A Different Type of Subprime Fallout – Part 1

The past three weeks have had more than just the financial markets on edge. They have caused the whole world to take notice. Included in that group are those in the mortgage lead generation market. After years of prosperity, that world experienced a jitter earlier in the year and currently faces an environment not yet seen since its inception. The stock market may have recovered a decent percentage of what it lost earlier throughout the month, the same does not hold true for the mortgage market. Subprime lending has undergone a shift that no quick recovery in stock prices can counteract. No longer will consumers with poor credit have access to funds as easily as they once did. Rationality and caution has replaced the not quite irrational exuberance we saw for five if not more years.

By now, especially as the overall industry starts to contract, we start to realize the uniqueness of the past few years mortgage lead generation market. Who would have thought that mortgage, namely refinance, could act like a run of network ad? Yet, if you think about those companies that leveraged the previously booming mortgage market, they acted less like vertical specific marketers and more like one that looks simply to cast a wide net. Very few other verticals could run across such a wide swath of inventory and do well. It almost makes sense that the incentive promotion gift card offers would work on untargeted spots like email, but mortgage? Yet, it’s these untargeted spots that performed best for those buying media. More than one mortgage lead generator’s fortunes were made or lost by figuring out Yahoo and/or MSN. These spots will continue to work for a select few, but they will no longer become the sure fire way to get volume.

The dramatic change in lending, which stems from an overall tightening in the credit markets, has meant that while the same number of people might fill out a refinance form, fewer will qualify and have access to funds. And, it’s this exact topic that we have addressed in various iterations the past two weeks, including last weeks graphical representation of the interaction between demand for borrowing money and lenders’ appetite and ability to give. Overshadowed by the market turmoil of the past few weeks, though, we see a different type of credit crunch immerging. This one also involves subprime borrowers, and in many ways it parallels the mortgage market, in that a group of borrowers accustomed to obtaining funds no longer can. Again, similar to the mortgage market, there still exists a very large pool of people desiring access to these funds. The biggest differences between this subprime market and that impacting the mortgage one comes in the form of the reasons for its change. This one, too, has relatively lax standards for accepting new customers, but the broader markets desire to securitize these loans plays only an ancillary role rather than a primary one. The illustration of this change comes in a potentially unlikely place – the paydayloan market.

The payday loan market has long, if not always, catered to the subprime market. The mortgage market on the other hand accommodated the subprime market because they could. Only recently has the mortgage lead generation market had to deal with that which the payday loan lead generation market has long struggled, ineligible borrowers. Mortgage lead generators might think how unfair it is that fewer and fewer of their leads can qualify as sold leads, but almost all other major verticals have to contend with not only a decent percentage of un-sellable leads, they typically can sell a lead only once. Instead of setting back subprime focused verticals such as payday loans, the combination of not converting all leads into a sold lead and any sold lead being bought only one time has led to innovation, i.e., ways to maximize the value of the data they do capture. This innovation and desire to make the most of an interested consumer brings us to the heart of a recent shift that, like mortgage, has impacted those attracting subprime borrowers, one that didn’t start out directly related to payday loans but whose rise and fall can be best explained through the lens of the payday loan vertical. We’re talking about none other than the credit card industry, but not the cards that you probably have in your wallet. Some of these cards might carry the same Visa and MasterCard logos, but they act anything like the "priceless" promotions. These cards, targeted towards with poor credit or no credit at all, carry a definite price, both to set up and in terms of what they can do. Click here to continue reading, Part 2 of our series on "A Different Type of Subprime Fallout."