On-line bidding for mortgage loans appears to be the wave of the future for many large lenders.

Charlotte, N.C.-based Lending Tree, a consumer-direct company that launched an on-line service in July, lets potential borrowers fill out one application on-line to be sent to a network of 18 lenders for review.

Participants such as Bank One Corp., Finance One Group, Advanta Mortgage, and Associates First Capital submit criteria on applicants they will accept, and Lending Tree matches the potential borrower to a compatible lender.

Offers are then posted on the site within two business days, and consumers use a password to log on and review bids.

"Our goal is to have four lenders to every borrower, and we'll probably add one lender a week for the rest of the year," said Douglas R. Lebda, chief executive officer at Lending Tree. "We cut out the middleman because there is an alternative channel for people to deal directly with banks."

Mr. Lebda said 20% of prospective borrowers who get multiple bids actually close on a loan. The company had about $1 billion of loan applications from potential borrowers in the third quarter, he added. Total revenue generated is much lower.

"This is cost-effective for lenders because they don't have the cost of processing people they're not going to approve-it's not the sifting through and finding a needle-in-the-haystack scenario anymore," Mr. Lebda said. "The Internet is great for smaller lenders, too, because it allows you to stand toe-to-toe with the big guys and access the same consumers for the same price."

Increased price competition fostered by on-line technology may create competition for smaller brokers, the "middlemen," but many agree the industry has room for everyone.

Mr. Lebda pointed to the automobile industry as an example:

"Some people value the service of a Lexus dealership when they can probably get a better price at Carmax; the same goes for mortgage shopping. I don't think the small lender will phase out."

Shawn Quinn, a broker at Monterey Coast Mortgage in Monterey, Calif., said his firm originated about $135 million of mortgages from Oct. 1, 1997, through September 1998. Mr. Quinn said he is not worried about technology's displacing traditional brokers.

"On-line is competition that can only absorb a small percentage of the market because not everybody is comfortable spilling their guts on the Net with all their personal information," Mr. Quinn said. "If you're buying groceries, this Costco-type buying idea is good, but unless you're really real estate savvy, people can put themselves in a worse situation."

Mr. Quinn warned that the average person may not be in a position to use electronic lending effectively. When enough mistakes are made by consumers, he predicted, on-line loan growth will slow.

Industrywide Mortgage Exchange, or IMX, is a loan trading arena of 50 lenders and about 3,000 loan brokers. Since the network went on-line a year ago, it has helped originate about $1 billion of loans.

"We are very different from consumer-direct systems because borrowers can't put in double applications, and that prevents fallout," said Erin Esparza, vice president of marketing at IMX. "Borrower's names, addresses, and Social Security numbers are stripped off their applications so lenders bid on the loans blindly in that sense."

With the IMX system, bids come back on-line to brokers who call their clients and counsel them through closing, Ms. Esparza said.

A broker can immediately lock in a loan rate on-line, and with 80% of locked loans closing there is no fee to brokers on the network, Ms. Esparza said. And lenders pay a transaction fee only upon closing, she added.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.