How will the Internet change the economics of mortgage origination? What strategy will prove most successful for online mortgage originators in the long term?

Some observers think the ultimate victory will go to whoever comes up with the most powerfully familiar brand name. For example, "SearsMortgage.com," "AmazonMortgage.com," or even "HomeDepotMortgage.com."

I disagree. I submit that it is not branding but the economics of distribution itself that will determine who wins extraordinary profits online.

Mortgages are a commodity. In a commodity business, it is not the cleverly or differently or familiarly branded producer but the low-cost one that rules.

That is why brokers dominate mortgage originations, controlling an estimated 70% share of the market. Brokers are nimbler and better able to keep their costs down than the retail operations of big mortgage banks. They find their niche in overcoming and profiting from inefficiencies in the supply chain.

It is here, in the economics of distribution, that the true impact of the Internet manifests itself.

Many early Internet investment dollars chased the promise of first-mover advantage, the idea that the first entrant to brand itself would win. If everyone who wants a book thinks of Amazon, or who wants a mortgage thinks of E-Loan — the theory went — then Amazon or E-Loan would have sustainable advantage in winning customers.

But is that really the secret that will fuel Amazon’s long-term success? Not according to a recent article in Booz-Allen & Hamilton’s Journal of Strategy and Business, "Extracting the Value from the Value Chain." Timothy Laseter and his co-authors explained the real value Amazon has brought book selling as eliminating the return of unsold books to publishers.

Amazon effectively moved backward in the value chain of book distribution and captured a chunk of the billions of dollars a year spent on unsold books. It zeroed in on an inefficiency in the traditional book business: publishers’ arcane practice, dating from the Great Depression, of guaranteeing the sale of every book printed. Wholesalers and retailers simply returned unsold books to the publisher, paying only the freight.

In 1998, nearly one-third of all books printed were returned. Amazon.com returns just 3% of its books.

Booz-Allen calculates that a truly efficient supply network, producing only sold books, would save more than $2 billion a year, about half the industry’s current annual profit.

By transforming the value chain from a “push” system requiring large inventories to a “pull” system responding to demand, Amazon has unlocked value and captured wealth. With leveraged bargaining power, it has reduced its inventory investment to a mere 15% to 20% of that of a brick-and-mortar competitor. The result: lower prices to consumers.

Therein lies the true earning potential of the Internet for everyone. Seek out inefficiency in the value chain. Use the Web to reach it and to unlock and retain its value.

In the mortgage origination business — legendary for its bewildering, inefficient practices — this could not be more true.

The raw materials of a mortgage loan are information and money, both of which should move freely by way of the Web. As Countrywide CEO Angelo Mozilo put it, “Everything between the borrower and the investor represents friction.” Financial reward awaits those who use the Internet to transform the mortgage value chain and erase that friction.

"Sears Mortgage"? Just another dead-and-gone branding strategy. It was tried years ago. It flopped. And so, probably, will "SearsMortgage.com," or “HomeDepotMortgage.com,” or the like, if they are not low-cost providers.


Mr. White is president and chief executive officer of LenderLive.Com in Denver, which offers Internet-based, private-label mortgage lending services for credit unions.


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