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E-Loan: Home Sweet Internet

No doubt, buying a home is the American dream, but when getting a mortgage loan, the process can turn into a nightmare.

You need to look at a variety of bewildering factors. In fact, unless you are a financial whiz, it is nearly impossible to know which loan is more cost-effective after factoring in such things as loan terms, points, fees, mortgage insurance, balloon payments and so on. Also, many consumers feel pressured when dealing with mortgage companies (in many cases, loan brokers are compensated based on commission structures).

There is also the problem of follow-up services. For example, suppose rates fall. You may not get notification to refinance your loan.

As for E-Loan (EELN) , it makes this much easier, by helping consumers make "apples-to-apples" comparisons of home loans.

Actually, retailing loans on the Web makes lots of sense. First of all, there is no physical product; rather, a loan is a virtual good.

You don't need complex fulfillment arrangements to get products to customers. Instead, E-Loan needs to use advanced technology to make it easy for homeowners to get the cash to buy homes.

And E-Loan is definitely a leader, with first-mover advantages.

Of course, the market for mortgages is impressive. In 1999, there are expected to be $1.2 trillion in new loan mortgage originations.

Interestingly enough, the mortgage market is highly fragmented, with about 20,000 mortgage brokerage operations in the US.

With the Net, this fragmentation can be greatly reduced. A Net-based company can create a national brand and also realize economies of scale. There is no need for costly local offices or brokerage reps.

Forrester Research estimates the online loan market at $18.7 billion in 1999. By 2003, the market is forecasted to grow to $91.2 billion or 9.6 percent of the total loan market.

Yes, there is lots of competition, such as from banks. However, such institutions do not have the incentive to offer competing products.

There is also considerable competition from such firms as Intuit, Mortgage.com, and Microsoft (which owns HomeAdvisor.com). Then again, where there are huge markets, there are many competitors. But there is enough room for more than one big player in the online mortgage market.

E-Loan has also been smart in extending its platform into other lending categories, such as car loans. For example, E-Loan recently purchased CarFinance.com.

There are also great global opportunities. For example, News Corp. and Softbank invested $22.5 million in a separate E-Loan unit to target Australia, New Zealand and the UK. What's more, Sofbank invested in another joint venture with E-Loan for the Japanese and South Korean markets.

True, last week the company announced that its third-quarter results would be worst-than-expected. But the company is still growing fast. In its last quarter, revenues soared to $4.6 million from $1.2 million in the same period last year.

The loan business is very cyclical. When interest rates rise, people do not take out as many loans, as the costs are higher (it's simple Adam Smith economics). However, it is during these times that investors should look at buying such companies. After all, people will continue to buy homes over the long-term. And many more will be doing it using the Web.

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