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Mortgage Mania.

Do mortgage products really need bricks and mortar? E-Loan's Chris Larsen intends to prove they don't.

Not unlike many savvy players in the financial services arena, Countrywide Home Loans had been quick to grasp the significance of the Internet. In 1996, while other sizable institutions were still debating whether to have an Internet strategy, Countrywide launched both its consumer-oriented Web site and a site for the exclusive use of correspondent sellers called Platinum Lender Access. This was soon followed by an Internet site designed exclusively for its wholesale lending business partners, called

Not coincidentally, E-Loan, a dedicated on-line mortgage company, was founded the same year Countrywide Home Loans hit the Web. The two companies, both pioneers in bringing the formerly paper-intensive mortgage process into the digital age, have from the start been fierce competitors. bills itself as the largest direct-to-consumer on-line lender; not surprisingly, E-Loan chief executive Chris Larsen balks at the claim. "We have done almost $1.2 billion through the third quarter in loans completed," he notes. We believe we are ahead of everyone else."

The on-line mortgage business could hit 1.4 percent of all mortgages in 1999, or roughly $18 billion, estimates Jamie Punishell with Cambridge, MA-based Forrester Research. "And as the Internet equips consumers with better information and more alternatives, mortgage lending on the Net will climb to $91.2 billion by 2003, almost 10 percent of the market."

It's a sizable pie, which might account for the present-day host of competitors scrambling for a piece of the Internet residential mortgage business, with Countrywide, an old-line mortgage company, and E-Loan, an Internet start-up, two of the most successful. But while these two leaders are both vying for market dominance, Countrywide and E-Loan represent two very different strategies.

Like most Internet companies, E-Loan has yet to show a profit. Last year, the Dublin, CA-based firm lost $11.2 million on revenues of $6.8 million, but sales growth was up a dramatic 552 percent for the year. Perhaps even more telling, in third quarter '99, E-Loan mortgage applications grew 38 percent as compared to an industrywide decline of 26 percent. E-Loan has even expanded its business horizons, recently buying an Internet auto lending company to match its home, credit card, and small business loan applications. And although E-Loan itself has become a mortgage banker and can lend in its own name, remains a multilender Web site where the consumer can shop among many different lenders for the best deal.

Despite being a mortgage banker, Larsen stresses, "we always sell the loan assets we produce. We never hold them on our balance sheet. That is the difference between us and a Countrywide. We believe that one breaks the bond with the consumer by holding loans. And the new model for the Internet is the multivendor approach. If you hold the products you can't be a multivendor."

Naturally, as a brick-and-mortar institution, the Countrywide Home Loans scenario is a bit more complicated. It's part of a Calabasas, CA-based holding company called Countrywide Credit Industries, but as Stanford Kurland, Countrywide Home Loans president and CEO (and senior managing director and COO of Countrywide Credit), notes, his company contributed about 80 percent of the almost $3 billion in revenues reported by Countrywide Credit last year.

For fiscal 1999, reported Internet fundings in excess of $642 million. This year Countrywide Home Loans merged its retail Internet and telemarketing operations, and the company no longer pulls apart the Internet business. On a combined basis, Countrywide's electronic retail production averages between $400 million to $500 million a month.

Beyond all that, Countrywide remains a true brick-and-mortar business. Even after developing a healthy Internet strategy, the company hasn't reduced any of its local branches, which number around 550 offices around the U.S.

"The way our operations work," explains Kurland, "is that the consumer can take the application over the Internet and that actual application is distributed to the local branch where it is applicable. In other words, the local branch takes over the processing and origination of that mortgage. Mortgages don't close in the virtual world; they require processing, collection of certain information, and signing and closing. You need a local presence to handle that activity." While all the activities and processing and collection of data can take place centrally, he adds, his system avoids shipping documents back and forth.

E-Loan, on the other hand, is a pure Internet company with no branches to maintain, and Larsen claims there are tremendous inherent savings to be had with that. "We know we are able take the cost down 50 to 75 basis points, representing about $1,500 on the average loan. That's because we don't have the same structure as brokers. We pass that down to the consumers to show them that they should be on-line."

To which Larsen adds, "it doesn't make sense to build the brick-and-mortar branches to distribute electronic products and services that are intangible. It's different from books and other physical goods. Mortgages are a product perfectly suited for the Internet. We believe it is pretty clear where the industry is going."

Perhaps not so clear to everyone. "Keep in mind that today only 1 percent of mortgages are sourced over the Internet," Kurland counters. "It would be foolhardy for a lender to set up a system that addressed only 1 percent of the mortgages. In our case, we have the benefit of being able to expand our Internet activities and utilize the distributor process in our existing capabilities." One might say, the best of both worlds, if it can be done successfully.

Larsen takes a different tack. "In the history of business when you have this kind of disruptive innovation in the marketplace--and the Internet is the most disruptive innovation--existing businesses have the dismal track record of sinking the ship. These companies look at the Internet and say 'we need a Web site,' but they don't change the business model to reflect what the new technology has wrought."

There seems to be room for both strategies for now But as on-line mortgages grow as a percentage of the overall market, it remains to be seen which model will prove more successful in their respective bids for the No. 1 spot.
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Author:Bergsman, Steve
Publication:Chief Executive (U.S.)
Geographic Code:1USA
Date:Jan 1, 2000
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