After last week's knockdown in the stock market, online mortgage companies' shares are struggling to get off the mat.

The stocks have recovered from Friday's selloff in line with other technology companies but are trading much further from their highs than others in the group. That suggests investors are discriminating among technology issues - rejecting companies whose hopes of conducting real estate transactions online are still in doubt and who desperately need more venture capital.

"If you look over the last six to nine months, all of these companies have been on a steady decline," said Nick Karris, a senior analyst at Gomez Advisors, who said the cause goes far deeper than the recent decline of the Nasdaq. "What's driving it is the inability of these firms to efficiently attract and retain the Internet-empowered consumer, who has access to literally hundreds of mortgage providers through the Internet. There's very little brand loyalty and high price-sensitivity."

Two Internet lenders ranked among last week's 10 biggest losers in stocks tracked by American Banker. of Sunrise, Fla., led the pack with a nearly 41% drop, to $1.625, and E-Loan of Dublin, Calif., came in fourth with a 27.1% drop, to $4.375.

Both companies rebounded on Tuesday from all-time lows, but their shares still were well below their initial offering prices. E-Loan, which opened at about $37 on June 29 and peaked at $63 on July 6, was up $1.25, or 38.5%, to $4.50., which opened at just over $7 on Aug. 11 and reached a high of $14 on Sept. 22, was up 0.125, or 7.69%, to $1.75.

The gains came on a second strong day for the Nasdaq, which was up 254 points, or 7.19%, to 3,793.50. The Dow Jones industrial average gained 184.9 points, or 1.75%, to 10,767.42.

Bank stocks, which had lagged, also had a good showing as strong earnings reports (see article on page one) began to make an impression on investors. The American Banker index was up 3.8%.

In addition to E-Loan and, Homestore of Thousand Oaks, Calif., of Melville, N.Y., LendingTree Inc., of Charlotte, N.C., of Reno, Nev., and of San Ramon, Calif. all lost significant value last week.

Company officials and their supporters point out that less than 2% of all mortgage transactions are currently conducted online, arguing that growth is inevitable. Critics contend that buying and selling property is too complicated for the Web.

The current valuations suggest the market may be telling these companies that their business plans cannot work.

Kenneth A. Posner, an analyst at Morgan Stanley Dean Witter, said: "The online referral model is a very difficult business model; there's little in the way of barrier entry, and without best-in-class execution and an extremely cost-effective structure, it won't be possible to make money. As crazy as the market seems, people are still going to put their money in companies they believe will work - and they are reluctant to invest in these companies."

Another problem may simply be bad timing. Rising interest rates have hit the whole mortgage sector hard, and a report released Tuesday by the Commerce Department indicated that housing starts are in a steep decline. According to the report, housing construction fell 11.2% in March - the largest drop since a 17% dip in January 1994 and much worse than the expected decrease of 3.9%.

Mr. Karris of Gomez said Web real estate players have to fundamentally change the mortgage process, not simply translate offline processes to the Internet. But that means coordinating appraisals, title searches, inspections, and other third-party involvement - no easy task. For example, many states require that "opinions of value" be given by a licensed appraiser, limiting the extent to which appraisals can be automated.

"Real estate is local," Gary Palmer, chief financial officer of FiNet, said several months ago when asked about his company's decision to switch from a direct consumer to business to business strategy. "San Francisco is not the same as Alabama, and it's very hard to build a localized Web site."

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