Zillow: tiny down payment mortgages open the door to problems

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Zillow does not just want to help you find your dream home. It also wants to be your mortgage lender. In an effort to attract more customers, the US online property company will start offering mortgages with just a 1 per cent down payment.

But whizzy ideas do not always pan out in reality. Zillow should know. The company infamously sought to diversify away from its legacy property listing and advertising businesses with a splashy push into home-flipping in 2018. It shut down the unit — called Zillow Offers — in 2021 following big losses. 

From the ashes of that fiasco, Zillow began touting the idea of a “housing super app”. The company wants to leverage its massive online following by building an all-in-one app that enables its users to buy, sell, finance and rent properties.

Offering loans for the same homes buyers come across in the Zillow app fits into this strategy. However, it remains a minnow among mortgage lenders. It originated $336mn worth of home loans in the most recent quarter. That compares to the $22.3bn and the $28bn made by Quicken Loans owner Rocket Company and UWM, the parent company of United Wholesale Mortgage.

Zillow’s loan business is also unprofitable. While the unit pulled in $119mn in revenue last year, it made $167mn in operating loss. That means a unit which accounted for just 6 per cent of group revenue last year was responsible for pushing the entire company into an operating loss. Offering 1 per cent mortgages will not change this unprofitable run.

The risks of making tiny down payment loans is high. Buyers could end up owing more than what their homes are worth, negative equity. This only encourages borrowers to walk away from their loans if things get tough.

Shares in Zillow may have rallied 48 per cent this year. However they are still 76 per cent off from their 2021 peaks. Investors should look more closely at the foundations of Zillow’s recent price run.