Online lending - not business as usual.

Online lending is a growing business with tremendous potential.

Four lenders tell how working online is bringing in solid loans at lower costs but it requires a true commitment to stellar customer service.

Online mortgage lending represents new opportunities for mortgage lenders. About $265 million in online mortgage loans were originated in 1997. David Weisman, an analyst for Forrester Research, Cambridge, Massachusetts, expects online originations to reach $725 million in 1998. This is a fraction (about 1 percent) of the $725 billion-plus in residential loans expected to be originated this year. Weisman predicts that online originations will jump to $25.5 billion by 2001 and by 2003 to 2005 will constitute about 10 percent of the entire mortgage market.

Those eager to get into the business may wonder if online mortgage lending is truly viable and cost-effective. This article provides an overview of the categories and costs of the three most popular types of online mortgage lending Web sites. Interviews show how four companies are meeting the challenges of online mortgage lending in very different ways, what has worked and what hasn't, and if the payoff is really there.

Types of online lending Web sites

The lender race for electronic commerce dollars is on. Killen & Associates, a Palo Alto, California research firm, predicts that by the year 2005 about 30 percent of all individuals seeking home loans will start by looking for them online. Currently, there are no paradigms for the perfect online mortgage lender Web site, but almost 80 percent of the 2,000 lenders with Web sites provide some sort of online preapplication or prequalification.

Prequalifications are most often mathematical calculations that indicate what the borrower can afford based on the information provided. This should not be confused with preapprovals, which are true lender commitments and [TABULAR DATA FOR FIGURE 1 OMITTED] involve more consumer information and lender underwriting. However, while each online mortgage lender may do business differently, their Web sites tend to fall into the three classes shown in Figure 1.

Type A: Brochure-Style Web Sites. These sites primarily provide lender product and contact information. Based on a survey conducted for this article, the construction of an online mortgage lender's brochure-style Web site can cost between $411 and $33,000. This includes the Web site design, hosting and maintenance and security. Construction of an easy to navigate Web site can be between $5 and $15,000. The annual cost of hosting and maintenance varies from $6 to $17,000.

Costs are dependent upon the purchase or rental of a Web server and costs for whoever is running and maintaining the site. (These folks need to be able to answer questions and solve problems quickly before it affects the online business.) Security includes certificates and software costs. There are two important areas of security for online mortgage lenders, transaction and data protection. Transaction protection involves using a secure facility so customers can enter credit card or sensitive information safely. Data protection is how the system handles this sensitive information after it is received. For brochure-style Web sites these costs can range between $400 and $1,000. (Including this type of security helps online mortgage lenders with brochure-style Web sites reduce a customer's fear that the lender will sell their name and address to marketing companies.) For mortgage lenders that want an "Internet presence," this is often their first Web site. For an exceptional example of a Type A Web site see www.guarantybankgb.com/servicesh.htm.

Type B: Brochures With Interactive Tools. These sites contain such tools as online calculators, continually updated interest rates, prequalifications (usually based on mathematical calculations of what the consumer can afford based on information from a mini-application), and other features. Based on a survey conducted for this article, the construction cost of a Type B Web site is between $840 and $97,000. This includes all the costs of the Type A Web site plus $3 to $5,000 for each feature (online glossary, online calculators, updated interest rates, home buyer advice and related services). Hosting and maintenance, and security costs increase as the size and complexity of the Web site increases. These are currently the most popular type of online mortgage lender Web site. For an exceptional example of a Type B Web site, see Waterfield Mortgage Company (www.waterfieldmortgage.net).

Type C: Full-Service Online Mortgage Lenders. These sites have a variety of features, but tend to offer "smart" e-mail automatic responses (based on the mortgage lender's lexicon of terms and the lender's loan guidelines), preapprovals that are real lender commitments, automatic loan interest rate lock-in agreements (often good for 30 days), loan applications (automatically "populated" by information from the lender's database and the new electronic credit report), database query functions to automatically calculate payoff amounts for refinancings, and more. Based on a survey conducted for this article, the initial costs of Type C Web sites can be as low as $580,649 or as high as $2,092,000. An excellent example of a Type C Web site is HomeSide Lending's at www.homeloan.com.

While $2 million for the construction of a full-service online mortgage lending Web site may seem expensive, it is comparable to the average $1.5 million cost of a brick and mortar branch office (see Electronic Commerce, a Manager's Guide Kalakota and Whinston, 1997).

The following interviews with Countrywide Home Loans, Inc., Calabasas, California; HomeSide Lending, Inc., Jacksonville, Florida; Centex, Dallas; and LaSalle Home Mortgage Corporation, Norridge, Illinois; highlight how each has approached the business of online originations. Each company explains its online lending process, discusses the lessons learned to date and provides insights into the next steps for online mortgage lending. These companies range in origination size from the market-dominating Countrywide (origination market share 6.9 percent) to HomeSide Lending (market share of 2.8 percent) to ABN AMRO Mortgage's La Salle Home Mortgage (which is part of ABN AMRO's 2.4 percent market share) to Centex Mortgage (market share of 0.8 percent).

Countrywide's online lending

According to Cameron King, executive vice president of electronic commerce, online mortgage lending is an extension of Countrywide's consumer-direct strategy. "Our goal is to provide mortgage services whatever way the consumer wants to see it." Countrywide launched its first Web site in September 1996 and started taking loans in March 1997. In May 1998, Countrywide originated $41.5 million in new loans over its Web site and closed 653 applications. The average loan is $156,000, which is higher than the firm's average traditional first trust loan.

According to King, the loans Countrywide originates on the Internet are less expensive than loans originated via the firm's retail channel. That's because the consumer conducts the point-of-sale activities involved with a loan application. Customers calculate what they can afford, select the product and complete the loan application on their own. By contrast, the consumer who walks into a branch office has to talk to a human being about pricing and product information and receive other consumer information before he or she will complete a loan application. On the Internet, these functions are automated so it is less expensive.

Countrywide did not have to purchase any Web-based value-added products for its online lending operations. The company took its automated branch loan origination underwriting, guidelines, pricing engines and made a user interface that was connected to the Internet. When the consumer fills out the forms (prequalification and application), the information goes into the same loan origination system that Countrywide uses in its branch offices. There is no difference between branch information and online information, so online lending is always current. The other advantage of this approach is that the same system can transfer information for a local closing. This reduces problems and delays at the closing.

Figure 2 illustrates Countrywide's lending process. The consumer goes to the Web site (www.countrywide.com), starts browsing prices and sees the products available for his or her area of the country. If the rate is not right yet for the borrower to jump on, the consumer can set up a "Rate Watch" and Countrywide will e-mail the customer when the company can match the desired interest rate. The consumer follows the prequalification steps and determines how large a loan he or she can afford, or if it makes sense to refinance current home loans. Online calculators show the monthly payment.

The only information Countrywide needs is customer name, e-mail address, summary of asset and liability information, current housing expenses, the money the person has to close, the price range of the property he or she is contemplating buying, and how large a down payment the consumer expects to pay. The consumer authorizes a credit report and pays $14 with his or her credit card.

Consumers are assigned preapplication numbers so they can stop and restart their loan qualification sessions. Also, they can use "Home Wizard," which runs them through Countrywide's underwriting guidelines but doesn't commit them to a specific loan.

The consumer information is automatically entered into Countrywide's pricing engine and loan guidelines. The results indicate which products the consumer qualifies for, and these are shown to the customer via the Internet. The consumer is also shown a series of rate and point ratios. If the consumer selects a loan product, he or she is given details of the interest rate, points, annual percentage rate (APR), closing costs, taxes and insurance based on the geographical location.

Next the consumer completes a streamlined loan application form. Countrywide tries to make this process as simple as possible. Countrywide then uses its EDI (electronic data interface) connection to pull the credit report. The credit report "populates" the loan application so the consumer doesn't have to transfer information about his or her savings, checking and credit card numbers and other sensitive information over the Internet. An Internet service representative is assigned to the loan.

With the new credit report and loan application information the system's artificial intelligence underwrites the loan. A series of e-mail messages begins. Countrywide's Internet service representatives use standardized e-mail messages to ask additional questions. These "templates" can be modified to meet special customer needs and are used to shorten the time (and lessen the cost) of communicating with the customer. The consumer sends an e-mail message back to the loan officer and locks in the loan rate.

The loan processing now follows standard procedures. Manually prepared origination documents are sent to the consumer by Federal Express. The consumer signs the documents, and they go back to the branch office where the transaction is closed. According to King, for new purchases, the loan can close in 10 days. For refinances it often takes 45 days. The average closing time is 27 days. Process bottlenecks usually arise with appraisals and titles, which can take two or three weeks to be prepared.

Cameron King notes that one of the things he likes best about online mortgage lending is the ability to get customer feedback and track customer usage. "We know our customers' likes and dislikes," he says. Individuals who use the Internet like to respond to surveys. They compliment the things they like and don't pull their punches about what they don't like.

Countrywide's King says online mortgage lending is not competing with traditional lending. "It is a different customer we are fighting for." Additionally, Countrywide has discovered that price is not the only thing that matters in online mortgage lending. Some consumers will pay a slightly higher price for a well-known lender. That is, a consumer will pay more to be certain that the loan will actually close. This indicates that consumers want a lender with a proven track record. This gives Countrywide an advantage over other, smaller and unknown online lenders.

King says that traditionally brokers are more expensive than direct lenders. He believes that, over time, direct lenders will price out the aggregators in the Internet origination marketplace. (Aggregators are online companies that connect homebuyers to lenders such as Quicken Mortgage [quickenmortgage.com], HomeShark [www.homeshark.com], E-Loan [www.eloan.com], Get Smart [www.getsmartinc.com], etc.) After all, the direct lender has the same technology as the aggregator, so who will have the lowest price? "Shop where you like, but when you are ready to buy, come to us because we will give you a better deal," King says.

According to King, since November 1997 Countrywide has been the largest receiver of QuickenMortgage leads. In surveying these leads he has noticed that consumers often use the aggregator's Web site for shopping but come to Countrywide's Web site (www.countrywide.com) to complete their streamlined loan application. (King says that Countrywide's Web site gets about 11,000 page views of their rate page per day.)

King says online lending will never replace brick-andmortar branch offices. There always will be some people who want the comfort of meeting and interacting with a loan officer face to face.

Near-term goals at Countrywide include launching a new and better Web site this summer and improving the personalization of the Web site - in other words, the tools and techniques incorporated into the site to communicate friendliness. According to King, there are ways you can personalize the Web site experience. "It won't be like dealing with human beings, but it will be unique to the needs of the consumer. You can achieve that level of personalization [with today's technology]," he says.

HomeSide's online lending

Ron Taylor, senior vice president of production for HomeSide Lending, likes to point out that his organization doesn't have any brick-and-mortar branch offices. HomeSide compared branch offices to telemarketing and online lending as a way to reach customers and realized it could offer consumers better prices if it exited the branch origination business. Taylor says that currently HomeSide's online loan origination costs are lower than the costs of lenders who use brick and mortar and comparable to that of telemarketing operations. In the future, HomeSide expects better technology will allow more cost savings in processing and closing.

According to Taylor, HomeSide Lending started its online lending operation in 1996. Since that time the company has passed the break-even point and been profitable for about a year. The firm focuses on increasing loan officer, processor and closer productivity through technology. This is changing job responsibilities and the ways in which these individuals interact with customers. For example, as loan processing and closing become more automated, the HomeSide loan officer in addition to loan originations may pick up the pieces of the loan transaction that aren't automated and complete the loan.

Taylor says HomeSide Lending has discovered that the pull-through rate of applications to closing is greater with online customers than with telemarketing consumers. He adds that the size of the average loan is greater (about $85,000) and the quality of the loan applicant is better. This makes loan officers more productive and reduces costs.

According to Taylor, with the HomeSide Lending system the lender can design special loan programs that match the customer database. For example, if an existing qualified customer wants to refinance his or her home loan all the customer has to do is send in an e-mail form and HomeSide can go directly to closing. All the documents are correct and automatically generated. The transaction bypasses the loan processors and is completed in 14 days. This takes out an enormous amount of costs.

Taylor says when HomeSide started online lending it built a security system that was equivalent or greater than what is at the Department of Defense. He notes that Internet lending security has never really emerged as a serious issue. The hesitancy at the beginning is now gone. If people are concerned about credit card information, HomeSide tells them to telephone their loan officer with the information. Data from HomeSide's aggregator site, QuickenMortgage (quickenmortgage.com), is encrypted so there are no problems there, Taylor says.

Figure 3 shows a flow chart that details the process of applying online for a HomeSide loan. Consumers go to HomeSide Lending's Web site at www.homeloan.com and browse rates and products. They can also e-mail HomeSide and inform the lender that they are looking for a specific rate. HomeSide will auto-respond with an e-mail message and send the customer to the Web site to see special programs, rates and products that fit his or her requirements. The customer then completes an online preapplication form and finds out how large a loan he or she qualifies for.

At this point there are no credit reports or fees. The customer is assigned to a loan officer. The loan officer e-mails potential customers a loan offer. HomeSide wants to offer the best price and the best service and keeps statistics on how many of these inquiries convert to loan applications.

If the customer leaves the process he or she is contacted with a follow-up e-mail message, which may result in the customer completing a loan application. Serious customers remain in the process and a credit report is authorized. The loan officer confirms the acceptance of the loan offer.

For a current customer (someone with a HomeSide home loan), the database is queried, and information from the new electronic credit report is used to complete the loan application. This can be done quickly and automatically. Next the customer receives the automatically generated application, disclosures and other related paperwork. Within three days, the paperwork is signed and returned, and money is exchanged.

For new customers, normal loan processing begins and the loan processor checks the application and follows a checklist of items to get the loan package together for the underwriting decision.

HomeSide keeps full tracking data on what people are saying about its online origination process. Systems monitor their online lending operations, and HomeSide surveys customers to find out what it can do better. According to Taylor, HomeSide believes that the way to differentiate your company in the marketplace is with service. This means quicker response times and delivering the best service at the lowest costs. For example, HomeSide customers can pay their monthly mortgage payments online and see their mortgage balances via the Internet.

HomeSide considers service even more important in online lending than in traditional lending. The lender views new customer contacts over the Internet as cold calls. Taylor says HomeSide understands these customers and is familiar with their wants and needs. According to Taylor, HomeSide, as a result, has felt it important to be interactive and have an element of "touch" in all its online customer communications. For example, certain classes of loans, such as FHA, require additional helpful guidance for the consumer. "To be successful you need to architect a system that incorporates 'touch' into your online lending process," Taylor adds.

Taylor says that HomeSide has a different strategy than many other lenders. Competitors that are smaller need to get their name out so they have a reason to use portals. (Portals are generally the Internet users first window onto the Internet, such as Microsoft Start [www.home.microsoft. com], Netscape [www.home.netscape.com], Infoseek [www.infoseek.com], etc.) According to Taylor, lenders with brand recognition, such as HomeSide, don't need portals to be successful. Portals add costs, don't create customer loyalty and often fail at providing information (their primary function).

According to Taylor, with online mortgage lending the most important thing today is to be a player. How things are done a year from now may be different from how they're done today. But if you are not a player, you won't see the changes you need to make to catch the opportunities that will make you successful. HomeSide's goal with its Internet lending is to show a modest profit, create infrastructure and build relationships. "Five years from now we are still going to be playing in this channel," Taylor says.

Centex Mortgage's online lending

According to Vern Smith, vice president, Centex Mortgage, the Dallas company started its national Web site in January 1996 as one pillar of its lending business. This was in response to customer demand for "ease of business." In other words, many of the firm's homebuyers are dual-income people with a computer at home and more money than time.

Today, Centex has a company Web site and Web pages for individual representatives who are located at branch offices throughout the United States. The firm offers media content and design assistance for $150 and hosts a sales representative page for $50 a month. It takes one to two weeks to get a sales representative's Web site up and running. However, marketing is not done on a national basis. Each sales representative promotes his or her Web page using whatever marketing techniques they think are the most effective. According to Smith, this causes a lot of diversity The company does not post rates. They sell on service and branding of the corporate name.

Figure 4 illustrates the flow of the Centex online lending process. The customer starts at the Web site and learns about the company. For example, Centex is rated by Fortune as the most admired company in America. (See March 2, 1998 issue of Fortune.) Then a customer completes the online mini-application and credit authorization. No bank account or credit card numbers are transmitted over the Internet. Centex orders an electronic credit report and forwards the mini-application and new credit report to the area's branch manager, who in turn distributes it to a local sales representative.

Next the customer goes back to the Web site and down-loads the online loan application. Alternatively, at the Web site customers can request that the loan application be sent to them on a disk. Once the customer has completed the form, the information is uploaded at the Web site. The loan information is secured through the company's wide area network called Infonet. Centex uses the Infonet system for its enclosed nationwide network. Each branch office has access to the loan application and can determine the status of the loan at any time. Then a branch manager assigns a salesperson to the loan, and that person recommends a loan type and quotes rates to the customer.

Smith says online loan originations are less expensive than traditional loan originations. A traditional lead for a loan costs usually $250. The Internet lead costs about $25 to $30. Online loans are consumer-direct loans and include fewer middlemen than traditional loans. For example, the process will not include real estate developers, real estate agents, financial planners or lawyers. This helps speed up the process and increases profits to the lender.

Centex also uses an aggregator called Get Smart (www.getsmartinc.com). Get Smart helps consumers through the loan shopping process and recommends lenders based on the borrower's financial profile and preferences. Centex leads go directly to the appropriate region's branch office. According to Smith, the benefit of this value-added Web-based service is that the volume can be turned up or down.

"Just yesterday, the branch office in Seattle originated 56 leads from Get Smart. About 50 percent of these loans were for refinancing," Smith says. However, Smith warns that while aggregators are a viable source for leads they are not the answer to the business of online lending. It still takes a loan officer to interact with the customer because the mortgage process is so complex.

According to Smith the entire mortgage industry is very saturated. The market is competitive on rates and fees, and there are less closings per representative than in the past. Over time he expects to see online mortgage lending grow. As more computers are sold, more people will become computer literate. Web television will put pressure on mortgage lenders as interactive television goes forward. However, all these advances will not knock out the loan officer, says Smith.

According to Smith, online mortgage lending is a lead-generation source. The loan officer needs to create an ongoing relationship with the borrower to offer after-market products and services. A homebuyer makes an average of seven loans in a lifetime. The loan officer needs to ensure an ongoing role with that borrower for each of those seven mortgages. This involves becoming the consumer's financial planner. For example, the loan officer may offer mutual funds, insurance, and other financial and non-financial products and services. Centex has implemented a policy of marketing added value to the consumer, and it is having great results. Currently, the average profit per loan is $760 to $770. Last year the average profit per loan was $500.

According to Smith, online mortgage lending is still in its infancy, and it is rapidly changing. There are lots of development costs involved with the business. Programmers are updating and changing the system every day. But with the move toward branding, creating a customer for life and cross-selling other services, companies can derive an excellent income from investments in online lending.

Smith concludes by saying most professionals know that the revolution is on. If there is anything to fear it is from large companies such as Visa, Citicorp and Microsoft getting together and creating something like a mortgage card that is similar to today's Visa card. Potential challenges such as that mean lenders have to think outside of the box and change the game today to be successful tomorrow.

LaSalle Home Mortgage's online lending

Cheryl La Roche, marketing manager for LaSalle Home Mortgage Corporation, says her company started online loan originations because it was assessing existing channels of business and looking for more cost-effective ways to do business. LaSalle Home Mortgage started its Web site in January 1997, but didn't really start originating loans online until it teamed up with aggregator QuickenMortgage (Quickenmortgage.com) on April 1, 1998. LaSalle is a subsidiary of LaSalle Bank, FSB, itself a subsidiary of ABN AMRO NA.

According to La Roche, due to the success of its QuickenMortgage relationship, the company is now changing and updating its home Web site (www.lasallehomemortgage. com). The LaSalle Home Mortgage Web site has always included a loan application, but it wasn't that popular. The revised Web site will be more like the QuickenMortgage Web site. LaSalle Home Mortgage is continually pursuing new technology and referral sources are coming in every day.

La Roche says LaSalle didn't have to purchase a lot of new hardware and software to become an online lender. Its online lending operations use existing equipment, and the company has learned to be more efficient. However, La Salle Home Mortgage is relatively new to online mortgage lending and it is difficult to say if this situation will remain unchanged as loan origination volume increases.

Because LaSalle is so new to online mortgage lending, it can't identify how profitable the venture has been. The lender has learned it works better if it has a group that specializes in online loans. In April, the company started with just one person; in May it increased staffing to two loan officers, and in June the company increased personnel to three.

La Roche says online lending is just another distribution channel for LaSalle. The number of middlemen is the same but includes a different cast of characters. For example, intermediaries like homebuilders or real estate agents have been replaced with referral sources such as aggregators and links to other sites.

LaSalle Home Mortgage primarily uses the aggregator QuickenMortgage for online lending [ILLUSTRATION FOR FIGURE 5 OMITTED]. Going to this site and completing a financial profile involves obtaining information about the consumer's income, assets and debts. The online customer does not provide any bank account or credit card information.

The customer shops for the loan that meets his or her financial requirements and preferences. The customer is shown a screen that presents the loan products of 11 lenders that meet the individual's loan criteria. The QuickenMortgage program allows the consumer to select only one lender.

Next the consumer completes an online loan application. Information from the financial profile is used in this form so consumers do not have to duplicate their efforts. This secured form (you can tell that the form is encrypted by looking for the appropriate icon on your browser) includes bank account and credit card numbers. It also authorizes a credit report. According to La Roche, the application can be completed in half the time it takes to complete a traditional form. The application fee is paid by credit card. Finally, a La Salle loan representative contacts the customer by e-mail or telephone and confirms the loan application.

According to La Roche, LaSalle has discovered that online mortgage lending is competitive, and each online lender is fighting for market share. Competition has not centered on pricing because everyone is charging about the same prices, she says. Overall, competition is based on service, she adds.

La Roche says compared with traditional lending, online lending is more controlled so you can measure service better. For example, it's easy to know when consumers log on and how fast you responded. Additionally, it's easier to follow up with an Internet customer than a traditional consumer.

Cheryl La Roche sees the major benefits of online lending as its efficiencies and its measurement capabilities. There are no regulatory problems because online loan applications are treated like traditional loan applications. Consumer benefits include the flexible business hours allowing borrowers to apply for a loan or communicate with lenders on holidays or at unusual times. The ease of access benefits customers because they don't have to travel to a branch office to meet with a loan officer. Service speed is another consumer advantage that enables rapid loan closings. According to La Roche, the disadvantages are the percentage of unknown, sometimes bogus leads LaSalle receives because people are "just playing" at the QuickenMortgage Web site.

Summing up

There are primarily three categories of mortgage-lending Web sites: brochures that provide company and product information; brochures with a few interactive features such as online preapplication forms; and full-service online mortgage lenders. The cost of constructing an electronic commerce mortgage lending Web site is comparable to the average $1.5 million cost of one branch office.

It takes about six months to a year for an online mortgage lending Web site to be operational. There is no model or plan for the perfect online lending Web site, and there is more than one way to be profitable. Competition comes from other online lenders. At this very moment, the land grab for market share is on and some online lenders describe the competition as "fierce." Many lenders have constructed elaborate Web sites to attract consumers, some lenders use portals to herd traffic to their Web sites; others use referrals from aggregators, and certain big lenders rely on the public being familiar with their reputation and brand name.

The automated lending system of an online lender can be unique. Advances in technology are automating more and more of the lending process. If online lenders have anything in common, it is they are all in a constant state of change. Moreover, they expect their Web sites and processes to be in development forever.

Online mortgage lenders tend to agree that you need to be in the game of online mortgage lending to know which technology will be the best and what new opportunities are available. Those that adopt a wait-and-see policy will be relegated to the sidelines forever, current players predict. In other words, to have the winning hand at online mortgage lending, you need to get into the game now.

Kathleen Sindell, Ph.D., is a best-selling author and management consultant specializing in business, finance, real estate and e-commerce. For more information see www.kathleensindell.com.