By Dean Foust
Some folks will drive out of their way to save a few pennies on gas, others clip grocery coupons. Me, I'm a hound for bargain financial services. I pay $8 to trade stocks through an Internet brokerage, carry a 7% permanent-rate credit card, and have a mortgage with a fixed interest rate of just 6.375%. But the thing is, I also have a second mortgage. It's a long story: Taking a second when I bought the home lowered my overall payments by making my main mortgage small enough to avoid a more expensive jumbo mortgage. My goal: To use today's low rates to cut the 8% rate on my second mortgage.
Last year, online mortgages began to take off, after initial skepticism, and one of the leading sites was LendingTree.com. The idea of LendingTree is simple: It's a marketplace where about 140 lenders pay the Charlotte. N.C., company to refer customers to them. You fill out an application, they screen your credit and hand you off to up to four lenders that, in theory, compete for your business and drive rates lower. Like some other mortgage sites, LendingTree also offers car loans and credit cards. "When banks compete, you win," the site's slogan goes. But is it really cheaper than old-fashioned loan shopping?
Nope. I ended up with rates no lower than I could have obtained from shopping locally -- and I didn't save any time, either. I had used LendingTree once before, shortly after its 1998 launch, and been underwhelmed. But I hoped it had grown up. In the nearly four years since, LendingTree has expanded its roster of lenders from the early-adopting clutch of high-priced subprime lenders, who would try anything to catch a fish, to a list that now includes blue-chippers such as Bank of America, Citibank, and Wells Fargo. So I gave the site another whirl. But I had pretty much the same result.
LendingTree's site is very easy to use: You fill out a simple questionnaire providing the basics -- name, address, age -- plus employment history, salary, and some financial information, including monthly debt obligations and the value of your liquid assets. To its credit, LendingTree provides useful help screens -- and based on your answers, will sometimes even recommend a different loan that might better suit your needs.
Once you complete the application, LendingTree uses your answers -- as well as the information it gleans from your credit report -- to select four lenders. Which four? LendingTree executives say their automated system doesn't simply select the four cheapest lenders. Instead, what it does is forward each request to the banks it deems most likely to approve the application based on their lending standards.
I did get approvals -- I was going to get those anyway -- but I didn't get the promised price benefits of the dogfight between bankers. I envisioned simply receiving four boffo offers in my e-mailbox, from which I'd quickly -- and painlessly -- choose the best deal. Instead, it set off a riot of incoming phone calls.
LendingTree is not really as e-automated as it appears. Yes, the offers arrived by e-mail. But whether your loan is actually processed online, saving you time and paperwork, depends on the individual lender. Most still use paperbound processes that begin with reproducing the information you gave LendingTree on a paper form so you can sign it. (Only a handful of lenders online offer e-signatures for even the most basic application processes.)
In addition, the four banks each figure they can improve the odds of winning my business by following up with phone calls -- lots of them. To work, to my house, during dinner, on weekends. I probably spent an hour on the phone with sales reps -- hardly a time savings over calling around myself.
SHORT ON BARGAINS.
The offers I received for a 30-year mortgage were between 6.75% and 7% -- a tad higher than the best rates I got cold-calling mortgage lenders around Atlanta. (In most markets, you can get rates for dozens of local lenders from either HSHAssociates.com or Bankrate.com). My request for a home-equity loan returned offers between 7.25% and 8.5% -- no raging bargains there. At about the time I was doing this piece, my main bank sent me a blind solicitation for a home-equity line of credit at the prime rate -- a mere 4.75%. LendingTree's lenders couldn't touch that.
I want to like LendingTree, because making bankers compete is a compelling idea. But its service is only as good as its participating lenders make it. The site is one of the cheapest marketing channels banks have -- they pay only $9 a lead, and $300 to $750 if the loan closes. Independent mortgage brokers get $2,000 to $3,000. But despite LendingTree's pressure, lenders are trying to hold on to too much of those savings, betting consumers won't notice.
The banks' approach is out to lunch. Bad news, boys. When consumers do their homework, you lose.
Foust covers finance from BusinessWeek's Atlanta bureau