That would be great.
All right. In the interest of time, let's get started here. Good afternoon. My name is James Yaro. I cover brokers, crypto, and investment banks in Goldman's equity research division. With us, we have Michael Tannenbaum, CEO of Figure, a position he took over in 2024.
Right.
He successfully led the company through its IPO last year, and has seen tremendous growth since. It is driven by an innovative approach to HELOCs and increasingly other asset classes. Thanks for being here, Michael.
Thanks for having me.
All right. Look, the business has evolved pretty quickly from a direct HELOC originator into a much broader capital markets platform. Update us on what Figure's building today and some of the long-term goals.
First of all, as I said, thank you for having me. It's been a great conference so far. Figure is a company really focused, as you mentioned, on the capital markets, and particularly, we're a first mover to the future of the capital markets on blockchain. We're the market leader in what's known as real-world asset tokenization. What we mean specifically by that is, especially in home equity, where we do about $1.7 billion of volume through our marketplace a month, our 500 partners are using our technology to originate mortgage assets. Those assets are on a blockchain that reduces the cost to originate, reduces the cost to trade, and are traded in a very liquid capital market that offers whole loan and securitization sales to those 500 partners.
In the process of that loan manufacturing process, we save about $11,000 out of a $12,000 cost to originate, and we save a ton of time as well. It's about as fast as five-day process versus industry 45. It's a really fast-moving process that has created a very standardized capital market. As you mentioned, James, it's a capital market that is now increasingly being used to standardize other asset classes, particularly in consumer finance and asset-based finance more broadly.
Perfect. Maybe you could just talk about the top two or three key strategic initiatives over the next, let's say, 12- 24 months for the business.
Sure. We see a tremendous amount of growth in our core mortgage opportunity. There is $2 trillion of mortgage outstanding, and we do about $20 billion a month. We also see about an opportunity in other asset classes, as we mentioned. We started in both auto and in small business. Just to be clear, we are not originating auto loans, we are not originating small business loans, but we are taking third-party assets and standardizing the rails and offering capital markets as a service to those asset classes. You have, as I mentioned, growth in the core mortgage, where we see about 100x opportunity, as well as bringing other asset classes onto the platform. Both of those are fueling that over 100% revenue growth that you are seeing in Figure over the past couple of quarters.
All right. Maybe let's turn quickly before we get into some of the business details, the competitive landscape, how it has evolved since the IPO, which was almost exactly a year ago. I guess as you add new TAMs and potentially new competitors, and then maybe just on your competitive moat as well.
Sure. Increasingly, Figure is moving more towards an exchange-like business model, and you should think about our differentiation and our moat from that context, or in that context. Specifically, we are the first mover in the home equity space. There is $35 trillion of home equity outstanding. We are the first mover and the market leader there. Increasingly in this rate environment, everybody wants to have a conversation about home equity, and we are making hay while the sun is shining. You also have a dynamic that creates a lower cost of capital as more and more volume goes through our platform. Investors like buying assets in bulk. As we grow and as we do more and more AAA securitizations and become more of a repeat loan platform for investors, the cost of financing comes down and spreads come down.
What that means is every marginal loan that we do is done more cheaply and provides this flywheel effect, and that increases our first-mover advantage. We see more broadly, capital markets are moving more towards tokenization. There is every bank conversation, every boardroom, every capital markets company that is your focus area, is talking about the future of the capital markets moving on-chain. Even as people are, regardless of enthusiasm for Bitcoin or Ethereum, there is absolutely a movement towards tokenization, and we are the market leader there. As more banks start to form consortia for tokenized deposits, as an example, we are there to provide the assets against those tokenized liabilities, as an example. All of these things, these first-mover marketplace style advantages, these flywheels, create a competitive moat for us more broadly. Right?
But then specifically, where I look to when I look at Figure's competitive advantages is one, the Fannie Mae ecosystem, where Figure is very competitive. Fannie Mae has done a lot on the first lien space of standardization and tools and technology and capital markets liquidity, we have done that in the second lien space. Right? So if you are in home equity today, you look at Figure as that standardized capital market. You look to us for liquidity, and it's actually driving conversations even with depositories, for example, who may not necessarily want to adopt our origination technology, but they see the opportunity to use our capital market as a way to offload exposure to mortgage. Mortgages are 30 years, and that's a long time even for a bank.
And so people are looking at Figure as the standardized way to access liquidity for mortgage assets and increasingly other assets.
So I think you alluded to a little bit, but this is really the third straight year where you're seeing an acceleration in origination of partner growth. I guess, what are the catalysts for that? Is it brand recognition? Is it volumes being bigger? Other factors and I guess, has the time to ramp up a new partner changed at all?
There's a bunch of different go-to-market motions that we have that are fueling the growth for Figure. Some of those were set forth years ago. Some are new. And in general, I came to the company three years ago, as you mentioned, and I brought a lot of B2B sales rigor to our process. The sales cycles that we have range from a couple of months to many years. And so you're seeing the fruits of some of those efforts start to develop now and in past months, and we see a very robust pipeline. We break out our partner opportunity set across a couple of different dynamics. One is what you would call mortgage banks, independent mortgage banks. Two is servicers, so people that service loans and can offer home equity on top of those existing loans.
Three is depositories, where we started to have a lot of growth. We announced in May our partnership with Flagstar Bank, which is a publicly traded bank, and that's unlocked a lot more depository conversations. We're also having conversations with small business lenders who we've now built a $500 million run rate volume business in that space. We're also seeing in fintech and home improvement, really big opportunities for us to grow as well. There's a bunch of different verticals, each within their own respective levels of maturity that are starting to come to fruition and fuel that origination partner growth, which is then fueling volume growth. I'll also add that within those 500 partners that we have, there's significant opportunity for upsell. We don't have nearly 100% penetration. In fact, for most partners, we're under 10% penetrated in their business.
Especially as we're now having more of a moment in home equity, given the rate environment, we are earning our way into the CEO and executive-level conversations to talk about expanding our business with our partners. I think we shared in our most recent earnings, it's like a 60/40 dynamic, new growth versus existing, especially as people adopt Figure Connect, that capital-light marketplace that's now 65% of what we do as of Q2.
You brought up Figure Connect. I thought it was really interesting what you said on the last earnings call about how new partners are onboarding directly into Figure Connect.
Yeah
That's obviously a new phenomenon. Why is this occurring? What does it mean to go directly to Connect? Maybe you could talk about that in the context of the speed to ramp up volumes or in terms of the volumes themselves.
Yes. For the audience, Connect is the dominant way in which partners interact with Figure today. It is 65% of our volume. We have guided to near term to 70%, and that number continues to grow. Figure Connect means that a partner for Figure uses our technology, originates loans on their license with their balance sheet and capital, and then sells the loan into the capital marketplace, and we just collect a rake or take a vig on that. It is capital light, and it is increasingly where we have gone, again, as we build towards that exchange for tokenized assets and the related trading. When we launched our business, we always anticipated a trajectory which would start with Figure as an intermediary, meaning we would buy the loans and then quickly sell them.
What we are starting to see, as James mentioned, and particularly in recent months, is large partners going direct to Connect and moving that percentage of Connect volume as a percentage of total to higher amounts than we anticipated at our IPO, which was only a year ago. We guided to 60%, and we have already gone through that. The reason is Connect, from a value proposition standpoint, is very attractive for partners. They are earning more of the economics, and it is much more of the business we want to do, given it is capital light, and given its high margin. You have also seen the company's margins post-IPO scale well into the 50s on an EBITDA basis.
We are continuing to focus on Connect and bring people into Connect, but I like to clarify our number one North Star is volume, and so we want to be a partner regardless of how the partner wants to work with us. If someone wants to start and they are not ready to go to Connect for a variety of reasons, they do not have the licensing, not comfortable, do not have the capital, then we are happy to serve them. Increasingly, I was meeting yesterday with one of the largest warehouse lenders on our platform, and that is an example where an ecosystem is building around Figure.
Today, if you want to go to Connect, we actually have warehouse partners, including our own proprietary product, Democratized Prime, but we also have third-party warehouse lenders like Texas Capital Bank, like Western Alliance, that lend against the Figure ecosystem and offer warehousing.
We are starting, which is something that really only Fannie Mae has today, right? We are starting to have financial partners that lend against Figure assets and make the onboarding to Connect more easy because these partners do not have to use their own capital. They can use the warehouse lending.
Right. I want to turn back to the 65% of consumer loan volumes that are on Figure Connect, and you increased the target to 70%, but obviously that is not that far away. Maybe you could just talk a little about the aspirations for what that proportion could be, and I guess are there any constraints on what it could eventually be over time?
Well, I think the growth, especially 2027, 2028 for Figure, we do not see anything slowing down the core mortgage market, right? We have continued to outperform analyst expectations, investor expectations. If you look back at our IPO, because we just actually were back at Nasdaq celebrating our one year, and we were looking kind of at the numbers that we put out a year ago, and we have blown through those. Nothing is slowing down from that perspective. But as a mix, we are seeing increasing momentum in third-party assets trading on Figure Connect. That is going to be the way, if we think about the entire capital markets as the prize, we do not want to wait for six to two-year sales cycles to get there. We are going to have to support the trading and the standardization of third-party assets as well.
That is going to take the ultimate percentage of. That is all Figure Connect. You are going to see Figure Connect continue to grow as that part of the business grows. For those students of our P&L in the audience, that will mean that the ecosystem fees that we capture as a percentage of total revenue will continue to go up. That is really the growth. I think in our most recent quarter, ecosystem fees became the single largest P&L line item for the first time ever.
I want to turn in a second to some of the new products that you are adding, but one more on the core home equity business. First lien HELOCs now comprise roughly 20% of volume.
That's right.
What are the key components of first lien HELOCs today? And I guess where are you seeing the most traction in that bucket?
Yeah. We grew first lien business 3x year-over-year in Q2. Despite so much attention now being paid on second lien because of the rate environment, first lien is firing on all cylinders for us. The first lien story for Figure is a cost story. Our partners that do $100,000, $200,000, $300,000 loans, first lien loans, traditional mortgages, they're paying on average, industry average, $12,000 cost to produce. $12,000 on a $200,000 loan is six points, which is from a regulatory basis, you're only allowed to charge five points of fees. You basically have to make up for all of that on gain on sale, which is challenging because then that means that the rates need to be higher.
Our low-cost production engine, which does a mortgage in under $1,000, is a very natural place for traditional mortgage origination to turn when they're looking at $100,000, $200,000, $300,000 loan balances. That is the pitch. We use home equity as a wedge, and we earn the right to that smaller balance origination, and that business is booming for Figure despite the rate environment because of the low-cost nature of what we do. We're taking market share there from the Fannie Mae ecosystem in all the first lien production that we do, and that continues to be a big part of our business.
As a reminder, there's $35 trillion of home equity that I've mentioned, and people are using our product not only to take out money for home improvement or to refinance an existing mortgage, but they're also paying off high-rate credit card debt, high-rate student debt, high-rate auto loans. As rates go up, all of the rates are going up, and so the value of being able to borrow against home equity over 30 years, which is going to be the lowest payment, and against the most attractive collateral, which is the home, is actually going to be more manifest in a higher rate environment. We're seeing some of those dynamics in the first lien space as well.
Okay. Let's turn beyond the core HELOC product. You've expanded into SMB, auto, DSCR, RTL loans. Just at a high level, how are you thinking about further product diversification? What are the key metrics that you think about when you're determining whether a product is a good fit for the platform? And then just how do you decide between an organic build, a partnership, or an acquisition?
Sure. Parametric questions there, so I'll take them one by one. Let's start with the diversification. I just want to make sure to clarify the diversification in other asset classes is a little different than what we're doing in the mortgage space. In auto and in small business, when we're standardizing those asset classes, we're working with people that are doing their own origination, their own underwriting, and we're taking those loans, we're tokenizing them, and standardizing the way that they trade and are securitized. So it's sort of capital markets as a service. We're not getting into auto origination. We're not getting into small business origination. In the small business space, small business brokers do use our home equity product as an alternative to their business mix, but that's just our home equity business. I just want to clarify that.
In terms of, you mentioned residential transition loans, also known as fix and flip, as well as DSCR. We bought a company called Kiavi. We closed last week. That is our bet in that space now. While we were experimenting with different models, they're the market leader in that industry. 25% of housing stock in the U.S. is owned by investors. So this is a huge market. Kiavi is the market leader. As I mentioned, transaction closed last week. They have 10% market share. The next best competitor has 2%. And their secret sauce is being able to lend above 100% loan-to-value. What Kiavi has done since 2013 when they were started, and they've done it with about 50 basis points of losses, is originated loans that are either home improvement, fixer-upper, adding an ADU, which is really popular here on the West Coast.
These type of loans where you are going to increase the value of the property, they are an expert in doing that. They have the capital market support and the data and the technology to do all that. We bought that. We can put that on top of a HELOC. It is very differentiating because 40% of home equity loans are done for home improvement purposes, and one of our biggest decline reasons is loan-to-value. People that bought a home one, two, three years ago do not necessarily have the equity, so they may be turning to a personal loan or to a home improvement loan. Now we can offer that proprietary through the Figure ecosystem, through all our partners, and Kiavi unlocks that. Big opportunity there. That is where we see a lot of the diversification efforts from our products, both first party and third party.
I want to turn to Kiavi, and since the deal just closed, I just wanted to ask firstly about the synergies that you are seeing from these new asset classes, but really in terms of the originating partners. What is the dialogue with those in terms of what they might originate on Figure, and I guess cross-sell opportunities to buyers as well?
Yes. When we announced the transaction, we announced an under four-year payback period and about $100 million of EBITDA, and in that contribution from the acquisition. Purchase price was around $537 million per Figure, and then Sixth Street bought the balance sheet with us. When we announced that transaction, we actually assumed in those numbers a decel in their growth. We were being very conservative. Based on the dynamic I just shared, as well as the more fundamental dynamic of Kiavi was a classic fintech in that they had a special secret sauce and they kept that for themselves and their customers, which is very different than the Figure approach, right? The whole nature of Figure Connect is us taking our proprietary technology and offering it to a broader marketplace, and that has fueled growth. You see that in our results.
We are going to do the same thing with Kiavi. People are already, partners are already reaching out to us saying, "I want their DSCR, I want their fix and flip. How do I get access to that?" We are making it available on both a brokered and a private label basis within the Figure marketplace, Figure Connect, not on our balance sheet, similar to what we do in the home equity space, but again, standardizing those rails and offering them the same benefits of tokenization, which are going to include the data attributes being put on chain, as well as using DART to prevent the loan from being double sold or double pledged, which is a huge value proposition to investors. We expect more and more volume on Figure Connect and investor demand accordingly.
Kiavi had $7 billion of loan volume last year. It seems like that is what you think is achievable in the near term, but maybe just comment on what success looks like for you, for Kiavi, 1-2 years after this deal.
Well, as I mentioned, you have 25% of the housing stock being investor-owned, so that is huge. We think that often in the investor world, you are competing with cash much more so than in the consumer world. It is, one, very diversifying in terms of the interest rate environment. So much of Figure has been focused on a world where rates come down and we focused a lot on first lien, and Kiavi also bolsters that. Obviously, in today's market, rates are going up, which has been kind of the status quo for Figure and where we have thrived. I think success for us is, one, the diversification, but two, that growth into that 25% of the investor market as we continue to standardize these asset classes and bring them onto our rails.
That growth from us and our partners is really going to be the metric that we focus on.
Right. Maybe digging one level deeper on Kiavi. Kiavi loans are, especially the RTL loans, are shorter term, but they do have sticky recurring customers.
That's right.
You talked about quite a high percentage of recurring customers.
Yeah, over 50%, I think.
Right. So maybe you could just walk through the economic model for Kiavi and I guess the impact on your profitability.
Sure. We talked a little bit about this in the transaction announcement, but at a high level with Kiavi, what we did that was very powerful is purchase the platform alongside Sixth Street. When loans or opportunities come to Kiavi from a recurring borrower basis, someone that does multiple fix and flips a year, which is a lot of people, that opportunity comes to Figure. Sixth Street is going to be paying an origination fee for the loan that will be crystallized by Figure in our ecosystem fee line item. Then Sixth Street will be selling the loan into Figure Connect. So it's almost as if day one, we already have the vast majority of the Kiavi business on Figure Connect because of that JV with Sixth Street.
What that allows us to do is continue our capital-light approach and our marketplace approach to all of the mortgage space. Then very naturally offer the same technology to the other 500 originators. You should expect a similar dynamic where we earn ecosystem fees as they sell those loans into the capital market.
Let's turn to Agora. What has the experience been so far of bringing auto assets onto the platform? Maybe you could just update us at a high level on the growth, the partnership, and I guess how that's impacting Connect and Democratized Prime.
Yeah. Democratized Prime is our short-term, basically warehouse lending alternative that Figure provides. We provide the rails and capital partners use the rails to earn yield. Borrowers or fintechs and other originators use it to borrow against their assets. So we built those rails and we started in the home equity space, which is our bread and butter. Then we expanded to auto. I think before we even get to auto, it's worth mentioning just the opportunity we have in home equity there, which is that lots of parties that may not use the Figure origination technology still want access to the Figure capital market. I mentioned banks as being an example of that. We also have, for example, the jumbo mortgage space today, which Figure doesn't play in.
We have a conversation tomorrow with a large jumbo originator that is looking to access Democratized Prime as a way to use as a warehouse line because they are seeing rapid growth as a fintech in that space. This is a big opportunity for Figure, and it is one that translates from home equity, where we have market leadership, now to auto. Agora is the partner that we announced in the auto space. That is the first partner that we named, and they are known for being an auto originator themselves, working with dealers, and they have basically outsourced their capital markets to Figure. You see this dynamic with fintechs where, the fintechs especially, but smaller originators, they do not have the wherewithal or the technology or the scale, frankly, to maintain a robust capital markets program or a securitization program. They are essentially outsourcing that to Figure.
We have announced that we plan to do a securitization in the auto space with Agora Assets. It will be the first securitization of tokenized auto loans done, and that is something we hope to do in early Q4. Once we do that should unlock a much lower cost of capital for those loans, and also serve as a hallmark to investors and borrowers and originators in that space, because it will be a more public offering with priced debt that will then set the benchmark for where the future can be in terms of capital market. You see, for those of you that are familiar with the fintech industry, securitization is often a watershed moment for an asset class or for an originator, and then they can expand from there. We are really excited about that.
There continue to be questions that I get from investors around the take rate, so I wanted to touch on that a little bit. Could you break down the take rate evolution between three things, mix shift, and I guess the impact of lower take rates in first lien, as well as some of these other asset classes we talked about, pressure from originators receiving volume-based discounts, which you alluded to on the call, and then thirdly, any other impacts we should be thinking about?
Yeah. The take rate has been an output of our strategy to move more towards an exchange, capital-light business model. As you have seen Figure Connect go from 0- 65 in two-year period, that is the lowest take rate of the three origination channels for Figure, one being our own direct-to-consumer, two being Figure as intermediary, and three being Figure Connect. It is very much an output of that strategy. That is the number one contributor to the take rate evolution over time, and it is something that we support, right? We want to move more towards that capital-light, high-margin business model that does happen to have lower take rate, but it is an output of that strategy. The second thing that we see, as you alluded to, is our partners, I wouldn't use the word pressure, I would say that our partners are hitting higher volume tiers.
As they are doing that, the blended ecosystem fee that they pay goes down. We are seeing, frankly, lots of success with some of our larger partners, as a result, they hit those contractually mandated lower volume tiers. We also, I just want to clarify this, most of our contracts, if not all, have some minimum level of ecosystem fee as a percentage of volume. It is not to say that as the largest partners do the marginal loan, the marginal take rate drops. That is actually not how it works. It is just that more and more partners are hitting some of those marginal, those lowest tier ecosystem fees, which we view as a positive. We view volume as our North Star, and we are absolutely focused on continuing to grow, and we have been growing both top line and margin really nicely throughout the past year.
Then you mentioned on first lien, we do actually offer a slight discount to ecosystem fee to origination partners that do first lien with us to incentivize what is a much larger percentage of the $2 trillion annual mortgage origination market is first lien, and we want partners to lean in there, so we offer some breaks there. What we have said publicly is that in Q2, excuse me, in our Q3 earnings, we want to provide more clarity about the take rate and what investors should expect going forward, especially as we have now Kiavi at 40% of our volume.
Also this dynamic, as you have been mentioning, with third-party assets, where if we do a securitization of third-party loans, that will, of course, impact ecosystem fees, which impacts take rate, but the denominator there is a bit unclear because technically you could imagine that is, quote, "lower take rate business." Obviously every investor in the audience would want us to do more of that business, not less, because it is high margin and attractive from a capital markets perspective.
Let us turn to the adjusted EBITDA margin, which I know is something that you have talked about as it relates to take rate or I guess, contribution margins. The adjusted EBITDA margin was 55% in the second quarter. As you noted, it is up substantially since the IPO. Help us think about incremental margins for the business and I guess, relative to that 60%+ medium-term target.
Yeah. One interesting way to look at it is even at the lowest ecosystem fee tier that we're doing on Figure Connect, you are still going to see incremental margins north of where we are printing today. Meaning that every marginal loan going through Figure is attractive on an EBITDA contribution basis and will continue to do so. We are benefiting from scale. When we bought Kiavi, we were clear that we wanted to maintain that 60% medium-term margin target. As I have referenced a number of times in this conversation, exchanges, we look at their relative contribution margin as we start to look much more like an exchange and less like an originator, which was our roots. You can see that in the EBITDA margins that we are able to produce and the marketplace style transaction economics that we deliver. That has been a focus for us.
Incrementally, a lot of the innovation, the moves towards third-party assets, all of that is building and guiding towards that marketplace model.
All right. We have a couple minutes left here. I just wanted to give you the opportunity to, as we close, just talk to investors about what you think investors are still misunderstanding about Figure.
Yeah. I think that sometimes investors focus too narrowly on the home equity market and think about, well, how does Figure diversify? I think the diversification comes not only inorganically from Kiavi, which is obvious, right? Introducing market leadership in multiple asset classes. It is really important to think about the. It is actually relevant from our Q2 earnings. We talked about the Home Mortgage Disclosure Act data, and when companies adopt Figure, they grow their home equity business 2.6x faster than they were doing prior to adopting Figure, which is enormous, right? If you looked at these people, these are not people that double their business in a year. Our average partner probably grows 5%- 6% a year, right? With GDP, if not, slightly higher. The reason they are able to do that is because we are doing something very fundamentally different.
The home equity business is not the right way to think about Figure because of that statistic. You should be thinking about that broader $35 trillion and the broader opportunity to standardize the capital markets, bring liquidity where it has not existed. People are transforming their businesses with Figure. When you listen and talk to our partners and look at the stories that we share at earnings or on our podcast or any of the opportunities that we give investors to hear from our partners, you see how transformational what we are doing, not only from a technology standpoint, but also from a liquidity standpoint. There has never been this level of liquidity and standardization in an asset class like this. We are coupling that with great technology.
Today alone, we announced a partnership with Sierra, as you may have seen, where we are offering an all AI loan officer assistant to our partners that do a lot of volume with us. The reason that that assistant is able to go end to end and close a loan is because of the simplicity of our platform and the connection between the capital market and the technology that we offer.
All right. Well, with that we are out of time, but it was great, Michael. Thank you so much.
Thank you, James. Appreciate it. Thank you all.