Zillow mortgage unit takes a loss as expenses outweigh strong demand

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Zillow's new mortgage division experienced better-than-expected customer demand in the first quarter, but it was outweighed by expenses that led to a pretax loss of $9.6 million for the period.

Operating expense allocation savings and expense timing shifts into future quarters led to the loss, according to a letter to shareholders accompanying the release.

This is the first period that Zillow is breaking out its mortgage business as a separate reporting segment.

The company rebranded Mortgage Lenders of America as Zillow Home Loans at the start of the second quarter. This segment also includes the mortgage lead generation business and the Mortech software unit that Zillow acquired in 2012.

Zillow acquired Mortgage Lenders of America to offer financing to buyers in its flipping business. It also participates in the Connect marketplace that provides lender listings to consumers based on their unique situations. The company did not break out how much business it got from each source.

"In the future, we will more tightly integrate Zillow Home Loans with our Zillow Offers consumer experience. This will take some time, but I'm encouraged by progress today," CEO Rich Barton said during an earnings call with analysts.

Zillow is working on creating a digital lending platform to go along with the call center-based origination operation.

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"We got to get a digital borrower platform out to the borrowers and loan officers," Greg Schwartz, Zillow's president of media and marketplaces, said during the call. "We've got to have a very efficient operating model with underwriting and processing. And then we have to make a lot of progress on automation to build a healthy scalable business. That is 100% our focus. We are focused on building a scalable model that's technically driven."

For the first quarter of 2018, the mortgage business lost $358,000. Results for prior periods in the mortgage segment were included in a recast profit and loss statement included in Zillow's supplement to earnings.

Revenue in the mortgage segment was $27.4 million, which Zillow said exceeded the high end of its outlook range. In addition to better-than-expected consumer demand, incremental revenue from a new mortgage originations service helped boost the number above what the company was able to in the previous quarter and a year ago.

Zillow produced $23.2 million in revenue during the fourth quarter and $19 million in the first quarter of 2018.

Zillow Group overall generated a net loss of $67.5 million during the first quarter, compared with a loss of $18.6 million in the first quarter of 2018.

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