double POSITIVE Marketing Group, Inc.

Given the sorry state of the mortgage industry, the big question is: What can we do?

The attitude out there is keep your head down, fight through it, be a tough guy. There’s no other way to survive. You have lived through hell the last five years, and you’re used to pessimism and the negative nature of the economy. You know you don’t have the answers. Your peers in the industry don’t have the answers. They are going to see if they can merge, roll up or fight through it and continue to operate on their own. But margins keep dropping, and it’s not a fun time. Not fun at all.

On the other hand, you talk to some big investors, and they see an opportunity, as the market continues to shrink, they want to get in and buy low. So there are some companies that are growing.

Lead quality drops

You guys know, I like to say I’m one of the most optimistic people out there. But this one of the most frustrating time in my mortgage leads lifetime.

At DoublePostive, we are seeing lead quality drop. This is happening because the re-fi market is drying up and the lead providers are beginning to be desperate to fulfill their client quotas. I can see lead providers dipping into affiliate marketplace leads, and this plays out in lower quality leads.

Quality has gone down over all. In response, we’re trying to optimize transfer rates as best as we can, via our normal process. Also we’ve added a lot of innovative tools to enhance speed-to-lead, features like call-backs, the ability to put our client’s name on the caller ID and email follow-ups on each lead.

Tightening the chin strap

My goal, assuming things continue to get worse before they get better, is to work with the folks who will survive, and partner up with the lead providers who are going to make it through it. I will continue to be a good service provider, and help the people that need to be helped.

For example, the big banks don’t have an outbound dialing culture. They don’t have the high-commissioned loan officers who are banking on a big commission, so they are not aggressive outbound dialers. This favors DoublePositive, in the long run. These big banks are paying low-level, inexperienced people, who are not aggressive outbound dialers, and that works for us. But what we really want to see is a period of healing for the smaller lenders.

The best medicine

Sometimes, when the stress is really, really bad, all you can do is laugh. That’s probably why I am reminded of Woody Allen as I wrap this series of updates. He said, “I want to leave you with a positive thought, but I can’t think of one. Would you take two negative thoughts?”

Here’s a positive thought. Just stay true to your vision, guys. Embrace the pain for the opportunities it offers. Do what you must do. Keep fighting, sell, roll up – but don’t give up. The adjustments you make now will build your company, and strengthen you to face whatever is coming next. I hope, in the long run, those who stuck it out will be rewarded.

So that’s my take on the state of the industry. My next update comes next quarter. Meantime, feel free to get in touch, or leave comments in the fields below.

In my last post, I gave the Internet leads perspective on where mortgage is as an industry today. Interest rates are low, but consumers can’t qualify for purchase or re-fi loans. Loan officers’ compensation rules have caused mortgage shops to change focus, and a huge pool of consumers for loan amounts under $250K is being ignored. The comparison lead product, which came onto the scene with such great promise, has been unable to provide enough volume. Margins are thin. Doors are closing. In short, there is a lot of stress and anxiety in the market.

Other than that, you might say, everything’s great.

No boom for comparison ads

Three months ago, I predicted that comparison lead buying would scale quickly. Since then, the comparison ad market has stayed flat. The LendingTree product Loan Explorer has been put on hold. I haven’t seen much from LeadPoint, either. They were supposed to have a major comparison lead product as well.

There are still four that dominate the comparison ad market (BankRate, Zillow, Informa, and Google). Their clients are doing well with the comparison leads. Unfortunately, they are complaining that they can’t get enough volume. (See my State of the Union – Part II http://bit.ly/iiltBZ to understand the factors that impact the volume of comparison leads available.) As a result in my estimation, it now looks like comparison ads will make up closer to 25-30% of the total next year, no more.

The state of the sales floor

Something else I predicted has not yet taken effect – but this time, I don’t think I’m wrong. I’m talking about my advice to lenders to divide their sales floor in order to scale.

Right now, I’m seeing shops go one way or the other. I’ve seen a complete reversal with two of the major players in buying lead aggregator leads. Until recently, they were heavy buyers of regular internet leads. Then they shut it off and went 100% comparison ads.

Why? Their conversion rates were dropping on traditional leads. I think they took a good look at the profile of their sales force and felt that, on the out-bound, aggressive side of the sales floor, they were not competitive with Quicken and big internet lead buyers. They lost out. So, to continue to operate in the Internet channel at all, they felt the only way to compete was to move to a low-margin / high volume business. So they publicized their rates, and completely switched over to comparison ads, where their “sales” folks just have to honor the published rates on the ad. BTW, I took some criticism for calling that order taking from some loan officers and managers in my last post. I was not trying to offend anyone on the front lines, just making a point that it is a completely different sale then the aggregator model.

This shift has been successful for both companies. But again, what I keep hearing is that lead buyers can’t get enough volume to meet their demand.

Opportunities in the confusion

So I stand by what I said at the start of Q2. In the long term, mortgage shops will buy both traditional and comparison leads online. To scale the company and hit revenue goals, you simply will have to do both. You’ll divide your sales floor, because you understand that you are dealing with two different types of sales, requiring two different types of sales people.

But you’ll still need to be smart about navigating these changes. A whole lot can still go wrong. I’ll talk about that in my next post probably mid-week.

Only one quarter of the year has passed, but a whole lot has gone down since I blogged about the State of the Mortgage Industry – and unfortunately I do mean down.

Before I start, I want to be upfront about the realities we are facing. You guys know me – I try to be the most optimistic person in the room. But these last few months have been one of the most frustrating time periods in my leads lifetime. I wish I could have a positive outlook. The truth is, the negatives continue to overwhelm the positive in all the major trends.

1. Interest rates

Yes, interest rates have stayed low. That’s a plus. But low interest rates are only a small part of the equation in qualifying a buyer for a mortgage. You still need a good loan-to-value to qualify for a mortgage. Most consumers don’t have that – they are upside down. The banks are still very strict on their underwriting guidelines. That has been frustrating for folks in the space who are ready to lend to consumers who are ready to buy or refi, but can’t get qualified.

2. Regulation-Z

The loan officer compensation requirement, Reg-Z, has caused a major change in the space. In my last post, I commented that loan officers earning over $150K per year would become a thing of the past. Well, a lot of them are in a state of confusion and disarray right now. These are smart, competitive men and women. I think a lot of them assumed they’d make a transition and things would correct themselves. But, from the leads perspective, we’re seeing that it’s tougher and tougher for them to win. The game has changed.

Reg-Z changed the game. In the past, you could do a $100K loan and still make a good fee off of it, because there was no regulation on the percentage that you could make off that loan. Now compensation is based on the loan size. The only way loan officers can chase the same type of fee they used to make is by closing larger loans only. As a result, mortgage companies are only going after large loan amounts, of $250K or greater.

This change in philosophy by mortgage companies has created problems in the Internet lead space as well. Traditional lead buyers, who for years have been buying leads from LendingTree and LowerMyBills, are now only buying the $250K loan amount or higher. This leaves a huge market of consumers for loans under $250K that is not even being called on. Lead buyers don’t want them.

What will happen to these consumers? They will go directly to their banks. I expect we’ll continue to see that the bigger banks are going to win in the long run. They will do those loans because they don’t pay their loan officers commission (most are just salaried), whereas the regional banks, lenders, mortgage brokers won’t even touch anything below $250K.

This is a frustrating business case from the leads perspective, as well. The big 4 banks are not buying leads. They are talking about it, but not really going after it right now, because they are able to rely on walk-in traffic. They keep saying they are going to be big lead buyers, but they aren’t feeling the pain. And so this huge pool of leads remains untouched.

3. Comparison ads

When I’m wrong, I try to be the first to admit it. So I admit that I overestimated the extent to which comparison ads would be adopted. This is still a relatively new lead product and did not grow last quarter as I predicted. Not because lead buyers don’t love them – they do. Because they simply can’t get enough volume.

I have a lot more to say on the topic. I’ll pick it up again in my next post. Check back soon.