Seth Goldstein: One of the issues I think a lot of people deal with in the online advertising market in general and in the Internet lead market specifically is how to evaluate the quality of the lead. How do you address the quality dynamic?
Lew Ranieri: Define quality, because when you say quality…
Ranieri: You need to tell me what he conversion rate is, and what loan it’s converting into. So am I multiplying the conversion rate by 5/8s or a point and a half? Is it converting into a 30-year, because remember, there’s more than one mortgage market. There’s the low income FHH market. There’s the big one, the conforming market. And then there’s non-conforming like in this world and California much of the product is non-conforming and because of the balances that stuff is generally worth more money. So again, I just need to know what I’m multiplying it by to figure out the value of the lead. So if quality is being used by you to simply mean the conversion rate, you need to be able to ascertain independently, unless somebody’s going to guarantee it for you, what the conversion rate is and you need to get enough information to do that effectively. The mortgage guys will eventually make you pay attention to pricing it this way.
Goldstein: How does this relate to the mortgage market in the ‘80s in terms of ratings agencies and the evaluation of quality?
Ranieri: We pulled the regulators into it because we needed somebody who had the power to standardize. The non-agency market, the non-conforming market took longer because we had to do it with money; we had to do it ourselves by imposing rules upon ourselves and then agreeing to abide by the rules we were imposing (and ostracize those who refused by putting them on a black list). It worked because you want to do business and if everyone else decides to black list you because you’re always monkey-ing around, eventually you decide that it’s not worth your interest to monkey around. But this takes longer than a regulator saying: “here are the rules, sign this piece of paper, and oh by the way if you monkey around I’m sending you to jail”. There’s something about those last words, which have the ability to make you pay attention.
Goldstein: How did the mortgages evolve from being a narrow, housing-specific market to the trillion-dollar bond industry that is has become today?
Ranieri: Mortgages became a vehicle not simply for housing, for the financing of housing, but it became an asset class for people to invest in. People use it as a proxy for the movement of interest rates because it’s so big.
Goldstein: Clearly, that was great for Wall Street and Salomon Brothers, but my question is how did that benefit home owners? How did that benefit the banks?
Ranieri: It’s called liquidity, liquidity, liquidity. I’ve developed a lot of markets, not just mortgages, and in every one of them your knee-jerk reaction is always: “I like my big fat spread, leave me alone. I like it this way, go away. I don’t want to hear about an exchange. I don’t want to hear about a security. I don’t want to hear about standardization. I’m making a lot of money.” Markets that grow to the size that I believe the leads business will, these markets never become totally homogenized. The generic will become the department store special, but there’s always the edges. I think you will see, in a very short period of time, that the new sex symbol of Wall Street will be the lead trader.
Goldstein: Ok, but how do consumers benefit? For example, how did the securitization of mortgages help people?
Ranieri: By lowering the cost. All of housing rests on two pieces of legislation both of which I helped to write: The Secondary Market Enhancement Act, which was passed in 1984 and the Tax Bill, which is called Remick, which passed in 1987. New markets don’t have that security web of regulation. When we went to Congress and asked Congress to pass a bill, you can imagine the strange looks we got. We had to agree on the first bill that there would be a “look-back” 4 years later and the look-back said that: if they gave us this bill we would be able to lower the cost of housing by 250 basis points. And so Congress ordered a review and if we had not met or exceeded that promise, the bill would have died. We ended up lowering the cost of housing by much, much, much more than that.
So, one of the ways I think the consumer will benefit here is through the democratization of information. The mortgage business has lived for a very long time by trying to capture the consumer, by trying to keep him fenced in. So if he comes to me to build a house, I want to sell him my house, but I’m not going to tell him to go call 40 realtors to get a mortgage. I want him to go to my friendly neighborhood realtor to get a mortgage because I’m going to get some part of that fee. And I’m probably going to try to sell him homeowner’s insurance as well. If I have a special deal with Anderson Windows, I’m going to try to get him to upgrade into Anderson. That’s just the nature of the world. The web has become the major vehicle of intention information. It’s much more difficult to keep consumers fenced in. It is easier for him to bracket what is a good loan and what is a bad loan because not only is he getting freedom of access to all of the forms, he’s getting freedom of access to information about people who are prepared to tell him about the risks of a given loan. RootExchange is in the center of this movement.
(Thread 5 of RootExchange/s speaker series: #2 June 13, 2006 with Seth Goldstein interviewing Lew Ranieri at NY office of Root Markets)