An Interview With Zillow's Mortgage Expert, Erin Lantz

The Motley Fool is in Seattle, visiting online home and real estate marketplace Zillow. Today we meet with Zillow Mortgage Marketplace Director Erin Lantz to learn more about how ZMM works and whom it serves.

Erin shares ZMM's experiences and outlook on the mortgage market, its own strengths and challenges going forward, and its direct-to-consumer philosophy.

Austin Smith: Hey, Fools. Austin Smith here, and I'm joined by Erin Lantz, director of the Zillow Mortgage Marketplace. First of all, thank you for taking the time.

Mortgage is obviously a very significant part of your revenue stream. I'm wondering if you could just give those people who are unaware maybe the 30,000-foot view of what it is and how it's driving part of Zillow's growth today.

Erin Lantz: Zillow Mortgage Marketplace, or ZMM as we call it, is a comparison-shopping site for borrowers to compare a whole bunch of different lender quotes on an apples-to-apples basis.

The way we make money is, lenders pay us to advertise their quotes on ZMM. It's a cost-per-click model, so we charge lenders somewhere between $0 and $12 per click. The average is around $3 per click, and we monetize the same way on site and on mobile.

Smith: What sort of factors are impacting that CPC number?

Lantz: We have a dynamic pricing model that changes all the time.

Smith: Got to keep them guessing.

Lantz: Exactly. Exactly. What we're trying to get a gauge on is the demand to quote a particular borrower's loan request. You can imagine that a borrower who comes in with really great credit and a lot of money down in a very high-priced state, there might be a lot of demand for lenders to quote that borrower, so that would be a higher-priced click.

Smith: Are your borrowers all sorts of banks? Just big institutions? Who makes up that audience that's advertising?

Lantz: We have hundreds of different lenders, and they're really the whole gamut. We've got the small brokers, we've got mid-market correspondent lenders, we've got online lenders with big call center staffs, and we've got the big national banks.

Smith: Do you guys do any vetting of these lenders to ensure the quality of the mortgages that people are getting? Is there some sort of process for filtering out the good or the bad there?

Lantz: When we launched ZMM back in 2008, part of the model originally was make this transparent and self-regulating.

The core of that is our ratings and reviews platform. We have over 30,000 ratings and reviews, so that makes it quite self-regulating. You'll see as lenders get bad reviews, they'll stop getting contacts or they'll get fewer contacts, and the inverse is true for lenders who get great reviews.

That's the self-regulating piece, but then we also have a quality assurance team for mortgage that does the extra layer of regulation, so they're vetting lenders before they get online, they're mystery shopping them periodically to make sure every lender is honoring the quotes that they post, and they'll investigate any quotes that are flagged as suspicious and they'll take them down if necessary.

Smith: It seems like there's been a big boom in refinancing. I'm wondering two things, maybe -- how that's impacting your mortgage arm, and what sort of trajectory you guys see in the refinancing boom, if you guys could comment on that?

Lantz: Definitely. Historically low mortgage rates have been a boon for refinancers. Zillow Mortgage Marketplace gets most of its traffic from Zillow, from people looking to buy homes, so we're actually mostly purchase loan requests.

We definitely see ... refis are an important part. Underwater refinances are an important part of our business -- we're the only marketplace where you can get quotes for HARP or FHA Streamline if you're underwater -- but mostly borrowers on ZMM are looking for mortgages to purchase a home.

As the interest rates rise -- we expect rates to remain fairly low for the next 12 to 18 months -- but as they rise, refis will fall down, and we expect the purchase component to fill most of that gap. Again, given where we stand, over-indexed on purchase, we're pretty comfortable about how we can manage that transition.

Smith: What does that makeup look like? You said, obviously, as rates go up refis go down, maybe new purchases would go up. Is it a one-to-one comparison? How does that shake out, at least from what you guys see on the lead-gen end?

Lantz: From an overall market perspective, I think if you look at the MBA, they're forecasting the market would shrink somewhat but purchases will almost fill the gap left by refi, so the overall market will contract somewhat.

One of the X factors is the extension of the HARP program. Whereas much of the market was forecast to contract, I think extending HARPs from 2013 ending to 2015 is pushing out the length of the refi boom. But overall we think the market will contract somewhat, but purchases will fill much of the gap left from the refi market.

Smith: Given that somebody who's refinancing, I guess I would assume -- correct me if I'm wrong -- since they've already been vetted and qualified once before that the cost per click would be significantly higher than on a new purchase lead? Or am I misunderstanding that?

Lantz: I wouldn't characterize that as the rationale for why refis are higher, but you're right. In today's market, refi clicks are typically higher.

The reason is, you're either in the money or you're out of the money. If you're in the money, you're probably interested in closing right then, so you're just an easier, lower "manufacturing cost" borrower for a lender to close.

The lender doesn't have to worry about "do you have enough of a down payment saved up," and all those types of -- does the seller actually agree to sell you the property you're buying -- so there's just less transaction risk that makes the transaction fall out. Refis are easier.

Smith: OK, got it.

Lantz: In the purchase market they're harder, and when you've got an easy refi and a difficult purchase, the lender behavior is to focus on the easy refi, so although we do see purchase clicks at a lower overall cost right now, we expect as lenders have to focus on purchase and are searching for more volume, they'll get more efficient and we'll have more demand for those purchase contacts.

I think that positions us well from a pricing leverage standpoint.

The other thing that's happening is, as lenders need to learn how to do, purchase well, they're looking to technology, they're looking to lead management tools like Moretech to help them do a better job converting those contacts, which are hard to convert because you have to stay in touch with that borrower for three months, six months at a time.

As lenders develop those skills, we think those purchase contacts will become more valuable to them.

Smith: What sort of impact do overall rates have on your CPC? If it's a higher rate and maybe the lenders get a little bit more from the transaction, does your cost per click go up a little bit? What's the dynamic there?

Lantz: The interest rate environment doesn't impact our click pricing, so unrelated. The rate environment is important, particularly to the refi market, in terms of the size of the addressable market, so how many consumers are in the money, and how interested are they in transacting at that time?

Smith: Are you seeing any sort of loosening of credit standards as the market thaws a little bit, or are things still pretty tight?

Lantz: We're starting to see a little bit of that, mostly around the lower ... we're seeing a little bit more lender activity around lower down payment borrowers or slightly lower FICO bands than we were a few years ago, but we're nowhere near where we were at the boom-year levels.

Looking at some of the ZMM data, since the last three years ago, we've seen borrowers with lower down payments are getting about three times more lenders willing to quote on their request.

Smith: Interesting.

Lantz: So, a little bit of movement there, but again, mostly we're not nearly as close to where we were back in the boom years, by any means.

The other factor there is that lenders are really busy in this low-interest-rate environment, so we're not seeing them have much incentive to try to widen their guidelines, because they've got more business than they can handle in the current guideline box.

Smith: What sort of makeup of mortgage leads are you seeing people take? ARMs were sort of the dynamite of the financial crisis. Are you seeing ARMs popular again? Is it 30-year fixed, 15-year fixed? What's the makeup of how mortgages are getting delivered today?

Lantz: The vast majority are 30-year fixed. We are starting to see a little bit more shorter-term fixed-rate mortgages, so a 15-year fixed, especially because rates are so low that we're seeing some borrowers are able to move from a 30 to a 15 and have an insignificant increase on their monthly payment even though they're reducing their term considerably. We're seeing a bit more of the shorter-term, but most everything is fixed and almost all of it's 30-year fixed.

Smith: As homebuying recovers a little bit, who are you guys seeing -- on the mortgage end -- buying these homes? Is it first-time homebuyers? I know we mentioned there was a lot of refi, so we know that that's in there. Investors? What's the makeup looking like?

Lantz: Looking at February data of overall market, we see about 35% of buyers are first-time homebuyers, but it's really hard right now to get a good handle on who the buyers are, because inventory is so tight -- so there's a lot of people who would like to buy who can't buy because they can't find a home -- so it's hard to get a really great handle on that.

Certainly we're also seeing investor activity in the market overall, and in certain markets that were hit hardest by the recession -- some markets like Phoenix -- we've seen really rapid 20% appreciation year over year from a lot of investor activity.

It's a mix, and I think it'll evolve as equity rebounds, prices rise, and as the rate environment changes.

Smith: If we were to maybe understand regional impacts on this division, what sort of trends do you see happening as far as mortgage leads on a city by city basis? If a city like Phoenix, let's say they see a rapid price appreciation. Do you then see that followed by a huge number of lead gen, or are you guys on the front end of that, or is there no impact?

Lantz: I don't think there's that type of impact. I think the larger geo impacts are going to be around buyer activity in those markets, as well as online and mobile usage in those markets. Those are the consumers that are finding ZMM.

Now, about a third of our ZMM users are finding us on their mobile devices, on phones and tablets, so as we see those buyers skewing maybe toward different regional areas we might see more activity from that, but the home-pricing nuances are less driving what's going on in the mortgage marketplace.

Smith: Where do you see ZMM in a few years contributing to Zillow as a division? What should we be looking forward to?

Lantz: We think that we have far and away the best consumer experience for mortgages. It's the way to find the lowest rates, lender ratings and reviews; you can shop anonymously -- so you contact your lenders, not the other way around -- you can find us on mobile, you can get all sorts of products, even underwater products, so bar none, the best experience out there.

We see a time when everyone who's in the market for a mortgage at least comes to check what their offer is, relative to what they can find on ZMM. But now we are less than one half of 1% of that market.

Smith: So there's a lot of potential. Best product, a lot of potential. That's a good formula to be in, I guess.

Lantz: Yes.

Smith: Do you have any advice for people looking to take out a mortgage today, looking to buy a home? Common pitfalls that they should avoid?

Lantz: The No. 1 thing is be sure to shop around. I can't tell you how many times we see people who spend all this time and money and energy negotiating the price that they're going to pay for their home, and then they get to the very last point when they need to actually buy it, and they've spent no time looking into their mortgage options.

We think it's really important. Even small changes in your interest rate can mean thousands of dollars over the life of your loan, so shopping around, making an informed decision, and working with a lender that will take care of you is absolutely the biggest piece of advice.

Smith: As people look at the Zillow Mortgage Marketplace division, what are some of the real strengths that you guys have in that division?

Lantz: Starting out with our position of leadership in mobile, we were in mobile early and -- really, to our surprise -- we're seeing extreme consumer adoption of even complex products like mortgage shopping on mobile. I think that's a place where we're really well positioned.

Secondly, on the purchase side, especially given our organic source of traffic from Zillow and seeing what we've been talking about, we know that refis are not going to be here forever, so we feel like we're in a real position of strength being deep in the real estate vertical and deep in the purchase market.

As rates rise, we're well positioned to introduce lenders to a continued stream of purchase contacts and give lenders the tools to convert those more effectively. I think that's where we feel really strong.

The biggest challenge is letting people know about us. Most people on Zillow still don't know that we exist, that ZMM is part of Zillow, and certainly off of Zillow, our awareness is limited. That's a huge opportunity for us, especially given the size of the market.

We estimate lenders spend $11 billion a year to advertise home loans to consumers, and we're just a small fraction of that. Gaining a bigger piece of that and building awareness of ZMM as the place for consumers to find lenders, I think that's the biggest challenge that we're facing right now.

Smith: Any strategies for getting that awareness out there that you'd care to share?

Lantz: Sure. Mobile is part of that. We've got mobile apps, so if you're searching for a mortgage calculator or mortgage rates, you'll see us in the App Store. We're also investing heavily in SEO, so we rank well for those terms.

Again, trying to find sources of traffic outside of Zillow, and then obviously within Zillow we're working on merchandising and making sure that the value proposition of ZMM is well articulated and obvious to consumers in the market to buy or refinance and at the right time in that process.

Smith: Is there any opportunity to maybe get better integrated with the Premier Agents? Logical that if you hand off leads to people and they start to convert a certain amount, their buyers are going to start looking for mortgages. Is there an opportunity there, or are there restrictions? I'm not quite sure what the dynamic is for participating in that lead-gen process.

Lantz: Historically, our focus has been direct to consumer, and that's really where we're focused right now.

We just think that there's a tremendous opportunity to empower consumers with more information so that they can then have a conversation with their agent about whichever lender they want to use, whether it's the one they found on ZMM or the one that their agent recommended, or the one that they used before, for their last transaction.

Our view is start with consumer empowerment, and we think ZMM direct to the consumer is the right place to do that, and then enable those conversations with other professionals that they're working with on the transaction.