Some would say it's all about servicing when you want to make money in the mortgage industry.
Lenders, including Countrywide Credit Industries in its latest operations release, have said that they are counting on servicing revenues to pull them through the latest down cycle as refinancings disappear.
Most would tell you that about $1,000 is lost per loan on the originations side.
That leaves observers skeptical about the fate of E-Loan Inc., the Palo Alto, Calif., on-line mortgage lender. E-Loan sells all of its loans for cash, with the servicing rights included. But its chief executive, Chris Larsen, says E-Loan's business comes from being the first player on-line in a big way and capturing a previously undeveloped market.
The company dazzled in its initial public offering at the end of June. But after settling at about $75 a share in its first week of trading, it fell to a low of $18.25 as interest rates wavered, and now rests at about $30.
E-Loan courted for years and last week finally won over Countrywide's technology guru, Cameron King. What is more, with one-third of projected expenses allocated to marketing, E-Loan is building a brand name, with Joseph Kennedy, the ex-promoter of the car company Saturn Corp., leading the way. It diversified its product offering when it bought Bank of America's CarFinance.com last month for 2.88 million shares, or a 5% stake in the company.
But E-Loan has not made a cent yet and, in fact, lost $17.4 million of its $60 million in equity last quarter. Investors are predicting that it will not approach breaking even until the end of 2002, at the very best.
In a recent research report, Sutro & Co. said the bulk of the company's loans were for refinancings, with only 18% for purchases in the second quarter -- glum news when refis have fallen to about one-fifth of the market. Mr. Larsen said, however, that the number for percentage of purchase loans is closer to 29%.
Goldman, Sachs & Co. was the lead underwriter of E-Loan's IPO and in a report released last weak it forecast losses of $1.04 per share in 1999, 97 cents in 2000, and 94 cents in 2001. Furthermore, the report read, "E-Loan's operating structure does not afford it any insulation from fluctuations in its closed-loan volumes because there is no offsetting servicing income or revenues from other sources."
The Goldman report also said that E-Loan's second-quarter processing cost per loan was $2,410, excluding "expenses associated with sales and marketing, general and administrative, technology, and non-cash compensation (76% of the total expenses and currently $7,817 per loan)." For perspective, this was compared to Countrywide's all-in cost of $1,519 per loan last quarter.
Mr. Larsen maintains that "the old-school way of looking at servicing and holding assets is anti-consumer because you're not going to be motivated to recommend the best products."
Mr. Larsen said the missed servicing dollars were made up by branching into car loans and possibly other debt products in the future, ramping up purchase-money loan production, and focusing on long-term earnings from E-Loan's joint ventures in Australia, Japan, and the United Kingdom.