Mortgage.com was praised for changing its business model this spring, but the decision has come back to haunt it.

In January of last year, when anything Internet-related was hot, the Sunrise, Fla., mortgage bank, then a traditional bricks-and-mortar company called First Mortgage Network, reinvented itself as a Web lender that would take applications from consumers in cyberspace. It bought an address that people shopping for mortgages on the Web would be likely to try: www.mortgage.com.

But early this year "e-tailer" stocks suffered a huge investor backlash, and business-to-business became the new buzzword.

In March, after a year of huge losses, Mortgage.com decided that the direct-to-consumer model was unprofitable and switched to a business-to-business strategy.

Some analysts said this was a smart move. But as part of the deal to buy the mortgage.com Web address, First Mortgage Network had signed a complicated marketing agreement with the domain name's previous owner, Credit.com Inc. of Alameda, Calif.

The agreement assumed that Mortgage.com would be a major direct-to-consumer lender; now the parties are suing each other, alleging contract violations.

Mortgage.com struck first, suing Credit.com on May 18 for declaratory relief. Credit.com responded with a suit on May 31, charging that Mortgage.com had breached its contract by changing its core business model.

First Mortgage Network had realized early on the potential of the Internet and bought American Finance and Investment, an online lending pioneer, in 1998.

The next year it made an aggressive push into the Internet lending arena. According to Credit.com's lawsuit, First Mortgage Network agreed to pay $2 million for the Mortgage.com handle.

"It was a land rush for who could grab share the quickest, and there were tons of capital available through the IPO markets at that time," said Nick Karris, a senior analyst at Gomez Advisors. "Many companies, particularly the early companies like Mortgage.com and E-Loan, were very aggressive to try to build a first-mover advantage."

Mortgage.com went public last August. Fueled by the euphoria over any company with a "dot-com" in its name, the stock soared, peaking at a closing high of $17.50 a share in September. But it has fallen steadily since then, and it was trading at $1.3125 at midday Wednesday.

Like many fledgling online companies, Mortgage.com remains far from profitable. Since switching to a pure Internet model, it has lost more than $59 million - $47 million in 1999 alone.

Mortgage.com and Credit.com now disagree on many details of their contract.

This much is certain: The deal gave First Mortgage Network rights to the Web address at an initial cash cost of $200,000.

Credit.com claims that the price also included 20,000 shares of Mortgage.com's stock and up to $1.8 million in fees from all loans closed on the site.

A spokeswoman for Mortgage.com said in a voice mail that, in addition to the $200,000, her company paid Credit.com 140,000 shares at $4.61 a share, or $845,400. She did not mention any fees.

The domain-name sale was linked to a 10-year marketing agreement that requires Mortgage.com to pay Credit.com $80 for each application the latter feeds to the online lender, up to $2.5 million a year, according to the Credit.com suit. If exercised to its limits, Credit.com could get almost $27 million for the domain name, which would be one of the most lucrative sales of a Web address ever.

But this March Mortgage.com changed its course. "It's too expensive to brand and to acquire a customer directly," Ed Johnson, then chief financial officer, said at the time. "It makes sense to acquire loan volume through other businesses, like point of sale, and it's a lot more cost-effective."

Analysts applauded the move, arguing that a business-to-business strategy offers more revenue opportunities than trying to lend to fickle borrowers, who browse and research on the Internet but so far do not typically close loans online or display any loyalty to Internet brands. "B-to-B could save a lot of these companies," said Mr. Karris.

"The initial models of spending at a loss to gain share, and using that to grow the business, hasn't generated profits," said Mr. Karris "The bottom line is that no one really knows how to efficiently attract and retain a consumer."

But what might be a smart business move for Mortgage.com puts the fee windfall that Credit.com was expecting in jeopardy. Credit.com's May 31 suit contends that Mortgage.com is breaching the contract by changing its strategy and forming partnerships with other consumer businesses, such as realtors and home builders.

In its suit, Mortgage.com charges that Credit.com "failed to perform certain functions under the agreement," such as marketing and promotion, and that Credit.com is seeking "inappropriate compensation and has been paid inappropriate compensation," for the application fees.

A Rose is A Rose...
Depending whom one asks, the Mortgage.com domain name cost:
  Credit.com
lawsuit
Mortgage.com
spokeswoman
Number of shares 20,000 140,000
Total share payment $92,000 $645,400
Delayed payment $1.8 million None
Total $2.1 million * $845,000 *
* Initial cash payment was $200,000

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