Following the landmark merger between Black Knight and ICE Technologies, the recently divested and rebranded Dark Matter Technologies is preparing to take the second-most used loan origination system in the industry, Empower, to new places. The CEO Rich Gagliano and CRO Sean Dugan join National Mortgage News to discuss how they're thinking about pricing, new products and other key issues in mortgage technology in this livestreamed discussion.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Spencer Lee (00:16):
Good afternoon and welcome to this Arizent Leaders Forum from a very sunny but very cold New York today. My name is Spencer Lee, reporter at National Mortgage News. We're very happy to have you with us for this Leaders Forum today. We'll be talking about loan origination systems, namely the Empower Loan Origination System. With me, I have two leaders from the new owners of Empower that would be dark matter technologies, and I have with us today is its CEO Rich Gagliano and Chief Revenue Officer Sean Dugan. Also joining us today is my esteemed colleague, Brad Finkelstein, who knows very much about the company, both in its present form, what led up to its creation and in its previous forms as well. So he'll be adding a great deal of expertise. Again, we're here today to discuss Empower Its plans for the future and just its effects on the mortgage industry and home finance in general.
(01:18)
Before we begin the discussion, I'll give you a little background on what led us up to this point, but I also wanted to pass on a little bit of breaking news, a little bit of sad news to start 2024. Today we noted the passing of mortgage industry leader, Dave Stevens, who we learned of his passing earlier today. Of course, we're very sad for his family, for his mortgage family and his friends in the industry. Many of you perhaps are watching today. He was a friend to this publication to National Mortgage News with his frequent op-Eds and also as an expert we went to for many of our interviews. We had an in-depth interview with him just a few months ago. Still racking up a lot of views, a lot of readers and of course we're very saddened to hear of his death and our sympathies, go to his friends and his family.
(02:10)
But to pivot back to the topic at hand, the loan origination system in power, how did we get here? Dark matter emerged, you could say, or came into being or was rebranded just a few months ago. Following the merger, one of the biggest mergers in the mortgage industry in years between Black Knight and ICE Mortgage Technology. The deal received a great deal of pushback from within the industry, from stakeholders within the industry. Dave Stevens himself was not shy about sharing his views about that merger in the course. It wasn't a straightforward process to approval. The Federal Trade Commission at one point voiced its opposition. It dropped the opposition after what was to be the newly formed ICE Black Night Company after they agreed to divest certain segments of the business, one of which was Empower. And there were a few other business slides as well, which we'll get into.
(03:12)
So to Constellation Constellation Systems. And that sale was approved following the approval of the merger between ICE and Lac Knight. Now, given that Empower has such a big role in the industry as the second largest loan origination system, what happens there is plans has a ripple effect throughout, and that's why we're here. That's what we'll be talking about. Talking a little bit about future plans for Empower, also cross-selling plans following the merger and plans for the future. Just to give a little insight on what's going on right now in the industry, what maybe we can look for in the year ahead. Fannie Mae, it's forecast calls for some improvement this year, $1.9 trillion in origination volume. That's compared to 1.5 trillion last year. So some improvement there. Also, mortgage rates, which everyone is talking about, I think it's heading back downward, trending back downward still though in the 6.5%, at least six and a half percent range. So more than two times greater than it was at this point, I think two years ago. So anyway, that's where I'd like to start. But first of all, I want to thank all of you for joining us today. We're really happy to have you. Thanks
Rich Gagliano (04:28):
Thanks for having us. Pleasure to be here.
Spencer Lee (04:29):
Yeah. I'll start off with the first question, maybe a little bit about the company itself. Dark Matter. I think what most of our audience thinks of what I think of about the company is its primary component is the Empower LOS, but it wasn't the only business line to move over when it was sold to Constellation and when Dark Matter formed Little plan words there, but when Dark Matter emerged. And could you tell me what other companies belong to Dark Matter?
Rich Gagliano (04:57):
Sure. So Empower is our flagship LOS. Along with Empower. We had our artificial intelligence capability, Ava, along with our suite of AVA products. Along with that, we had the exchange, which is basically a portal for vendors to integrate into Empower and other oss, and we have 25,000 providers that are using that portal today.
Sean Dugan (05:31):
We also have our business intelligence capabilities and then the digital portals that also came with the divestiture as well.
Brad Finkelstein (05:40):
Okay, and just going to take a quick second here to note, the one thing that was not mentioned was Optimal Blue, which was also sold to Constellation, but is actually now a separate company, not connected to dark matter. There has been some confusion in the industry about that relationship, but it is a totally separate business. But speaking of relationships, what is the current status of your relationship with ICE Mortgage Technology? I mean, in the past when Empower was under Black Knight's ownership, there was actually ties because of MSP is now that kind of the reverse. How are you working with ICE right now? Well,
Sean Dugan (06:31):
We'll continue to collaborate with ice. Obviously we're two of the largest players within the industry. Well implemented across the ecosystem, if you will. So we'll continue to have relationships and integrations with MSB. We've got some of the other origination products such as Ernst and Expedite, et cetera, that we will continue to offer within our bundle for the foreseeable future. Those integrations are actually protected by some of the covenants that the FTC required to make sure that our clients who signed up for our really expansive bundle will continue to be able to utilize those services that they have on contract.
Brad Finkelstein (07:12):
And so how has your mindset changed at all that you're now competing against your former parent company for clients?
Sean Dugan (07:24):
Well,
Rich Gagliano (07:25):
Go ahead. No, I would say we're obviously we're competitors out in the market and we also, it's more of the competition cooperation combo there. So we compete in a lot of ways and we'll continue to do that. And we're also going to be sharing some of those products that Sean talked about.
Sean Dugan (07:49):
And I would say across both organizations where there is that co-Opetition, if you will, I think the North Star for both is to put the client needs first and try to operate in that type of manner.
Brad Finkelstein (08:02):
And Black Knight has already call the Black Ice has already announced a couple of client wins. Most recently they announced that Carrington Mortgage Services was signing up for Encompass. They put it in comp as again, is it hard to compete against that sort of bundle they can offer?
Sean Dugan (08:31):
No, not at all. I think there's quite a bit of differentiation between the products. I would also suggest that our bundle is, we believe more robust best in class as well. And with regards to some of the components within our ecosystem, specifically task-based workflow, the artificial intelligence suite that Rich mentioned, which includes a very robust rules engine. That's what really drives the efficiency and productivity for our clients and we believe that is absolutely head and shoulders above any other competitors in the marketplace.
Rich Gagliano (09:11):
Yeah, we strongly believe in the automation. We've been working on that for 10 years and we do think that that's a strong differentiator for us and our clients.
Sean Dugan (09:21):
And we've also made many announcements with regards to our continued growth, whether that be under the deal overhang or since the divestiture. We continue to see very strong growth with regards to net new logos and current clients that also sign up for additional channels within the Empower LOS.
Rich Gagliano (09:42):
So we had a strong fourth quarter and we're having a great start to the year so far this quarter. So things are going well.
Sean Dugan (09:48):
I think there's a lot of interest with regards to having another option over and above ice, and really again, how Empower makes clients more effective, more efficient, and at the end of the day, again, more profitable. So we're getting plenty of looks, plenty of conversations and certainly a lot of lenders that are signing up as well.
Spencer Lee (10:09):
I wanted to maybe touch a little bit on that from the marketing side. Previously you were under the, I guess the Black Knight umbrella and you sort of had, could be marketed alongside its other services, but now you're a standalone Empower as a standalone operation. How has that changed? And obviously you had to make some sort of pivot and how are you trying to do that now? Market yourself as a standalone company without the other product?
Sean Dugan (10:39):
I would refer to it as a rebirth, quite frankly. You already pointed out Black Knight had to market as an enterprise and take all of their products and all of their divisions under consultation with regards to how they went to market. And sometimes those would be shackles with regards to how aggressive we could be, how prominent we could be. All of that has been removed. We've come out with a new website, obviously Logos, new branding, and we've seen really significant growth. Also social media platforms, so very active, LinkedIn, Twitter, x and the rest. And that's all matriculating into qualified leads that are getting to our sales team. So I'm really proud of what we've been able to pull off from a marketing perspective. I think it's more dynamic, more irreverent if you will, but while still being respectful and you'll continue to see that we really want to differentiate ourselves not just from a marketing perspective but from a corporate and a corporate culture perspective as well.
Rich Gagliano (11:47):
So we went from enterprise marketing to, it's our marketing and we're not competing for marketing dollars with various businesses within the Black Knight umbrella. It's all about us and our business and we put together a really great team that's doing some really nice work.
Sean Dugan (12:06):
Another example of that is our user conference that's coming up. It'll be in Southeast Miami, April 24th and April 25th. It'll be very specific to Dark Matter. You've got to have it in a desirable location in Spring. And we're very much looking forward to all of the content that we get to share with our clients and also just yet another avenue to let our clients give us direct candid feedback with regards to what their objectives are, what they're seeing from the marketplace, and how we can best support really their objectives.
Spencer Lee (12:46):
No, I'm glad you brought up your current clientele. It leads very nicely to my next question, the lead up, it was probably no secret that this would happen just given we covered the merger extensively. When I say we, I mean mostly Brad, but I covered it a little bit. My colleagues, all of us did cover it to some point. And of course it was the news story for about a good year and a half and there was some question whether or not the merger would eventually go through, but at the same time, everyone I think was preparing for it including, and you obviously had some clue that there might be a divestiture of Empower. What were your clients saying your at the time, current Empower customers saying what were their fears about the disruption and how did you sort of tackle that and condense 'em to stick with you for the long run, even though now you're in dark matter, still in power, but dark
Rich Gagliano (13:51):
Matter. Yep, that's right. We had questions and we spent a lot of time staying in front of and talking with our clients. The belief was in the market as you guys know that the business was going to, if it moved, it was going to move out. And that was always our belief also. And that's exactly what happened. Our entire team of 1300 employees moved over and then we've added a couple additional executives. But the clients were good. We had a great product. We have a great product and clients are obviously not looking or not wanting any kind of disruption to that. And as we transitioned, we did all the scanning up as a standalone business now, but we had no interruptions with the clients. We've since brought CSI in Constellation software, introduced them to our clients and they've been great. They've been a great partner. As soon as the announcement was made, they got on the road with us and even to this day, they'll talk to any client. They've been supportive and been really great partners.
Sean Dugan (15:04):
Yeah, I think the conversations, if there were any concerns, they really centered around continuity, which Rich has already spoken to. And the other element was product investment and whether or not we'd still be in a position to continue to invest in the products for the obvious reasons. And we're happy to report that we'll invest more in product and infrastructure in 2024 than we ever have before. It's four times the average of a software provider. So it's something that we take very serious. With regards to continued enhancements, investment in our products,
Rich Gagliano (15:39):
We laid out a three-year plan with the buyers so they understood where and what the investments were going to be, what we were expecting. And they were good with it and it had been nothing but supportive.
Brad Finkelstein (15:53):
Is those investments software as a service type investment cloud?
Rich Gagliano (15:59):
It is. We've moved to the cloud several years ago. We have some clients we have to move out of the Jacksonville data center that was Black Knights, but we've been cloud, everything we build is cloud-based, cloud native, and we've been doing that for a number of years and our segment, our business. So yeah, a lot of that was already put in place. So our strategy has been cloud first and that's been working well for us.
Brad Finkelstein (16:28):
And people in the industry may not believe it, but there are other servicing platforms besides MSP.
Rich Gagliano (16:35):
There are other platforms out there.
Brad Finkelstein (16:38):
Those clients have those platforms. Natural targets for a marketing campaign from Dark Matter,
Rich Gagliano (16:45):
I would say they are. And along with any other provider out there, we're kind of top tier down to the middle market. And so anyone that fits in that category is a potential client for us. Clients that are looking for automation streamlined capabilities, pulling that cost out of the origination process, that's what Empower is. Great. Along with the tools that we talked about with Ava. And so yeah, I would say any client that fits that category as a prospect,
Spencer Lee (17:25):
I'm just curious. And who else are you trying to reach out to? You're talking about clients of other servicing platforms, but looking at client retention I'm sure as well. How do you approach that?
Sean Dugan (17:40):
It has a lot to do with the continuity and the product investment. I think those are the two things that business leaders really want to understand, that they're with a long-term partner that will continue to enhance the products, will continue to evolve as the market evolves and will continue to support their particular objectives. And when we engage in those conversations, that's really what resonates. And so long as we continue to deliver on those objectives, we feel like we're in a really good spot.
Rich Gagliano (18:06):
Our clients have been bought into our strategy around automation, and there were questions around if the team changed what would happen. And thankfully the entire team moved over and really uninterrupted. Our strategy's the same and the team's the same.
Sean Dugan (18:28):
Part of that was how Black Knight was really formed, if you will. We did have separate business units that by and large operated relatively independently. We didn't make all of our own decisions such as product enhancements, investments, et cetera, which we now have the ability to do so, but we operated pretty independently. And so the ability to do this carve out and standalone as dark matter led itself to greater continuity. So I think the clients, to Rich's point, they've been really happy with the fact that they've not seen a difference, not a fundamental difference with how we operate every day.
Spencer Lee (19:07):
How do you, you talked a little bit about the future. You had, I think you said a three year plan going forward. How do you operate in this market an improving market compared to the lows of a year ago or two years ago, but still, I think the sentiment, at least at the last Mortgage Bankers Association conference was survive until 25. Still some headwinds we expect in 2024. So I guess lenders, they want to spend on technology, but of course pocketbooks are tight. How do you approach that this
Rich Gagliano (19:40):
Upcoming year when the market's great and they're so busy, Hey, I don't have capacity and I don't have time to swap out platforms. And then we go to the other side where there's no volume and I don't have the budget. But the reality of it is in both scenarios, what we're selling and what clients are getting is operational efficiency. So when things are great and you're busy, you have the ability to have users process and push through more volume, and you get into the other side, you can run that platform with a smaller team. And so really our story is the same regardless of the environment. And we see a lot of the banks and credit unions and some independents that are taking this as an opportunity to go improve their platforms and to go after those efficiencies that when it's the other side, when it's busy, they just don't want to do it.
Spencer Lee (20:45):
Now when you talk to them, your clients, we talked a little bit about 24, but what is their sentiment looking forward this year? And maybe in 25, 26?
Rich Gagliano (20:56):
I would say you've said it right. I think it's survived 24 really. And I don't know that anyone's terribly optimistic about the market, but we'll see. They're definitely batting down and focused on taking care of the clients that are coming in.
Sean Dugan (21:16):
Yeah, there's finally some light at the end of the tunnel. I would say. We do expect a couple of cuts by the Fed this calendar year. You already mentioned that there is going to be additional origination volume, so nobody's preparing for the volume of 2020 by any aspect, but the ability to make sure that they're ready for the next bear market, bull market, pardon me, is something that we're getting a lot of feedback from clients that they want to make sure that the tech stack is in order, they can originate loads as efficiently and profitable as possible,
Rich Gagliano (21:55):
Better than 23,
Sean Dugan (21:57):
I mean, on an uptick,
Brad Finkelstein (22:01):
But the other part of Survive Till 25 is survive part. How is it you're trying to, you're not a new business, but you are trying to establish a name during a time of heavy consolidation in the mortgage industry. How much of a battle is that
Rich Gagliano (22:17):
Empower, thankfully, is a well-known brand in the market, and we do have a new company name, but I would say most people know Empower and then competitor. And as long as we have an opportunity to get in there, we believe we have a strong chance at winning that deal.
Spencer Lee (22:40):
Now, I wanted to ask a little bit about that interim period when the sale was announced, but it wasn't approved yet. There's still some question about whether the Ice Black Night merger would go through. How can a business plan for the future in that environment sort of in limbo, so to speak?
Rich Gagliano (22:59):
Yeah, we were able to do some things and some things we weren't allowed to do. And so where we could, we put a lot of planning around it but couldn't execute. And there were some pretty strict rules about what you could and couldn't do. But what we did was we managed through it. And so when the transaction happened, we started moving immediately on some of the back office transitional work that couldn't start. And we stood up really quickly. And part of that was the planning that we did. And then we talked about just working with the clients on the certainty, uncertainty part. And then we were able to, and were allowed to bring in Constellation software to meet the clients prior to the closing. And they were great spending time with the clients and really getting them comfortable that it's the same management team, it's the same strategy, and they're all in as far as investment and partnering with us.
Spencer Lee (24:04):
It's still the people they know and the people they trust.
Rich Gagliano (24:06):
It is, and I think that was probably the two biggest things were certainly the team. I think, like I said earlier, I think clients really believe in the strategy, and then two strategy's great, but you got to have the dollars to invest. And we're comfortable with both of those.
Sean Dugan (24:25):
And also to allow us to operate independently and autonomously and deliver on the innovations that Rich and the rest of the executive leadership team feel are important. I think that was also exciting to many of our clients.
Brad Finkelstein (24:43):
And about a year ago, loan Depot made an investment in Encompass. Empower.
Rich Gagliano (24:58):
That's okay.
Spencer Lee (25:00):
We've all done it. We've all done it.
Brad Finkelstein (25:01):
Yes. Made an investment. Did that follow with the merger? And so what is the current status with sale, what that,
Sean Dugan (25:10):
Yeah, they are a client of Dark Matter and that is an active project, so absolutely. That is still very much alive. Well,
Rich Gagliano (25:17):
Yeah, I think they put out a real nice piece talking about their strategy. It wasn't necessarily about us maybe the past two weeks, and a lot of that was about automation. What they're talking about is the platform that they're putting in with us. So yeah, they've been great partners and we're excited to get them live here soon.
Spencer Lee (25:42):
Now we have only a few minutes left. I wanted to at least get one quick question in about what's been the theme of the last year, last few years, and of course that's ai, and how does that play into Dark Matter's future? You mentioned, I think it was Ava, am I Ava,
Rich Gagliano (25:59):
Sorry, artificial intelligence, virtual assistant.
Spencer Lee (26:03):
But what about AI and its future implications and how does that play into Dark Matter's future?
Rich Gagliano (26:09):
Sure. So AI has been a part of our strategy for the past six, seven years. We made an acquisition six plus years ago of an AI company out of Philadelphia, and we've been working with that capability and continue to invest in that area and things like mundane but important data extraction and classification, so you don't have humans doing it when you pull the data off of documents, being able to run that through a rules engine. Those are all the things that Ava's doing today with extremely high accuracy. And then we've been building upon that. So we now have what we call our assistance, AVA assistance, and those assistance focus on different categories, income assets, and so lenders have the option to kind of a la carte where they can focus and layer those capabilities over time. But we'll continue to work on AI and focus a lot of our energy with things that we can't solve simply with data and rules. And when we need our artificial intelligence, we're plugging that in.
Spencer Lee (27:20):
Well, AI is a topic that's not going to go away. There's a lot of potential. There also a lot of potential controversy too, but
Rich Gagliano (27:27):
It's a different conversation. We've been on that and believe that as well. We've been working with the regulators and we've had a lot of, we have a white paper out, and our belief has been, and it still is, that we're not making AVA make determinations. What Ava's doing is bringing the information and calculating and bringing that information to the processor underwriter and leaving it up to the human to make those decisions. So we're staying out of the determination part that's caused a lot of concern, and the regulators seem to be comfortable with that. Yeah,
Spencer Lee (28:07):
Yeah.
Brad Finkelstein (28:07):
It's not just the determination part, it's also the employment part. A lot of, are we replacing human workers with ai?
Rich Gagliano (28:20):
Yeah, we don't think so. We think it makes people more efficient and hopefully they spend more time talking with the borrower and getting them comfortable and getting them through that process as opposed to working on some of these mundane tasks that machines should be doing. Yeah.
Spencer Lee (28:39):
Well, that's a real interesting theme that we have been following and will continue to, there's a whole lot more we could ask today both about AI and dark matter. It's been a great conversation for the last half hour. Very productive, real interesting topics we touched upon. So I want to thank all of you, Sean Dugan, Rich Gagliano from Dark Matter Technologies, and of course, Brad Finkelstein. Thank you, and thanks to all of you for joining us at this Arizent Leaders Forum today. Have a good day.
