Online financing

Forrester Research Inc, of Cambridge, Mass., estimates that on-line mortgages will capture nearly ten percent of the $1.3 trillion mortgage market by the year 2003. So, why use a live mortgage broker when, armed with an ISP, an HP-12C, Excel, and NoDoz, you can run your own calcs in only 48 virtual hours.

Frankly, I don't know how Forrester defines "on-line mortgages".

If it defines them as mortgages originated by mortgage lenders, mortgage bankers, and mortgage brokers as a result of their online presence, I suppose it may be true.

However, if it defines them as mortgages originated by folks with no bricks "&" mortar presence other than a single headquarters office, I disagree. Before the bubble burst there were a few. Now there are fewer. Is it possible for a single office, basically an online-only mortgage lender/broker, to make it as a public corporation? I doubt it. And if you can't get shareholders, you can't get venture capitalists. And if you can't get venture capitalists, who's going to bankroll the startup?

In my essay, What's Your Best Rate, Tomorrow, I recommend that borrowers use mortgage brokers, and that they agree now as to how much the broker will charge over wholesale, on that date in the future when the borrower is ready to lock. The current essay considers that recommendation in light of online mortgage financing, where there is no one to whom the borrower can address such a question. Some may reply that the trade-off is that the online lender is "available 24/7". Well, yes and no. Being able to access loan status on a 24/7 basis is great. But this assumes that an anonymous "loan consultant" has updated the status report during the night and over the weekend. Sometimes the status report on Friday at 5 happens to match the status report on Monday at 9.

On September 24, 2001, I conducted the latest of my periodic Merlot Mortgage Surveys[*]. I searched for a California, 30 year fixed [parenthetically, THE most expensive loan product - on Day One], $600,000 jumbo, 20% down, at par [no points, or close to it], owner occupied, no prepayment penalty, 30 day lock, full documentation. Not every site asks for each of those parameters.

I selected some companies on name recognition; others, by surfing.

Online Lender Rate Fee Comments
E-Loan 7.250% 0.000 Plus you receive a $864.00 credit. Online mortgage broker located in Dublin CA and Jacksonville FL.
Quicken Loans 7.250% 0.375 Online lender owned by Intuit, with 400+ "loan consultants" operating out of Livonia, MI
Lending Tree * * *Borrowers submit loan parameters and receive replies from up to four lenders.
E*Trade Financial 7.125% 0.000 Online lender located in Huntington Beach, CA, formerly LoansDirect.
MortgageBot 7.375% 0.000 Plus you receive a $700 rebate. Online lender affiliated with a bank holding company, located in Cedarburg WI.

For comparison I drew wholesale rate sheets today for the following three local lenders as if I was a mortgage broker.

Local Lender Rate Fee Comments
Bank of America 7.250% 0.000 Broker fee would be 1.111 points over wholesale, 30 day rate lock.
Washington Mutual 7.125% 0.000 Broker fee would be 1.125 points over wholesale, 30 day rate lock.
Greenpoint Mortgage 7.125% 0.000 21 day rate lock.

OK, so, who's got the best deal - today? Who's got the best deal - tomorrow?

If you want to purchase 100 shares of G.E. you may be able to save by doing it through an online stock broker. There's not a lot of difference between one share and another. The same logic holds for a mortgage ONLY IF you know the exact loan product that suits your needs, and ONLY IF many sources offered the identical product. The challenge is to define that product.

SO ..... you now want to analyze the cost savings of a 15 year loan to one amortized over 30 years? Well, you'll have to start all over and run them head-to-head on each site. Return to GO.

You now want to compare 7 year ARMs? You can go back online, looking for those online lenders that offer a 7 year product. Return to GO.

You're willing to accept a 3 year prepayment penalty? Return to GO and re-set the parameters.

You want to compare 15 day locks? Return to GO and re-set the parameters.

On the other hand ..............................

If you are concerned about the following issues you may need a human broker:

* you want to compare Adjustables to fixed;
* you want to compare 80-10-10 financing to 90% financing;
* you want to add in closing costs and make APR comparisons;
* you want a lender who'll reward your impressive FICO score;
* you need a lender who will accept a very high back end ratio;
* you prefer a lender who'll self insure on 90% financing;
* you need a lender who'll consider mixed use;
* you need a lender who'll do high rise condos;
* you need a subprime lender;
* you need a lender who still permits hold backs.

These permutations, if you will, are what Jack Guttentag, Professor of Finance Emeritus at the Wharton School terms " market nichification". He observes that no lender operates in every niche; that the narrower the niche, the fewer the lenders; and that the lender offering the best product in one niche is very unlikely to be the one offering the best deal in another niche.

So it seems to me that human brokers are not likely to be replaced in the near or distant future with virtual brokers.

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