We’re Saved…Sort of

Mortgage marketers, long a staple of the Internet advertising landscape, have in the past year had a much more subdued presence online, especially display. As an inescapable piece of text link advertising on content websites, through providers such as MSN, mortgage markets have not fallen completely from view, but they sure haven’t dominated the mindshare and marketshare the way they did from 2002 into 2007. Outside of specialized financial sites like Bankrate, a publicly traded company that has almost miraculously avoided stock market disaster, you will struggle to find other signs of the mortgage market advertising online. With hundreds of billions recently injected into the financial system, and into the banks themselves, you might start to expect a bigger presence. And, while it took longer than expected, the impacts of the capital infusion have made there way online. And not surprisingly, one of the pioneers in the online space, LowerMyBills, has ads to this extent. Below you see a recent banner touting the passage of the housing bill and the corresponding landing page that reiterates the theme. The banner uses their familiar "Calculate" call to action, but the landing page focuses on the doubts many people have over the financial meltdown, stressing "Refinance with More Confidence."

Despite the often overly optimistic nature of many mortgage related campaigns, such as those still touting rates at historic lows, this one has some truth to it, especially the last part of the of landing page’s headline, which reads "Rates Dropping Sharply." Give them credit for finding yet another powerful headline. While we can’t vouch for the quantity of the infusion or when this ad began, we do know that about two weeks ago, just before Thanksgiving, the Federal Reserve said that it would buy $500 billion in mortgage-backed securities currently guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Rates had dropped some at the announcement of the bailout, but that announcement caused a truly dramatic rise in mortgage activity, and not marketers saying truly dramatic. As reported in the NY Times, "The Mortgage Bankers Association said its refinance index, which measures refinancing activity, tripled to 3,802.8 last week from the week before. The index was also 37.7 percent higher than in the same week a year ago. It was the largest increase in refinance applications in the survey’s 18-year history." Requests to refinance dominated, accounting for 69.1 percent of all mortgage applications submitted during the record week, compared with 49.3 percent the week before. Says Bob Walters, chief economist of Quicken Loans, "We did quadruple our normal volume last week,” adding that they "had loan officers staying past midnight to get back to all of the people that had been calling." Putting these increases in perspective though, the number of refinances expected this year will amount to not much more than 1/4 of the total seen in 2003 during the height of the housing boom.

Refinance activity added the rocket fuel to the economy post-tech bubble bursting, and a housing recovery would presumably help not just the American but expectingly the global economy. The Catch-22 of course is that the same activity that propelled massive growth also resulted in a contraction, at least in the stock market, that exceeded the initial growth. Not surprisingly, as the US housing market tries to find terra firma, the volume of loans will start smaller. The current overration to the loose-lending of 18 months ago is certainly one reason that hampers the total number of loan activity. For example, as rates drop, it should mean that a greater number of people become eligible to refinance, but unlike a few years ago, of those who technically qualify, i.e. their current mortgage rate is higher than what mortgages could be had for today, only a small number will actually get the lower rates. Whereas almost any mammal could get not just a new loan but one at a low rate, now only those with pristine credit and significant equity in the house can, limiting the overall impact of the lower rates. Subprime lending has virtually come to a halt, and current lending rules also make it tougher for those seeking larger loans or small-business owners and other self-employed individuals.

The limited audience of those who can take advantage of new loans explains only part of the current challenge in the housing market and its potential recovery. The larger issue stems from two things – those who now owe more money on their house than it is worth and secondly, unemployment. Focusing on the former, an article in the WSJ reports, "A survey showed that one in 10 American households with mortgages is overdue on payments or in foreclosure. Prime loans, 5.9% of loans were past due or in foreclosure in the latest quarter. For subprime loans, those for people with weak credit records or high debts in relation to income, the rate was about 33%. Those currently behind on their mortgage, generally those underwater, have had limited options to date. Like debt settlement they can attempt to get a modified loan from their bank, but most report limited success in doing so as the banks have not the motivation nor process for handling this in scale. Enter the FDIC who announced their plan to prevent an estimated 1.5 million foreclosures by the end of 2009 by creating guidelines that will modify more than two million loans at estimated costs. Again, according to the Journal, "This may be wonderful politics, but the real-world evidence suggests it will be far more difficult and expensive." Making sense of the math for the various options for modifying is also difficult. It’s tempting to root for the plan because selfishly it would result in an amazing resurgence in mortgage spending online.

Returning to the second point, for the past four to five years, the housing market has acted like the economic center of the universe. The housing market is not only a cause but an effect of the broader economy. In good times it can do to the economy what no other industry can, and, it can pull the economy down in a similar fashion. The mistake that many of us finally realize with the housing blinders removed is that housing doesn’t make the world go around. Jobs do. The housing market is in trouble, but to fix it, we cannot focus on the housing market directly. Now, though, fixing it means fixing the owners of the homes. It means a growing economy and job creation. We need jobs if we want people who can afford their homes. We need jobs if we want spenders. And, spending – smart spending, not the loosey goosey overspending that happened in the housing boom – will have the biggest impact. That said, let’s not downplay the benefit of lower rates and some of the first good news in a while. Quicken economist Bob Walters summarizes the upside best, saying "…the unique combination of falling home prices and falling rates are bringing home affordability back to ‘normal’ or ‘better than normal’ levels, making it a great time to buy a home."