At the dealer where I take my car to be serviced, plain paper printouts adorn the walls reading, “We Strive for Five.” After asking, I learned that the service writers, that is, the one who handles your visit, receives more money if you give them a rating of all fives during the follow-up phone survey that precedes each visit. Turns out the phone call serves a purpose outside of annoying patrons; it plays a major role in compensation. The higher the rating, the more they make. The dealer could have used a four point scale, maybe even a three; instead they chose five. And, similar to the dealer’s scale, five has become the magic number for many in the mortgage lead generation space.
For as long as I can remember, which means at most three years ago, when it came to mortgage lead generation, companies would sell a lead up to four times. Last year, if you went to LowerMyBills, Nextag, and/or LendingTree and filled out a form, your lead would wind up in the hands of, in theory, up to four lenders. The mortgage banking lead generation space has for a long time contained some participants of questionable integrity. Fill out a form via co-registration or email through an unknown name, especially during the height of the refinance boom and your name might end up in the hands of 15 people when all is said and done. For those on the up and up, they stuck to a four times sold.
I would suspect that the magic four times sold happened by accident, a product of a hot market and the perceived increasing upper threshold for what users could tolerate. Some companies started at three times sold and eventually realized they could charge the same amount per lead and sell the lead an additional time. Having a three times sold model or even a four times sold does not mean all leads will sell three or four times. Only certain leads will sell that many times. In the mortgage banking lead generation business, as is the case with almost any lead generation business, all leads are not created equal. In a hot market, more leads will meet that criteria and make the lead generator money as the economy around it can support more people. In a hot market, e.g. when rates actually hit all time lows, it didn’t take a super skilled loan officer to save a person some money and make a nice commission themselves. This means that in a hot market, companies could afford to be less picky about the leads they take.
That is what makes the move by some to a five times sold so curious. When companies moved from three times sold to four times sold, they did so because of demand. They had more people buying than their lead flow could support with a three times sold. This leads to wondering whether the same holds true in a market where rates have risen and fewer people will refinance their house. The answer lies in the leads that did not sell three or even four times. It might sound unfair to some, but not all leads have the same value. With respect to mortgage banking, laws by state vary, property values vary, all of which means certain customers can earn loan officers more money than others. Companies will still service the other leads, but overall fewer companies will, and in some areas, the banks / brokers have a high enough natural demand where they do not need to pay for these lower value leads.
Ad networks have this problem too. They have international traffic and ads where a user has already seen a hundred ads prior. The premium spenders simply do not want those ads. Ad networks tend to call a company that will help them monetize the rest, a soaker. The soaker companies play a funny role as they play a major role in monetization but they often know their power and drive hard bargains, leading to some resentment. If the soakers stop buying, it leaves a big revenue and even bigger margin void, and it’s not always easy to make it up. The mortgage banking space acts similarly; it has buyers who compete for the premium leads and those that act as soakers. And when the soakers go away, what do they do? They raise to five times sold and look for the increase in profit on the premium leads to cover the loss felt on the rest.
The shift to five times sold reflects in this case a weakening market, not a strengthening one. It is a short term solution to a problem that will continue, and it’s a solution that most likely benefits no one but the lead generation companies. The buyers have more competition and the end users will deal with even more aggressive companies trying to keep up the returns to which they had grown accustomed. Signs of contraction have existed prior to the shift to five times sold. Several mid tier shops have either closed or face closure.
The shift occurring now should not seem like a slight against lead generation or even mortgage lead generation. Markets will contract, and this one has been due. Customers will need other services, and still need mortgage banking related. Those firms that have figured out not just mortgage but the platform to deliver customers to the clients will succeed regardless, and now is the time when the really good can distance themselves from the pack. Some will fall but many I suspect – LowerMyBills, Nextag, Low.com, and Lending Tree will find ways to thrive, especially as lead prices will ultimately rise in the wake of today’s decreasing supply.
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