E-Loan to Shut Down – Why Online Lenders Aren’t Cheaper

Online lender E-Loan recently announced that they will be shutting down their mortgage operations after the first of the year.  Most people will chalk this up as another lender cratering due to the credit crisis.  I chalk it up as just a failure of the online business model for mortgages.  Ever since the internet all but destroyed travel agents, every one has been predicting the same would happen to mortgage brokers.  The failure of E-Loan puts the nail in the coffin of that theory.  The credit crisis merely exposed the flaw in the business model.

The Role of the Loan Officer

The reason E-Loan failed is because they did not understand the role of the loan officer.  The simplistic way of thinking is that you can eliminate the highly paid workforce of loan officers and pass the savings on to the consumer by opening up huge call centers staffed with hourly workers.  The problem with this approach is that it ignores the central role of the loan officer at a bank or brokerage which is to GENERATE BUSINESS (bring in mortgage loans). 

The Flawed Model

The theory behind businesses such as E-Loan is that they would be able to lower costs and pass it on to consumers.  This almost never happened.  Business models like E-Loan instead chose to spend a ton of money on advertising to bring in business and minimize the role of the loan officer as the rain maker.  There are two obvious problems with this approach.  First, it ignores the inherent cost of large scale advertising.  Second, it costs a ton of money to staff up a call center with non-productive loan officers.  As a result, E-Loan could not pass on the cost savings to consumers OR its shareholders because while the loan officers compensation may have been lower, the other expenses with running the business were a lot higher than your typical mortgage brokerage that employs loan officers that bring in business with minimal advertising.  In other words, E-Loan was simply not efficient at originating mortgage loans. 

To make matters worse, the business model only really works in booming refinance markets when mortgage loans are falling off the trees.  However, in a down market, it actually takes skill and relationships to bring in mortgage loans.  This is why many mortgage companies who employ top producers are still doing well.  There are several loan officers at Perl who will still close in excess of $75 million in loans this year in a market in which many loan officers can barely close one loan a month!

The mortgage business is very complex and is a lot more involved than simply pushing paper around.  As any great mortgage company will tell you, it is the loan officers that seperate the one company from the next.  When companies devalue their loan officers, it is almost like they are choosing to sell an inferior product.  The results are evident.