cost reductions, another way of saying that management is slowly winding up the business. The company pivoted to a focus on bank lenders and away from its initial focus on nonbank mortgage lenders in 2022, but the shift in focus only helped on the margins. Mortgage and title, the latter of which was added after BLND acquired Title 365 from Mr. Cooper (COOP) in 2021, account for the lion’s share of the revenue. The acquisition of Title 365 helped to add top line revenue but not profitability to BLND.

The cost-cutting efforts by BLND are mostly about immediate survival, but the more interesting question is where is BLND going to take this business? The cuts in R&D and marketing have largely gutted the company’s technology capabilities, which were originally the firm’s claim to fame. Many of the technology and marketing people that made BLND a sought after partner for lenders have left the firm and have even created new ventures that compete with BLND. 

From a larger perspective, however, the travails of BLND in creating a meaningful platform to facilitate mortgage lending illustrates a bigger issue for banks and nonbanks alike, namely that the GSEs are providing so many services in the primary market for loans that there is little market opportunity left for independent vendors. From underwriting to default servicing, Fannie Mae and Freddie Mac are directly involved to such an extent that conventional lenders have been reduced to the role of brokers.

Because of the difficulties involved with government lending, most of the technology vendors in the mortgage sector are focused on conventionals and bank lending. But the GSEs are the biggest competitors for these technology providers. This is why, as one customer told The IRA for this note, BLND is still trying to figure out where they should focus to generate incremental revenue.

The obvious question: Why is BLND still public?  CEO Nima Ghamsari was forced to sell $1.5 million in stock earlier in the year, according to Bloomberg. He had pledged most of his equity stake to support loans to an undisclosed lender, according to filings this past January. Given the sharp drop in the shares of BLND since the IPO, the more recent runup in the stock may at least give Ghamsari a little breathing room to consider his next move.

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