The Evolution of Internet-Based Mortgage Lending


[I am on vacation, and my access to e-mail is
sporadic and not timely. In my place are daily commentaries from a series of
very knowledgeable mortgage industry people with different backgrounds, and
they have been given very little direction about what to write about. The
second is below
. Our views may or may not coincide, but I thank them for
their time in volunteering and helping out.]

Today’s contributions come from:

Owen Raun Michael Hillman
RMC Vanguard Mortgage

The Evolution of Internet Mortgage Lending

Internet Lending Begins

Just a little over fifteen years ago the Statement of Policy Regarding Computer Loan Origination System was published in the Federal Registrar. From the HUD website: “This Statement of Policy sets forth the Department’s interpretation of
Section 8 of the Real Estate Settlement Procedures Act (RESPA) and its
implementing regulations with regard to the applicability of RESPA to
payments for services from certain computer systems, frequently called
CLOs, used by settlement service providers in connection with the
origination of mortgage loans or the provision of other settlement
services covered by RESPA.”

This HUD “Statement of Policy” set the tone for consumer-direct business sourcing on the Internet. Up to that point, only a handful of small,
visionary mortgage companies had been attempting to use the web in the same way
other industries were by getting “free” advertising and leads.  Their model was to get leads from your site,
cut commission splits, take apps, process, and deliver closed loans in a manner that cut operational costs. It was the Dot.Com promise-and the Dot.Com


In 1996 HUD changed its interpretation of the anti-kickback provisions written into Sections 8A B of
RESPA with regard to “CLOs” (Computerized
Loan Origination Systems). In going beyond the “qualified CLO” of
1994, HUD opened the door to entrepreneurs who chose, rather than to be
mortgage lenders themselves, to be online marketers of consumer mortgage
“opportunities”.  The key was
that these market operators could earn their fees if everyone acted within
HUD-delineated restrictions which included lender-neutral, multi-lender platforms
with standardized CLO fees. A perfect history of this period can be
found in the October, 1994 issue of Mortgage Banking in an
article by Phil Shulman.

Business Model

The Internet can be a place where a mortgage
lender can disintermediate its advertising agency and outsell its salespeople by going directly to the public with its
message.  Since 1996 the internet has allowed mortgage lenders to leave the brunt of its consumer-based marketing efforts to web professionals. They simply buy leads under CLO rules and maintain or build pipeline volumes while controlling marketing expense and cutting

Early Examples

Two obvious examples of this dichotomy are
E-LOAN and LendingTree. Janina Pawlowski and Chris Larsen were Silicon Valley
whiz kids who clearly early saw where the Web was going, but they saw it too
soon and got caught up in that Dot.Com mind set that told us “E-Commerce is here! The old world is gone forever!” E-LOAN was such
a well crafted solution-why didn’t it work? Because its value proposition was
lost in the medium, it was ahead of its time. It tried to attract borrowers
with the internet, to the internet, to explain why you should get a mortgage on
the internet.

Success on a Big Scale

LendingTree’s model worked though.  TV ads
pushed viewers to get up and go to their computers to submit personal information so banks could compete for their loan. It was an irresistible offer for many. Lenders could even set
efficiency filters for quality and location.  When combined with falling rates and a growing list of lending products, LendingTree allowed lenders (like us) to expand from single market referral
based companies to multi-state internet call centers. Lendingtree’s “long
form” lead became the standard, and is still unmatched online.  

Lead Gen Grows

Several competitors sprang up, most notable
LowerMyBills.  The “short form” lead became the favorite of the
larger call center lenders.  Cheaper and in much larger quantities, these
lenders grew with the expansion of HELOC’s, 125%, Alt-A and Subprime.

The Model  Starts to Change

The original “long” and “short” form placed
contact with the consumer before a price was ready to be quoted.  Today, with fewer mortgage products available, increases in consumer empowerment, and better
technology, more lead generators are quoting offers before they contact the consumer. Zillow,
Google, and iCanBuy are examples. Bankrate has employed that model for some time
now.  The consumer sees the price then chooses to contact or be contacted
by the lender. 

Goods/Bads of New Model

Lenders like the quality of leads but
quantity can be an issue.  A bigger issue with this “price before
contact” is the “price”.  How do you get noticed? 
Well, low ball pricing usually.  We would like to think that the internet
has matured enough where lenders that “lure” consumer with price won’t survive.  Recent L.O. compensation reforms have kicked some of these low-ballers in the teeth as
company margins need to be set and can’t vary (much).   Time will
tell but from what we can see – companies that deliver a fair price and have
customer service scores to back it up will come out the winners.  
Quicken Loans comes to mind here.


The empowered Web 2.0 consumer and future
borrowers (your kids and grandkids) will have more and more opportunity to
check on and select a lender prior to initiating contact.  A nice website
with company managed testimonials is no longer enough.  Websites that
allow consumers to “rate” lenders and loan officers will become more
common.  Yelp and epinions are examples. However it’s accomplished,
getting a borrower in the door and to the closing table will forever involve
some sort of cost of sale, and the development of some sort of customer

Editor’s note:

Higher capital requirements? Not so
fast…Myron Scholes, a Nobel Prize-winning quantitative analyst, said
subjecting major banks to higher capital requirements could make financial markets
more volatile. “If you restrict or require more capital of banks, what
will happen is that they have to wait until the deviations [in price] get
larger before they intermediate, because they have to make a return on the
capital they are employing,” Scholes said. “As intermediary services
stop, markets then become more chaotic.”

For a smattering of large investor news, Bank
of America issued disaster declarations for Vermont and Massachusettes, as well
as updates for Oklahoma and Kentucky. The company also came out with a merger
of Bank of America, N.A. and BAC Home Loans Servicing, along with issuing a
product clarification on the flood insurance requirements for condominiums.
GMAC released their July Client Development Calendar. Chase announced requirements
for correspondents in connection with the SAFE Act, specifically to assist
correspondents in complying with those requirements by noting common mistakes
to avoid when submitting loan files to Chase and to offer guidance to ensure
proper documentation is in the loan file at the time of funding submission.

Yesterday’s FOMC news was…not much. Overall
the FOMC statement was in line with expectations, and we find the 10-yr still
sitting around 2.96%. Housing news has been mixed lately, as we all know, and
even “mixed” might be an optimistic term. Overall “the housing
sector continues to be depressed” – as the FOMC statement so succinctly
put it. Even apps yesterday showed a drop of about 7% during last week. READ MORE

Leave a Reply