Whither Mortgage Lead Gen? More Thoughts.

I wrote about where mortgage lead gen was going last week and got quite a few responses from people I know in the industry. It's an interesting question, and a complicated one.

A few data points. In "Mortgage Originations in a Down Market" Booz Allen says that the average retail cost per loan (meaning, in this case, the cost to the originator) is about $3,000. From their graphic it looks like about half that is sales cost.

My friend Bill Rice over at Kaleidico (a great lead management system company), who has an interesting vantage point on the industry, pegs the close rate of a mortgage lead at 2%-3% (although he points out that companies that use his LMS have a much higher close rate.) If we assume that two-thirds of the sales cost is lead acquisition, then the effective break-even cost per lead from the originator standpoint is between $20 and $30, higher if they use a LMS (or have otherwise implemented some sort of financial accountability in their handling of leads.) Note that this is the lead-gen versus all marketing break-even: the point at which it is more effective to buy leads than to do other sorts of marketing.

Here's the dynamic as I see it:

1. People looking for a mortgage become harder to find; the cost of marketing to them increases;
2. Mortgage originators decide to lower their marketing risk by doing less marketing themselves when they can buy leads at a lower effective cost-per-close;
3. Lead generators also have a harder time finding borrowers; this leads to fewer leads and a higher cost for generating a lead;
4. Higher demand and lower supply of leads increases the purchase price of a lead;
5. Each lead sells more times, lowering average close rates for everyone;
   
6. Originators with already low close rates can't compete;
7. Originators who know what they're doing get the additional business.

Note that the increased demand for leads at a higher price and the additional difficulty in generating them means an increase in mortgage advertising spend by lead generators, my point last week. Whether this is offset by the decrease in direct mortgage advertising by originators is beyond me.

Two other things I see happening:

• Originators will scramble to implement lead management systems;
• Providers of low-quality leads (those that have the lower close rates) will be squeezed out of business quickly (as Niki Scevak pointed out last week).

I'm still pondering the impact on internet advertising as a whole, but I think the impact on quality lead generators will be positive.