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Jun. 23, 2011: The power of borrowers in the internet age; some light industry news
Rob Chrisman
[I am on
vacation, and my access to e-mail is sporadic and not timely. In
my place are daily commentaries from a series of very
knowledgeable mortgage industry people with different
backgrounds, and they have been given very little direction
about what to write about. The second is below.
Our views may or may not coincide, but I thank them for their
time in volunteering and helping out.]
Here is a write up
on how potential borrowers use the internet to select a
lender, followed by some industry news:
Internet Lending
Begins
Just a little over
fifteen years ago, with the publication of Statement of Policy
1996-1 in The Federal Register, Nick Retsinas’s HUD determined
the direction of the use of the Internet in consumer-direct
business sourcing. Up to that point a handful of small,
visionary mortgage companies had been attempting to use the web
in the same way other industries were by getting “free”
advertising on the Internet. Their model
was to go consumer direct, get leads from your site, cut
commission splits, take apps, process, deliver, and fulfill in
all ways thereby cutting operational costs. It was the Dot.Com
promise—and the Dot.Com Bust.
CLO
The change
implemented by HUD in 1996 was to the interpretation of the
anti-kickback provisions of Sections 8a &b of RESPA with
regard to what had become known as “CLOs” (Computerized Loan
Origination Systems). In going beyond the “qualified CLO” of
1994, HUD opened the door to entrepreneurs who chose, rather
than to be mortgage lenders themselves, to be online marketers
of consumer-facing mortgage “opportunities” and transparent
competitive marketplaces. The key was that these market
operators could earn their fees if everyone acted within certain
HUD-delineated restrictions: lender-neutral, multi-lender
platforms with standardized CLO fees. A really perfect history
of this period can be found in the October, 1994 issue of Mortgage Banking in an article by
Phil Shulman.
Business Model
The Internet can be a
place where a mortgage lender can go to disintermediate his
advertising agency and media vendors and where he can outsell
his salespeople and go direct to the public with his message. Since 1996 it’s a place where a mortgage
lender can still leave the marketing for mortgage customers—both
online and offline—to the professionals and buy leads from them
under the new CLO rules, hopefully maintaining or building
volume while controlling marketing expense and cutting
commissions.
Early Examples
Two obvious examples
of this dichotomy are E-LOAN and LendingTree. Janina Pawlowski
and Chris Larsen were Silicon Valley whiz kids who clearly early
saw where the Web was going, but they saw it too soon and got
caught up in that Dot.Com mind set that told us that “E-Commerce
is here! The old world is gone forever!” E-LOAN was such a well
crafted solution—why didn’t it work? Because its value
proposition was lost in the medium, it was ahead of its time. It
tried to attract borrowers with the internet, to the internet,
to explain why you should get a mortgage on the internet.
Success on a Big
Scale
Lendingtree’s model
worked. TV ads promoting that viewers
get up and go to their computers and submit a form so that banks
could compete for their loan was irresistible. Lenders could set
filters for the lead types and locations they wanted and focus
on those chosen consumers. With dropping
rates and expanding products in our industry Lendingtree allowed
lenders (like us) to expand from single market referral based
companies to multi-state internet call centers. Lendingtree’s
“long form” lead became the standard, still unmatched on-line.
Lead Gen Grows
Several competitors
sprang up, most notable LowerMyBills. The
“short form” lead became the favorite of the larger call center
lenders. Cheaper and in much larger
quantities, these lenders grew with the expansion of HELOC’s,
125%, Alt-A and Subprime.
Model
Starts to Change
The long and short
form leads placed the contact with the consumer before the price
was quoted. Today with scaling back of available products,
increase in Web 2.0 consumer empowerment and better technology
more lead generators have put the price before the contact.
Zillow, Google, iCanBuy are examples and Bankrate has had that
model for some time now. The consumer sees the price, and
chooses to contact or be contacted by the lender.
Good/Bad of New
Model
Lenders like the
quality of the leads but quantity can be an issue.
A bigger issue with this “price before contact” is the
“price”. How do you get noticed? Well, low ball pricing usually. We would like to think that the internet
has matured enough where lenders that “lure” with price can’t
survive. The recent LO Comp change has
kicked some in the teeth as company margins need to be set and
can’t vary (much). Time will tell but
from what we can see – companies that deliver a fair price and
have customer service scores to back it up will come out the
winners. Quicken Loans comes to mind
here.
Future
The empowered Web 2.0
consumer and future borrowers (your kids and Grandkids) will
have more and more opportunity to check on and select a lender
prior to initiating contact. A nice
website with company managed testimonials is no longer enough. Websites that allow consumers to “rate”
lenders and loan officers will become more common.
Yelp and epinions are examples. However it’s
accomplished, getting a Borrower in the door and to the closing
table will forever involve some sort of cost of sale, and the
development of some sort of customer relationship.
Owen Raun
Michael Hillman
RMC Vanguard Mortgage
www.rmcv.com
Editor’s note:
Higher capital
requirements? Not so fast…Myron Scholes, a Nobel Prize-winning
quantitative analyst, said subjecting major banks to higher
capital requirements could make financial markets more volatile.
"If you restrict or require more capital of banks, what will
happen is that they have to wait until the deviations [in price]
get larger before they intermediate, because they have to make a
return on the capital they are employing," Scholes said. "As
intermediary services stop, markets then become more chaotic."
For a smattering of
large investor news, Bank of America issued disaster
declarations for Vermont and Massachusettes, as well as updates
for Oklahoma and Kentucky. The company also came out with a
merger of Bank of America, N.A. and BAC Home Loans Servicing,
along with issuing a product clarification on the flood
insurance requirements for condominiums. GMAC released their
July Client Development Calendar. Chase announced requirements
for correspondents in connection with the SAFE Act, specifically
to assist correspondents in complying with those requirements by
noting common mistakes to avoid when submitting loan files to
Chase and to offer guidance to ensure proper documentation is in
the loan file at the time of funding submission.
Yesterday’s FOMC news
was…not much. Overall the FOMC statement was in line with
expectations, and we find the 10-yr still sitting around 2.96%.
Housing news has been mixed lately, as we all know, and even
“mixed” might be an optimistic term. Overall "the housing sector
continues to be depressed" - as the FOMC statement so succinctly
put it. Even apps yesterday showed a drop of about 7% during
last week.
If you’re interested, visit my twice-a-month blog at the
STRATMOR Group web site located at www.stratmorgroup.com . The current blog
takes a look at near-term news for non-agency securities, such
as jumbo residential loans. If you have both the time and
inclination make a comment on what I have written, or on other
comments so that folks can learn what’s going on out there from
the other readers.
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