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Zillow Mortgage Marketplace

Written by David Bayer on April 16, 2008 11:01 am EST

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Zillow Shakes Up The Online Mortgage Industry – But Does It Make Cents?

For the last 10 years, the online mortgage industry has been predominately dominated by lead generators such as Lending Tree, Eloan, NexTag & LowerMyBills. In fact, according to a Forrester research report in 2006, nearly 75% of all online mortgage applications were a result of online applications with lead generators who sell qualified borrower prospects to a stable of hungry mortgage brokers and lenders. Zillow’s transparent and free – yes free – mortgage marketplace aims to disrupt the mortgage lead generation category.

Zillow’s website provides an overview of how the new mortgage marketplace works. In a nutshell, borrowers provide basic property and loan details, an estimated credit score, and a brief summary of assets and debt. Lenders pay a one-time $25 application fee to participate in the program, have access to search mortgage requests and may provide a mortgage quote to a prospective borrower. As opposed to the traditional lead generation space, where borrowers are often bombarded with lender inquiries (usually between 4 to 6 lenders compete for one borrower), Zillow allows borrower’s to control the contact process by choosing which mortgage quote they would like to continue to pursue. Borrowers provide feedback for lenders based on the accuracy of the estimation of their quote and presumably other aspects of their service.

So how does Zillow make money? Of course, Zillow tells you. Unlike lead generators who get paid by lenders to facilitate a possible transaction with borrowers (remember, only 1 out of 4 or 6 brokers actually closes the deal with a borrower – and sometimes none at all), Zillow generates their revenue by selling advertising. It’s a classic matchup of media vs. lead generation.

First let me say that I’m a big proponent of lead generation over “traditional” online media (CPM/CPC). With the average cost/click of keywords in the real estate lending category climbing to as much as $4.00, I’ve personally experienced the benefit to an advertiser of lead generation, despite its current shortcomings, as compared to cost-per-click marketing campaigns. In addition, with the push towards click-to-call, live hot transfer & other instant customer delivery mechanisms, I’ve never been quite sure how Zillow plans to succeed in the online real estate/lending category from a media perspective. Nontheless, with over $87MM raised in venture capital, they’ve got to makes an industry changing play to attract enough eyeballs to provide a realistic shot at investor returns, and this is a pretty good one. (I’m also not undervaluing the value-creation of their data compilation strategy – they will soon be the single greatest source of information about real estate values/transactions on the web.)

So all of this sounds like a real win/win for both borrowers and lenders, right? Maybe. Maybe not.

Advantages to Zillow Marketplace over Lead Generation

Borrowers Contact the Lender – Not Vice-Versa

The current lead generation model can be very frustrating for consumers who can receive solicitations from up to six brokers within minutes of completing an online application.

Participation is “free” to Lenders

Qualified borrower leads can cost a lender as much anywhere from $4.00 to $40.00 depending on the type & quality of a lead, in addition to exclusivity, semi-exclusivity or non-exclusivity of the lead. Lenders in Zillow’s marketplace pay a one-time $25 fee for participation with no additional cost to solicit borrowers thereafter.

A Transparent Marketplace – Borrowers can Rate & Review Lenders

This makes sense – and for the life of me I can’t figure out what’s taking the lead generators like Lending Tree so long to jump on this one. Ala Yelp, CitySearch & the Atlist business directory (a DataBanq Media property), borrowers can read reviews and ratings from other borrowers which forces lenders to act with integrity or what Zillow calls its “Code of Conduct.”

Disadvantages to Zillow Marketplace over Lead Generation

Participation is “free” to Lenders

Lender’s are already demanding improvements over the traditional methods of lead generation. Lead exclusivity, quality score & quality verification are all cornerstone improvements that the industry is quickly embracing. “Free” removes all barriers to participation, which means a broker or lender who makes a mortgage quote to a borrower may very well be competing against dozens of lenders in the same market. Not a very attractive scenario when compared to an industry that has some major players moving towards exclusive lead generation. Brokers incur a cost (if only in time) to put together a qualified quote for a prospective borrower, and it won’t be long before brokers and lenders alike experience diminishing returns from a marketplace that doesn’t provide a justifiable quote/contact/loan conversion ratio.

Open Marketplace Governance is not Easy

I think Zillow is underestimating the difficulty in governing a transparent and open marketplace. It’s difficult enough to provide a credible ratings and review system for bars and restaurants. But believing that an industry notorious for its lack of transparency, hidden fees, and predatory tendencies is going to suddenly become transparent in a hands-off borrower/lender marketplace seem simply naïve. Zillow’s lender gateway states that lenders “will be able to view loan requests and associated quotes from other lenders before submitting an unlimited number of loan quotes.” I like the idea in practice, but implementation is going to be difficult. Traditional lead generators have a huge head start on scoring systems, which already include scoring publishers based on lead quality. New systems are also allowing lead generators to provide lenders with a first look or discounted pricing based on borrower feedback and a lender quality score.

Borrowers Don’t Know They’re Own Finances

One of the most glaring aspects of online borrowers is that they have no idea about their own finances. A model where lenders carefully prepare mortgage quotes based on a borrower’s self-assessed credit score and financial profile is likely to create one of two scenarios: either brokers will get frustrated by borrowers who aren’t really qualified loan candidates, or borrowers will blame lenders for not sticking to rates based off of their self-assessments. Combine this with a borrower-driven rating system, an unlimited number of lender submitted loan quotes, and no cost for lender participation, and things start to get real messy, real fast. Borrowers might just have a different perspective on calls from four qualified lenders who take the time to thoroughly vet out their finances and provide an appropriate loan product over the phone

I tend to believe that this is Zillow’s attempt to gain mortgage market share, and that the “free” participation by lenders is something that will change as/if Zillow gains a more dominant market position. Even if Zillow is able to attract increased visitorship via a well-oiled transparent mortgage marketplace, I imagine it would be difficult to turn a cheek to the investor gains available by tapping into what has proven to be a very lucrative mortgage lead generation industry. While I like some aspects of what Zillow is doing with their marketplace, I don’t expect the online marketing pendulum to start swinging away from direct customer acquisition and back towards “traditional” online media and eyeball metrics.

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