Making Sense of the Mortgage Market Mess, Part 1 & 2


Compliments of DM Confidential 

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 – 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.

—- PART II —-

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.

DM Confidential


  1. I love ADOTAS and have been around for more years than most think you have existed. What I find interesting is how “small businesses” which remember can mean $5M in revenue has seen the CRUNCH because of failing/correcting mortgage rates in their markets, especially those of us in Phoenix which has been oversold and overpriced for years and truly is driving this national impact in averages!

    Who’s ready to be honest here?

    Amanda Vega
    (480) 275-9797


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