Full disclosure from IndyMac. Not only do they dare to list their toughest competitors, they even provide direct hyperlinks to make it easy for users to check out the competition. In this example, LoansDirect ($1,076 savings) and MortgageBot ($605 savings) both offered substantial savings on loan origination fees for a 30-year, 7% mortgage.

Open lending has long been embraced in the off-line mortgage market. Mortgage brokers, accounting for nearly 7 out of every 10 retail mortgage origination in 1999,¹ have been practicing a form of open lending for years. In theory, they take a customer’s loan application, match it with the best loan program from dozens of wholesale lenders, and deliver the best possible deal.

In practice, the process is ripe for abuse. As with any 100%-commission product, there is a temptation to recommend the loan that is best for the broker’s pocketbook, not the applicant’s. The personal finance literature is full of warnings about this conflict of interest.

¹Source: Mortgage Banking, 4/01; the percent fell to less than 50% in preliminary 2000 data.

On the Internet, it’s easier for consumers to compare prices and avoid purchasing a non-optimal product.  According to Mortgage Banking (Oct. 2000), 56% of recent homebuyers used the Internet at some point in the mortgage process . However, loans, and mortgages in particular, can be hard to compare, that’s why the auction model makes so much sense.

LendingTree, by far the industry leader, struck a chord last year with its $50-million advertising campaign featuring bankers falling all over each other trying to capture the applicant’s business. The company is beginning to reap the rewards of its 40% consumer awareness level. Last year the company received 1.8 million loan applications, 716,000 (40%) of which were good enough to funnel to one or more of its 100+ lenders. The results: 57,000 closed mortgage, home equity, auto, and personal loans and 88,000 credit card accounts

MortgageBot goes even further for rate shoppers. It allows users to search in their home market if desired.

By selecting the “Apples to Apples” section, users can view profiles of the top mortgage sites as determined by Gomez.

In total, LendingTree facilitated $4.6 billion of closed loans in 2000, more than 10% of the entire online loan market, according to figures in its annual report.¹ In 2001, the LendingTree may double that amount, booking close to $10 billion, while reaching profitability in the fourth quarter.

What have you got to lose?

In a recent Mortgage Banker’s Association study of consumers using the Internet in the mortgage process, 72% shopped more than one lender (see Table 1, below). Furthermore, 12% of those looked at 5 or more lenders. Shopping was even more prevalent in the refi segment, with 85% looking at more than one lender; and 17% of those considering 5 or more.

Table 1

Lenders Considered by Online Mortgage Shoppers

percent of sample performing each activity

Source: 2000 Internet Home and Mortgage Shopping Survey, Mortgage Bankers Association, 10/00 (see Table 2)

Let’s say you aggressively roll out open lending on your Web site. Even if 25% of your applicants ended up with brand X, we believe you would still be far ahead in the long run. First, you’d have a much larger applicant pool as word got out. Second, satisfaction would increase with the more open process resulting in a higher close rate and more repeat business. Third, by referring marginal applicants to appropriate financing alternatives, there would be fewer outright declines, so you’d have less angry (ex) customers for your other banking services.

And even if some of your best customers ended up with a Brand X loan initially, you would still be in a great position to bring them back with a preapproved refinance offer when rates dropped.

Or you could be more aggressive on the front end, offering to beat the competitor’s rate before it closed. For example, say a customer is approved for a Brand X HEQ loan of $75,000 for 50 basis points (0.5%) less than your published rate. If you thought this customer was worth keeping, and you trusted the underwriting process of Brand X, you could match the rate, add $5,000 to the credit line, and handle it as a “prequalified” deal, so the there was little additional paperwork.     8

¹Total online lending market size was estimated as $44 billion by Forrester.

Research Notes

Consumer Attitudes

• 27% of consumers reported that poor customer service kept them from getting their loan online
• 22% were concerned about privacy and security
• 14% were concerned about closing the loan on time

Source: Nick Karras, (nkarris@gomez.com ) Gomez Advisors, in speech at the most recent MBA Technology Conference (reported in Inside Mortgage Technology, May 7, 2001)

• 53% of consumers want to simplify their personal financial services by maintaining a relationship with their mortgage origination firm and tracking their monthly mortgage payments online
• 27% of online mortgage shoppers who elected not to apply did so because they wanted service from a local branch

Source: Mortgage Banking, April 2001

Table 2

Mortgage Shopper Attitudes on Applying Online

percent of sample listing each reason

Source: 2000 Internet Home and Mortgage Shopping Survey, Mortgage Bankers Association, Web-based survey of 1,005 consumers who took out a mortgage in 2000 (new or refinance) and used the Internet at some point during the home buying or mortgage process, fielded Oct. 17 through Nov. 7, 2000

*Full answer: I do not fell safe providing my personal info via the Internet

Customer Service Performance

• Gomez Advisors found that only 33% of  online lenders provided timely email responses
• 40% of online lenders who were sent an email asking for a return call to apply by phone did not answer the message

Source: Mortgage Banking, Dec. 2000

Commercial Bank Efforts

Bank of America recently launched a private-branded version of Homestore.com at    www.bankofamerica.com/homesolutions  as part of a $10.5 million marketing and Web services agreement between the companies.

Source: company press release, 5/01

• More than 50% of CitiGroup student customers apply for their student loan online

• 29% of CitiGroup second-mortgage business is over the Internet

Source: Mortgage Banking Oct. 2000

• 16% of banks under $10 billion have implemented online lending (April 2001 study by Tower Group)

• 1,830 of 4,541 (40%) credit unions with more than $10 million have online loan applications (NCUA Dec. 2000)

Source: as reported by CUES Techport, 5/29/01

Consumer Demand

• 60% of those looking for mortgages go to the Web for some sort of assistance (according to Morgan Stanley Dean Witter)

• 56% of those recently buying a home used the Internet at some point in the mortgage process

Source: Mortgage Banking Oct. 2000

Table 3

Activities of Online Home/Mortgage Shoppers

percent of sample performing each activity

Source: 2000 Internet Home and Mortgage Shopping Survey, Mortgage Bankers Association, Web-based survey of 1,005 consumers who took out a mortgage in 2000 (new or refinance) and used the Internet at some point during the home buying or mortgage process, fielded Oct. 17 through Nov. 7, 2000

Vendor Processing Volume

According to Digital Insight, as of Dec. 2000, the six leading online loan application vendors were processing nearly 100,000 applications per month. In comparison, LendingTree processed about 133,000 applications per month on behalf of its 114 lenders (see Table 17).

Table 4

Application Volumes at Third-Party Processors

percent of sample performing each activity

Source: Digital Insight, 12/00, as reported by CUES Techport, www.cuestechport.com , 5/29/01

Mortgage Distribution

Source: Tuttle Risk Management Services, cited by Mortgage Banking, 6/01 Gomez Advisors, 5/01

* varies by year

Table 5

Gomez Quality Indicators

Source: Gomez Advisors <Gomez Advisors> as reported by Mortgage Banking, 2000/2001                       
*total unique site visitors