We all know that mindless "nothing-has-changed" rhetoric has replaced the equally pat "this-will-change-everything" blather of the early Web. But the blindly bearish might look at one surprise: Online mortgages are slowly catching on. And while no one is going to "Amazon" old-style banks and take over the $1.5 trillion mortgage market in a rush, signs of life (even profitability) are unmistakable. The reasons are simple. These sites provide a valuable service, and they get paid for it.
The dot-com collapse actually helps sites like Quicken Loans, E-Loan (EELN
), and LendingTree (TREE
). Recession fears triggered by the stock market have made interest rates plunge. Refinancing applications are up fivefold since last year, while existing-home sales hover near 1999's records. These sites together did more than $2 billion in loans in the fourth quarter of last year. That's up nearly 200% in a year, but it's still less than 1% of the $262 billion in total U.S. fourth-quarter mortgage lending. And spring buying season is here.
These companies give consumers two basic ways to borrow online: You can either borrow from a Web bank directly or use a Web site to connect you with a traditional lender. Both Quicken and E-Loan are direct lenders, while LendingTree is a middleman. Sign up at LendingTree and you can get access to any of more than 100 lenders, up to four of which will make you an offer.
What does each system do for consumers? First, let's lay out the standards. An excellent online loan site should give you the precise market intelligence you would get from the smartest, best-prepared broker at a real-world mortgage bank. The idea is to use the Web for quality control. Software delivers information with less sales pressure and human error than I've seen from human loan brokers in my past, not all of whom were stars. The site should have the latest data on rates and the financing market, and be able to make fast, understandable comparisons among different combinations of interest rates, points, and other loan terms. It certainly should have competitive prices--nothing is more of a commodity than cash. And it should simplify a hopelessly arcane, expensive process designed to fit the needs of a pre-Internet property recording system.
By these standards, all three of these leading pure-play mortgage sites are pretty good, but none is great. They put a lot of information at your fingertips, and they'll save you a couple of trips to the mortgage broker's office. But the big disappointment is that shopping for loans online doesn't ward off the blizzard of paperwork that comes with financing a home. Limitations in last year's law authorizing digital signatures on legal documents, sadly, mean that you've still got to do a lot of your applying for loans the old-fashioned way--on paper. I'll give a slight nod to E-Loan for two reasons. First, they waive up to $1,500 of fees that both Quicken and LendingTree's partners still charge, lowering closing costs. But they build that money back into the interest rate you pay (which they freely admit). So the real benefit is that the cost of E-Loan's money is more straightforward--meaning fewer surprises at settlement--and that more of it is deductible.
E-Loan also does a better job of distilling the information you need to compare loans and figure out your overall finances. Mostly, this is a matter of presentation, since all of these sites provide the kind of information that I think is necessary. The difference is that E-Loan dishes up loan comparisons in the easiest-to-follow format, with site navigation that makes some of it easier to find.
That said, don't expect miracles from any mortgage site. Pricing is pretty much the same online as offline. And mortgages are a paperwork-intensive hassle, even on the Internet: At all three sites, the first step after your loan wins online approval is to send you paper forms, soliciting all the same information. The surprising thing about online lending isn't how different it is from other loans, but how similar it is.
First of all, let's talk rates. I ran a hypothetical applicant through a loan application at each of these sites, to avoid detailing my own credit history when I wasn't actually in the market myself. E-Loan gave Mr. Hypothetical a 7.125% rate for a 30-year fixed mortgage. LendingTree countered with 6.99%. Quicken quoted 7.125%. All assumed a 20% downpayment and good credit. By comparison, the bank where I have my mortgage was charging about 7% on the same day, while Countrywide Credit Industries Inc., the nation's biggest independent mortgage lender, was charging 7.25%.
Why aren't online banks cheaper? Because the cost of offices is only a small part of what you pay. The huge majority of your interest rate reflects the cost of funds--what the bank pays to borrow the money it lends you. That's set by the bond market, and everyone pays pretty much the same amount.
Once lenders approved applications by the various hypothetical characters we invented for our tests, all three sites promised to close my loan in six weeks or less. This is pretty much what you expect from any bank.
Although I liked E-Loan the best, most of the attention has gone to LendingTree, which says its system makes banks compete (even grovel!) for your business. It's also closing more loans than the other two. But I wasn't overly impressed. Its system is competitive, but no world-beater.
LendingTree's software matches each application against the loan criteria for its partner banks, and sends it to up to four potential lenders. If they see my credit and figure I'm a bill-payin' fool, they'll route it to the First, Second, Third, and Fourth National Banks for the Virtuous and Punctual. If LendingTree deduces I'm a fool about paying bills, it'll go to We Understand Bank and Trust.
The four banks make offers and you pick. LendingTree then steps aside while you and the bank do the rest. Their fee comes from banks, not you. Despite ads promising "When banks compete, you win," LendingTree's big edge is that it helps speed up the comparison shopping people do already. Rates are about the same.
The bottom line: Online mortgages are fine for people who like to do a lot of business over the Internet. It's not so much that there's a compelling reason to borrow online. It's simply that there's no compelling reason not to.
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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