Bucking the dot-com loss trend, MortgageIT.com, an online lender based in New York, reached profitability last month, earning several hundred thousand dollars, its chief executive said.
The company funded more than $200 million of loans in April, according to Doug W. Naidus, and will come close to $300 million this month; its break-even point is just below $200 million a month.
The birth of his first child, Jordan Alexander, on April 28 and the advent of his company as a profit-maker gives him a sense of "new beginnings," Mr. Naidus said. "That makes us one of the few pure-play e-commerce platforms to be profitable." The company should reach monthly seven-figure profits by the third quarter, he said, and may post earnings of up to $10 million for the year.
In addition, he said, ING Barings, one of MortgageIT's founding backers, is leading another $10 million round of funding for the company, which is expected to close next week. MortgageIT will simply put the money away to use as leverage for more warehouse lending capacity, Mr. Naidus said.
MortgageIT's profitability is in stark contrast to online mortgage businesses whose wild spending has thus far yielded little in returns. Mr. Naidus acknowledges burning $20 million of the $50 million MortgageIT has raised since 1998 but says the company retains "the majority" of its capital.
"People talk about the first-mover advantage, but we had the second-mover advantage," Mr. Naidus said in his office in lower Manhattan. "We did not have to trailblaze. There were paths there, and we saw dead bodies strewn on certain paths."
The bodies included that of Mortgage.com, which after losing almost $50 million in the first nine months of last year alone and changing business models, fired its staff in October. ABN Amro Mortgage Group paid $1.8 million for the domain name and other assets. And iOwn.com, which laid off 100 employees in August, was bought by CitiMortgage in February. Of those still showing a pulse, FiNet Inc. lost $35 million in 1999 as a direct-to-consumer lender, then switched business models to a technology provider and lost another $25 million last year. E-Loan Inc. also continues to bleed cash. After losing $73 million in 1999 and $91 million last year, the Dublin, Calif., lender lost another $16 million in the first quarter.
Mr. Naidus credited his steering the company into the black to slow, controlled growth and a thrifty approach to spending. "We looked for cost-efficient customer acquisition from the onset," he said. "And though it took us more time to generate significant volume, we controlled our costs."
He also pointed to his first company, IPI Skyscraper, the largest mortgage broker in New York City, as a key to controlling costs at MortgageIT.com. "I never had the benefit of outside capital, so for 14 years, my discipline had been, every dollar you spend is your dollar," he said. (He remains the majority shareholder in IPI Skyscraper.)
For example, MortgageIT.com spent $1 million in late 1999 to produce a television commercial that never went on the air. Mr. Naidus said the move saved at least $15 million, though it was a difficult decision at the time.
"I remember the board meeting where I walked in and I said to them, 'You know that exciting TV campaign? I'm not running it,' " he said. "It was the subject of lengthy discussion, but I decided to let somebody else spend $60 million on an ad campaign and measure their results."
Mr. Naidus said branding MortgageIT.com never seemed viable to him. "How can you brand something you only have to think about every seven years?"
Some observers, however, though applauding MortgageIT's earnings, said some perspective is in order. Its profits may not be the beacon the nascent online lending world should look to, said James Punishill, an analyst at Forrester Research, because its aspirations thus far have been more modest than those of some flashier peers.
E-Loan, for example, wanted to become one of the nation's largest lenders, so it had to spend a lot of money on growth and marketing, argued Mr. Punishill, leading to its breathtaking losses. If one deducted E-Loan's marketing budget, he said, it might be profitable, too.
"I don't want to downplay what MortgageIT has done," Mr. Punishill said; "it's excellent that they were able to achieve profitability, and quickly. But at the end of the day, neither Doug nor anybody else has done what needs to happen to make online mortgage lending big," which is to fix the product and the process. "Until they are more electronic and Net friendly, online mortgage lending will remain stalled," he said.
Yet Mr. Naidus argues that the race to succeed in online mortgage lending is going to the tortoise, not the hares. In the end, he expects to compete with the lending giants - but will get there slowly.
"We're looking at top-lender status in the country, not just in our sector," Mr. Naidus said. "Forget new technology and old technology; we're just looking at a top 25 or top 10 lender in the country. Why not?"
