Someday, millions of homebuyers may yet decide that the Web is the perfect place to obtain a home loan. But a few years into the e-commerce revolution, plenty of consumers see it as a great place to shop for a loan, but far fewer are enthusiastic about following through to actually close their loans through Internet-based lenders.
That has led online mortgage companies to change their strategies in hopes of surviving in a field that’s become increasingly competitive, as refinancing business has tapered off and mortgage interest rates have risen from the historic lows seen two years ago.
The good news for consumers is that there are still legions of mortgage lenders out there competing fiercely for homeowners online.
They range from companies whose clients come through their Web sites, like Quicken Loans and E-Loan, to established giants like Countrywide Home Loans and Wells Fargo that operate partly on the Web and partly through traditional branch offices.
In August, iOwn.com, an early entry into the field of online mortgage lending, announced that it had stopped accepting new loan applications. But the company is not giving up on the online mortgage “space,” as the Internet lingo terms it.
The company laid off more than 100 of its 250-plus staff and is in the process of reinventing itself. Now the site features a “Find a Local Broker” referral service, while still providing the various calculators and information resources that most online lenders’ sites include. On the day that iOwn stopped accepting new loans, company chief executive Ned Hoyt said that iOwn’s move to a referral model was “an indicator that it’s very hard for the online players to get to scale fast enough in their core operations to be truly successful.”
In other words, companies that have to spend a great deal on lending and on hiring customer service people, but can’t attract enough new business to keep revenues flowing, can wind up in trouble.
And many online lenders operate with slimmer profit margins than their traditional counterparts, but still have to do all the same work to close the loan.
Lack of experience selling loans on the secondary market to investors like Fannie Mae and Freddie Mac has also meant problems for some online companies, mortgage industry experts say.
Timothy Barry and his wife, Karen, were among the e-commerce believers who got caught in the middle when iOwn changed its business model.
They moved from San Jose in March, and in late July started working with iOwn to get a mortgage to buy a four-bedroom home in Cary, N.C.
A few days after he had sent back an overnight package full of signed documents, Barry said, he still hadn’t heard from the loan representative with whom he’d been working. He went to the Web site to check the status of his application, but could not access that function.
“It was kind of a sobering experience,” Barry said. IOwn later referred him to a company that could fund his mortgage. But the Barrys had never heard of the lender they’d been referred to, and they were not feeling as confident as they once had about obtaining a mortgage from someone unknown to them.
Ultimately, they applied for and got a loan from Chase Manhattan Mortgage Corp. Giving up on the online application process was not an easy decision for Timothy Barry, whose livelihood is helping companies take their businesses online.
“I still do most of my business on the Internet. I kind of evangelize and encourage other people to do business online,” he said.
His experience with iOwn, he said, “was frustrating and gave us a sense of abandonment . . . What stuck in our craw was they didn’t give us any indication they saw trouble on the horizon.”
Part of the problem the online mortgage business faces is that obtaining a mortgage online and getting one from a traditional bank or broker are still very similar processes, said Jaime Punishill, a senior analyst with Forrester Research, who studies financial services and technology.
Even online, getting a mortgage is a messy business, he said, “still with 400,000 pieces of paperwork and 95 vendors to deal with. It’s a disaster offline and even more of a disaster online.”
Some online lenders promise a refund of a few hundred dollars if the customer’s loan does not close on time — E-Loan, Mortgage.com and IndyMac Mortgage (formerly LoanWorks), to name a few.
Many Web sites allow borrowers to get pre-approved and lock in a loan rate online. Some offer reduced fees in exchange for customers’ business. There are dozens of online mortgage sites to visit and learn from.
But they haven’t been able to remove many steps from the loan process. Documents must still be sent to the lender, papers must be signed by hand, and so on.
Forrester Research has found that among U.S. households that had an Internet connection and obtained a mortgage in 1999, one-third of the borrowers had used the Web to research mortgages.
About half of all households now have Internet connections, Punishill said. Yet only about 1 percent of those borrowers actually closed their loans online:
“They find the best rate from the best lender and they get a mortgage broker to give them personal service and handle all the paperwork at virtually the same cost as online. Why would they switch?”
The answer is that consumers probably won’t switch from this method until someday when the process is much more automated than it is now, when digital signatures and electronic document delivery have substantially streamlined the process of closing a mortgage online.
Consumers are certainly comfortable doing research on mortgage Web sites, said David Espenschied, CEO of Countrywide Home Loans’ e-business division. But the purchase transaction is more problematic, he said.
Asked about the future of consumer confidence with the online process, Espenschied laughed and said, “I’m really happy we have 450 branches out there right now.”
Countrywide is one of a few large traditional lenders that have moved aggressively to supplement their branch offices with an online presence. Banks have been slow to take this path, in part because soliciting borrowers on the Internet can mean fewer commissions for the loan officers the banks already employ.
But in response to online competitors and a decrease in mortgage applications and refinanced mortgages vs. a few years ago, banks are pricing competitively, experts say. And in response to that pressure, online mortgage companies are pursuing diverse strategies in order to survive and thrive.
“If you merely duplicate what happens offline, you are destined for failure,” said Doug Lebda, founder and CEO of North Carolina-based Lending Tree.
At the company’s site, consumers enter their financial information; then a network of more than 100 lenders compete for the borrower’s mortgage, auto or personal loan business.
Lending Tree has customer service representatives, but it stays out of the complicated world of closing and servicing the loans.
Its strategy is to license its own technology, called Lend-X, to other Web sites, which then can offer the same kinds of services that Lending Tree does.
This strategy, pursued by many companies in various Internet niches, is known as “private labeling,” and is probably more lucrative than the actual business of funneling customers toward lenders, said Forrester Research’s Punishill.
Mortgage.com has chosen a business-to-business emphasis as well. The company, based in Los Gatos, Calif., and in Sunrise, Fla., has loan officers who work in about 90 realty offices in the San Francisco Bay Area, and works with new home builders in Florida, and licenses its software to other companies. And, of course, customers can find them on the Web.
“This segment of the Internet, like many others, is going through a shake-out period. I think the key to survival is focusing on the Realtor relationship and builders relationships, and affinity groups and financial services” companies, said Brendon Riordan, vice president of sales at Mortgage.com.
Part of E-Loan’s strategy is to offer not just mortgages, but also auto loans, business loans and credit cards, among other products.
Chief executive Chris Larsen explained that his company will eventually be focused on all services related to “debt management,” whereby consumers will be able to look at all their financial obligations in one place.
“We have a way to go before the ultimate vision is attained,” he said, “but that’s the way we see the future going.”
As the company has evolved, Larsen said, it has found that customers want to access lots of different kinds of information at once, but “they don’t want technology because technology is cool.”
For example, he said, early on, the site experimented with a multimedia feature that created an on-screen, animated loan agent. The animated agent didn’t last, he said.
QuickenLoans, which started out using a referral model, last year bought Michigan-based Rock Financial, and is now a direct lender. The strength of the combined company’s back-end loan processing and customer service will help it prevail in the coming years, said chief executive Dan Gilbert.
“The companies that figure out the very intricate details and have the ability to provide and close loans in 50 states over the Internet and . . . provide a great consumer experience will be the winners,” said Gilbert. “So it won’t be the pretty home page or nifty calculators.”
Oakland resident Lorrie Carter, who was seeking to refinance her mortgage in August, worked first with an online company, but couldn’t find a favorable rate for her jumbo-sized mortgage (i.e. more than Fannie Mae’s “conforming” amount of $252,700).
Then she found broker Scott Doruff of LH Mortgage, through a Web site called Mortgage Rate Watch. She and her husband got an adjustable rate mortgage through Doruff at an initial rate of 8 percent.
“I think that one of the downsides of working with some of the online brokers is if that’s the only way in which they work . . . they kind of try to fit you in a box,” she said. “And if you don’t fit a particular box, you may or may not get a product that you want.”
