From...

January 13, 1999
Web posted at: 3:15 p.m. EDT (1515 GMT)

by Robert L. Scheier

(IDG) -- When Lakeland, Fla., retiree Gloria McCabe began searching the Web in September to refinance her home mortgage, she hoped she'd be able to compare rates, fill out her application, track its progress and receive her new loan by just pointing and clicking.

No such luck. Some loan sites turned her down flat because their electronic application forms insisted she list monthly income. "As a retiree, my income is whatever I choose to take out that month [from investments], and I don't need much," McCabe says. Because "there was no place where I could tell them what my actual assets were, they would come back and say there were no loans available."

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It was only when one site, LoanWeb in Canoga Park, Calif., referred McCabe to a real, live mortgage broker that she found the kind of deal that would work for her, a cost of funds index (COFI) loan, with an interest rate at a little over 5%.

Without the human touch, "I would still be up the creek," McCabe says. "He was willing to listen when I told him I had assets that weren't showing. Why didn't any of the other loan Web sites tell me anything about the COFI loan I'm getting?"

The Web is a good place to compare rates, fill out applications and figure out how much home you can afford. But to reach the important, legally binding milestones, such as getting a preapproval letter to wave in front of a seller or locking in a rate before it goes up, customers such as McCabe must still play phone, fax and mail tag with brokers or loan officers.

"Right now, you apply online and they print up your application, and in many cases it's fulfilled in the same manual way as if a mortgage broker had done it," says Jaime Punishill, an analyst at Forrester Research Inc. in Cambridge, Mass.

Only about 4% of the $1.3 trillion in mortgages originated in the U.S. last year came through the Web, he says, which is "not even a rounding error on somebody's balance sheet."

"Only about 3% of all the mortgages we do on the Internet are done without any human interaction besides E-mail," says Seth Werner, president and CEO of First Mortgage Network Inc. in Plantation, Fla. "We find it easier to meet the needs of the customers by talking."

Common data standards and information systems will help the online mortgage business to grow. But as with online retailing and stock trading, the Web will create new winners and losers. Those most likely to survive will be the ones who understand that as the Web turns products such as mortgages into commodities, great customer service becomes the crucial differentiator. That's where the mortgage industry is stuck now.

Wedded to paper

Even if everyone in the industry were committed to going paperless, it wouldn't be an easy job. A real estate loan is a custom-tailored financial product in which exact specifications change based on everything from the credit score of the borrower to the location of the property.

"It wouldn't be unusual for a single loan product to have thousands of rules associated with how that loan might be priced," says Allan Redstone, CEO of GHR Systems Inc. in Wayne, Pa., which provides software and services for online lenders.

Mortgage brokers usually "don't have those rules in anything other than a hard-copy book," Redstone says. The broker must consult the book to verify that a customer qualifies for a specific loan. Then there are other costs that vary from case to case, such as lawyers' fees, court filing costs and local real-estate taxes.

Any online mortgage package must also take into account separate criteria set by Fannie Mae and Freddie Mac, the quasigovernmental "secondary market" organizations that buy mortgages in bulk and resell them to investors.

Mortgages flow through a highly fragmented distribution system, ranging from retail banks to mortgage brokers to mortgage banks -- and each party relies on multiple sources of information. Most of that information, ranging from title reports to divorce decrees to appraisals, is paper-based and stored in nonstandard formats. The data goes to companies that are usually conservative, to say the least, when it comes to technology, says Janina Pawlowski, president of Palo Alto, Calif.-based E-Loan Inc., which has taught some technophobic lenders how to set up their first account with America Online Inc.

Even when Web-based lending works, a broker or loan officer has to step in whenever the applicant's situation doesn't fit predetermined criteria (such as McCabe's) or has more complicated needs (such as a poor credit history). Still, at more than $1 trillion, the mortgage industry "would be a very large market for Web-based lenders to tackle," says Theodore Iacobuzio, an analyst at The Tower Group, a Needham, Mass., consulting group.

Following are some of the ways Web-based lenders are trying to overcome or work around the technical hurdles:

Launched in November 1997, the QuickenMortgage Web site offers loans in all 50 states through 17 lenders. It does no lending of its own and earns its money charging the lender a transaction fee of 40 basis points, or 4/10 of 1% of the value of the loan.

Intuit Inc's QuickenMortgage rebates $225 of that to customers who apply online, so on a $160,000 loan, QuickenMortgage is paid about $415, group product manager Alison Berkley says. Lenders also pay an annual fee to be listed on the site, but that just covers the cost of linking lenders to the site and doing some marketing, rather than generating a profit, Berkley says.

QuickenMortgage claims to be "the most electronically integrated with the lenders," with the ability to electronically transmit information about applicants to lenders rather than having to reenter information from an online application. The lender must still, however, call the borrower to get additional information, paper documentation and send a written application for the applicant to sign.

It also claims to generate more traffic than other online mortgage sites, through alliances with portal sites such as AOL and Excite Inc. Approximately 5,000 customers per month submit loan information to the QuickenMortgage site, Berkley says, resulting in "more than several hundred and less than several thousand" actual mortgages per month.

Mountain View, Calif.-based Intuit won't say if QuickenMortgage is profitable, but it cited "operating expenditures to expand Internet business" as one reason it lost $27 million in the fiscal quarter ended Oct. 31.

It also noted that Internet commerce still accounts for less than 10% of company revenue and that "potential Internet-related revenue and profits may be difficult to predict or achieve."