In Online Lending part 1, we argued that banks should embrace what we called Open Lending, a strategy of guiding customers to their optimal source of credit, even if that means helping them secure a loan from another financial institution.

This doesn’t mean tossing the value of your brand and customer relationships out the window. It’s more like American Airlines in the early days of its SABRE reservation system. You show all available options, but position your rates first, and in the most desirable light. But more importantly, you make it far easier and faster to apply with you.

IndyMac, Gomez’s top-rated mortgage lender, demonstrates how this concept can play out in the mortgage space. Users select a loan type, e.g., “loans under $275,000 with a 7% rate,” and IndyMac compares its total origination cost to eight of its toughest competitors, including LoansDirect, E-Loan, and Countrywide (see Table 1, below).

Table 1

Competitive Price Comparison from IndyMac’s Web site

origination fees for 7% mortgages less than $275,000

Lender	Discount Points (%)	Discount Points  ($)	Lender Fees	True Lender Cost	With Us You Save
IndyMac Bank	1.125%	$1,969	$795	$2,764	--------
BofA	1.639%	2,868	875	3,743	$980
Countrywide	1.750%	3,063	840	3,903	1,139
Ditech	1.250%	2,188	1,086	3,274	510
E-Loan	1.524%	2,667	0	2,667	(97)
WAMU	1.375%	2,406	600	3,006	243
LoansDirect	0.250%	438	1,250	1,688	(1,076)
Citibank	1.375%	2,406	775	3,181	418
MortgageBot	1.125%	1,969	190	2,159	(605)

Source: IndyMac Web site, 5/18/01

The competitive comparison could be made even stronger with other factors such as approval time, service guarantees, and other intangibles. Finally, you could leverage rate uncertainties by showing your rate as locked for applications received today.                          

For now, specialist lenders are way in front of banks in the online mortgage arena. And don’t expect these savvy lenders to be satisfied with just the first mortgage portion of the financial services pie. The top four highest-rated mortgage lenders on Gomez already have banking charters at the parent company:

1.       IndyMac became a bank holding company last year.

2.       LoansDirect was purchased by E*Trade in February and is being positioned as a division of E*TradeBank.

3.       MortgageBot is a spin-off of M&I, a Wisconsin-based banking company.

4.       Countrywide, the largest mortgage lender in the country, has purchased a bank and was just granted approval to become a bank holding company.¹ Jumping the gun a bit, banking has already been added to its home page menu, even though the functionality is still under construction (screenshot above).

Now that leading online lenders have put together excellent mortgage sites, and the refinancing boom has renewed faith in their business models, we believe home equity (HEQ) lending is the next area of aggressive expansion. E-Loan, for one, launched its home equity product in December, and it accounted for 3.5% of its dollar volume in Q1 2001.

Why the push to HEQ?

• It uses many of the same core competencies as mortgage lending.
• It’s easier to do online than a first mortgage.
• It’s profitable, oftentimes more so than first mortgage lending.
• It tends to be somewhat counter cyclical to the mortgage business. For example, when refinance volume is up, home equity loans tend to get paid off and closed.

¹Countrywide purchased Washington D.C.-based Treasury Bank, renamed it Effinity Bank, and plans to market under the Countrywide Bank brand. Countrywide won conditional approval from the Federal Reserve Board to become a bank holding company.

 
We expect a mini-boom in home equity lending later this year as customers who closed their home equity lines as part of a refinance seek a new line of credit. According to the Mortgage Guaranty Insurance Corp.¹, in the latest refi surge, six out of 10 borrowers are either taking cash out of the refinance and/or consolidating one or more other loans into the mortgage balance.

LendingTree’s full-year 2000 results show the importance of home equity lending. Even though home equity applications numbered only half that of first mortgages, home equity loans brought in nearly as much revenue as the mortgage business, $10.3 million vs. $11.1 million (see Table 17). The primary reason: a valid² HEQ application is four times as likely to close as a mortgage application.

Whether it’s mortgage refinance, home equity, or some other type of loan, you have the brand, the trust, and the customer file. And you know loans. Put it all together; online lending is a business you simply must go after.

¹According to an op-ed piece by MGIC CEO Curt Culver in Mortgage Banking, 6/01

²A “valid” application is one that ends up being transmitted to at least one LendingTree network lender.

LendingTree uses an “open lending” positioning with this banner ad on BankRate.com’s Home Equity section (6/11/01) www.bankrate.com/brm/rate/loan_home.asp?nav=ln