For online lenders, what a difference a year makes. In July 1999, investors were so smitten with online mortgage lending that upstart E-Loan Inc., which went public in June 1999 at $37 a share, saw its share price soar to almost $75 within a month. Investors and stock analysts loved the firm. No online lender got more "most likely to succeed" votes from Wall Street than E-Loan.

But the bloom has clearly faded from the rose in the eyes of investors. Now the stock of consumer-oriented Web companies is taking a beating, and E-Loan's determination to stick by its focus on servicing consumers hasn't been popular with investors. At the end of May, Dublin, CA-based

E-Loan's stock was hovering around $4 a share. Even a $40-million capital infusion and a partnership with Charles Schwab & Co., San Francisco, failed to whet the appetite of investors. The partnership gives E-Loan access to Schwab's millions of brokerage customers, but it only boosted E-Loan's stock a few dollars for a few weeks. It's the type of deal that used to send an Internet company's stock soaring.

Investors months ago turned their attention toward business-to-business models. But despite pressure from the investment community, E-Loan is largely staying its original course. Chief Executive Chris Larsen believes that the Internet is going to revolutionize the way debt is marketed and distributed to consumers. Rather than pandering to business-to-business enthusiasts on Wall Street, he says E-Loan is focused on building the scale and brand identity it needs to be profitable when the Internet lending revolution takes hold.

His critics ask: At the rate E-Loan is running through cash, does the company have time to realize that vision?

E-Loan has already racked up a track record more impressive than most on the Internet. Its vies with Intuit Inc., the

Palo Alto, CA-based operator of Quickenloans.com (known, until recently, as Quickenmortgage.com), as the largest online originator of mortgage loans. E-Loan closed about $1 billion in mortgage loans in 1998, rising to $1.5 billion in mortgage and auto loans combined, last year. (E-Loan entered auto lending in August 1999 with its purchase of CarFinance.com from Bank of America Corp., Charlotte, NC.)

Larsen still believes that E-Loan's best bet is to replace brick-and- mortar mortgage banking with streamlined processes enabled by the Internet. While the stock market treats firms like E-Loan as a former boom industry destined for a bust, he believes that over time, it is the old guard in consumer finance that will suffer as people increasingly shop on the Internet. Larsen says E-Loan will continue to embrace its "values and vision." The Internet, he says, radically enables improvements in consumer communication and commerce in ways that will reshape consumer finance and mortgage lending, where the products are information -intensive and not physical. Brick-and-mortar lenders are poorly positioned to make the transition to this new, Internet-enabled world, creating a huge opportunity for firms like E-Loan, he says.

"We take a pretty long-term approach to what is happening with what we call disruptive innovation," Larsen says.

By contrast, he believes the b-to-b models being adopted by some Internet lenders to serve mortgage brokers add little value for the consumer. Creating a site to serve loan brokers is like "selling life preservers on the Titanic," in Larsen's eyes.

"If you are b-to-b, your business is built around serving those players that will no longer be around in ten to fifteen years," he says. "Your ultimate customer is the consumer, so you need to be serving him."

The reason Larsen still believes consumers will eventually turn to Internet-based lenders in large numbers is because they are the only ones that can dramatically cut costs. "Every Internet model takes out needless processes," he says.

Yet critics of E-Loan and other online lenders say they can't afford to continue offering consumers discounts on the front end, when the back end of the mortgage lending process has not been made more efficient. Relatively few of the services involved in closing a mortgage loan-including employment verification, appraisals, title and mortgage insurance-have been brought into the electronic loop.

E-Loan did not respond to a follow-up query asking how much cheaper it would likely be for a consumer today to obtain a given loan through E-Loan rather than a traditional lender. At E-Loan's Web site, consumers enter a few details about their loan applications and are given a list of unnamed wholesale lenders' loan rates and closing-cost options from which to choose.

A cursory glance at traditional lenders' rates quoted in the newspaper in late May indicated they were much the same as E-Loan's. It's not known if E-Loan discounts the points (percentage points of the loan value) that consumers are charged as an origination fee. It has been standard for consumers to save about half a point by applying online.

E-Loan believes it is important to be the number one or two multi- lending mortgage site. The company bets it can build scale that will ultimately drive down the variable costs of business substantially, to the detriment of its competitors.

But it hasn't happened yet. Richard Beidl, an analyst with the Needham, MA-based Tower Group, says that E-Loan has been estimated to spend as much as $10,000 per customer-about $7,000 in marketing and $3,000 in processing costs.

Competitors that have long been in the mortgage-lending business, such as Countrywide Home Loans Inc., Pasadena, CA, spend less than half that amount on loan processing, to say nothing of the marketing costs. Countrywide, currently the nation's third-largest conventional mortgage lender, originated $75.4 billion in mortgages last year, compared with E- Loan's $1.5 billion in total lending. Even if E-Loan has been bringing those costs down, it is still a long way from beating the old-guard lenders.

Larsen responds that E-Loan's critics are mistaking long-term investments in scale for processing costs. E-Loan believes it is important to "own its own fulfillment" capability, rather than outsourcing underwriting or loan funding.

While traditional lenders rely on commissioned sales agents, E-Loan is using the Internet as a "buying enabler" that will make lending cheaper, both for E-Loan and its customers.

In the long run, the whole debate about b-to-b versus direct-to- consumer models may be irrelevant, Larsen says. The company's recent partnership with Schwab and with other investment firms such as Chicago- based Morningstar Inc. and real estate agents RE/Max International, Denver, suggest that E-Loan may be moving in the direction of a b-to-b model in some respects, giving E-Loan access to other businesses' established customer bases. It's a natural fit for a firm like Schwab, which offers asset management services to provide customers with debt management as well. But Larsen says that E-Loan's partnerships will reflect its consumer focus. "Ultimately, we are all building toward scale," he says.

Larsen believes the Internet lending like Schwab have considerable interest in entering the mortgage business. That could indicate there will be other opportunities for E-Loan to form partnerships that might expand its customer base. A company like Schwab can use a relationship with E-Loan to essentially buy its way into the mortgage business and leverage its customer base without having to invest in a loan processing platform, since E-Loan can do that, Beidl says.

But he believes E-Loan has to reduce its cost of obtaining customers and processing loans in order to survive as an independent company. To date, E-Loan has not had a high enough volume of business to amortize its technology investment. Because of the technology needed to process loans efficiently, scale is becoming increasingly important, Beidl says. He notes that the Schwab-led investment is E-Loan's second major cash infusion this year, following Japan-based Softbank's decision to increase its stake in E-Loan. "The question is, how long can they continue to hemorrhage at the rate they have been hemorrhaging?" Beidl asks.

"I don't think they have the luxury of time to build brand and to build scale."

He says that mortgage originators have long had trouble turning brand awareness into brand preference, with consumers largely focusing on loan costs rather than brand identity when choosing a loan.

Internet mortgage analyst Nick Karris of Gomez Advisors Inc., Lincoln, MA, also expresses skepticism, though Gomez recently ranked E-Loan second among 26 mortgage lenders for the quality of its online lending program. Gomez estimates that 2% of mortgage loans were originated last year, a number the firm expects to increase to "some 16%" by 2003. But that doesn't mean E-Loan is out of the woods.

"Market growth and profitability are two different things," Karris says, adding that building brand is "incredibly expensive." Currently, E-Loan is spending at a net loss to attract customers. While the company still has significant potential for long-term profitability, you can't operate at a loss forever.

Jeffrey Runnfeldt, an analyst with Minneapolis-based investment bank Dain Rauscher Wessels, has been neutral on

E-Loan's stock since initiating coverage early this year. E-Loan has been taking steps to improve its prospects, such as enhancing its automobile loan offerings, Runnfeldt says. From zero earnings before its August acquisition, E-Loan's car loans grew to represent nearly a third of its revenue in the fourth quarter of last year. Runnfeldt notes that E-Loan has expanded its auto loan platform.

Calling Schwab a "great partner for anyone in financial services," he says Schwab benefits as well. "I think E-Loan represents a service offering that is highly complementary to what they are doing."

Yet, Runnfeldt says that mortgage lending on the Internet poses fulfillment problems that plague companies like E-Loan and likely will continue to pose problems until electronic signatures (federally approved last November) and electronic documents become more widespread. Until then, real estate lending will likely remain paper-intensive on the back end, he says.

By contrast, auto lending, leasing, and other forms of consumer debt that are rely almost entirely on credit scores for underwriting may be easier to do profitably on the Internet today.

Another challenge for E-Loan and other online mortgage lenders is getting the support of point-of-sale consumer contacts, typically the Realtor or a home builder. E-Loan needs them to "quit being an obstacle" to online lending, Runnfeldt says.

"The person at the point of sale controls a lot of the borrower's decision-making."

E-Loan's business plan is compelling in principle. It's about replacing bricks and mortar with e- commerce, and sharing the time and money savings with consumers. Larsen says that the recent $40 million investment led by Schwab will be the last capital infusion the company needs to turn this idea into a profitable enterprise. His vision is an elegant picture of the future in lending, perhaps. But it's still a question as to whether the future will arrive in time to save E-Loan.

But despite their differences, LendingTree and E-Loan seem to look a lot alike to investors.

Like E-Loan, LendingTree reported a first quarter operating loss (of $17.3 million) despite growth in its revenue. And like E-Loan, LendingTree, which facilitated $563 million of closed loans in the first quarter, hopes that scale will provide a route toward profitability. But LendingTree's stock is also down significantly from its high earlier this year (its trading range has been from a high of $21 per share to a low of $4.75, with the stock standing at just over $5 at the end of May).

Like other online lenders that originally focused on the consumer market, LendingTree now complements its consumer offerings with a "business to business" strategy, providing Internet technology to other lenders. It's stock hasn't bounced up on its b-to-b prospects, however.

Nobody has embraced the switch to a "business to business model" more enthusiastically than Mortgage.com, Sunrise, FL. Early this year the firm announced it was abandoning its direct to consumer focus in favor of an "all Internet business to business" strategy of providing technology to enable other lenders to make loans on the Internet. Chairman and CEO Seth Werner says it doesn't make sense for Mortgage.com to "compete in the branding wars of the Internet." While the company will shed its heavy consumer advertising budget, investors remain skeptical. At the end of May Mortgage.com's stock was trading at about $1.25, down from a high of $22.75. The company reported a $12.8 million net loss in the first quarter, which it attributed to the restructuring associated with its new b-to-b focus. Mortgage.com says it expects to be profitable by the end of 2001.

But investor skepticism hasn't dampened interest in online lending. Gomez Advisors recently ranked 26 Internet lenders that take home loan applications online, give consumers a 24-hour loan tracking service, and offer loans over a geographic area that covers at least half of the United States' population. Gomez found online loans accounted for an estimated 2% of loan originations last year, but expects that to increase steadily to some 16% of loans by 2003.

So far, that hasn't lured investors back to the direct-to-consumer game. But Internet entrepreneurs are not giving up on the prospect of replacing bricks and mortar with a computer click loan origination service.

Ted Cornwell is a business writer in New York.

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