Welcome to the Lend Academy Podcast, Episode No. 57. This is your host, Peter Renton, Founder of Lend Academy.

Transcription

1 PODCAST TRANSCRIPTION SESSION 57: ANTHONY HSIEH Welcome to the Lend Academy Podcast, Episode No. 57. This is your host, Peter Renton, Founder of Lend Academy. (music) Peter Renton: So I'm going to be completely honest, today's guest, Anthony Hsieh, the CEO and Founder of loandepot...his company I'd actually never heard of until last year, probably April or May of last year was when I first came across it, and they have a scale which I was astounded by when I found out. They are the second largest non-bank lender in this country, they have really grown tremendously fast in just six years. They launched after Lending Club, after Prosper launched and they have become very large, very quickly. What is most interesting and one of the things we focus on today is their personal loans business. They started off in real estate. Anthony, as you'll find out, has a long history in real estate lending and he has now decided to tackle personal loans. They have a lot of advantages so we get into that, we sort of dive into some of synergies between real estate and personal loans and how his personal loan operation works and his vision for the future. I hope you enjoy the show! Welcome to the podcast, Anthony. Anthony Hsieh: Thank you, Peter, how are you? Peter: I'm really well. So I want to get started by giving the listeners a little bit of background about yourself. It seems like you've had quite an interesting entrepreneurial journey so could you give a little bit of the details about yourself for the listeners? Anthony: Yeah, sure, I've been around a little longer than I care to admit now. I think I passed that mark about five years ago, but quick history is the fact that I really was a generation of the internet developing in financial services. I got into the business right around the time the internet was coming on strong in the early to mid-90's and have been fascinated with the delivery of financial service products utilizing technology ever since then. Peter: Can you give a little bit of detail about some of the companies that you started? Anthony: Sure, my first company was one of the first movers online. The company was called Loansdirect.com, it was acquired by the E*TRADE group back in Loansdirect was the first company that developed a online home loan rate lock system, online loan document review and online approval so that was really the very early version of a digital mortgage back in actually So E*TRADE was interested and they ended up acquiring the company in Peter: Okay, and what was your next company?

2 Anthony: My next company I started a year after the acquisition. I took a year off and in 2002, we created a company by the name of Home Loan Center and this version in 2002, as the internet and technology was developing at that time, we created a model where we had a different variety and types of home loans available through the internet to all 50 states where version one was really prime home loans. The second version at Home Loan Center had first and second purchase and re-finance as well as agency and non-agency going to Alt-A and adjustable rate mortgages. That business we grew in two years to approximately 1,600 employees and we ended up merging with LendingTree in 2004, which at that time was owned by InterActiveCorp, IAC. Peter: Okay, and so did you stay on working there for a little while then? Anthony: I did, I stayed on as the president at LendingTree for almost three years. I left that business in Q3 of Peter: Okay, sounds like you've been around the home loan business for most of your career, it sounds like so. Just tell us about loandepot and why you started it, what's different about loandepot and some of the other companies you've started. Anthony: Sure, so I was in home loans until LendingTree in 2004 and certainly LendingTree was one of the first brands in financial services online and LendingTree even today specializes in personal loans, credit cards and various other financial services products. So as I looked at the continued change in the landscape and technologically changes as well consumer adoption, and, of course, the crisis that happened in 2007 and 2008, I realized that there was a significant opportunity to create a platform that utilizes technology to deliver multiple types of lending products directly to the consumer. With banks sort of backing up in its market share and the focus of delivering lending products directly to the consumer as well as many non-bank lenders not surviving through the crisis, we felt that as consumer demand improves through the cycle, as the recovery continues to happen and the nation continues to heal as far as credit and overall demands on borrowing, we thought that there was a great opportunity so January 2010, we launched loandepot. Peter: Okay, so that was like six years ago, I guess, and you ve built the business up. Can you give us an idea what sort of scale you are at today? Anthony: Certainly, last year we completed our 6th year, we funded in totality a little over $29 billion last year making us the second largest non-bank retail lender in the country. Last year, we also launched our personal loan business that works similar to a marketplace model. We launched that business in May and through the seven months of last year we grew that

3 business nicely from inception. I believe we ended up at $353 million from a standing start. It helped offer, I believe, 25,000 customers. What's interesting is the fact that the customers that we re helping on the personal loan side really is the same demographics of our customers on the home loan side. Eighty percent of our personal loan business are home owners so there is some nice synergies there of cross sale and having some additional choices to the consumer. Today, loandepot has over 5,000 employees, we re coast to coast, we're serving all 50 states offering purchase, re-finance, re-finance cash out, second mortgages and personal loans. Peter: Okay, so you've really been focused on real estate, but you ve moved into personal loans, was this something your customers were asking you to do, did you just see the opportunity, what was behind that move into personal loans? Anthony: There's a variety of reasons that's driving it. Keep in mind, Peter, that a loan is a loan, collateral is a secondary question and that is, as the cycle continues to change towards a higher demand, consumers looking for money to borrow...typically, a consumer will always turn to a home equity loan, home equity line of credit or a first mortgage cash out, but because of the financial crisis of 2007 and 2008, the non-agency home loan market has not yet returned for a variety of reasons. Number one is investor confidence, number two is lack of equity and number three is the new regulations particularly around Dodd-Frank so the difficulty in attaining the cheapest cost of credit for a homeowner by taking out a second mortgage or first mortgage cash out is a lot more difficult or problematic today. Where personal loans...because of different regulations, the liquidity has returned much sooner and we certainly watch that market come back and because of that we decided that as a non-bank you have to create lending products where there is liquidity so we decided to enter that market. Just from a pure consumer demand perspective, it's another way for a consumer to access borrowing in the post-crisis world. Peter: Sure, so then are we talking unsecured personal loans then? Are you doing any kind of home equity type loans or what type of personal loans are you talking about? Anthony: Yeah, the personal loans that we're offering is unsecured, but the company did introduce a home equity product, I believe we were the first national non-bank lender to offer home equity products to all 50 states. We launched that a few months ago anticipating that as home price appreciation continues to happen that a second mortgage will become a better choice for some consumers as they compare first mortgage rate versus second mortgage rate versus personal loan rate.

4 They're all uniquely different; they have different paybacks, they have different terms and certainly different coupons and costs associated with it. So for a homeowner that has equity in their home and may not want to touch their first mortgage because they're able to obtain a great interest rate through re-financing the last couple of years and they don't want to pay that off, a second mortgage is going to become a more realistic solution as HPA or Home Price Appreciation continues to happen around the country. It's a matter of paying 6% to 8% that is most likely tax deductible as opposed to a 12% to 14% coupon on a personal loan. Peter: Right, sure, so then...i'm curious about your actual loan application. Sounds like you've got a lot of experience operating online marketing. I guess a couple of questions that I'm interested in is, one, where do your borrowers come from and on both products I'm interested in and how does the loan application work? So maybe start with the first one about where your borrowers come from. Anthony: Yeah, so this is where things are fascinating and very, very interesting. In the last cycle and I call that 2007 to 2010, any innovation in home loans took a giant step backwards. So the fact that innovation and data and risk continue to be elevated, in the home loan world the process is becoming less and less of a digital process where personal loans and other types of consumer loans are becoming more of a digital delivery. So this is where companies like ourselves have a really unique bird's eye view into evaluating what the customers are looking for and yet customers are not finding in the home loan side because 90% of the market, Peter, on the home loan side which is still $9 trillion outstanding and a run rate of $1.4 to $1.5 trillion annually. Ninety percent of loans this year are going to happen through Fannie and Freddie, FHA and VA, and that value to the consumer of being digital is not yet online. Where personal loans and home equity loans that we are delivering is valuable on a digital basis online so there's a bit of shuffling here and engineering on the overall customer experience on different types of products that they're interested in and the overall delivery mechanism and how we interact with that consumer is quite different in today's world. But that's one of the opportunities as we continue to develop the technology is that both of these worlds will not necessarily collide, but they are going to blend a lot more going forward to the future. Peter: Sure, because I imagine if you're talking about the millennial generation who are really coming into their prime earning years and prime home ownership years then most of them demand or would prefer some kind of online experience versus going and sitting down with a mortgage broker and getting through all of the paperwork and that sort of thing. Are you finding that impacting your business? Anthony: Yes, yes. The liquidity on the home loan side currently is massively controlled by GSEs and government types of lending. The credit assessment and the risk assessment is done by those agencies so a lender really does not have the control over the assessment so

5 therefore, much of this experience has to go offline and not have a instant type of response. But if you compare that to the previous cycle which will give you some indication of the future, is that private home loans that are non-government was 60% of the marketplace where today private mortgages are less than 10% of the marketplace. Peter: Wow! Anthony: As lenders continue to innovate these non-government type of products, the lenders will have control over credit decisioning and ultimately, its own credit decisioning models and with the associated liquidity that matches these loans. So this is where as the industry changes and continues to mature, you're going to see one credit engine that will approve a consumer for a personal loan, for a home equity loan and for a home loan. Peter: Okay, so let s just talk a little bit about that. Can you explain how your underwriting engine works today? Anthony: Certainly, our proprietary underwriting engine underwrites personal loans and home equity loans. On the home loan side, we build bridges and input data into Fannie and Freddie s automated underwriting modules. This is where there is a contrast between control over risk and developing of credit and credit engines versus building a bridge of data and transitioning it or transferring it as a messenger over to Fannie and Freddie. Peter: Hmm, interesting. I guess there's only so much you can do when you've got these government enterprises or semi-government enterprises, I guess controlling the process, as you said, you are limited, I imagine, with your innovation that you can do, right? Anthony: For now, but the market for home loans outside of government control is developing and as that happens the experience from the consumer, particularly the millennials, will match their desires as a consumer. Peter: Right, okay, so who do you see as your main competitors in the space? Let's just talk about your real estate business and your personal loan business. Anthony: Well it s interesting because if you look at sort of our comparables versus really market share, the market is so massive and so fragmented it s certainly hard to say if in any category there is a Coke or a Pepsi type of comparison. In the home loan market we have a 2% market share and number one is Quicken and I believe they have around a 5% or 6% market share. The top two retail non-banks only hold 7% to 8% total market share so it s massively fragmented and this is very, very early on in the cycle. Of course, on the unsecured side, the leader there is Lending Club and I believe they've done a terrific job in creating scale and creating a whole new category, but, again, the market there is also massive and also very, very early.

6 For companies such as us to come into the space within seven months time to scale the business up from zero to $350 million in the first seven months gives you sort of some confirmation that the market is large, lots of opportunity and as a lender that is already creating lead flow from a $130 million annual marketing budget, it allows us more choices to the consumers that we are already talking to. Peter: Right, right, that s fair enough. So one thing on that, as far as marketing, you said $130 million marketing budget, how do you feel like...on the real estate side, you re definitely competing with the banks, wouldn t you say? You didn t mention them, but I imagine your average consumer is still going to think about banks when they re thinking about a real estate loan, right? Anthony: Correct. The number one retail lender is still Wells Fargo. They are the dominant market share player in the real estate lending side, but you ll be surprised that we don t really run up against them as much as you think we should. Our competitors are massively fragmented from local credit unions to small mortgage brokers, to other non-bank lenders. There s really no specific pattern of any lender or even group of lenders that we ve come up against, it s really massively fragmented, Peter. Peter: Right, right, fair enough. So your real estate business seems to be...it s obviously got a lot of things in common with the personal loan business, but I know you have some offline components to your real estate loan business. Is the personal loan business...are you doing this a hundred percent online, do people...i mean, I presume there is no face-to-face interactions but is there...what are the channels and how do you underwrite the personal loan business? Can you just talk us through a little bit about that? Anthony: Yes, certainly, our personal loan business is entirely online so through loandepot.com we run our credit model, our fraud checks and then connect to various different vendors and ultimately, the process stays online and is a pretty easy and fast process. What s also interesting that I like to note is you mentioned the fact that we do have lending stores throughout the country that are established to have relationships with local real estate agents to penetrate the real estate purchase market. We re noticing that personal loans is quite popular or gaining popularity with real estate agents, real estate agents that are taking on listings to sell a home are utilizing the personal loans or recommending to their home owners personal loans to take out for them to fix up their home that allows them to increase the marketing of their listings. So we thought that was really interesting. Peter: Right, that s a whole other channel that you have a huge advantage of over some of your competitors, that s for sure. Before I let you go, I want to talk about the IPO that almost happened last year. You filed to go public and I think it was a short time before the date you decided to pull the IPO. Can you just share what your reasoning was back then?

7 Anthony: Yeah, I think the reasoning has been confirmed now 60 days later. If you look back on the timeline, we were supposed to price on November 12, Peter, so as we went on the road show the general reception and the support of our story and how unique loandepot was positioned was very favorable. We have pricing pressures as evidenced by Square pricing I think three days after we did at 25% under...we were looking at pricing pressure, but we were not interested in entertaining a lower price point than between 16 and 18 that would provide a guidance for the marketplace. We believe loandepot is uniquely positioned because we are a profitable enterprise and one of the few home loan tech-enabled lenders that can continue to be molded and transitioned into modern lending. So as we felt that pricing pressure, we decided that this is not the right time and we made a decision to stay as a private company and obviously now playing Monday morning quarterback that was the absolute right decision as the market has come on tremendous pressure and I think that what we felt and what we ve seen in mid-november while we were on the road was just the tip of the iceberg of what s happening in today s marketplace. So being a profitable cash flowing, a working model really gave us more opportunities to say no and we certainly took advantage of that. Peter: Right, right, so what are your thoughts on the current environment in the public markets? Obviously, right now it s looking pretty bleak, but obviously you re paying attention to it. What are your thoughts for the future for maybe later this year or are you just sort of playing the waiting game? Anthony: Well, I think there s two ways to look at this. Number one is no one likes to see the value of their company go down so that s never a fun exercise or conversation, but that said, ultimately what this does do is limit the capital that comes in to few and new competitors and existing competitors. This is a $13 trillion market, it s massive, there s a huge barrier to entry and now the barrier to entry just increased because raising capital is going to be that much more difficult now. For those that went through Series A and B, the pressure is on for them to prove a working model that has cash flow, otherwise Series C is going to be a lot more difficult. So the guys that are well that are well capitalized have a lot better opportunity to succeed long term. In the short term, it s not great because the valuations are hit, but for those of us that are in the marketplace it s actually positive news because all it does is just increases the level of difficulties because raising capital is now that much harder. Peter: Right, right, fair enough. So I want to touch a little bit on where you see your company going, particularly on the personal loan business, but in general. Obviously, you re a very dominant lender in real estate, what is your vision for your personal loan business, that s part one and part two, are you looking at other verticals that you want to get into? Anthony: Yes, we are. We have so much lead flow, Peter, that we constantly look at what else we can add that ultimately gives us a greater return on investment for our marketing budget which is at scale. So it s a constant exercise here, but just like anything else, we don t want to

8 load too much on our plate and will roll out products as it makes sense as far as our ability to execute these different projects. Our plans on the personal loans...we love the business, the business makes a ton of sense and when I say the business, I am really talking about the personal loan product. It s an easy product, it s a product that consumers are interested in and we believe that they have substantial opportunities for us because of the fact that we get to cross-sell a customer through really both directions. If somebody comes to us looking for a personal loan, we have the opportunity to present a home loan offer, both in terms of re-finance cash out or home equity loan and from the opposite direction, if somebody comes to us looking for a home loan, we have an opportunity also to present a personal loan offer. What this has allowed us to do is create sort of this flywheel effect that allows us to get a much greater return on our marketing because it increases conversion through choice. The customer acquisition cost is going to continue to come under pressure as more competitors enter the space and many of the competitors are using the same exact marketing channels and marketing strategies. So the return on marketing dollars invested is going to come under pressure more and more and I think that gives us an advantage certainly because we have the widest variety of products today in home equity loans, home loans and personal loans. Peter: Right, right, okay that sounds good. So last question, we re actually recording this just a few days before the Super Bowl. I have heard that Quicken Loans are doing a Super Bowl ad, we got SoFi doing a Super Bowl ad, are we going to see a loandepot Super Bowl ad sometime? Anthony: No, we re going to put in our marketing dollars where we know that there is a guarantee of return on investment because that s what my board wants. (laughs) Peter: (laughs) Okay, good answer. I really appreciate you coming on the show today, Anthony. Anthony: Peter, thank you so much for your time, it was a pleasure speaking with you. Peter: Okay, see you. Anthony: Alright, bye. Peter: You know, I think customer acquisition is probably the most important factor now when it comes to growing a platform. It s a very different environment than it was two or three years ago. It s harder to grow, it s more expensive to grow for most companies. Now companies like loandepot have an inherent advantage because they have had a huge scale of their real estate lending operation, they have another channel that they can lean on to bring in those customers inexpensively. I, for one, am very interested to see how they scale. Clearly they have big plans,

9 they have done very, very well in real estate. I wouldn t be surprised if they do a similar kind of thing here in personal loans. They are certainly a company to watch here going forward. On that note, I will sign off. I very much appreciate you listening and we ll catch you next time, thanks. Bye. (closing music)