Mortgage Trends

When interest rates spike, as they did this year, the dread-quotient among mortgage bankers soars as well. For traditional mortgage lenders, higher rates pack a double-whammy. The slow-down in volume not only reduces their income, but it boosts the cost of doing business on a per-loan-booked basis, since even the most ruthless managers can't shrink overhead fast enough to match the fall-off in loan demand. 

These days, however, one group of mortgage lenders seems to be taking the rate hikes in stride: the dot.coms. Some executives of Internet mortgage lenders postulate that higher rates may actually drive more business to the Web as buyers search for lower rates.

Bolstering the confidence of some of these online lenders is the fact that, despite current market conditions, venture capitalists have been pouring money into Internet companies that sell or finance homes online, say industry experts. These investors are betting that technology can transform the mortgage industry by reducing costs and speeding up the process substantially. 

Not as easy as it looks

While it's true that there are inefficiencies in mortgage processing that can be eliminated by technology, online lenders still face significant hurdles. First, most dot.com mortgage companies are still struggling with operating losses and attracting new capital. Second, few have figured out how to convert lookers into bookers.

So far, home buyers tend to use the Web to shop rates, but when it comes time to apply for the loan, they opt for a bricks-and-mortar lender. According to GomezAdvisors, a Lincoln, Mass. e-commerce analyst, in the coming year, 40 percent of home buyers will go to the Internet first to get information.

"The Web has proven to be a great source of information for mortgage shoppers," agrees Robert C. Andwood, senior vice president of Cendant Mortgage, Mt. Laurel, N.J., "but completing transactions is still a challenge. Currently, only 1 or 2 percent of mortgage transactions are completed online."

Although online loan volume has been anemic, many industry watchers are optimistic about the prospects for online mortgage lending. Forrester Research, an Internet research firm, estimated that online mortgage volume will reach $167 billion by 2003. Deutsche Bank analysts are forecasting a more dramatic climb, to more than $250 billion, or a 25 percent market share, by 2003.

However, Andwood, whose company partners with financial institutions to offer mortgages online and by telephone, says that to meet these goals, online lenders must be prepared to provide multiple delivery channels, such as teleservices, which support the Internet experience. 

"Most customers still demand live chat or other forms of human intervention to complete the transaction," explains Andwood.

Streamlining the process

The dot.coms are not the only lenders facing the dual challenges of how to speed up processing and reduce costs. Bricks-and-mortar mortgage providers are facing the same hurdles. Across the mortgage industry, the costs of support staff have been soaring. As a result, more lenders have turned to automated underwriting programs, which can double the productivity of a traditional loan processor.

"Technology is creating a more streamlined, user-friendly process," says Andwood. "Getting a mortgage used to land right up there with getting your teeth drilled. That is changing, though, as lenders, government-sponsored enterprises, and others involved in the process -- such as title companies and appraisers -- work together toward developing processes that are faster, less intrusive, and more reliant on readily available customer information and scoring engines. The result is more satisfied customers -- who are more inclined to use other bank services -- and loans that are closed faster and more error-free, - which adds up to better economics for the lender."

Unfortunately, the kind of technology that delivers these results doesn't come cheap. The cost of automated underwriting software, combined with an Intranet to connect staff with customer data, appraisals, and credit reports, can quickly reach six figures. Top it off with even the most basic of Internet sites, and the costs can easily pass the $1 million mark. 

A build-vs.-buy conundrum

In this new technology-driven market, mortgage lenders really have only three choices, says Andwood. "Build the technology; buy it; or don't play.

"Most bankers have a real problem with not playing because they are going to be left behind. At the same time, they recognize the importance of the mortgage product as a key customer need and a cross-sell generator. 

"On the other hand," he adds, "Significant capital resources and scale are required to build and maintain a Web site that has the utility of the top sites available today. To my way of thinking, outsourcing or buying into a platform that one of the large players has built makes absolute sense."

Technology also is raising the bar for off-line lenders, who know they have to streamline their processes and reduce costs to compete. For these lenders, outsourcing mortgage originations is also an appealing alternative.

Ask the right questions

To decide if outsourcing or other partnering arrangements make sense for mortgage originations, Andwood suggests that mortgage bankers ask themselves three questions about their existing business. 

1. Does the business consistently meet goals and/or achieve efficiency ratios or returns that are comparable with other lines of business?
2. Does the business have the scale to warrant the capital investment needed to develop or acquire the technology and overhead needed to compete effectively?
3. Is the institution's branch staff enthusiastic about referring a customer to its mortgage department because they know the experience will be smooth and easy and will reinforce the value the bank places on the customer? 

If the answer to any of these is "no," says Andwood, then outsourcing some or all of the mortgage lending business may be a viable option. A private-labeled alliance can give institutions access to the scale, technology, Web content and efficiency of a leading-edge mortgage platform, with minimal capital outlay or operating expenses. 

In addition, an outsourcing partner bears all the risk inherent in the business, which can create significant competitive advantage for the outsourcing institution. 

"Banking institutions with small- to medium-sized mortgage programs are caught in a never-ending cycle that is problematic for them," says Andwood. "Periods with more business than they can handle (refinancing booms), which cause customer dissatisfaction, are followed by periods of too little business, which causes inefficiency."

Technology can help bankers cope with these cycles, but only if they take the plunge now and leverage all available technologies to provide the no-hassle, low-cost lending experience consumers are demanding.