Seth Goldstein: How does this relates to mortgage leads?
Lew Ranieri: A lead is nothing more than an opportunity to close a loan and a loan is all about the value of the servicing that’s being created. One of the most important aspects is what kind of a loan? So, the golden opportunity in the land of refinance leads today is that you can roll a refi not into another ARM which is only worth five-eighths of a point but into a fixed rate loan which is worth a ton more. A mortgage geek, not a lead geek would tell you to pay a lot more because what you would be rolling it into is a 7- or a 30-year, the value of which is almost twice as much as a traditional ARM. And there is roughly something in the neighborhood of about $600 billion of this stuff rolling up to the cap, so there’s a lot of refi business. So for the time being, even with rates going up on the short end, we will have a new generation of refi leads and refi business in general. But for housing in general, which is slowing down because of the absolute level of rates, you are starting to see some problems. The most obvious and the most problematic are in the condo market in states like Florida, Arizona, New Mexico, Las Vegas, places like that because we misjudged the amount of speculative inventory that was out there. Much of what was sold as legitimate second home inventory turned out not to be a second home, turned out to be spec.
And now with a perception on the part of the consumer that housing values aren’t going up, that stuff is flying back in our face at extraordinary levels. To date it’s largely a creature of the condominium market not of the single-family market. But traditional single-family housing in some markets is struggling. I’ll give you a personal example. I live on Long Island and in Merrick, Long Island, a middle-class neighborhood, you never saw a house for sale. It was always sold before it ever went on the market. There are now 222 listings in Merrick. That’s an unheard of situation. So you are starting to see a slow down in housing and you may see some price decline.
SG: If you could “short” one type of customer and go “long” another type of customer, what would it be?
LR: The refi business will go through a cycle maybe, not by volume but by value, because instead of refi-ing in the five-eighths servicing, you’re refi-ing into a point and a half servicing. Now that’s a pretty good deal. So, the guys who can keep the volume up, or even three-fourths of what the other volume is, the actual value of the roll will do very well. I think your industry, the lead industry as far as mortgages are concerned, has to sooner or later make the adjustment to deal with what is the real nature of housing forever, which is not just refi’s. We’re at a 45-year low in rates. It’s an easy mathematical bet to say which way rates are going. Just say up and you’re going to likely be right. If you’re at a 45-year low, in that environment refi will go back to its more traditional role and the vast volumes will be in the traditional process of housing: new construction, home improvement and resale. The lead business has to adapt to that business because that is the business. That is the one that will be there year in and year out. It will only expand and diminish on the margin and the value of the asset created is the more valuable asset in the first place. The first lead guys who figure out how to cut the Gordian knot and do new construction will be successful.
It’s kind of interesting to me to look at the fact that nobody wants to buy leads for new construction because the mortgage guy has the world turned on its head. But the new home purchase lead is a more valuable asset! It’s got the most servicing, value, plus the person who buys the house is likely to buy all the insurance programs. The refi guy isn’t buying insurance; he’s already bought them. So a lead for a new construction lead is worth more than the lead for a resale buyer and certainly infinitely more than the lead for a refi. And yet, in the RootExchange spot market today, that’s the least valuable lead and the one that frequently goes unbid for.
(Thread 4 of RootExchange/s speaker series: #2 June 13, 2006 with Seth Goldstein interviewing Lew Ranieri at NY office of Root Markets)