One of the great promises of the Internet is a better shopping experience. While most retail products have indeed become easier to shop for—think automobiles or vintage postcards—the financial services experience is still a mixed bag.

It's certainly much easier to compare savings rates online, a capability that has fueled growth at ING Direct and others. But loans are still much harder to shop for. The lead-generation sites, such as BankRate, GetSmart, LendingTree and Interest.com, have made it easier to contact multiple lenders, but in most cases, the customers still has to select a single lender, complete an application, and hope that there are no nasty surprises at closing in the form of extra fees or higher rates.

However, Mortgagebot is about to change all that and hopefully usher in a new era of transparency in mortgage pricing, with the launch of Mortgage Marvel, making its debut at our FINOVATE conference tomorrow.

How it works
Mortgage Marvel is a destination site where mortgage shoppers can search and find actual rate and fee information for participating lenders, usually at a nearby bank or credit union. And there is no personal info required, just the loan amount, property value, and zipcode. If the shopper finds what they want, a simple click on the APPLY button sends them directly to the lender's application to lock in the rate and fees listed (see screenshot below).

The key to making the marketplace work is having a wide variety of participating lenders with recognizable brand names at the local level. Normally, that's extremely difficult. But Mortgagebot, with more than 700 bank and credit union clients on its mortgage platform, can plug its existing client base into the exchange with ZERO systems integration (note 1). Currently, there are 250 lenders on the system.

And Mortgagebot clients have little to lose by placing themselves into the exchange which for the most part, only charges fees when mortgages are originated through the marketplace.

Right now, all mortgage lenders are displayed equally in order of lowest APR. But in the future, the company may offer preferred placement for additional fees.

Summary
For the first time, U.S. consumers can easily shop and compare the total price for mortgages from competing lenders. And thanks to the Internet, they can complete an application in less time than it takes to drive to the nearest loan office.

Note:

1. Currently, only Mortgagebot mortgage-platform customers are allowed to participate in the network.

As we enter the final week of summer, we will begin showcasing the companies that will be DEMOing new products and services at our inaugural conference FINOVATE 2007. See here for the complete lineup.

Person-to-person lending
P2P lending has grabbed headlines around the world since it launched in the the United Kingdom in March 2005 by Zopa. We are pleased to have on the FINOVATE agenda the two leading U.S. providers: Prosper, the brain-child of E-Loan founder Chris Larsen, and Lending Club, which launched its exchange on the Facebook platform just three months ago.

Both companies received significant cash infusions this summer and we're looking forward to seeing what enhancements the lenders will showcase at FINOVATE 2007.

Lending Club received a significant $10.3 million first round last week (blog entry here). Since the company's launch of Facebook three months ago today, it has closed 134 loans averaging approximately $5,600 for a total of $750,000 in originations.   

In June, Prosper, the winner of an OBR Best of the Web award last year (note 1), secured a $20 million third round bringing total funding to $40 million (previous post here). The company now has more than 380,000 members and has funded nearly 14,000 loans totally $80 million. Since inception, Prosper has posted more than 168,000 loan listings from more than 75,000 borrowers.  

Mortgage lending
Here's a bit of trivia for Monday afternoon (or Tuesday morning if you read NetBanker via email): What was the first profitable banking website? And no, this is not a trick question with the answer being "none" or "no one knows" (see note 1).

The answer: Bank of America in 1994, or at least that's what an exec told the audience at the first conference on Internet banking held in the summer of 1995. Practically before anyone outside of academia or Silicon Valley had heard of the Web, BofA was using it to produce mortgage leads in the lucrative California market. I can clearly remember the woman who ran BofA's website saying, "mortgage leads are already more than covering the bank's costs (of its website)." Of course, that was in the days when a website cost less than a couple billboards.   

We've been writing about online mortgage lending since that first 1995 conference. One of our favorite lending platforms, winner of the second mortgage-related OBR Best of the Web award in 2001, is MortgageBot. The company was also named to last year's INC 500 list of the nation's fastest growing private companies producing a 560% revenue increase during the YE 2002 through YE 2005 period. 

At FINOVATE 2007, MortgageBot will take the stage to show a radical new approach to mortgage shopping that its been testing for some time now. We can't release the details yet, but we were luck enough to get a sneak peek on Friday and were very impressed!

Note:

1. Our sister publication, Online Banking Report (OBR), typically names 6 or 7 companies as "Best of the Web" during the course of each year. It is earned by launching a product or service that significantly "raises the bar" in online delivery of retail banking and lending products.

Mortgagebot LLC, the online mortgage spinoff from M&I, has introduced an online widget for its clients (see Fairwinds CU version inset). The widget allows users to keep current mortgage rates visible on their desktop.

Typically, it would appeal primarily to someone currently in the market for a mortgage or refi where an 1/8 difference in rate can add up to thousands over the life of the loan. 

So far, seven of Mortgagebot's 600 clients have posted the widget at Yahoo's widget center; however, many more offer the service through their websites.

The first widget posted on Yahoo was uploaded Aug. 28 for Northwest Savings Bank and has been downloaded 711 times. In total, the Mortgagebot widget has been downloaded 2,200 times.

• Northwest Savings Bank (national), 711 downloads since Aug. 28
• Fairwinds Credit Union (Florida), 215 downloads since Sept. 27
• Vista Federal Credit Union (California), 330 downloads since Sept. 27
• Gateway Community Bank (Iowa, Nebraska), 275 downloads since Oct. 2
• Northwest Bank (national), 351 downloads
  since Oct. 3 
• Macon Bank (North Carolina), 216 downloads
  since Oct. 12
• Riverside Bank of Florida, 127 downloads
  since Oct. 12

For more information on creating a desktop presence, read Online Banking Report #85, Grabbing Desktop Mindshare. Also see our previous coverage here.

The Company

MortgageBot

Q1 ’01 volume: $69 million
W57 N14280 Doerr Way
Suite 2W
Cedarburg, WI  53012
(877) 408-8845
www.mortgagebot.com

MortgageBot was spun off from parent Marshall & Ilsley (Milwaukee, WI; $26.1 billion) on April 1, 2001. The privately held company added several new investors including GE Mortgage, a division of GE Capital (Stamford, CT; $370 billion), and Bank One (Chicago, IL; $269 billion). Scott Happ, a 17-year veteran of M&I founded MortgageBot and is its CEO.

Mortgagebot.com claims to be the first to offer true online approvals of first and second mortgages in 1998. Our records show Bank of Montreal was first in North America in Feb. 1997, but it’s entirely possible MortgageBot was first in the U.S.

Direct sales at www.MortgageBot.com  only amounted to $69 million during the entire quarter (Q1 2001), just a single week’s worth of production at E*Trade Mortgage. It appears that MortgageBot is more proof-of-concept than an online mortgage player.

table 1

Gomez Scores: MortgageBot vs. IndyMac

Spring 2001

Source: Gomez Advisors, 5/01

B2B Ambitions

True to its software company heritage, MortgageBot began actively licensing its mortgage platform to other banks and lenders in Dec. 1999. The company currently claims more than 50 clients (table 2, next page.)

Apparently, MortgageBot’s strategy is to keep licensing costs affordable, even for small mortgage brokers. The company charges an initial licensing fee of no more than $5,000 and monthly subscription fees of $1,500 to $2,500. The company hopes that its clients can break even with just one closed loan per month. There is also a $100-per-loan transaction fee after the first 15 to 20 loans each month.¹

¹Source of pricing information, link on MortgageBot.com to an article in Mortgage Technology, 4/01

table 2

MortgageBot Client List (partial)*

AAA Financial Services

American Chartered Bank

American Mortgage

Baylake Bank

Central Bancompany

Century South Bank

Citizens Bank

Community Bank

everbank.com

Far East National Bank

Fastloan.com

First Virginia Banks

Florida Banks

Gold Banc

GreenPoint Mortgage

Greater Atlantic Mortgage

Independent Financial Network

InvestorsBank

Landmark Credit Union

Lightning Mortgage

Meridian Residential

M&I Bank (part owners)

OneLoanSource.com

Ozaukee Bank

Sandy Spring National Bank

Signature Bank

South Financial Group

Sterling Financial

Universal

Wintrust

Source: company, 5/01

*The company claims more than 50 clients; these 30 are listed on their Web site

table 3

MortgageBot’s Best of the Web 2001 Features

Loan Status, General Info: MortgageBot offers an outstanding Loan Status function divided into six areas. Every bank should develop something similar.

Loan Status, Loan Terms: At every step of the way you see the name and contact info for your loan advisor.

Loan Status, Important Dates: Summarizes and explains the sequence of events in the loan process including the date each activity began and when information was received.

Loan Status, Your Appraisal Includes a summary of the appraised value and a copy of the actual appraisal in PDF (link at bottom of the screen).

Loan Status, Needed from You

Lists any outstanding items needed from the borrower.

Loan Status, The Loan Closing Demystifies the closing process with clear instructions.

The top online lenders are writing surprisingly straightforward and effective guarantees. MortgageBot’s over-the-top graphic hammers its key messages home:

• lowest rate
• speedy approval
• great service

All backed up with a $500 guarantee. MortgageBot’s guarantees and service promises.

Like E*Trade Mortgage, MortgageBot posts the results of its satisfaction survey online. The company isn’t quite as brave as E*Trade Mortgage, which posts real-time survey results. MortgageBot’s results are a few months old; in mid-May it showed results from Q4 2000 responses. Satisfaction surveys are sent to each customer after their loan closes. The company does not disclose its response rate.

If you post customer satisfaction scores for the world to see, the scores have a tremendous marketing value. So you can toss out the conventional market-research wisdom of using a 5-point scale to give consumers more choices across the top three categories. MortgageBot cleverly uses a 4-point scale with Excellent, Good, Fair, and Poor as choices; figuring, correctly, that most users will choose Excellent or Good, especially when the third category is called Fair, which has somewhat negative connotations. But from the results, it appears that MortgageBot doesn’t have to worry about low scores: its good/excellent combined scores were very high, ranging from a high of 98% on service quality to a low of 90% for its Web site. In addition, 93% liked the closing experience, 96% were satisfied with the overall experience, and an exceptionally high 94% would likely recommend the lender to others (see table 4, right). MortgageBot also includes selected customer comments at the bottom of the survey, a nice touch.
 

table 4

Customer Service Scores

Source: MortgageBot Web, 5/15/01

Everbank is running MortgageBot’s platform. On the surface, it’s almost identical. However, some functions are not available, such as the customer satisfaction survey results. And the guarantees are different, for example Everbank offers a $300 guarantee compared to $500 at MortgageBot.

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