Zillow continues its march up the real estate value chain with a new feature that allows house buyers to apply for mortgages. The mortgage service, like everything else on Zillow, is ad-supported and free to both buyers and lenders. It is a direct strike against companies like IAC’s LendingTree.com that sell leads.

The company’s goal is to place high-value contextual advertising. BankRate.com, another mortgage service, apparently gets CPMs in the $50 range.

Key features of Zillow’s mortgage service are a “blind” registration that doesn’t compromise the identity of home buyers; the input of more detailed registration information, such as house value, which allows for more exact quotes; and a requirement that lenders stick to their quotes — a real problem in the mortgage quote game, where “bait and switch” is rampant.

Also in place is a lender rating system along the lines of eBay’s rating service. It would presumably take a half-year or more before there are enough ratings to make it scale.

Zillow expects its high user volume will give it a major lead over rivals, such as LendingTree.com. It claims 5 million monthly users, propelled by the recent addition of 1.5 million listings from various brokerages and real estate media such as NCI’s The Real Estate Book. There is still a backlog of 400,000 listings that haven’t been put up yet.

Those are internal numbers, however — and quite remarkable given the housing recession. Rating services such as comScore and HitWise suggest Zillow has considerably less usage.

Jorrit Van der Meulen, Zillow’s VP of partner relations, notes that a high percentage of Zillow’s users are looking for a mortgage. Plus there is a built-in group of potential advertisers. If there are 5 million users, that means 150,000 lenders are already using Zillow.

While Zillow is bullish about the mortgage service, it says it won’t have an immediate impact on its earnings (the company hasn’t turned a profit yet, but claims a big boost in recent ad revenues). “Marketplaces don’t happen overnight,” Van der Meulen says. “The (immediate) impact of this will be really, really small.”

In other Zillow news, Van der Meulen says the company has formally completed its deal to provide an exchange of services with many members of the Yahoo! newspaper consortium. There had been some skepticism that such a deal would get completed.