Don’t fall for the mortgage ‘Value Trap’

There’s a concept in stock investing called “value trap” – an investor looks at the current valuation and thinks it’s potentially a bargain due to historical valuation. The naive investor may think that there is a deal to be had if a stock’s fundamentals appear cheap – its share price, price/earnings ratio, etc. The thought is that the stock is destined to go back up but ultimately, the stock is likely cheap for a reason. The likelihood is that the stock will continue to trade around its current price – or worse, continue to decline.

When thinking about launching a marketing campaign, we often see lenders and loan officers fall for value traps when it comes to lead sources. The same principles are at play in marketing when it comes to investing. Quite often, we hear lenders talk about the upfront cost of various marketing sources. Considering all the myriad places to acquire leads, it can be difficult to compare pricing.

Depending on the source, you might pay a cost per impression, cost per click, cost per lead, cost per call, among others. Not only are there several ways to pay to acquire traffic, the quality of that traffic can vary greatly within a sole source. For example, we see variance in performance across different search terms from Google.

The best way to compare marketing sources is to look at your average cost to acquire a customer or cost per funded loan.

This is a metric that can be measured regardless of source. There a couple of ways to look at your acquisition costs – either in a dollar amount or as a percentage of a loan amount. The latter is particularly important for lenders that tend to have a higher average loan amount.

For example, if your average loan amount is $200,000, a lender spending $2,000 to acquire a customer is spending 1%. But, if a lender has an average loan amount of $300,000, the percentage drops by almost a half to just under .7% of your loan amount. This could have a material impact on whether or not a campaign is profitable.

Another thing to consider is not just the dollar investment, but also the time and effort. Once a lead is generated, there are key metrics we tell lenders to monitor – contact rate, transfer rate, lock rate and close rate. Often, the cheaper the upfront cost is, the more effort it’s going to require getting that customer on the phone.

Bigger lenders have the scale to handle the low-cost, high-effort marketing campaigns. But for most lenders, the cost of human capital to goes up and offsets what may appear to be a profitable marketing acquisition cost.