The decline of mortgage brokers has had a profound affect on loan origination system provider Ellie Mae. As indicated by the Pleasanton, Calif.-based company’s disclosures to the Securities and Exchange Commission, its customer base has shifted dramatically from broker to lender since 2008.
There were 41,351 lender mortgage professionals who used Ellie Mae’s Encompass origination system at least once during the quarter, up 18% from the first quarter of 2010 and up 4.2% from the fourth quarter of 2010.
Active broker mortgage professionals using the software stood at 11,014 at the end of 2010—down 49% from the same period of 2009—but Ellie Mae did not disclose the number of active brokers during the first quarter of 2011.
In a recent call with analysts, Sig Anderman, the president and chief executive of Ellie Mae, said the number of broker users dropped below 10,000 in first quarter, the result of declining number of mortgage brokers in the industry.
“The broker market is being pretty much decimated out there,” Anderman said. “We’re not focusing at all on brokers. Our entire focus is on lenders because that’s where the future is in this business; it’s pretty clear from virtually every perspective.”
In an interview with Origination News, Anderman, himself a former mortgage broker, said that however unfortunate, his assessment reflects the reality of the industry.
“A lot of it is because of the meltdown, but here’s my theory: they were the weakest constituency out there,” he said. “You had the big banks, Fannie Mae, Wall Street and the big mortgage banks and the broker was an easy target.
“It’s like saying it’s the grocery store owner’s fault if it sells a can of tuna fish with a peanut in it. But he got it canned from Chicken of the Sea or whoever sold it to him. He didn’t put it in the can. He got it and he sold it and it had a peanut in it,” Anderman said, adding, “It’s the same thing with mortgage brokers. They got these products from the investors. They didn’t make up these subprime products.”
Anderman said critics have put too much blame on brokers, without criticizing borrowers that lied on mortgage applications that weren’t properly vetted.
The shift in business model has changed the makeup of Ellie’s customer base, with lender users outnumbering broker users. In its debut quarterly report as a publicly traded company, mortgage software provider Ellie Mae posted a net loss of $800,000 for the first quarter of 2011.
Revenue was up 19% from the first quarter of 2010, to $10.6 million. The first-quarter loss was equivalent to 22 cents a share, better than the $1.6 million ($0.48 per share) loss a year earlier.
The first-quarter loss compares to net income of $84,500 in the fourth quarter of 2010 on revenue of $12.7 million.
Anderman told ON that he thinks it will be difficult for brokers to make a comeback, “the hurdles that have been put in place are just too tough,” he said. “It’s an unlevel playing field.” But brokers aren’t necessarily getting out of the mortgage industry completely.
“When I say the brokers are gone, it doesn’t mean the individual who was a broker is gone. The successful guys morphed [into] bankers. So it’s not like if you had a 100-person brokerage shop, they didn’t disappear and turn into book sellers, they became bankers.”
Ellie Mae projects annual revenue to be $50 million to $52 million in 2011, which would be an increase of 16% to 20% from 2010. Ellie Mae also projected net income of $2.1 million to $3.1 million for all of 2011, which would be an increase of 170% to 299%.
Chief financial officer Ed Luce told analysts the projections are based on estimates of $1 trillion origination market in 2011 and growth in the number of users on Ellie Mae’s loan origination system, but declined to specify Ellie Mae’s target for annual new customers' growth.
“We had planned to add 2,400 success-based pricing users in the first quarter, which are almost entirely lender users,” Luce told analysts. “We beat that handily.”
Lender use of its software-as-a-service origination system has increased to more than 11,100 mortgage professionals at the end of first quarter of 2011, from 2,738 at the end of first quarter of 2010 and 8,704 at the end of fourth quarter of 2010.
The company said the average revenue per active lender user was $216, up 16% from $186 in first quarter of 2010, but down 19% from fourth quarter of 2010.
Ellie Mae’s software and services revenue (its LOS business) was $8.4 million, an 18% increase from first quarter of 2010, but down 17% from fourth quarter of 2010. Network transaction revenue, which is generated when the company’s users pay to access other service providers across the Ellie Mae Network, was $2.2 million, up 24% from first quarter of 2010, but down 15% from the previous quarter.
