Biggest Home Lenders Lag Online

The race to offer point-and-click home loans is on.

Amid predictions that the mortgage business will be the next industry transformed by the Internet, thousands of companies are flocking online. Already borrowers can apply for mortgages electronically, download documents and be approved for a loan in minutes. So how many of the nation’s leading mortgage lenders are open for business on the Internet?

Surprisingly few. Of the leading 20 U.S. mortgage makers, only four allow borrowers to apply for loans on the Internet, and none provides approval online.

“If this is a race, the big lenders are still tying their shoes,” said James Marks, analyst at New York-based Deutsche Bank.

It’s a familiar story seen over and over as the Internet transforms the way U.S. companies do business. Analysts say that mortgage industry leaders appear to be making the same mistakes as did large stock-brokerage firms, which resisted online trading only to watch newcomers such as E-Trade steal much of the exploding online market. From booksellers to music companies to toy makers, market leaders are falling furthest behind in the race to capture online customers.

For the nation’s biggest lenders, the late start could prove costly, analysts warn.

Online mortgage originations went from zero in 1997 to $4 billion last year, a scant 0.3% of the industry’s $1.4 trillion in total loans. But over the next five years, mortgage loans made over the Internet are expected to soar to $250 billion, or about 25% of the entire market.

At the heart of the foot-dragging is a fear by major lenders of cannibalizing business from their existing loan offices and alienating brokers who currently supply most of their customers.

As the mortgage business works today, commissioned loan officers are the primary source of borrowers. But if lenders suddenly started allowing customers to bypass brokers--and worse, offered faster, cheaper service on the Internet--brokers might bolt and take that business with them.

“We have a very well-developed distribution channel that has provided good volume over the years,” said Craig Davis, who heads the mortgage business for Washington Mutual. “Some may feel that there are some channel conflicts with the Internet.”

The Seattle-based thrift, which has about 375 Southland branches and loan offices, does not currently offer online applications, but hopes to start testing the concept later this year.

Norwest Mortgage, the nation’s No. 1 home lender, doesn’t even post interest rates on its Web site, lest it interfere with a broker’s control over providing information to the customer.

“Lenders are not ready to send a message to their sales force that they are going to start competing with them,” said Seth Werner, chief executive at Florida-based Mortgage.com, a fast-growing online mortgage provider competing with the major lenders.

The delays have opened the door for a new breed of smaller, aggressive online loan providers with names such as E-Loan and IOwn. These companies are quickly building a foothold on the Internet, angling to become the Amazon.com of mortgage lending. This year such online providers are expected to control 75% of the Internet market.

“The rules of the business are changing, and the big guys are letting these upstarts set the new rules,” warned James Punishill, analyst at Forrester Research in Boston. “When the Internet takes off, the Norwests [and other laggards] are going to be left in the dust.”

The first big lender that can leverage its brand name on the Internet stands to win big. Consider what happened to discount stock brokerage Charles Schwab after it embraced online trading. Once Wall Street began regarding Schwab as an “Internet play,” the company’s stock price doubled. Today the San Francisco firm has a market value higher than Merrill Lynch & Co., the much-larger New York brokerage that only this week reluctantly announced it would start offering online trading.

Countrywide Home Loans, the nation’s second-largest mortgage lender, has taken the early lead among the titans. The Calabasas-based company allows some borrowers to apply online and hopes soon to start disclosing loan fees via the Internet, according to Cameron King, who heads Countrywide’s online division.

But other lenders see no need to hurry online.

Bank of America, California’s biggest home lender, said it might be 18 months before it offers online applications and approval, according to Louis Leone, vice president of corporate development. Its Web site is typical of large lenders, offering customers the chance to fill out an online referral form that is routed to a BofA loan officer, who then telephones the customer.

“We want to do it, but we want to do it right,” Leone said. “There’s a tremendous risk if you do something wrong. You end up providing the consumer with a negative experience.”

Other big lenders appear to view the Internet as little more than a new marketing tool. Utah-based Crossland Mortgage, the nation’s 20th-largest lender, doesn’t accept online applications, but in an effort to appear Web-friendly, offers a $250 “Internet special” rebate. To get the rebate, however, borrowers must call and apply over the phone.

Compare that with cutting-edge technology found elsewhere on the Internet.

At E-Loan and Mortgage.com, borrowers can submit applications, compare products at several companies and lock in interest rates--all online. At Irvine-based LoanWorks, borrowers can apply online and get an approval in minutes. Computers automatically review the application, pull the applicant’s credit record and provide an answer, which is contingent upon verification of income and an appraisal.

Pressure from brokers and loan officers also is playing a role in the sticky question of whether Internet mortgages should be cheaper for consumers. Analysts and online providers say the attraction of online mortgage-making is that consumers can save hundreds of dollars, primarily by cutting out the broker or loan officer’s commission.

“Brokers add costs to the system,” said Michael Perry, chief executive at Pasadena-based IndyMac Mortgage Holdings, parent to LoanWorks.

But so far, only one large lender is offering Internet discounts. Countrywide Home Loans, which does not rely on commissioned loan officers, offers a 1.25% discount on loan fees at its Web site.

Others--including Norwest, Washington Mutual and Bank of America--say they have no plans to give discounts to customers who get loans online.

Analysts say that strategy--an apparent concession to loan brokers--may backfire. If large lenders fail to take the initiative on the Internet, they may never catch up, regardless of how much they spend, Punishill said.

“Everyone is waiting to see what happens and then they think they can just flip the switch,” Punishill said. “It doesn’t work that way. The field is littered with [companies that have done that].”

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Making Mortgages Online

The nation’s top lenders have fallen behind in the race to offer home loans via the Internet. Only four of the top 20 current allow borrowers to apply online.

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Market Apply Company share online? 1. Norwest Mortgage 7.8% 2. Countrywide (https://www.countrywide.com) 6.6 3. Bank of America 5.9 4. Chase Manhattan 5.8 5. Washington Mutual 2.7 6. Fleet Mortgage 2.5 7. Dime/North American 2.3 8. HomeSide Lending 2.2 9. ABN AMRO/LaSalle (https://www.lasallehomemortgage.com) 2.1 10. Cendant Mortgage (https://www.mortgagesvcs.com) 1.9 11. GE Capital 1.6 12. FT Mortgage (https://www.ftmortgage.com) 1.6 13. National City 1.4 14. Flagstar 1.4 15. First Union 1.3 16. Resource Bancshares 1.2 17. Citicorp 1.2 18. AccuBank Mortgage 1.0 19. Old Kent Mortgage 1.0 20. Crossland Mortgage 1.0

Company 1. No 2. Yes 3. No 4. No 5. No 6. No 7. No 8. No 9. Yes 10. Yes 11. No 12. Yes 13. No 14. No 15. No 16. No 17. No 18. No 19. No 20. No

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Source: Deutsche Bank Securities