Making Sense of the Mortgage Market Mess, Week Two – Part 2

Over the course of several years, we’ve talked many times about the mortgage lead generation market. As the fuel for much of that growth, the subprime lending market, which collapses at unprecedented speeds, the mortgage lead generation market once again comes into focus. Last week, we gave a informal and not necessarily verbal history of the mortgage space as we looked to explain the changes taking place. This week, we wanted to follow-up on themes outlined one week ago, especially in light of the dramatic changes in the mortgage market over he past week alone, where we saw just how far reaching the US subprime market is. The snowballing of the unattractiveness of subprime loans has impacted not just mortgage companies but the world’s economy. Continuing with our mortgage coverage, which saw $38 billion injected into the US financial markets from the Fed between last week’s issue and this one, here in Part 2, we do our best to illustrate the interplay and impact on our space between the mortgage market as a whole and the lead generation space servicing it. (Note: This is our best guess)

• Lead Volume – With interest rates still high, the ad economy in the midst of free for all, the wrong way, lead volume for mortgage related services remained low. Advertisers just started to experiment, with the majority of lead generation focusing on work from home and unsecured debt consolidation
• Lead Demand – In 2000, Standard & Poor’s made a decision about an arcane corner of the mortgage market. It said a type of mortgage that involves a "piggyback," where borrowers simultaneously take out a second loan for the down payment, was no more likely to default than a standard mortgage. (Source, WSJ) The seeds had been planted and as interest rates began to drop due to the aftermath of 9/11, this change played a big role in the, soon to come, refinance and subprime boom.
• Price Per Lead – Shared lead forms had just begun; overall price per lead was very low as the fees to be earned on loans were still not quite understood

• Competition – Very limited and not much sophistication

• Lead Volume – In Pre-Expansion, supply of leads and demand for leads was low, with their being slightly more demand for the higher value loans than subprime loans. That all changed during the growth phase. Piggybacks, and interest rates at historic lows drove a never before seen boom. During this phase volume shot up but not in conjunction with demand.
• Lead Demand – As mentioned in the intro Lead Volume, demand skyrocketed, far out-pacing the ability of lead generators to deliver. Subprime loans were relatively quick to close, applied to so many that weren’t eligible previously.
• Price Per Lead – The amounts paid to generators increased dramatically, but with media costs still somewhat low, conversion rates high (everything a generator produced sold), rates didn’t get out of control.

• Competition – Once you have more demand than supply, you can bet on more generators entering; during this phase only volume mattered, with generators often buying and selling data. The immense desire to cash him put a stigma on the whole lead generator industry that still lingers, although not as badly.

• Lead Volume – Here in Maturation, lead volume surpassed demand, mainly due to rising interest rates that began climbing steadily in June 2005 from 3% to 5.25%. Rates were still much lower than was historically the case, but the feeding frenzy slowed. By this time, many people had already taken advantage of the rates so the newness wasn’t quite there. During this time, we began to see a shift with more leads coming through being interested in new home purchase.
• Lead Demand – Compared to the growth phase, the number of leads purchased declined, but this is mainly due to the weeding out of extremely low quality leads and cutting back on higher volume, lower quality places such as co-registration. In this phase we saw the increased sophistication of buyers, which forced many of the generators, who had lived off adding no value to the process, to fold. This was a good thing for the industry’s development.
• Price Per Lead – Even though volume of leads surpassed demand for the subprime categories, the supply of premium subprime leads remained fierce. While it might seem like the market contracted during this time due to the lower overlap between lead supply and lead demand, prices per lead increased allowing the overall market to grow.
• Competition – Maturation saw a bigger premium placed on lead quality; the selling and reselling was trimmed from the marketplace, i.e. there wasn’t a business in buying leads from one person and selling them to another person where neither had direct relationships with buyers. There was a greater focus on expertise and building technology and process infrastructure to remain competitive in a market with rising media costs.

• Lead Volume – Even during Maturation, the mortgage lead generation market looked attractive. That started to change once we entered Survival. The product mix hadn’t dramatically changed, i.e. lenders still wanted subprime and the slightly more upmarket Alt-A paper loans. Instead of the product mix changing, we saw the leads changing. Those filling out the forms started to fall outside the range of what lenders wanted. This included new home purchase leads, less profitable states, and most important for today’s market, we saw a growing percentage of those filling out forms looking for help with their now adjusting rates.
• Lead Demand – Buyers still wanted loans. In a continuing trend from the Maturation phases, what they could consume, i.e. fund profitably, fell below lead generators ability to acquire (focusing again on the subprime loans). Their slightly decreased period over period appetite should come as no surprise or no sign against the profitability of the market. Fewer people needed the same thing they needed one to four years ago.
• Price Per Lead – Overall price per lead leveled, if not declined, slightly as lenders focused on more of the profitable states and took advantage of the over abundance of less profitable leads, i.e. lowered prices. During this time, Ameriquest shut down, giving people a sign of what might follow.

• Competition – Even though we saw fewer players, we saw an increase in competition among them. The pool of available leads was smaller, and companies were becoming more advanced in their acquisition strategies. That forced a cycle of relentless focus in order to not see margin compression.

• Lead Volume – Paradoxically, as the you know what has hit the fan, the ability of lead generators to generate leads has not decreased. As we have covered previously and alluded to above, the issue came from too many people who, for lack of a better term, got suckered into “too good to be true” deals. People continue to fill out forms, but it’s in desperation now, as the too good to be true becomes true. Conversions haven’t dropped, but that hasn’t helped lead generators. Notice the almost flipped situation from growth, where supply far exceeds demand.
• Lead Demand – Unprecedented might describe this scenario best. The chain for years worked as follows – lenders could and did make lenient loans, it was home buyers who sought out easy mortgages, and it was Wall Street underwriters that turned them into securities. You could say it began when New Century went under, but it came to a head (or so we hope) this past week. In a matter of days, Wall Street went from hesitant to down right reluctant to securitize the adjustable-rate mortgages and related products that contributed to the situation we see today. Lenders have borrowers but the whole chain from taking that borrower and turning it into a funded loan has fallen apart for a majority of those requesting money.
• Price Per Lead – It’s now not so much a question of price but demand. The buyers of leads have had their monetization taken away from them. Instead of lowering rates, they are simply pulling out from a wide swath of leads, ones that they would have gobbled up during Growth, lived with during Maturation, and bargained for during Survival.

• Competition – I think people are less worried about competition and more about how they will survive. If anything we might soon enter a period of cooperation because taking out your competitor does not equate to an extra seat on the life boat. Instead, you need all the hands you can get to lower the boat and row to safety.

I’d like to pretend that we know what might happen in the future. If we did, we probably wouldn’t report on it, but in true direct marketing fashion, go find a way to make money off of it. While I wish I felt otherwise, I don’t feel that we’ve hit the floor yet. In my opinion though, we have come closer, so with respect to lead appetite by lenders, what they will buy, and the price they will pay, I don’t think it will change as significantly as it already has. Unfortunately, this means a still contracted mortgage lead generation market and a bevy of leads that generators cannot monetize. The smart generators will learn how to better target their ads to have the ratio of completed forms become more in line with what buyers want. They will send on less waste, buyers will become more efficient, and prices might rise to stem the current bleeding. The best will figure out how to gain market share of the existing leads available, growing because others have not as successfully altered their marketing mix to impact their lead mix.