BridgeSpan CEO Larry Walker has taken a calculated risk with his decision to shut the company’s two small title subsidiaries and focus instead on a mortgage automation product that hasn’t scored significant adoption among lenders.
“We think we have an (electronic) process that beats (the paperwork approach). If we can just get the lenders to adopt the process, we will have it made,” he said.
BridgeSpan rolled out its eMortgage Axis electronic mortgage processing system in 2002. A few lenders are using components of it, but no one is using the entire end-to-end system, according to Walker.
He thinks opportunity is about to knock. Indeed, lenders are turning their attention from the deluge of mortgage refinancing applications to the potential efficiencies and cost savings of new technologies. They’re are shopping for new products and systems and some have approved budgets to spend, according to one survey.
“We did four pilots with electronic mortgages. The pilots worked fine, and the lenders said, ‘That’s great, when we get ready (we will call you).’ And we said, ‘Don’t you want to save money and get efficient now?’ And they said, ‘No, we don’t have time. We’re drowning in mortgage applications.’ It was crazy. Now they are saying they are about ready,” Walker said.
BridgeSpan’s two title companies in Frisco, Texas, and Los Angeles last year reported some $32 million and $1 million in revenue, respectively, from more than 40 states, but 99 percent of the business was mortgage refinance deals from lenders. Walker read the writing on the wall when interest rates moved higher, and he concluded the refinance business was dead. He opted to get out of title altogether, rather than try to compete head-to-head in the retail marketplace.
“We got into the title business to prove the value proposition of our mortgage processing platform, and we had gone as far as that could go. We were going to have to come up with a breath-taking sensation in cost or product or find some other way to compete. We didn’t want to get into a dog fight with Fidelity and First American,” he said.
The Texas title operation has shrunk from 150 to 40 or so employees, half of whom eventually could be offered positions at the technology company when the title company closes its doors. The California title insurance license has attracted some interest, judging by the half-dozen mostly small-town callers who have inquired about buying it, Walker said.
One flaw in Walker’s thinking could be the drop in 30-year fixed-rate mortgage interest rates from near 6 percent to the mid-5 percent range this month. If lower interest rates trigger another run of refinancings, that business could recover quickly and again distract lenders from their newfound interest in the technology. BridgeSpan’s closed title companies won’t be in a position to contribute incremental revenue. Yet Walker’s strategy could prove to be right on the money if the refinancing business fails to materialize or is only a short-term phenomenon.
Another challenge could be Ellie Mae, which has an established presence in the market for mortgage automation systems through its ePASS and Encompass products. Ellie Mae’s Web-based transaction portal already connects some 27,000 third-party mortgage origination companies to 250 wholesale lenders and 90,000 settlement service providers, according to the company.
The answer to marketplace challenges might be some sort of BridgeSpan financial guarantee of the lender’s cost savings through eMortgage Axis, Walker hinted. The company was at the breakeven point in mid-2003 and may close another round of venture capital financing later this year with an eye on expansion. Current investors, including Benchmark Capital and Sequoia Capital, have expressed interest in the round as have some other new partners, he said.
The company doesn’t need the additional funding to remain a going concern; however, the infusion of capital would open some new opportunities, including the possibility of a financial guarantee for eMortgage Axis customers, he said.
“Without (the money), we will be fine, we will just grow a lot slower. The real issue for more money is being able to take more risk with the lenders. I think we are going to have to take some financial risks that would be extraordinary for a technology provider,” he said.
Walker himself is keen on the idea, which would replicate a strategy he utilized during his days at Electronic Data Systems. But without the extra capital, the guarantees would place BridgeSpan’s very survival at risk–a gamble Walker’s disinclined to take.
“We feel confident, but we are going to have to have more capital on hand to be able to take on that risk,” he said. “Today I couldn’t do it. I’d be risking the whole company because of the size of (the lenders) and their transaction volume.”
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