The Web is a hot topic for mortgage lenders, but a report released last week said their on-line efforts so far have been disappointing.

"Few lenders have utilized the Internet to revolutionize the process of marketing, originating, and selling mortgages," Sutro & Co., a San Francisco-based stock brokerage, said in its report. "With few significant exceptions, the initial reality of the new Web lenders does not yet live up to this promise, either in terms of convenience to the consumer or, we believe, in risk-adjusted potential returns to investors."

The report was co-authored by Arthur K. Bender, vice president and senior analyst, and Richard A. Eckert, an associate of the firm.

Mr. Eckert said home lenders will not realize their potential on the Web until they re-engineer their back-end operations. Lenders are "loath to give up the power and authority of making the final underwriting decision," Mr. Eckert said.

Direct lenders and people with large servicing portfolios eventually will tap the full potential of the Web, "but they have to restructure and must really trust their automated underwriting system," Mr. Eckert said. "Progressive lenders are willing to do it, but mortgage originators as a whole tend to be very conservative, and their first instinct is to cover themselves."

Mr. Bender said consumers would benefit from increased financing activity on-line, because "expensive middlemen" and "expensive physical infrastructure" would be eliminated.

Still, Mr. Eckert said, mortgage brokers will never become obsolete.

"We will never eliminate brokers, especially in purchase transactions," Mr. Eckert said. "First-time homebuyers need someone to navigate them through the process."

Mr. Bender said the anonymity of the Web, which enables consumers to shop for rates and terms and seek information on mortgage regulations, ultimately will empower customers in what can be a confusing transaction.

But there are pitfalls for lenders, he said.

"Mortgage banking is a cyclical business, and several Internet mortgage lending firms are going public in the midst of a tremendous boom," Mr. Bender said. "Investors should think twice before assuming that the volumes realized by Internet upstarts is sustainable throughout different economic interest rate environments."

Mr. Eckert said on-line mortgage companies that merely broker loans are too dependent on volume and may face trouble when rates rise and originations decline.

The study singled out IndyMac Mortgage Holding's LoanWorks as a promising Web-based lender, saying it offered an on-line application, an almost instantaneous lockable loan rate, and concise closing instructions.

Mr. Bender also singled out, a loan auction service, as being able to "complete the lending process quickly on-line."

Mr. Eckert said most commercial banks and traditional mortgage bankers are not geared toward taking applications on-line and are limited to referring Web users to a loan agent at a branch office.

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