Google Inc. has set its sights on the mortgage-referral business, where its name recognition and technology pose a threat to the best-known name in the market, LendingTree LLC.
In a lawsuit filed in federal court Wednesday, LendingTree, which is owned by Tree.com Inc., said it learned that Google plans to launch a service similar to its own this month or next. Fear that the Internet search giant would shake up the field triggered a 7.1% drop in Tree.com's stock, to $7.93 a share, Thursday.
Lead generators like LendingTree and Experian Group Ltd.'s LowerMyBills collect information on prospective borrowers through Web sites and sell it to lenders, which then contact the consumers with loan offers. In recent years LendingTree has shifted its focus to an in-house mortgage banking operation.
As a result, "LendingTree provides a much weaker mortgage product in rate shopping today than they did five years ago," said Craig Focardi, the senior research director for the consumer lending service at TowerGroup Inc., an independent research firm in Needham, Mass., owned by MasterCard Inc. (Direct lending accounted for about 60% of Tree.com's revenue in the first half. The lead-generation business accounted for about a third.)
More broadly, Focardi said there is room in the market for a better service to help consumers shop for the best rate.
Existing sites "are less effective in matching borrowers to loans and presenting alternative rate options to consumers than they are in attempting to capture the consumer as a lead and requiring them to enter loan application information in order to get an accurate rate quote," he said. "There's still opportunity and need for somebody to improve the mortgage quoting system out to consumers."
However, another technology titan, Microsoft Corp., stumbled in this field a decade ago, and Google's ability to take over the market is not a slam dunk.
Brad Strothkamp, an analyst at Forrester Research Inc., said brand recognition — which LendingTree, LowerMyBills and Google all have — is critical to differentiating among the dozens of lead generators.
But "the technology is just table stakes," he said. "The real business potential is tied up with building a strong lead-generation process, having a stable of good partners and being recognized as a leader in the mortgage space. Google may have a way to go in those areas to be a viable competitor."
Focardi agreed. "Success in the real estate and mortgage space is by no means ensured for large, powerful vendors," he said. "Some of the critical success factors still come around these issues of proprietary technologies, relationships with the underlying financial institutions."
In its complaint, which was filed in the U.S. District Court for the Western District of North Carolina, Tree.com accused Mortech Inc., which provides lenders with software to price offers to customers through LendingTree's mortgage platform, of violating an agreement not to work with Tree.com competitors by helping Google with the new mortgage lead venture.
Tree.com, based in Charlotte, asked the court for an injunction blocking Mortech from providing pricing services and confidential information to Google.
Google would not discuss the suit. The Mountain View, Calif., company said it is "currently working on a small ad unit test that will run against a limited number of mortgage-related search queries in the U.S."
Mortech, of Lincoln, Neb., said it "has a proven track record of treating all industry partners and customers with absolute respect and consideration."
George Askew, an analyst with Stifel, Nicolaus & Co. Inc., downgraded Tree.com to "sell" from "hold" Thursday on the news that Google might be entering the business.
"If Google launches a competing product, we believe LendingTree may face a decline in consumer loan requests, fewer lenders in its" mortgage lead business, "higher marketing costs and lower lead pricing," Askew wrote in a note to clients. Even if Mortech loses the suit, that would not "reduce the competitive risk that Google represents to LendingTree."
In a conference call last month, Tree.com Chief Executive Doug Lebda underlined the importance of competing for new relationships with lenders to offset a slowdown in refinancings.
He said that while interest rates appear likely to drift up, reducing mortgage activity, his company "can stem that trend somewhat … by signing up more lenders."
LendingTree's screening will be a key selling point, he said. "In this environment lead quality matters a lot to banks and to mortgage lenders, because they want people that can qualify."
Marco Kincheloe, a vice president at Guaranteed Rate Inc., a Chicago mortgage lender, said that as the refinancing boom ebbs, the importance of Internet-sourced leads also recedes.
"It's very difficult to establish a relationship regarding a purchase over the phone or via the Internet," he said. Lenders "need to get back to basics," including "getting out there, breaking bread, meeting more realtors, taking care of my builders."
