E-Trade Group Inc. says it will succeed in online mortgages where many have failed because it is not entirely dependent on the business - or on the Internet - and will be able to use the business for cross-sales.
"It's not just a stand-alone mortgage business for us, it's part of an overall strategy that E-Trade Bank and E-Trade Group are focused on - to diversify revenue streams," said Stephen Dervenis, general manager of global asset management at the Menlo Park, Calif., company. "It's a piece of an overall puzzle of financial services, and more specifically, an overall lending and credit strategy."
It got the mortgage piece of that puzzle in January by purchasing LoansDirect, of Huntington Beach, Calif. It integrated the operation, which is now called E-Trade Mortgage, into a roster of financial services offerings that now features stock brokerage and may expand to include home equity loans along with lines of credit and other forms of consumer debt.
E-Trade felt it could not consider itself diversified without offering mortgage loans, and felt it had to offer them because customers kept asking for them, Mr. Dervenis said.
Many online lenders and some traditional ones are struggling to turn a profit, but E-Trade officials say they are confident their company can do well in the mortgage business. Some observers say it is on the right track but still has its work cut out.
Mr. Dervenis said of E-Trade's entry into mortgages: "Clearly it's a product that we need to offer to our customers, and the demand is there. But can we make money from the mortgage business? In a number of different ways, yes."
One way is cross-selling, using mortgages as a hedge against downturns in other business lines, Mr. Dervenis said. It helps, he said, that the mortgage lending arm operates more like a traditional mortgage bank than like a brokerage business.
Before it bought LoansDirect, E-Trade offered mortgages to its customers through a referral deal with E-Loan Inc., of Dublin, Calif. It ended that relationship shortly after it did the LoansDirect deal.
"Sending customers elsewhere just really was not a good alternative for us, when you consider both the rationales for doing the deal," Mr. Dervenis said. "It's part of that core financial relationship that you have with your customer that we felt the need to be involved in tailoring and offering that product. The only way we felt we could do that was to control it."
E-Trade Mortgage had originated $1.6 billion in mortgage loans through June 1, and it had the No. 2 mortgage lending Web site in Gomez Advisors' latest rankings.
"We looked a long time for a mortgage company," Mr. Dervenis said. "We're really thrilled with the mortgage unit and the progress we're making."
Several analysts said the LoansDirect acquisition gave E-Trade a great way to take advantage of its deposit capital and its own customer base. In addition, the deposits base helps E-Trade slash its mortgage lending costs, several observers said.
Meanwhile, the deal relieved LoansDirect of the burden -and considerable expense - of building its brand and a customer base by itself, said Nick Karris, an analyst at Gomez Advisors. It costs an average of $2,000 to acquire a customer on the Internet, he said, and the margin on a mortgage is often less than 1%.
"Now being part of the E-Trade family, all of their customers are potential clients of E-Trade Mortgage," Mr. Karris said. "E-Trade is trying to become is more of a trusted adviser, instead of just a facilitator of loans."
James Punishill, an analyst with Forrester Research, said getting into the mortgage business made a lot of sense given E-Trade's lofty goals.
"E-Trade has desires of being nothing less than the next Citigroup, not just an online brokerage," Mr. Punishill said. "They've set their sights on being an enormous, competitive, diversified financial services institution. So this fits right in with that strategy."
But E-Trade still has much to prove. After recording profits in three straight quarters last year it lost $9.2 million in the first quarter of 2001.
It will not prosper unless the branch network it has begun building is built well, observers say.
"The Internet does not replace the other channels, it augments them," Mr. Punishill said. "If you do one without the other, you limit yourself to a very limited part of the populace."
Mr. Karris at Gomez agreed, saying consumers need to know they can sit down with somebody face to face. This is particularly true of the novice homebuyer, he said.
E-Trade addressed that issue by buying Telebank recently, and it plans to open branches in at least 20 Target stores this year, Mr. Punishill said. It has also installed about 3,000 automated teller machines around the country.
Mr. Dervenis said E-Trade is developing branding efforts for the mortgage operation and discussing the aforementioned product additions. Over the next several months it will focus on targeted marketing for individual products and for the mortgage unit as a whole.
"We just finished actually changing the name of the company," Mr. Dervenis said. "Now branding and getting the recognition behind E-Trade Mortgage" is "the exciting part of the integration that we're looking forward to."
