Almost four weeks ago today, on July 19, 2007, the Dow Jones closed at an all time high or 14,000. In the four weeks since, the Dow has managed to give now more than 1000 points, closing below 13,000 for the first time since the end of April. Much of this decline stems from the fast changing, and not for the better, US mortgage landscape that starts with lenders but impacts everyone. In the midst of the upheaval, and sensing that perhaps a respite for both the stock and broader mortgage market, last week we published "Making Sense of the Mortgage Market Mess," our attempt to explain the interplay between lead generators, lead buyers, and the changing market. What we see from the feedback mentioned in the comments, if you look for a decent primer on the history of the mortgage lead generation space, while not the original intent, it seems to serve that purpose. This week, we look first at the tumultuous last week in the markets spired on from uncertainty relating to the affects of mortgage market and secondly a visual representation. Before doing so, though, last week’s article brought in some great feedback from those closer to the mortgage market. We know the lead gen market much better than the mortgage market we support. So before continuing, we want to share our thanks to the great insight from readers and some of their feedback for those that haven’t seen it.
Feedback – Reader Insights
Arnie Davis adds something I wouldn’t have considered by saying, "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."
Realty Blogger submits, "…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."
Teemoney gives us this great bit, "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.
Rob D. adds, "…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."
What A Week – Stock Market Review August 9 – 15
When it rains it pours, or as we might use for the market, when one area starts sell-off, others jump right in. As I sit writing this, I watch the market go from a moderate gain to closing below 13,000 for the first time in more than three months. In percentage terms, the market has given back eight percent in the past four weeks, but it feels much worse, especially if you owned such stocks as Thornburg Mortgage. Had you purchased the stock today, you would have done well; it gained almost 40%, but that three dollar a share increase doesn’t compare to the fifteen dollars it has still given up this month alone. Even those in Google and Apple have seen greater than market losses. In the past four weeks the normally robust Google has dropped ten percent, whereas Apple has plunged almost seventeen percent in the last three weeks alone.
Perhaps most significant of all during the last week, the Federal Reserve injected $38 billion dollars into the markets to provide short term liquidity to banks, in an effort to avert a more widespread crash due to their exposure to subprime loans. This comes after a shakeup in broader markets from Australia, to Mexico, to Germany and France. For instance, prior to the Fed’s injection, France’s largest bank, BNP Paribas froze $2.2 billion in funds across three of their hedge funds, meaning investors in those funds could not withdraw their money. The bank did so because they could not calculate the value of the funds due to their exposure to subprime mortgages. They were not the only ones as several US funds had to mirror their actions. It’s not just one or two companies with exposure, it’s global.
The fallout which unfortunately has just begun will no doubt get worse before it gets better. In the end, we could witness the next Enron, as behind the scenes players, namely the underwriters and ratings firm start to receive the scrutiny they deserve for their role in helping the sub-prime mortgage backed securities seem as stable and attractive as government offerings. And much like Enron, the collapse feels as though it is coming on so fast and with such potentially wide ranging impacts, that it can easily give rise to a panic. Borrowing has become harder and more expensive, and for better or worse, generally the better, the economy runs on borrowing. This past week has shown that the potential impact to borrowing extends beyond the already large mortgage market.
Mortgage Lead Gen and Market Interaction
The past four week’s volatility has shed new light on the once hot but predictably cooling mortgage and mortgage lead generation market. As we said during the boom, this can’t last, and sure enough it hasn’t. While we all expected it, but, as mentioned before and repeated many times in the future, we didn’t expect it so fast. Continue on to Part 2 where we distill down the phases of the mortgage lead gen market, its growth and now decline based on changes in the mortgage market.
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