Less than a year ago, e-Loan and Mortgage.com could boast blazing initial public offerings and soaring stock prices; indeed, the shares of the latter more than doubled in value in the two months following its IPO. Dominant off-line mortgage companies such as Countrywide saw their stock prices plunge. But in the months since then, the World Wide Web hasn’t remade the way the mortgage business is conducted. For example, Mortgage.com announced in February that it was leaving the consumer market to focus on its business-to-business (B2B) counterpart. What happened?

During the early days of Web-based providers, companies like e-Loan and Mortgage.com imagined that consumers would go on-line, input how much they wanted to put down and to finance, and choose the type of financing they preferred—fixed rate, variable rate, or some other. As the applicants waited on-line, mortgage companies would check their credit. If everything was fine, consumers would have a mortgage commitment within moments of hitting "enter." The new channel would squeeze out costs and intermediaries, thus creating more value for consumers and profits for new entrants.

But this vision didn’t reflect a sophisticated understanding of either consumers or the way the contemporary mortgage market truly works. A...