E-Loan Inc., an online-only mortgage and auto lender, went public in June 1999. Its stock hit an all time high of $72 a share that summer but over the past 52 weeks its high has been just $18 and its low just 37 cents. (No, the stock didn't split.)

Lately, it has been trading at just under $3 a share, and "short sellers," speculators who bet that a company's share price will go down, have been targeting the Dublin, CA-based lender. The only other online-only lender, Mortgage.com of Florida, went bust in late 2000. By last summer the word on Wall Street was that Mortgage.com was "Mortgage.gone."

In other words, E-Loan has a tough road to hoe.

Analyst Mike McMahon of Sandler O'Neill & Partners first predicted in October 1999 that E-Loan would never earn a nickel. McMahon, so far, is sticking to his prediction.

Meanwhile, interest rates are continuing to fall, and a genuine refinancing boom is underway. Some mortgage economists are now predicting that residential originations could total $1.5 trillion this year, which would come close to shattering the 1998 record of $1.55 trillion.

Falling interest rates are great for residential lenders, including E-Loan. Even with the economy weakening and unemployment rising, the thinking is that consumers will refinance their current mortgages at a brisk clip. And this time around, even though unemployment is rising somewhat (it's really not rising that much--up two-tenths of 1%, to 4.2%, as of this writing), the "purchase money" market is still good.

Yes, if E-Loan is going to "make it," some think it's now-or-never time for the company. Recently, U.S. Banker interviewed company chief executive Chris Larsen, a former loan broker, over the telephone, and then a week later sat down with him in our Washington office to ask about the firm's future and its prospects over the near term.

USB: E-Loan's share price has come back a bit of late. In December, it hit a low of 37 cents. Now it's at about $3 a share. It seems that soon after you announced strong auto loan volume you got a spike.
LARSEN: There were a few things that helped. We recently got a $50 million warehouse line from G.E. Capital. Greenwich Capital renewed a line, too. Also, I think some of the selling (in our shares) that was happening at year-end was due to tax considerations. At year-end, some investors were dumping shares (to take a tax loss), and after that was over, we came back up a bit. But, yes, our auto lending numbers have been very good. We are very bullish on that business.

USB: What were your overall loan volumes like in the most recent quarter?
LARSEN: In the fourth quarter we originated $344 million in residential loans, $320 million in auto loans and $35 million in home equity loans. Residential accounts for 60% of our revenue.

USB: What about profits? There are some folks out there who think your firm may never earn a dime. What's the current estimate on when you'll earn a profit?
LARSEN: We're sticking to our original estimate of the second quarter of 2002. We estimate that we will burn through another $16 million in cash to get there.

USB: What type of residential loans are you making? Conventional? Subprime? Government-backed?
LARSEN: Most of what we do is Fannie, Freddie, (conventional or what is referred to as "A" paper loans in the U.S.) and jumbo mortgages (large residential loans that, by law, cannot be purchased by Fannie Mae and Freddie Mac.)

USB: You don't keep your loans, obviously, and you don't keep the servicing rights to them. How come you don't sell your loans directly to Fannie and Freddie? The word is that the guarantee fees they charge your firm are too high. (Note: A lender pays a guarantee fee ranging anywhere from 15 basis points to 23 to Fannie Mae or Freddie Mac to secure their purchase of the mortgage. The "g-fee," as it is known, is considered an expense of doing business and is deducted from a lender's profits on a loan. The g-fee charged to a particular lender is never disclosed by the lender, though Fannie and Freddie publish their overall, average, g-fee.)
LARSEN: Well, we offer the loan to whomever will pay the most. Other lenders (Countrywide, Chase, Bank of America, for example) are willing to pay us more so we take the cash. We want that cash now.

USB: So you do sell to Fannie Mae and Freddie Mac?
LARSEN: Very little.

USB: What about servicing loans? Do you see yourself getting into that business eventually?
LARSEN: In a way. We want to control the data on the loan customer. Right now, with the refi boom, I'm glad we don't own any servicing because it is all running off. But we think the customer data is valuable and we'd like eventually to get into that business. That's what we're all about--dealing with the customer, the consumer. That's the relationship that we value.

USB: What do you think of the "B2B" (business-to-business) sector, those online trading platforms in which companies buy and sell loans among each other?
LARSEN: I think they're doomed. I think by having a platform out there, you set up needless intervention. I know a lot people might disagree with that. There's a lot of competition in the B2B sector. I think only a few of them are going to survive.

USB: There's been a bit of debate in the mortgage industry about what is, and isn't an "online" loan. Some consumers start online, then get frustrated or confused and call a phone number and finish the application off-line. And, still, some lenders like Countrywide count that as an online loan. Do you know how many of your customers actually fill out the entire application online?
LARSEN: We don't disclose that number. We have a call center (where consumers call in for help), but I can tell you that a great majority of our customers fill out the entire application online.

USB: Countrywide touts itself as one of the biggest online lenders. IndyMac makes big boasts too about its online lending prowess. Who do you consider your biggest competitors?
LARSEN: We think there is plenty of volume out there and that we can share it with the big traditional lenders like Countrywide, Chase and so on. Our competition is the loan broker. We think they don't offer a good deal to the consumer, that they just get in the way. We go direct to the consumer and feel we offer them the best deal. To me, loan brokers are like used car salesman--they are not out to get the best deal for the consumer.

USB: So you have no plans to diversify your production channels? Go into wholesale lending and use brokers?
LARSEN: None. Our customer is the consumer.

USB: With the refi boom underway, are you hiring now?
LARSEN: Actually, we're hiring again.

USB: How many?
LARSEN: We're not disclosing that, but I can tell you that we are hiring customer service reps, processors and engineers.

USB: How many people do you employ now?
LARSEN: About 350. Our turnover is decreasing.

USB: What happened to E-Loan in the U.K. and the rest of Europe? In January, those operations were closed.
LARSEN: There's a new reality in the capital markets over there--and here, of course--concerning e-commerce firms. Their venture capital provider (eVentures) ceased to exist. (Editor's note: the fund had invested $42 million in E-Loan Europe. Its backers included Rupert Murdoch's News Corp. and Softbank of Japan, among others.)

USB: Did E-Loan U.S. put any money in the operations?
LARSEN: No. We put no cash into these firms. We gave them our technology, our branding and licensing, and we took equity. We gave them assistance, advice, but we never had those investments on our balance sheet. They had their own officers, directors and personnel. If they had gone public, eventually it would have been all upside for us.

USB: What kind of residential loan volumes were these two firms doing?
LARSEN: I don't know that. I don't know if the figure has ever been released. I don't think it was a very big number. They never got traction there. You have to remember that banks over there lend out money at below their cost of funds. There is no secondary market to speak of in the U.K.

USB: Do you think E-Loan, your company, might ever go back to Europe?
LARSEN: We might. We're still licensed to lend there. We have a Japanese operation and that continues to do well. (It's a joint venture with Softbank.)

Paul Muolo is executive editor of National Mortgage News in Washington, D.C.

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