Trends - Making Sense of the Mortgage Market Mess

Making Sense of the Mortgage Market Mess

by Editor

For the past four, perhaps five years, the mortgage vertical has generated more leads and ultimately more revenue than any other. That could change this year as the mortgage market undergoes its biggest correction in the past 7 years, if not longer. It's a strange place for those in the lead generation business, especially sellers of leads, where entire businesses came into being and sold for hundreds of millions of dollars based on growth from this one vertical alone. And, those who deliver mortgage leads, never paid close attention to the larger market factors as there was no prior history for this market. They simply listened to lead buyer demand and acted on that demand. If demand changed, or other factors came into play, e.g. increased competition, they looked for the low hanging fruit in their process - increasing conversions, increasing the number of times sold, etc. That's why most in the mortgage lead generation space have been relatively unprepared for what we face today - a contraction that almost parallels if not exceeds the refinance explosion.

To date, in mortgage lead generation, those on the lead selling side have had it relatively easy, and I say that they've had it easy because for the longest time they only had to worry about each other; that is they only had to focus on outperforming the next guy in the same vertical as opposed to the internet advertising arena at large. Beginning in 2002 and extending well into 2004, lead generators couldn't acquire enough leads fast enough. The source of the leads hardly mattered with all too many leads swapping hands way more than today's four or five times sold. Quality always stood out, but so many people wanted so many leads that even those who resold the already sold leads could find a buyer and thus make money. Even the buyers who often bought what today amounts to absolute crap could eek out a living, because mixed in with their leads were the occasional decent customer that others who had the lead first couldn't service in time because they had no more room in their pipelines. This could happen because the market conditions (easy to borrow money) lowered the bar for what counted as a decent customer. If he breathed, a lead seller could sell him something. Combine that with the fact that during 2002 through 2005, so many of the people filling out the forms hadn't gone through the process before and you had the perfect storm of supply and demand for a boom lead generation market.

The same boom times that led to an almost incalculable number of lead generation firms springing up also prepared some of those in the space who have made it until today. Going back to 2002 through 2005 where success in mortgage lead generation came down to speed and, not so much skill at sales, as hustling. The smart companies looked to gain an edge through ultimately defensible positions - better media buying, technology for paid search, organic inventory, landing page optimization, strong lending partners, and so on. The not as longer-term inclined simply pocketed the money only to find themselves unable to compete as market factors changed, namely interest rates increased which decreased the number of serviceable leads and, more importantly, the housing boom that drove the mortgage lead generation boom started to increase competition for ad inventory as a whole. While you know what hit the fan early this year with Ameriquest and New Century collapsing, the continued increase in demand for media forced the hacks out in 2006. Everyone else who wanted to stay had to really improve their operations in order to squeeze the most out of a slowing market. If only the same held true for buyers.

Not to call it arrogance, but the same lack of urgency and non-reinvestment of profits that forced many of the less-focused lead generators out of the market in the past 18 months, has now just started to do the same with the lead buyers. While their market started to soften, they didn't have the additional layer of hyper-competitiveness that drove the lead generators to improve their operational effectiveness. Too many lead buyers enjoyed the returns without thinking about how they might operate when times got tough. Several of the largest buyers didn't allow their organizations to grow without this operational excellence in place, but unfortunately, they can only buy so many leads. And, in a parallel to the lead generators having their profits hurt by the greater ecosystem, the lead buyers face a similar crunch as they can no longer service as wide a filter set as once before. Where in the past, they could take a lead and turn it into money thanks to a slew of lending products that fit a wide variety of individuals' economic circumstances, the lead buyers have a much smaller set of products they can sell which naturally cuts down how many of the leads that lead to money. As you might guess, this buyer side operational inefficiency and fewer ways to service a lead has caused a decreased lead appetite and lowered the price per lead.

The real shame in the mortgage market mess is that none of what we see today should come as a surprise to anyone over the age of 29. It's understandable if you don't quite remember the rise of the subprime market beginning in 1994 along with its first collapse in 1998 when poor accounting along with world economic factors came together at the wrong time to wreak havoc on the market. You should remember 2001, the bursting of the tech bubble, followed by the Fed lowering interests rates to levels that only those over 60 might remember having seen. With the stage already set from the mid to late 1990's for borrowers of less than good credit able to obtain financing, we entered a period where it cost lending institutions so little to get funds, which in turn had them lending funds as if they didn't have incredible returns to make money lending. This influx of people with money, if not caused, added fuel to skyrocketing home prices, which in turn had more people wanting to buy and lenders only to happy to take part. The subprime mess came about because a) banks made it too easy to get money; people didn't have to show proof of income for so many of these, and b) the banks made it even more tempting by offering loans with below prime rates (teaser loans) along with those that started low but adjusted later, with them now adjusting much higher as interest rates have jumped. Banks and consumers bear the burden equally. In the end, we simply see a great example of human nature's big flaw - acting in a manner counter to our long-term best interests, because everyone else is doing it and you don't want to miss out. Suffice it to say, the mortgage market won't go away, but what we see is exactly what we should see. May we have better preparation for the next vertical that will bust; although I doubt we will.

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Editor
DM Confidential
www.dmconfidential.com
e: confi@digitalmoses.com

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Your article was very on point in many regards.

Posted by: Sam Hakim Date: August 09, 2007
URL: http://www.Alansis.com
190298

Pretty decent article but lots of other key factors left out.I have worked in residential housing for over 26 years.The same mistakes are made today as was then.
The fact that builders go crazy and borrow a 100% to do their "spec houses" and now can not sell them.They have over stocked the new housing market and can not pay the interest on the loans.
Lenders,builders and developers have shot themselves in the feet by not monitoring market demand.These guys loan and build "blind" the only time they stop is when the money runs out,they cant borrow any more or supply far exceeds demand.
Only when the lenders and the builders take their heads out of the sand will this industry get a clue as to supply and demand.

Posted by: Arnie Davis Date: August 09, 2007
URL:
190299

I agree that as things heat up, the housing industry is very predictable. The only part that is always hard is to predict how long the party will last.

The longer it lasts, and this last one was pretty long, the more riskier everyone seems to behave.

Then comes the "crash" or "soft landing", and everyone tries to punish those that were to risky or even illegal, and keep the pain as low as possible.

The savior is always the rest of economy and how much it can stomach the upset.

Most Realtors and Mortgage Pros lose track of fundamentals because there is no need.

By the time the part ends many have forgotten what the fundamentals are. And only the strong survive for the next party.

Posted by: Realty Blogger Date: August 09, 2007
URL: http://www.houseblogger.com/houseblogger/real_estate_bubble/
190308

Editor-

Your article was spot on regarding the lead generation space, but on the lender side, it is extremely difficult to reinvest into the business. Outside developing seasoned collections, recovery and REO teams, there is nothing a lender can do once the loans are booked. Credit got way too easy, which resulted in individuals with 40K incomes buying 400K homes in Las Vegas. This is why there is regulation in the banking industry.

Everyone is turning a blind eye, but I believe the problem is worse than many realize. For lead generators, they can shift business models and move into payday loans, title loans, and
debt consolidation. Won't be as lucrative, but it will pay the bills. Where I see denial rampant is in over priced suburban communities where a whole industry/lifestyle is centered around the home. I call it the HGTVille. Towns like Gilbert, Arizona; Rocklin, California and Orlando, Florida witnessed a crazy concoction of sprawling subdivisions, the "Home Depot Wars" (Home Depot vs Lowes, HGTV, and methed-out contractors all glued together by loose credit and easy money are now coming apart.

In Arizona, people are abandoning new homes.
http://www.azcentral.com/community/chandler/articles/0728cr-foreclosed0728.html

Let the writeoffs begin. By the way, what is the payout on a payday loan offer?

Posted by: teemoney Date: August 09, 2007
URL: http://www.subprime.com
190311

Great article, one thing to point out about the easy credit is that some of this lending got away from the banks and into the hands of Wallstreet.

rob

Posted by: Rob D Date: August 11, 2007
URL: http://robdeichertjr.blogspot.com
190440

Great article - gives me an idea for additional lead sources!

Posted by: Payday Loan Leads Wanted Date: September 21, 2007
URL:
194025

interested in pauday leads

Posted by: Payday leads wanted Date: September 21, 2007
URL: http://www.site.com
194026

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