HTTP. XML. SSL. Acronyms are as numerous as product offerings in the technical world of online, consumer-direct, mortgage-lending applications. However, application architecture is only a small part of the big picture.
What lenders really want to know is: How do we implement an online lending capability and, when we build it, will borrowers come?
Looking into the industry's crystal ball, it appears that the prerequisites for greater online lending demand are emerging and the crowds are beginning to gather. For several years, consumers have been conducting housing research online, and that trend continues. According to a spring 2002 survey by Pew Internet & American Life Project, Washington, D.C., 40 million Americans (33 percent of U.S. Internet users) have used the Internet to search for a home. The study also reveals that online home researchers are young (47 percent are between the ages of 18 and 29) and Internet-savvy (46 percent are broadband users).
These demographics--youthful borrowers who are in or entering home-buying years and the growth of high-speed communications technologies--bode well for the future of online lending. Needham, Massachusetts-based research firm TowerGroup estimates online lending will comprise 14.4 percent of total loan originations by 2006. Already, many consumers are adopting the Internet as a tool to not just search for a home, but to actually take out a mortgage.
Leading online lenders are already seeing significant growth in application and origination volume (see "Booming Web Business," by Charlyne H. McWilliams, Mortgage Banking, December 2002).
Historical roadblocks to consumer adoption of the Internet (such as privacy and security concerns) have largely eroded as the Web matures into a viable business channel. Secure data transmission and federal consumer protections have helped to drive more commerce to the Web. Yet, challenges remain. For Internet users to adopt online mortgage lending more enthusiastically than they have, lenders will need to meet rising consumer expectations for more sophisticated, interactive and transactional tools.
Fortunately, these tools and capabilities exist today. Today's lenders can now deploy low-cost third-party systems that provide origination services to consumers, help boost overall lending productivity and improve workflow efficiencies in the back office. In this way, lenders can gain advantages over competitors that are slow to offer online lending choices. This is the new business case for online lending--securing an early advantage in a growing distribution channel and gaining the operational benefits of system integration as data moves seamlessly through the lender's online solution, its loan origination system (LOS) and other mission-critical bank and third-party business systems.
Online lending then and now
Consumers are demanding more comprehensive, Web-based banking applications. At the same time, lenders must justify technology spending with the promise of a positive return on investment. Today's Internet distribution channels are highly competitive, the current online mortgage lending market is relatively small and information technology budgets are limited. That is why many lenders have tended to move cautiously through the online lending landscape, pursuing a phased approach to develop this channel.
First-generation mortgage lending Web sites typically provide the borrower with general information about the lender and the products and services offered. These sites are widespread; the 2002 Fannie Mae Mortgage Focus study found that 91 percent of lenders surveyed had established marketing or information sites (see "Technology Pays Off in 2001," by Tern Davis, Mortgage Banking, October 2002). While those sites may have content that is important to the borrower, such as current rates or printable applications, they generally lack interactive features. Nevertheless, they can be an important first step in establishing a Web presence and generating brand recognition.
Once they establish an online presence, lenders often develop second-generation Web sites. These sites typically provide an online, form-based version of the standard "1003" mortgage application. Only limited customer interactivity is available with this type of Web site, and as a result this approach generally results in a disappointing volume of new applications. Further, lenders may find a large discrepancy between the number of online mortgage loan applications originated and the number of loans closed--particularly if their internal lending procedures do not ensure the rapid responses and high level of service that online consumers demand.