A Chicago executive recently decided to take advantage of falling interest rates and refinance his mortgage, but business trips kept him too busy to visit his bank.

So he e-mailed a request to mortgageIT.com, which replied with a mortgage application in Portable Document Format delivered to his Palm Pilot. After he e-mailed the completed form at the end of a three-day trip, his refinancing was approved.

But what may be eliciting songs of praise from consumers and lenders may soon be bringing cries of worry from investors in mortgage-backed securities. Those investors may have a new variable to consider when gauging prepayment risks during a refinance boom: the Internet’s role in mortgage shopping.

Analysts have long argued that the Web and related technology have yet to make a dent in the first mortgage origination market but will flourish during a refinance boom. Interest rates will always be the primary factor in consumer refinancing decisions, they say, but the Web has become a big consumer resource for refinances and thus a big factor in modeling market behavior.

People can easily get data on rates and points, make inquires, and access a variety of automated mortgage systems online, as well as apply for Fannie Mae and Freddie Mac loan guarantees online. This is making the mortgage process less expensive and less of a hassle.

“The Internet is definitely affecting the industry, and that is something we are thinking about. It is a factor that investors and our clients have to consider when they invest in MBS,” said Sergei Ivanov, an analyst at Salomon Smith Barney who co-authored a report issued this month about the Web’s impact on mortgage-backed securities.

In the wake of last-month’s record-breaking prepayment rates, it is a factor many are considering more.

In January, spurts in refinancing led to more prepayments on mortgages, which analysts say has hurt the mortgage-backed securities market. In early February, Fannie Mae and Ginnie Mae announced that prepayment speeds on mortgage bonds surged — as much as 219% on one coupon.

Mr. Ivanov said Salomon has already incorporated the Internet effect into Salomon’s prepayment model, which the company uses to price the securities.

Some lenders say the Internet has been coming on especially strong in the past three months. David Doyle, executive vice president for consumer marketing at Countrywide Credit Industries Inc., said the Calabasas, Calif., company originated $742 million worth of consumer loans in January through the Web. And he said Countrywide’s online loan volume last month, including business-to-business, was $2.9 billion, or 42% of its business.

“The Internet is one of the best things to happen to consumers since the adjustable-rate mortgage was introduced in 1979,” Mr. Doyle said. “They love it.”

Michael D. Youngblood, managing director at Banc of America Securities in Charlotte, N.C., all the processes to underwrite a mortgage loan can be done through the Internet efficiently and cost-effectively.

Mr. Ivanov of Salomon pointed to several major effects the Internet will have on prepayments, including a short and simpler process and lower mortgage-origination costs.

In his report, he writes that though the Internet’s impact has been overstated, there is no doubt that it is “having a profound effect on the mortgage-origination process.”

“Clearly the Internet is a direct channel for credit,” he said. Though he said it is hard to say precisely the impact it has had on prepayments, he asserted that the past decade’s growth in industry efficiencies and related consumer savings can be credited at least in part to Web use.

Other analysts had similar assessments. Arthur Q. Frank, head of mortgage research at Nomura Securities, said of January’s prepayment surge, “It’s hard to separate out the various things that are going on right now.” Apparently, he said, borrowers were able to apply in early January and finish the process by the end of the month.

“That is something that is going faster than it has in the past,” he said. “I don’t know how much of it to attribute to the Internet, although there is something to attribute.”

Mr. Youngblood also said he thought that analysts will find it “very hard” to incorporate the Internet in their MBS prediction models. “Unfortunately,” he said, “model-building is a retrospective activity, and it captures changes in behavior after the fact.”


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