Web Lending?s Next Hurdles

January 18, 2002

Major Brands Report Profitability, But Face Possible Higher Interest Rates, Privacy Concerns

By Warren Lutz
Inman News Features

The online mortgage industry finally may have found a profit margin last year, but other obstacles--including the possibility of higher interest rates--may loom ahead.

Matt Carrick, a financial services analyst with Gomez Inc., said the low mortgage rates that fueled the early growth of such companies as E-Loan and QuickenLoans through mortgage refinancings probably won?t last much longer.

"The big thing going forward is to really try to get (the volume of) purchase mortgages up," Carrick said. "Let?s face it, it?s a rate game."

Craig Focardi, a senior analyst with The Tower Group, agreed. "When (the refi) boom subsides, these firms will need to constantly refine their technology," he said.

And other hazards for Web lenders remain, both analysts said, even though several leading brands in the industry are coming off their best year ever.

QuickenLoans and E-Loan reported record loan volumes last year and claim to be profitable businesses. LendingTree, another popular mortgage-related Web site, also recorded record volume and lower expenses.

"It was a good year, where the suriving firms began to consistently realize financial benefit from their technology investment," said Focardi.

Yet Focardi said online lenders increasingly find themselves competing with large financial institutions that provide home loans through telemarketing and retail locations.

And Carrick said dot-com lenders face more competition from traditional banks with maturing clicks-and-bricks strategies.

Banks like Washington Mutual and Countrywide are "already reaping dividends from an online strategy both through cost savings and originations," he said.

Nevertheless, E-Loan CEO Chris Larsen said the company proved last year that "fundamentally, the online model can and does work."

"It was really a pivotal year for us," Larsen said.

E-Loan last month announced its 2001 mortgage loan volume had passed $2.5 billion, a 140 percent increase compared with the same period in 2000. Larsen said the company is now profitable--and not merely on the basis of pro forma figures, which are based on partially on projections. A number of dot-com companies have used pro forma figures to polish their financial reports, but that practice is controversial.

Larsen also said E-Loan reduced its costs of providing a mortgage last year to below industry averages.

He believes the refinancing boom will subside this quarter, but he said E-Loan?s other product lines--auto, home equity and student loans and credit cards--should help shoulder the weight.

Mortgage refinancing represented 56 percent of Dublin, Calif.-based E-Loan?s revenues for last year?s third quarter, he said.

"One of the things we continually have to prove to the market is that we?re viable in any kind of interest rate market," Larsen said.

Carrick said dot-com lenders can help protect themselves from higher mortgage rates by offering other financial products, like E-Loan does.

"The firms that are just offering mortgages online and haven?t really diversified their product set will be the ones to struggle as time moves forward," Carrick said.

Dan Gilbert, QuickenLoans? president and CEO, countered that diversification doesn?t always succeed. Livonia, Mich.-based QuickenLoans doesn?t offer credit products other than mortgages and home equity loans on its Web site.

"The ones that try to refocus themselves will lose focus and not be able to execute," Gilbert said.

Originally Rock Financial and now a subsidiary of Intuit, QuickenLoans is profitable, according to Gilbert. The company reported $3.1 billion in mortgage volume during the fiscal year ended July 30 and another $1.2 billion in the first quarter of 2002.

"We?re very excited about the year we had," Gilbert said.

Gilbert added QuickenLoans plans to tap into Intuit?s four million Quicken software users and become the first Web site to let borrowers digitally sign loan applications.

Yet the biggest factor preventing the growth of online lending may be largely out of the lenders? control.

Focardi said online mortgage growth depends on consumer "trust in the channel and privacy of their data entered over the Web." Most research, he said, shows that no more than 2 percent of mortgage shoppers actually apply online.

Carrick adds: "It comes down to how easy (Web lenders) make the online application and how good of a job they do in enticing customers and instilling customer confidence."

E-Loan has fought to give consumers access to their own credit scores, and Larsen believes a national law protecting consumer privacy would help resolve the trust issue.

"We need a knockout blow on privacy," he said. "Privacy is the biggest reason why people won?t make the jump (to applying online for a mortgage)."

Copyright: Inman News Service

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