MENLO PARK, Calif. E-Trade Group Inc., seeking to put its fast-growing mountain of deposits to work, entered the direct mortgage lending business Thursday with an agreement to buy LoansDirect.
By originating residential mortgages through the Huntington Beach, Calif., Internet company, E-Trade aims to draw more customers to its increasingly diversified Web site and keep current ones there longer.
E-Trade has already dabbled in mortgage lending by providing a link from its site to that of the struggling E-Loan Inc. of Dublin, Calif., which shares an investor SoftBank Holdings Inc. with E-Trade. The E-Loan relationship is being unwound, officials from E-Trade said.
Todd Mackay, head of corporate development for E-Trade, said the company liked LoansDirects expertise in funding and processing a loan, as opposed to some of the models that are out there that would have been more pricing-oriented or brokerage-oriented.
E-Trade has made several acquisitions designed to diversify its revenues and fatten its customer rolls. The online brokerage giant entered banking last year by purchasing Telebanc Financial Corp. and has been flush with deposits, many garnered with higher-than-average rates. But without a lending arm, it has not been able to put those deposits to work.
Instead, E-Trade has been buying assets on the secondary market, generally a more expensive way to build a loan portfolio. In fiscal 2000, the margin between what it paid on deposits and what it earned on assets was 1.44%; the same net interest spreads at traditional banks generally range from 2.5% to 4%.
Acquiring LoansDirects origination capabilities should change all that. According to a recent press release, the privately held company funded more than $2 billion in consumer residential mortgages through June 2000. It uses its Web site and call center to sell conventional, subprime, government, and second mortgages.
This allows us to go right to the consumer, eliminate some of the middlemen, and improve our spreads along the way, Stephen Dervenis, head of E-Trade Capital Markets, a sister company to E-Trade Bank, said in an interview.
Cross-selling efforts have borne fruit at E-Trade. In its most recent quarter, ending Dec. 30, E-Trade increased net new deposits at E-Trade Bank by 40%, or $1 billion. And much of that deposit growth affirmed its strategy of cross-selling more financial products to its three million customers who use E-Trades brokerage and trading capabilities: 60% of those new deposits came from established brokerage customers.
Analysts said they were not surprised that E-Trade decided to go after LoansDirect even though it already has the E-Loan partnership.
Unlike more well-known online mortgage lenders, LoansDirect was founded in 1983 as a conventional mortgage company. It began evolving into a Web mortgage bank in 1994, the release said.
They have been among the heritage lenders that have done the best job in developing an online channel, said Thomas Carter, an electronic finance analyst at U.S. Bancorp Piper Jaffray. Other possible attractions for E-Trade may have been LoansDirects relatively low advertising budget, which would have been wasted in a difficult market for rates, Mr. Carter said. (Other online mortgage lenders, such as E-Loan, have suffered as high marketing costs were not offset by loan revenues.)
Richard Repetto, head of e-finance research at Putnam Lovell Securities, said problems that have dogged other online mortgage lenders such as costly processing and labor requirements could detract from the LoansDirect acquisition despite the companys steady origination volumes.
Its a step in the right direction, but I dont think it will meet for E-Trades asset-generation needs, Mr. Repetto said. The portion of online mortgages as a percentage of overall mortgages hasnt accelerated the way we would have expected.
The stock-swap deal is to be accounted for as a purchase, which should immediately add to E-Trades earnings. Further details about the deal were not released. E-Trade officials said they expect it to close this quarter.
