Nick Beim

Thoughts on the Economics of Innovation

Clara Lending: A Big Swing

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There are few markets larger or more important to the US economy than the consumer mortgage market, which consists of $1.5 trillion in annual originations. Or more emotionally important to consumers, for whom homes represent an opportunity to build stability, a family and a better life.

Or more structurally broken. As was made clear in 2008, the mortgage market is fragmented into tens of thousands of companies in many different layers — brokers, originators, servicers, securitizers, government sponsored enterprises — whose complex interactions add costs, skew incentives and obscure risks, sometimes with devastating results.  

If one were seeking to reimagine this industry from scratch, the core problem to solve is much simpler than all this complexity suggests. On one side of the market you have consumers seeking low-cost financing for their homes. On the other side, you have the U.S. government, which finances more than 70% of consumer mortgages through Fannie Mae, Freddie Mac and the Federal Housing Administration and sets clear variables for the qualified mortgages it will subsidize.  

Why can’t one build an online platform to sit between these two sides of the marketplace, bringing transparency, lower costs, integrated data and a delightful consumer experience? That is is the vision of Clara Lending, a recent investment we’ve made that represents a big swing by its founders in one of the most important consumer markets there is. Clara is not simply reimagining the front end of the consumer mortgage experience. It is reimagining the entire mortgage bank from the ground up with software and data.  

The founders know this market unusually well and are as motivated as much by the social good the company can do as they are by the economic opportunity it represents. Jeff Foster, Clara’s cofounder and CEO, served as a senior policy advisor at the US Treasury during the first term of the Obama Administration to help fix the mortgage market and understand where the core data and incentive problems were. Lukasz Strozek, Clara’s cofounder and Head of Product and Technology, was previously a senior technologist at Bridgewater Associates, the world’s largest hedge fund, where he focused on translating complex processes and risk analyses into software.

If Clara is successful, it will lower mortgage financing costs for consumers and bring transparency and trust to an industry that tends to lack both. It will also bring transparency and integrated data to the mortgage supply chain, reducing macroeconomic risk and providing regulators with a clearer view of the market. It is a company we believe can create enormous value and bring enormous social benefit, the kind of investment we are most eager to make.

This post was originally published on Medium