A Sub-prime Primer – Part 2
Mortgage banking as a whole has played a significant role in the Internet advertising landscape. It provided the catalyst and platform for LowerMyBills’ $380 million purchase and NexTag’s estimated $90 million in display ad spending last year. With the rising interest rates, several in the mortgage banking lead generation space continued to grow, despite some setbacks. In March of last year, for example, large lead buyer Ameriquest reached a $325 million settlement with regulators and prosecutors over allegations of predatory lending practice, one that lead to the shuttering of all its 229 retail branches and some 3,800 employees losing their jobs. According to customers’ lawsuits and reports to state officials consumers were misled by Ameriquest about upfront fees, given higher interest rates than they were promised, and were stuck with prepayment penalties.
While the best in the lead generation space continued on, despite the Ameriquest implosion; their overhaul still sent a shock wave felt by those in the space. Up until that time, they played a key role in the liquidation of Internet leads. If you work in the mortgage lead generation space, this makes almost intuitive sense. Not all leads are created equal; this holds especially true for mortgage leads where one lead can differ from the next by orders of magnitude depending on the consumers geography, desired loan type, loan amount, and loan compared to house value (among others). Most buyers have filters, i.e. preferences for leads and will only purchase leads meeting certain criteria. The larger and more flexible the criteria, the more likely the lead generator will earn money on the lead, and increase the all important number of times sold. Ameriquest ranked among the more flexible and equally important, among the largest consumers of Internet leads. Having a relationship with them could add a guesstimated 20% to 35% to a company’s earnings. When they scaled back, it left many needing to figure out a way to keep their revenue per lead at its previous levels to allow them to continue purchasing media profitably.
Fast forward a year, and this brings us to one of the companies covered in Part 1, New Century Financial Corp., a.k.a. New Century. They find themselves in a similar situation of financial distress as Ameriquest. Their woes, though, do not relate to an allegations of impropriety. New Century, the nation’s second-largest sub-prime mortgage loan originator, faces no "mere" $325 million settlement; they face a daunting $8+ billion in debts to its bank lenders who have cut off funding or informed the company of their intent to do so because of New Century’s failure to make payments. A look at their stock tells the story. In early February it traded around $30. On the eighth, it dropped 30% to a tick below twenty dollars on an announcing that it had to restate earnings. Continued concern over their rising delinquencies and defaults, combined with the aforementioned demands from their own lenders to take back soured loans at a loss only made matters worse. What might have seemed like a good buy down 30% only got worse; on March 3rd, the company announced it defaulted on a $900 million loan to Barclays, sending shares down more than 70% from $14 to $4 when trading resumed on the 5th. Less than a week later, the company acknowledged being under investigation by the State of California and garnering the scrutiny of the SEC, and rumors about it’s ability to pay back other loans only heightened, sending many to think it would soon declare bankruptcy. On the 13th, the company found trading of its shares suspended; their stock price hovering at just over a dollar and a half.
In all of this mess and definite uncertainty, some good news seems to exist. It appears that more than a few economists appear relatively unphased, that is they haven’t changed their outlook as a result of the closures. Investors natually fear that the troubles in the sub-prime space extend beyond the housing slump that began in 2005. Some of the economists, though, see the sharp rise in defaults among riskier borrowers as merely a part of the housing slump, and that consumers who purchased using no-money-down mortgages with the help of loose lending standards, have little to lose by walking away from their homes and debts. Companies gambled and people gambled. As David Calloway, editor-in-chief of MarketWatch wrote, "The thing about the brewing mortgage debacle, however, is that everyone saw it coming. They just refused to believe it." People got addicted to the returns even though more than enough questions and warning signs existed in advance.
As was the case when Ameriquest pulled back, New Century has had, or will have, a similar impact on lead generators. Not working closely enough with lead generators, I do not know whether the company has ended ties with lead generators; given that they have reportedly already stopped accepting all new loan applications, though, those working with them might want to think twice about continuing to send leads. New Century’s situation matters, because like Ameriquest, they absorbed both a large amount of leads and a wide variety of them. Having them out of the general buying mix will hurt everyone from the NexTags to the affiliate running off LeadPoint who I’d assume saw their yields decrease by a healthy (unhealthy?) amount. Even Google to some extent could see an ever so slight ripple as players in the, perhaps largest, vertical decrease spends. Consumers, though, will always need banking products, even more so when in trouble. When the banks can place a value on these products and reorganize their sales forces, then those in the direct marketing space can go to work. In the meantime, this recent blip just evens up the playing field a little more and will force a new round of consolidation.
