It is not as if I was the only one saying this, but the hens come home to roost at some point and this seems to be the case with default rates in the mortgage space. This, in my opinion, was primarily due to consumers being put into mortgages they did not understand.

The industry is bracing itself for more bad news and we have begun seeing the upstream ripple effects in the supply chain: Wall St is concerned about the defaults and is passing it on to banks by yanking further funding and closing warehousing facilities; banks feel the pinch and will put the thumbscrews to originators by requiring lower LTVs and greater documentation; and, originators are pulling back from aggressive lead-buying and have become more selective in lead sources and lead quality by canceling certain relationships.

So, the age-old question: What does it all mean?

1. Times will get rough for undifferentiated lead-gen firms that are small and mid-sized
2. Lenders will reduce their sources of leads, seeking higher quality generators (read: non-incentivized, non-email blast)
3. Many small and mid-sized lead generators will be consolidated or go out of business

Good news: The market will survive, for both lending and lead generation, with surviving lead generators more profitable and lenders seeing stabilized mortgage default rates
Bad news: Quality of leads and loans will be paramount to remain in business, and many lead-gen firms won’t make it.

Where does this leave Centrro? Well, markets in turmoil are one of the best to enter as there are value shifts occuring, and they present amazing opportunities as long as you address inherent risks and can suitably identify compelling opportunites. We are extremely well position to do so. With Centrro

• Consumers have choice. We can assist in their selection the RIGHT loan for their unique situtations by better educating consumers and ultimately reduces future default risk
• Lenders can make the right loans. They get a BETTER qualified lead which reduces value-misappropriation risk, by not forcing a loan on a consumer to ensure a return on the cost of the lead

So as the bad news continues, I hope the innovative entrepreneurs in our industry return to the drawing board and reconstruct their companies to fit into this new, changing world. There is exists a lot of opportunities as the mortgage market is not disappearing anytime soon, and it requires a steady flow of prospective customers to make it work.

Centrro recently had its first holiday party. Being a start-up, we didn’t really have the resources to go crazy. Luckily for us, the good folks over at STIRR held a great holiday party mash-up for start-ups who couldn’t afford to go all out. Picture 400+ people from 120 small start-ups at the Exploratorium in San Francisco having a great time. On another note, the folks over at STIRR also have great get togethers where start-ups can do 60 second presentations to get the word out. It’s usually attended by a few angels and sponsored by a VC firm so if you’re an entrepreneur looking to generate some buzz, take a trip over to their website.

Till next year… HAPPY HOLIDAYS!

The above headline was a front page article [online subscription required] in today’s Wall Street Journal.

It seems every year we get this headline that mortgage lending, and its associated real estate market, is about to enter a funk and begin a precipitous decline that hurls the US into a recession. This scenario might be a bit extreme but cracks are evident in the market place.

Maslow best postulated it in his hierarchy of needs by placing shelter as a rather primitive one. So, people will always require it and will strive to pay for it, whether they own it or not. The unfortunate truth is that most owners that are defaulting are first-time homebuyers and are the ones most susceptible to mispricing of loans. (I shan’t make a pitch for Centrro here as you, by now, know what we do and how we do it.) But, the default situation begins becoming unsettling when “80,000 subprime borrowers who took out mortgages packaged into securities this year are behind on their payments”, delinquency rates are 2X the rate recorded last year, and mortgage lenders such as Option One and KeyCorp are beginning to exit the marketplace. The greater concern, as the article correctly states, is less with banks exiting the subprime market and more with the secondary market that supports it. As the delinquency ripple works its way downstream it has a chilling effect on the investment marketplace.

If the secondary market begins observing higher than expected default rates, someone is left holding the bag. The question is who? In the securitization process investment grade tranches have protected payouts and are typically safe. However hedge funds and other investors seeking much higher yields hold the toxic part of the bonds, and could be creamed as a result. Assume 10% of all mortgage bonds held — let me state that this is a dart-against-the-board assumption and is being used for illustrative purposes alone — are toxic and subprime securitization requires its greater-than-average share of toxic bonds, let’s assume 60%. This translates to a $600 billion share of a $10 trillion US mortgage market. A higher default rate IS a big thing as it:

1. Forces the tightening of requirements for lending [a good thing, especially in a slowing real estate market]
2. Damps investment in the toxic part of mortgage market (toxic bonds make the other tranches in a securitization investment-grade) [a bad thing]
3. Frees up a lot of investment cash in a national market already saturated with investment money, further depressing returns [a bad thing]
4. Forces money to seek international markets to deploy investable cash [bad thing for the US, good thing for developing nations]

Result: 1 good, 3 bads…

This is just a thought: it might make sense for the industry to take the hit on the size of the new originations by improving the origination process; be it by better matching consumers with homes and loans they can afford, or raising the hurdle rate of who can get a loan.

Yes, it is tough medicine to swallow but the reason for a doctor is to get better not prolong the ailment.

It’s been an amazing few months since we launched the site. As with all public betas, we’re quickly finding the holes in our system, both technically and conceptually. Technical issues are somewhat easier to address. Something is broken, you figure out the issue, and you fix it. Conceptual issues are much harder because they strike at the core of your business philosophy. Did the concept we originally come up with translate to a working business in the real world? For the most part, a resounding yes. However, one issue that we grapple with is changing lender’s behaviors as it relates to online advertising. Google, Yahoo, and now MSN, have successfully proven that cost per click advertising can be quite effective for financial related offers.

One of Centrro’s main tenants was to give lenders a much more detailed and targetted advertising channel. To this end we asked our lenders to provide us information on their ideal customer so that we could better target the leads they received. Some of the lenders in our system were happy to do this. Some were more used to the keyword marketing style of online advertising. As we talked to more and more lenders, we were beginning to see that the path of least resistance was where most people wanted to go. Who could blame them? Nobody wants to try something new unless they are absolutely sure it will be better than what they currently were doing.

To that end, you’ll notice that we have two types of results in our home loan search results. The ones with the orange “Apply” button are for the original method of submitting a lead to a lender (more qualified and with more information). The grey “Click” buttons are for our lenders who prefer to just have users do directly to their website a la standard keyword marketing.  It’ll be interesting to see which one gets the most use. Till next time…

We have been having discussions about how our base of lenders might use this service and have been surprised by lenders that create an account and price leads without any prior experience.

Since we operate a little differently than most companies that supply leads (in that we do not set lead prices but allow lenders to set their own), our service might require the lender to take the extra step in figuring out a bid price. So, this is a quick bid price tutorial for loan leads.

How much should I bid?
The answer depends on you and your business.

1. Type of loan you package: If you are in California and your average target loan is a jumbo $600K which allows you to get 0.75% from the borrower and 0.25% from the wholesaler, you end up with $6K in commissions on the loan.
2. Your cost structure: You might attribute $1K to processing costs, $1K to overhead, and $2K for all marketing costs to get this loan (this includes flyers, pamphlets, newspaper ads, open-house time, time spent talking to prospective customers, accessing credit reports for quotes, processing quotes, etc.).
3. Your close rate: For every lead that you get you estimate that 10% close and 90% are lookey-loos.

Now that you recognize these numbers it allows you to price what you might pay for a lead.

Lead Bid Pricing
With a $2,000 marketing cost and a 10% close rate, it costs you $200 per lead. Presume this metric holds true and 25% of your cost ($50) is for credit report pulling and communicating with the customer, your maximum bid price would be $150 per exclusive lead. You needn’t start at this point but you have now established a range — $25 to $150 — within which to bid.

Add water and mix
So you have the formula, now take the cost structure you have and your close rates and determine your bid-pricing strategy.

Bidding by Loan Product
Since your commissions vary across different loans, as do the loan amounts you fund, it makes sense to vary your bid strategy by product. A $400K new purchase loan with a 10% close rate and 1% commission will have a different bid price than a $1 million refinance loan with a 20% close rate and 0.5% commission.

This is how most lenders in our network are determining their bids. If you have any thoughts to share on this we would love to hear about them.

There was a recent article (on Sept 11, 2006, I believe) in the Wall Street Journal on predatory lending. It was opportune as I was about to have a conversation with a new partner who’s primary charter, I found out, is to actively address this issue in its portfolio of underwritten loans. As I prepared for the call, it got me thinking about how a person is coerced into paying a higher price.

The anwser is that we fear – we all feared as some point.

Take your first credit card application in college: you apply fearing rejection. You wait, hoping, praying that Citibank returns a positive response. After graduation the same held true as you entered a dealership to buy a car. As you approached your first home purchase, you felt almost grateful when the bank/mortgage broker pre-approved you. The truth is that we fear rejection and are so thankful when not rejected that the below-market offer we receive is appreciated instead of negotiated.

The second time you apply for a credit card you understand 23.99% interest compounded is not as much a gift as you thought. So, you create a litany of things for the next card — no annual fee, low interest rate, Mastercard, reward points — and shop for a lender that can deliver plastic that fits your requirements. Once found you contact the 800-number (or go to the website), request and apply to the offer. The only thing missing is the knowledge of whether you qualify and will be approved before applying…hence, the greatly subdued, yet still lingering, fear.

Home loans are much better in this regard because a mortgage lender knows what you will be approved for before you apply, as long as your credit score and other financial stats meet a series of cutoffs. So, why don’t people know this. Actually, some do. Unfortunately not everyone realizes that they have options. The goal in reducing predatory lending is to make consumers aware of their options in a comparative environment. This is one of the applications that the web is ideally suited for. We hope that Centrro can assist in reducing predation of fearful customer by eliminating this information asymmetry. This would allow consumers to explore all options available to them, and be informed, before applying, whether they might or might not be approved for a loan based on their unique profile. The ultimate goal is the elimination of rejection fears for all consumers as they seek out financial products.

Welcome to the first post of many from us here at Centrro.  My name is Tuyen Vo, co-founder and VP of Products here at the company.  We’ll be using this space to tell you about company updates, new feature releases, or just general industry news we think is interesting.  Our hope is to create an informal dialogue between ourselves and you, our users.  We strongly urge you to respond to our posts and/or send us your comments and suggestions.  As we are in a live beta, you’ll see a lot of changes on our site which will be directly driven by user feedback.

So what is Centrro?  The technical answer is we are a vertical search engine focusing on the personal financial space.  The simpler answer is that we help people find the ideal credit/loan products that best fit their credit profile.  We give users powerful search and filtering tools that put them in the driver’s seat when shopping for things like mortgages and credit cards.  Our philosophy is, who better than you to decide what’s best for your unique situation?

We’re a bit different than a typical search engine like Google or Yahoo.  Instead of keywords, you’ll be inputting things like your Target Home Price or what Card Rewards you’re interested in.  Eventually you’ll be filtering down the total number of products you see until you’ve gotten to a manageable list you can choose from.

So there it is a nutshell.  Though we’ve got our version 1.0, we’re actively working on new features which we’ll release steadily every few weeks.  Check the site often for these new releases and come back here from time to time for more news.  Till next time…