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FEBRUARY 7, 2002 COMPANY CLOSEUP By Dean Foust Lending Tree: Steadily Spreading Its Roots The online middleman between loan shoppers and banks has defied long odds so far. Now, profitability is nearly in sight
Since then, the 32-year-old former consultant at PricewaterhouseCoopers has made it his mission to simplify the mortgage hunt. His solution was to create Lending Tree Inc., now a three-year-old Web site where consumers can comparison-shop for the best deals for not just a mortgage but for a car loan, home-equity loan, or credit card. It's a huge opportunity. In 2001, the Mortgage Bankers Association of America estimated that Americans took out to $2 trillion dollars in mortgages. Thanks to Lending Tree's witty TV ads that poke fun at hapless bankers and its technology that helps banks slash their customer-acquisition costs, it has survived the dot.com shakeout by grabbing a sliver of that multitrillion-dollar pie. Last year, more than 1.4 million customers applied for loans via Lending Tree, enabling the site's lenders to book more than $12 billion in loans from its leads. "GOOD BRAND NAME." E-LOAN, Lending Tree's closest Net startup competitor, originated $7.3 billion in loans last year. (E-LOAN actually lends money to consumers and resells the loans to banks.) "They've built Lending Tree into a really good brand name," notes Richard Beidl, a principal of Beidl Associates, a Norwood (Mass.)-based bank consulting firm. Now, the $64 million Charlotte (N.C.)-based Lending Tree is close to turning the financial corner. After cutting its net losses from $66 million in 2000 to $28.9 million in the past year -- and to just $4.5 million in the fourth quarter of 2001 -- Lending Tree now says it expects to begin generating positive cash flow in February. On Feb. 5, company officials said they expect to reach profitability by the third quarter of this year. For the full year of 2002, Lending Tree still expects to lose $2.3 million on revenues of $94 million. At times, it sure looked doubtful that Lebda's vision for Lending Tree would ever take root. After leaving PricewaterhouseCoopers in 1997 to earn an MBA at the University of Virginia, he began to hone his idea for an Internet-based lending exchange. But Lebda's classmates didn't buy it: When he pitched the notion to other students in a "business plan" competition, Lebda finished behind another proposal for a nightclub. JUICY CARROT. Undeterred, he dropped out of school after just a year to concentrate on building Lending Tree. He coaxed $69 million altogether in venture investments from General Electric Capital and Goldman Sachs Group, among others. Lending Tree raised an additional $44 million when it went public in February, 2000, at $12 a share. Selling bankers on his network, however, was another story. At first, they feared that an online exchange would further commoditize the already competitive mortgage business. In one early meeting, Lebda recalls how an executive from one leading bank interrupted his presentation by slamming his fist and warning, "You will never get between us and our customers." Lebda persisted -- patiently convincing bankers with a juicy carrot: He could significantly lower their costs of acquiring customers, which can easily run between $2,000 to $3,000 for loans originated by independent mortgage brokers. WARMING UP. Here's how it works: Consumers log on to Lending Tree's site and fill out a brief questionnaire about their borrowing needs, and they get a promise that they'll receive offers from up to four lenders. Using criteria the banks have supplied, Lending Tree automatically forwards the lead to four institutions best suited to make the particular loan. The lenders respond to the consumer with a rate quote. For that, Lending Tree charges banks $9 for each customer lead, bringing $36 total if the lead goes to four banks -- and an extra $300 to $750 if the lead turns into an actual mortgage loan. Despite their initial resistance, bankers are warming to the idea. Today, the site has signed up 145 banks, including Bank of America, Citibank, and Wells Fargo, as well as the banker who threatened Lebda back in that 1999 meeting. Among the lenders is Ohio-based Provident Bank, which admits it now depends on Lending Tree to generate "a significant source of volume for us," says Senior Vice-President Jay Plum. "I think they're going to make it because they've used their advertising very well to establish credibility and a brand with consumers." Still, some analysts question whether Lending Tree can make money over the long haul. Critics say its commissions are too skimpy, and they're skeptical it can pile up enough of those $300 finders' fees to build a company with any scale. OVERVALUED? Last July, Michael T. Vinciquerra, an analyst at Raymond James & Associates, wrote in a report that "the model just doesn't seem to be capable of generating enough revenue to create a noticeable earnings stream." In response, Lebda enlarged the report into poster size and displays it in the company's meeting area as a motivational tool for his 230 employees. And some investors are betting that Lending Tree may be vulnerable when the housing and refinancing booms play out. Others question if Lending Tree is overvalued. Since last March, its stock has risen fourfold off its $2 low to around $8. Bearish investors are holding short positions equivalent to 25% of the float. Even Lending Tree's fans say the stock may have gotten ahead of itself. On Jan. 28, Merrill Lynch analyst Michael R. Hughes lowered his rating from strong buy to neutral, noting that in light of the recent run-up, Lending Tree is now fully valued for a company that likely won't show a small profit before 2003. While some investors believe Lending Tree may ultimately become takeover bait for the likes of eBay or Yahoo!, Lebda insists he isn't looking to cash out. And he believes that even if mortgage demand wanes -- the Mortgage Bankers Association of America forecasts that it will fall 30% this year -- he vows that Lending Tree's business will remain firm, with lenders approving more loan applications they get through Lending Tree. Over time, Lending Tree also believes it can build a profitable niche from selling information from its database on loan-pricing trends to financial institutions. "We are building an extremely powerful database of information on U.S. lending," says Lending Tree President Tom Reddin. All the result of a $60,000 condo loan.  Foust is BusinessWeek's Atlanta bureau manager Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. 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