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Net-ting a mortgage
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August 2, 1999: 6:23 a.m. ET
Online home financing may lower costs and hassle for consumers
By Staff Writer Nicole Jacoby
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NEW YORK (CNNfn) - Mark Davis was surfing the Internet one day when he stumbled upon a link to Keystroke.com.
Although Davis was planning on financing his new home through a traditional mortgage broker as he had in the past, he decided to give the online lender a try.
The experience left the 44-year-old Internet entrepreneur a true believer -- so much so that Davis recently used the Web to refinance the Bridle Trails, Wash.-home he bought two years ago.
"The turnaround was unbelievable," Davis said. "From the time we started processing, it took about three weeks."
Davis is part of what analysts contend is a growing trend in the mortgage industry.
Although still in their infancy, online mortgages are expected to play an increasing role in the home-lending scene. Only $4.2 billion -- or less than 0.3 percent -- of the $1.5 trillion in mortgages originated in 1998 were generated over the Web, but that figure is supposed to climb dramatically in the coming years, according to Deutsche Bank.
The bank estimates that online sites will generate as much as $60 billion in mortgage originations in 2000 and $250 billion -- or 25 percent of the market -- by 2003. Even conservative estimates put the online mortgage market at $167 billion by 2003, according to Internet research firm Forrester Research.
Some hesitation seen
Despite such optimism, many consumers still remain resistant to the idea of financing a home over the Internet. Only 21 percent of respondents surveyed in Fannie Mae's national housing survey said they would probably or definitely try financing a home over the Web.
However, the Internet has been very popular among consumers for research purposes. A majority of those respondents who have recently bought a home described the Web as "very useful" in providing information on getting a mortgage.
Information and price comparison remain the primary reason consumers log on to the Internet. Many online mortgage sites enable consumers to compare different rates and also provide an idea of what type of loan they qualify for.
The challenge for the online mortgage industry is getting consumers to take the next step.
"With e-commerce, the challenge is always converting people from lookers to bookers," said Jim Marks, industry analyst at Deutsche Bank. "But in general, people are becoming more comfortable online, as systems become easier and quicker to use."
Boon for consumers?
Online lenders generally fall into two categories: those that refer consumers to lenders and those that actually process loans themselves.
In the referral model favored by companies such as GetSmart and Quicken Mortgage, companies generate leads for their affiliated lenders. (Quicken is a partner of CNNfn.com, providing the financial Web site with personal finance tips and tools.) Basic loan, property and financial information is collected to determine which lenders are the best fit. The borrower's information is then passed on to the lender which handles the loan from that point forward. Lenders pay the referral site a fee for each application provided and sometimes additional fees for loans that are successfully closed.
In the processing model preferred by companies such as KeyStroke.com, iOwn.com, and E-Loan, Web sites function exactly as a mortgage banker or broker would, collecting completed applications, running credit checks, verifying job and address data, getting appraisals and other tasks needed to complete a loan package.
Both models promise increased convenience, choice and cost-savings for consumers.
"Multi-lender sites allow you to get a good look at the rate market. (Traditionally), it has taken a lot of time and effort to find out what rates are. You'd have to go to two or three different places and possibly even fill out an application each time," Marks said.
Along with the convenience of one-stop rate shopping, the Internet permits products, particularly in the financial services, to act more like commodities. Because mortgages are intangible, the institution providing the loan as well as its location is largely irrelevant. The Web bolsters price competition by eliminating geographic boundaries and enabling consumers to compare a wider range of prices more easily.
Increased efficiency and quicker processing periods may also be inevitable. After a borrower fills out all the required information online, an automated system distributes these documents to all the necessary parties, such as the credit reporting agency and house appraisal company, effectively eliminating several middlemen.
But of course, online companies cannot do everything. Because of legal requirements associated with the closing process, consumers will ultimately still have to deal with a real, live person.
"At the end, the loan is still going to be closed in person. The borrower is still going to be sitting at a closing table with representatives at all the different parties," Marks said. "I don't see that changing quickly, although when it comes to refinancing, things might be able to be processed on a strictly remote basis."
Capturing an audience
Internet financing is not for everyone and there is no indication that online mortgages will ever replace traditional mortgage brokers or banks entirely.
"We believe there is a place of value for the (traditional) broker. We don't see everything going on to the Internet, just about 20 to 30 percent," Marks said.
Given the complicated nature of the mortgage process, as well as the significant financial commitment it represents for most people, first-time home-buyers may feel more comfortable discussing their loan with a live person, as may consumers whose experience with the Internet has been limited.
However, analysts and industry insiders expect the breadth of online loan applicants to widen, as consumers increasingly become comfortable with the Internet.
That already appears to be happening. Keystroke.com's customer demographics, for instance, have widened significantly since the company's inception in 1995. Three years ago, Keystroke's primary audience was in their mid- to late-30s with average incomes of $78,000 and jobs in the technology sector.
"Now we're seeing more customers that could be described as credit-challenged and loan sizes are dropping," Keystroke chairman and chief executive Joe Hausauer said. The company also has more females and minorities logging on to its service, and fewer customers employed in the technology sector.
"This is a much broader set of Americans than we saw a few years ago," he said.
The anonymity offered by online lenders may partly explain that widening. Minorities and other groups that sometimes feel they get treated unfairly by lenders may see the Internet as a means of getting hassle-free or embarrassment-free information.
"Some people don't want to sit in front of a stranger and discuss why they went bankrupt several years ago," James Horne, director of technology at the Mortgage Bankers Association of America, said. "With the Internet, consumers don't have to be out there looking people in the eye."
Those that have bought homes in the past or are refinancing their current homes are seen as ideal candidates for online loans, since they are less likely to be overwhelmed by the intricacies of getting a home loan.
And while online lenders are unlikely to replace their brick-and-mortar forefathers, they will create new ways of financing a home for those who are interested.
"Some people like doing business over the phone or by mail. This just opens up another avenue for those who like to work electronically," Horne said. 
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