Making Sense of the Mortgage Market Mess

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.