TheMReport — News and strategies for the evolving mortgage marketplace.
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24 | M R EP O RT FEATURE and Economics of the Mortgage Bankers Association, said: "With the surge in mortgage production volume in the third quarter, net production profits among independent mortgage bankers increased, surpassing 200 basis points for the first time since the inception of MBA's report in 2008." Lenders were no longer focused on competing for customers; they were competing for talent to handle the overwhelming production volume. This resulted in a hiring binge. Using the term "hiring spree" seemed to understate what was really happening since lenders were also offering large signing bonuses and guarantees. Many also put together training programs to remotely develop industry newbies into mortgage professionals. The industry grew quite a bit in a relatively short period of time. This is all well and dandy until you begin to think about what will happen when rates tick up. Well, that time has come. Rates are increasing and refinance demand has dropped compared a year ago. Unfortunately, the industry is now overstaffed and the overhead is hurting lenders' bottom lines. The Economics of Mortgage Marketing I n order to keep production up, lenders have already sharpened their pricing, which reduced their margins, and are spending more marketing dollars to drive more leads in order to generate enough production to keep the staff busy. One easy channel to immediately drive in more leads is the performance marketing (lead generation) channels where vendors sell each consumer inquiry to multiple competing lenders. As demand for buying leads (predominantly refinance leads) increases, the cost for leads go up. At the same time, as rates increased the overall conversion rate on a lead goes down resulting in a spike in the marketing cost per funded loan. As an example, last year, approximately 10% of high-quality refinance leads were converting into a funded loan. So, if a performance marketing company generated 100 leads, 10 of those leads would fund. However, those leads are not usually sold exclusively to one lender, they are often sold "up to 4 times." Since many lenders tapered back their lead buying, many leads were only being sold to one or two lenders. When sold to a single lender for $60 per lead, a 10% conversion rate would yield a marketing cost per funded loan of $600. When sold to two lenders at $30 each, then each lender would convert approximately 5% and still have a $600 marketing cost per funded loan (although they each had to work twice the number of leads to get the same number of funded loans compared to buying exclusively for $60). More realistic today is a 40% decrease in overall lead conversion because of increased mortgage rates, which drives up the demand for more leads to counteract the decrease in conversion. Each lead is now typically being sold to three lenders, which decreases each lender's conversion rate to 2%. If prices increased to $40 per lead per lender, that is a $2,000 marketing cost per funded loan—a 233% cost increase! Certainly a shock to the system. Purchases Are Not Refinances M any consumer direct lenders focus on refinance business because it is an easier loan type to master at scale using market- ing automation. It is also a shorter cycle from the moment you spend marketing dollars to the time you receive revenue from the sale of those loans on the second- ary market. Purchase loans take longer as borrowers need to find the home and get into a purchase contract (if they ever do!) not to mention some of those pre-ap- proved borrowers—often referred to as "TBDs" since the property address is to-be-determined—may be swayed by their realtor to go with their preferred local mort- gage professional. Trying to transition from doing 90% refinance business to a 50/50 refi/purchase split is a substantial challenge. Since the purchase loan cycle is much longer, there is a much wider time gap from spending marketing dollars to realizing the revenue. Additionally, it takes more patience and thoughtful consideration in timing follow- up with the borrowers so you are present enough to help them when they need the help, but not too much as to annoy them. Because of the differences, it requires a separation of loan officers to be consistently successful. If the loan officer has the choice between trying to convert a purchase or a refinance lead, they will lean towards the refinance lead because they have a better chance of getting an origination on a refinance than a purchase. Soon, the purchase leads are neglected and conversion rates tank. Lenders who try to increase the mix of home purchase In order to keep production up, lenders have already sharpened their pricing, which reduced their margins, and are spending more marketing dollars to drive more leads in order to generate enough production to keep the staff busy.