If mortgage industry veterans Marvin I. Moskowitz and Richard G. Thornberry are right, the Internet is about to do for mortgage lending what the telephone did in the 1980s.
Mr. Moskowitz and Mr. Thornberry, who together held senior posts at Prudential Home Mortgage and Citicorp Mortgage in the 1980s and 1990s, are back in business, this time heading up Nexstar Financial, an Internet mortgage company that officially opened for business in June.
The executives, who were at Prudential's mortgage business at the time telephone originations were a new frontier, one that slashed the cost model for lenders, fully expect that their technology-heavy approach is going to produce a similar shift in the business.
Mr. Moskowitz, Nexstar's chairman, and Mr. Thornberry, who is president and chief executive, have kept a low profile since founding Nexstar in St. Louis a year ago with financial backing from buyout firm Kohlberg Kravis & Roberts. But in a recent phone interview, Mr. Thornberry said he believes the platform Nexstar has developed - with help from such big-name tech companies as IBM, Lucent Technologies, Siebel Systems, and Razorfish - will enable it to originate loans at a lower cost than anyone in the industry.
"I'd say our strong belief is we're going to be able to cut the cost of doing business in half from where the best performers are today," Mr. Thornberry said.
Although Nexstar is just one of a seemingly countless number of online mortgage companies that have come to market in the last year, its all-star management team and financial sponsorship from Kohlberg Kravis' sponsorship mean it must be taken seriously.
"The difference is, you've got a strong management team that has a lot of experience and a successful track record in the mortgage banking industry," said Kevin M. McCann, managing director at Deutsche Bank, which is the lead bank in Nexstar's syndicated warehouse line of credit.
That track record includes a tenure at the Prudential unit, which was sold to Norwest Mortgage in 1995, and was one of the first branchless mortgage companies. That operation is widely credited with inventing telephone mortgage originations and was a pioneer in corporate-relocation lending.
Like its predecessor, Nexstar also has no branches; it takes applications by phone and on the Web. It plans to get its production from two main sources: corporate relocation programs and cobranding arrangements with companies - not necessarily financial - that want to offer mortgages to their customers but don't want to do the work themselves.
The giants Cendant Mortgage and HomeSide Lending have had success with similar strategies. But Mr. Thornberry said Nexstar has a leg up on these and other competitors because it has built its business from the ground up, using the latest technology.
"Having run very large organizations, we understand what size and scale drive within a business," Mr. Thornberry said. But "the mortgage business, as it's constructed today, is highly inefficient. Something with scale that's inefficient is not as well-suited for the future as something you can design from scratch."
"We've started with a clean sheet of paper and redesigned how the business should be run," he said. He wouldn't disclose exactly what Nexstar's costs are. Industrywide, the average cost last year to originate a loan was 1.46% of volume, or $1,886 for a $145,000 loan, according to the Mortgage Bankers Association.
"Unlike others, we won't say we'll be the lowest price," Mr. Thornberry said. He and his colleagues know better: In previous cycles, they witnessed the folly of falling on one's sword to win loans. "But we will be very competitively priced," he added.
Mr. Thornberry said Nexstar would not charge any "junk fees" for work done by the lender, such as underwriting or processing. It will only charge for services performed by outside vendors, such as credit reports and appraisals.
Aside from price, Nexstar is promising superior customer service. For example, a borrower will be able to initiate an application on the Web, then follow up by telephone or vice versa, without disruption. All loan files are electronic, so customer service reps will never need to keep customers waiting while they dig for paper files.
Another reason Nexstar can offer better price and service, Mr. Thornberry said, is that it uses no intermediaries: It is lending directly to consumers and then sells the loans in the secondary market. "When you add more chains in the process, you create friction," he said. "We control the experience all the way from the point of sale through servicing."
Nexstar has kept quiet for the last year, Mr. Thornberry said, because it wanted to take time to develop its technology before beating its chest. Unlike other start-ups, "we chose not to come out with a tremendous number of press releases," he said.
A key part of building its platform came with the acquisition last September of eoTek LLC, an Evergreen, Colo., software development firm run by another Prudential Home Mortgage alumnus, Steven Bucuvalas.
As an independent company, eoTek had a clientele that included Chase, Bank One Corp., and GMAC, but it is now completely preoccupied with Nexstar projects, Mr. Thornberry said. It has integrated the tools supplied by IBM, Lucent, and the others into Nexstar's platform and developed some proprietary technology, he said.
Nexstar is still playing it close to the vest. Mr. Thornberry would not disclose how much volume he expects Nexstar to do or how much Kohlberg Kravis has invested. He may never have to because the company has no intention of going public.
He did say that Nexstar has hired a subservicer to service its loans for now and that the company began originating loans through its Web site with little fanfare in December. Its volume so far has been negligible, mostly loans to friends and family members, Mr. Thornberry said. The company officially opened for business in June.
Mr. Thornberry said the company has already signed up clients for its corporate relocation and cobranding arrangements, is in talks with others, and expects to announce some of these this summer.
It has done some advertising in St. Louis but has no plan to spend heavily on consumer branding. "Our national strategy is to be a partner and employee benefit provider," Mr. Thornberry said.