Online Mortgage Lending: An Uphill Climb

For those who have tried to re-finance their homes in the past few weeks, the routine goes something like this: Hurry up and wait.

With interest rates plummeting and an unstable economy that promises more layoffs and corporate downsizing, Americans are doing everything they can to reduce their expenses. Reducing an old home with an interest rate that begins with a “7” or an “8” to a low “6” is highly inviting.

Online mortgage companies, therefore, are swimming in business.

But for how long?

Will It Last?

Whether the current boom in Internet re-financing will be enough to carry an overcrowded online industry through to daylight remains to be seen. For the moment, things look great. Unfortunately, the big picture is murky.

The Mortgage Bankers Association of America reports that fewer than 5 percent of home mortgages are originated via the Internet. Before the current rush, online lenders had plenty of time on their hands but not enough consumer prospects.

New Playing Field

In the past, the choice of a mortgage lender was largely about rates. Everything else was built in. That included human contact, a key part of the experience.

Digitized mortgages have much working against them, but the lack of a handshake is still a concern among many borrowers. Couple that with the number of ancillary offline entities, such as city records offices, that are operating strictly low-tech, with no capacity to process electronic mortgages, and the outlook is uncertain.

New, Bigger, Better

The current rush to re-finance is bound to give online mortgage lenders a leg up — a welcome unexpected lift. But in preparation for a return to pre-September 11th business, many are adding services and heavily promoting options.

That’s particularly necessary since there are so many mortgage lenders online, and no one can point to one as the industry leader. Unlike other online industries, the Internet-based mortgage lending field is overcrowded, without anyone setting industry standards.

At a time when standards and practices have been firmly established among a number of other online businesses, mortgage lending’s disarray is confusing and awkward for many consumers.

Diversity Is Key

The key to success appears to be diversity. If mortgage lending is a company’s main event, chances are longevity will be elusive.

Consider Principal Financial Group, a Des Moines, Iowa company that raised US$1.85 billion Monday by selling 100 million shares at $18.50 each. At a time when most online ventures are hoping just to get through the current mess, Principal Financial’s initial public offering (IPO) is a standout.

But that may be because the company is largely focused on 401(k) plans. It does deal in mortgage loans, but only among a number of other products including insurance and online banking.

And it doesn’t hurt to have multiple channels, including both offline and online entities. So if your name happens to be something like LendingTree.com, chances are you enter the market with a distinct disadvantage — the dot-com stigma. Having a real world image brings credibility.

Path to Profits

Unfortunately, online financial services are still struggling to gain public trust. Sometimes the more new technology a company touts, the less comfortable its customers feel. How many customers are clamoring for the use of digital signatures, for example? Very few.

It still comes down to the basics for many American borrowers. Those include the reassurance of personal contact, a guarantee of confidentiality and privacy, and the development of a relationship with the lender.

So far, online mortgage lenders have been unable to check off any of those menu items with regularity.

What do you think? Let’s talk about it.