ANYONE WHO HAS STOOD ATOP MOUNT WASHINGTON IN PITTSBURGH, with the city's three rivers flowing several hundred feet below, knows that it would take a flood of biblical proportions to cover it over with water. But when Doug Lebda applied for a mortgage on a condo there in 1996, his lender strung him along for months--then at the last moment demanded he buy flood insurance. * Lebda found the entire experience "disempowering, hard to sort through and difficult to understand." And it inspired him--then a 25-year-old consultant for Price Waterhouse--to start Charlotte, North Carolina-based LendingTree Inc., an online exchange where more than 230 lenders compete for mortgage borrowers, often providing them with multiple offers in 10 minutes or less. * Aided in no small part by a red-hot refinancing market, LendingTree has turned out to be a big success: Lenders on the exchange have funded $74 billion in loans--most of them home mortgages--since 1997. The company went public in January 2000, then last year sold to New York-based IAC/InterActiveCorp, an eCommerce company that owns such high-profile businesses as Expedia.com and Ticketmaster. * At its most basic form, LendingTree is a giant marketing machine that uses its strong brand to generate leads more cheaply than participating lenders can on their own. According to Lebda--now 33 years old and still running the company as chief executive officer--the company's biggest challenge is converting those leads into funded loan commitments, a process that's complicated by the fact that LendingTree does not control the underwriting decision. Because LendingTree makes most of its money after a loan closes, it uses a carrot-and-stick approach to boost closing rates as high as possible.
But now an even bigger challenge may be looming directly ahead. As the refinancing market cools down after two years of record loan volume in 2002 and 2003, lenders are being forced to shift their emphasis to purchase mortgages.
While all lenders will have to make this difficult adjustment, the online origination channel may find the purchase market to be a particularly tough nut to crack. This is due to the influential role that real estate agents often play in directing homebuyers to preferred lenders. Because of this, LendingTree has built a companion network of realty firms that could turn out to be an important strategic weapon in the next few years.
LendingTree has since branched out to include car loans, credit cards, personal loans and student loans, although mortgage and home-equity lending accounted for 80 percent of the company's revenue in 2003. President and Chief Operating Officer Thomas J. Reddin says that LendingTree will spend approximately $70 million on marketing in 2004, which covers the cost of television and print advertising as well as its relationships with such important Internet portals as Yahoo!, America Online, Priceline.com and AutoTrader.com.
The company also sources leads through strategic partnerships with the likes of Costco Wholesale Corporation, the American Automobile Association (AAA) and several of the major U.S. airlines.
The 8-year-old company employs about 250 people and operates from two large one-story buildings in a suburban office park several miles south of Charlotte. The environment is pleasant but spare, suggesting this is still a startup operation that spends money carefully. Even Lebda's office is smaller than what most...