On June 13, 2006 we hosted our second session of the RootExchange/s speaker series. Our first speaker was Michael
Goldhaber, the leading philosopher of our emerging Attention Economy. This second session featured Chairman of Root Markets, Lew Ranieri. As Vice Chairman of Salomon Brothers in the 80's, he pioneered the mortgage security market and helped turn it into the trillion dollar market it is today. Ranieri shared his insights on the housing and mortgage markets, and described how the Internet promises to introduce further efficiencies to benefit consumers, publishers and lenders.
Seth Goldstein: What inspired you to become involved with Root Markets and how does it relate to your perspective on the evolution of the mortgage customer acquisition market?
Lew Ranieri: About a year ago you started talking to me about your vision “the lead business” … I must admit I’d never heard of it before. I’ve built a number of banks and some of the largest mortgage companies – I was the founder of what became GMAC Mortgage before there was a mortgage business. “Lead generation” … what does that mean? When I started to understand it, what became apparent to me was that this is potentially the most powerful origination channel across all the consumer areas. I truly believe that from a trader point of view. I’m a trader. I’ve built businesses and owned companies, but the only thing I’ve ever really loved was trading. The good thing about trading is that you come in in the morning and at the end of the day you know whether you’ve won or lost. I remember when corporate bond traders were kings of the world. And then it was junk bond traders. And then mortgage traders. I will make a prediction for you: I think that very shortly the new sex symbol for Wall Street will be lead traders; because I really do believe that as a channel, this is the most powerful technology I’ve ever seen. It’s in its infancy, it’s ruthlessly inefficient, in many ways it makes very little sense in the way things are being priced, but it has embedded in it the seeds of an extraordinary potential because it’s totally variable cost. It operates where the consumer has migrated to. It’s based on the most powerful consumer force, namely the democratization of the access to information. It’s just extraordinary in its breadth and in what it could become. So since I have an innate desire to continue to become wealthier, I thought this was a really interesting place to get involved in
SG: Juxtapose that with your outlook on the mortgage market, both that which is driving online advertising, which is primarily focused on refinance, and what you call the “real housing market.”
LR: One thing that surprises me about the lead generation business is that when people say mortgages, they mean typically mean refinance (refi). Normally, when mortgage people are saying mortgages, refi is this other thing that happens periodically when rates are going down because the rest of the time there is no such thing. The basic process of housing is new construction, resale, home improvement. Refi for us is a “sometimes” thing. It’s been a great stretch over the last seven years as rates have come down and everybody’s been refi’d at least one and a half times.
SG: What is your outlook on interest rates?
LR: My outlook for interest rates should not be surprising to many of you. I think Bernanke will over-compensate and that interest rates will tighten too much because he believes that to be the safest course. He feels that it’s easier for them to reverse the course from an over-tightening situation and stimulate the economy than it would be to let interest rates take hold which will take a much longer period of time and be much more painful to stamp out. So they’re much more prepared to create a recession than they are to allow inflation to take hold. I think Bernanke, in order establish his bona fides as a certified inflation fighter, will have a double reason to want to overcompensate so I think they will tighten on the front end. Although the economy, in my opinion, is already starting to slow down. Energy prices take a long time to work their way through the economy. So, with the tightening that I believe that they will do, we will wind up in a position where we’ll invert the curve more. We may actually get to one of the more inverted curves with all of those implications, and I can see 18 months from now we might be going the opposite direction with great haste.
SG: What are the implications for housing?
LR: But what does that mean for housing? Well, you’re already starting to see it. You’re seeing an absolute slowdown on the part of the consumer. Those of you in the mortgage business know that volumes are off substantially across the board. That’s likely to continue. It’s creating some interesting opportunities in refinance because – this is probably the first period since ARMs have been in existence where they’re actually going to roll to the cap at a point when the 30-year rate is lower. Most adjustable rate loans and a very substantial amount of adjustable rate loans are not rolling to their cap, and note that cap is somewhere between 7 and 7.25 so many consumers are now looking at a 7.25 mortgage rate when the 7-year or 30-year fixed rate is well below that, 6.5 as an example. So it’s unlikely that a consumer is going to start paying 7.25 or 7.5 when he can just refinance into not another ARM, which used to be we could roll ARMs forever. Now we’re not in a roll ARMs, we’re actually in the unique position to roll ARMs into fixed rates.