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Consumers Ahead Of Online Mortgage Game

by Broderick Perkins

Online mortgages aren't faster or cheaper if you shop online for rates and financing information and then use what you've learned to negotiate offline for competitive prices from brick and mortar originators.

That's just what savvy consumers have learned to do with the proliferation of online loan sites.

Consumers' grassroots approach to electronic mortgages doesn't speed up the lending process, but it does leverage the best of both words -- cheaper loans and hand holding through the mortgage maze.

And online lenders who don't get it are closer to being squeezed in the imminent shake out.

The boom in online mortgages has been a bust for many online lenders grappling with low closing rates, regulatory hurdles, a love-hate relationship with brokers, and consumers who refuse to be "sticky," according to "Mortgage Lenders Get Squeezed," a report by Cambridge, MA-based Forrester Research, an independent research firm that examines technology's effect on businesses, consumers, and society.

"It's like when Kelley's Blue Book first came out. You have the information and now you can get a good price. That's the power of the Internet. Research, do all the work online and then when you go off line and someone tries to give you a high rate you know it's a high rate," said Warren Myer, CEO of San Jose-based Myers Internet Services, a mortgage Web site developer.

Directed by Seema Williams, senior analyst, Forrester's "Squeeze" research project interviewed 50 online mortgage lenders to quantify what most industry experts already knew.

The percentage of online mortgage applications that become closed loans is often negligible, in some cases a low as 1 or 2 percent -- too low to sustain a profit. Consumers use phony names and information, complete applications, obtain the information they need and then move on.

"The consumer is getting pretty intelligent using it for what they can't get offline, but there is no reason to think processing online is any more or less efficient," says Jack Guttentag, who offline is a finance professor emeritus at Philadelphia's Wharton School, and online "The Mortgage Professor."

"The lamentation in the report is that the automation that you see on the site does not extend to the back office operation, which is true, but it doesn't extend to the back office offline either."

Gumming up the works are the same regulatory hurdles lenders face off line -- hard copy disclosure requirements and in-person signature mandates. Until it can digitize government requirements, the industry can't move more of the lending process online.

"A mishmash of regulatory oversight has led to a lot of disclosure and complexity. These regulations have become an impediment," Forrester reported one interviewed broker lamenting.

Brokers bring lenders more than 70 percent of their loan volume so lenders fear they'll alienate brokers if they aggressively bypass them to market their own products online.

"The traditional friction between lenders and brokers exist, but it's a love-hate relationship. Lenders rely on them, and at the same time want to eliminate them," said one industry source.

Consumers aren't loyal customers, but more like fickle shopping sprites hungry for information that often proves so overwhelmingly voluminous they require hand-holding from loan approval to closing.

"The Net has not simplified anything -- it offers even more information, and now people get confused and go to a broker instead," one broker said, according to study.

Improving the ratio of online closings and creating a sustainable, profitable, online mortgage lending business, hinges on several factors: online lenders offering offline services, digital signatures legislation (currently making its way through Congress) and more consumers who aren't so fidgety.

It will happen -- but not without casualties. By mid-decade the industry will bifurcate into distinct segments.

Today, the top 10 lenders represent 40 percent of the market, with none enjoying larger than a 10 percent share, Forrester reports.

By 2005, the top 10 lenders will snare 75 percent of the market and the remainder will be held by those who offer specialized mortgage products.

"These leftover lenders must prepare themselves for the auction block -- because being acquired by a lender aiming for volume will be their best survival strategy," according to the "Squeeze" report.

Published: April 28, 2000

Use of this article without permission is a violation of federal copyright laws.

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home.

The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services.

The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home.

Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News.

Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake.

He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications.

In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.

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