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CLOSING STRATEGY

Lenders are reinventing themselves after finding that buyers will research loans online but prefer a face-to-face closing over an online one.

Plenty of consumers see the Web as a great place to shop for a loan, but far fewer follow through to close their loans through Internet-based lenders.

That perception has led online mortgage companies to change their strategies in hopes of surviving in a field that has become increasingly competitive, as refinancing business has tapered off and mortgage interest rates have risen from the historic lows of two years ago.

The good news for consumers is that there are legions of mortgage lenders out there competing fiercely for homeowners' business online. They range from companies whose clients come through their Web sites, such as Quicken Loans and E-Loan, to established giants such as Countrywide Home Loans and Wells Fargo that operate partly on the Web and partly through traditional branch offices.

Recently, iOwn.com, an early entry into the field of online mortgage lending, said 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 reinventing itself. The site features a "Find a Local Broker" referral service while still providing the calculators and information resources with which most online lenders' sites are equipped.

On the day iOwn stopped accepting new loans, chief executive Ned Hoyt said 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 the same work to close the loan. Lack of experience selling loans on the secondary market to investors such as Fannie Mae and Freddie Mac also has 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, Calif., 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 he'd been working with. 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 no longer as confident 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 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 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. Many Web sites allow borrowers to be preapproved and lock in a loan rate. 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 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.

Yet only about 1 percent of those borrowers closed their loans online.

Consumers probably won't completely embrace online loans until the process is more automated, when digital signatures and electronic document delivery have substantially streamlined closing a mortgage online.

Consumers are comfortable doing research on mortgage Web sites, said David Espenschied, chief executive of Countrywide HomeLoans' e-business division. But the purchase transaction is more problematic, he said.

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 compared with a few years ago, banks are pricing competitively, experts say. And in response to that pressure, online mortgage companies are pursuing diverse strategies to survive and thrive.

"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 Dan Gilbert, chief executive of direct lender QuickenLoans. "So it won't be the pretty home page or nifty calculators."

Oakland, Calif., resident Lorrie Carter, who recently sought to refinance her mortgage, worked first with an online company, but she couldn't find a favorable rate for her jumbo mortgage.

Then she found local 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."

Doruff, who also is president of the Silicon Valley chapter of the California Association of Mortgage Brokers, said customer service is a big reason home buyers still gravitate to mortgage brokers.

Clients want to have "someone who they can speak with either in person or on the phone, someone who can immediately address any problems or concerns that might arise during the loan process," he said.

But doing research on the Web was crucial to her search for a mortgage, Carter said. "I think if the broker knows you are already shopping, that's even more of an incentive for them to aggressively look for the best product for you," she said. "They know that you know that these products are out there."

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