Dean C. Caso – ‘Timing wasn’t there’

Experts predicted that jumping into dot-com waters would result in surging profits for lenders. Instead, the riptide pulled many under. But while the demise of numerous Internet start-ups has made quite a splash in the business world of late, one local dot-com slipped quietly into the deep.

E-Jumbo, a Wellesley-based online mortgage company formed in late 1999, closed its doors in September. However, e-Jumbo founder Robert Watterson, a past president of the Massachusetts Mortgage Bankers Association, orchestrated a quiet withdrawal for the online jumbo loan company, speaking to the press about its closure for the first time last week during an interview with Banker & Tradesman.

E-Jumbo was launched in September 1999 amid high expectations, buoyed by optimistic predictions based on the promise of new technology. The start-up initially received between three and five mortgage applications per week, but the promise of lower rates delivered through efficiencies derived from the Internet proved undeliverable, as back-office costs couldn’t be cut by automation, Watterson said. In September 2000, the company’s initial angel investor decided against delivering a seven-figure sum needed to sustain the operation. Although Watterson for a short time considered attempting to complete the planned acquisition of an Atlanta-based mortgage company, he quickly decided the time was right to close down e-Jumbo for good.

Watterson, who was CEO of e-Jumbo, remains as president of its sister company First Financial in Wellesley, a more traditional mortgage firm. A 19-year veteran of the mortgage industry who has spent 17 of those years with First Financial, Watterson said he remembers the timing. “That was in the midst of the disasters with the stock market. It was like the classic dot-com company [scenario]; we were literally out of money and we had to shut the doors and lay the people off.”

E-Jumbo was housed in the same Wellesley office building as First Financial. The layoff of 22 people affected First Financial in a number of ways, said Watterson.

“First Financial got minuses and pluses out of it. It’s been a drain,” he said, recalling the relationships that developed among all the employees, eating lunch together and getting to know each other.

“So when the e-Jumbo people were let go, that beats the hell out of any company. It’s just very, very hard on people. I’ve never been through a round of layoffs myself let alone [overseeing the process], and it was hard on people personally,” he said.

But lessons were learned during that difficult time. “From the positive side, we learned a lot about the Internet and how to interact with customers on the Internet … that we’re bringing to bear on First Financial – that’s very helpful. We took our bad medicine and are looking for the future to build and learn on.”

One of the stumbling blocks e-Jumbo encountered along the way was the attempt to set up a streamlined and automated back office to eliminate much of the cost of doing business. But, said Watterson, technology within the industry hasn’t advanced so far that significant savings could be realized. “When I look back at the end of the day, we really didn’t offer [any advantage to consumers] because the structure of the business didn’t really change in that short time. There was really no pricing advantage.

“It was clear the business model didn’t work,” said Watterson, who noted that other companies in the industry such as mortgage.com and iOwn had far greater sums of investment capital and still did not perform well. “If misery loves company, we had plenty of company in the fourth quarter of 2000.”

Based on profitability, the company never did well, said Watterson, although it was solving some of the technology hurdles and getting the name out effectively but “too expensively,” he said. “[There’s] no question, we were caught up in the Internet gold rush, the ‘if you build it, they will come,’ sort of mentality of two years ago.”

But Watterson didn’t rush headlong into the e-Jumbo venture without due diligence and a strong conviction based on research and predictions that an Internet mortgage operation could succeed. Included into the model was a report by Forrester Research, which predicted that 10 percent of mortgages would be transacted online by 2003. That was one of the more conservative estimates being published at the time.

However, the reality is that consumers have been more reluctant to embrace Internet mortgage transactions than experts thought would be the case. Mercer Management Consulting, which has offices in Boston, recently reported that only 3 percent of consumers they surveyed since July 1999 actually purchased a loan online.

Internet Storm
Even if the then-pessimistic projection of 10 percent market share had come to pass, it represented a huge portion of the market, said Watterson. But looking back, he calls that and other predictions “naive.”

“Two years ago, everybody was saying the industry was going to be taken by storm by the Internet. I think the industry is an easy target because people come in and see these fat paper files and lot of human interaction in the process.”

It’s easy to say that the employment verification process, for instance, or deposit verification should be done online through an instantaneous computer process, but actually making that happen is a different story, said Watterson.

“I firmly believe all these things will be solved over time and that at least what we call the processing and underwriting of a loan will be virtually instantaneous in our lifetime.”

Because of the technology hurdles, e-Jumbo wasn’t able to cut back office costs enough to offer a better online loan rate, he said.

In addition, the changing economy contributed to the downfall of e-Jumbo. Interest rates crept up from the time the business began until about two months ago and the refinance business company’s leaders thought they could rely on for traction “evaporated,” Watterson said.

“The customer base we thought was going to be there went away. That was not only unpredictable, it was contrary to what people expected. People expected rates to stay the same or go down a little and they just kept going up and up and up.”

Customer interaction with loan officers was another problem e-Jumbo encountered. The company struggled with creating a computer model that acted like a loan officer, coaching clients through the decisions about what products would best suit them. People often are not familiar with the mortgage origination process and need to be told the benefits of a 30-year fixed rate or other pricing structures available to them.

“We built something on e-Jumbo’s site called the Mortgage Analyst that tried to walk people through these questions and give them real-time [analysis of] their own situation to help them through those decisions,” he said.

“I concluded there’s going to be a human interaction with people in terms of making those … key decisions, but once those decisions were made, everything else could happen almost in a finger snap. We’re there today,” he said, citing automated underwriting and statistical appraisals as examples.

Watterson said that back-office support will eventually become fully automated, with a few exceptions for problem loans. Considering that, he’s using the technology developed for e-Jumbo to enable First Financial’s loan officers to achieve a better relationship with their clients.

Although it was struggling, Watterson pursued opportunities to allow e-Jumbo a chance to succeed until the very end. E-Jumbo announced its planned acquisition of the wholesale mortgage banking arm of Atlanta-based Eagle Bancshares last year. Watterson’s intention was to establish a call/processing center where rental and wage rates were less costly than is the case in Massachusetts, he said.

As the acquisition date approached, however, e-Jumbo lost its financing and shortly thereafter decided the acquisition “didn’t make sense.” Eagle reported that the deal was terminated on Oct. 6, 2000.

While the struggles of e-Jumbo did create drain on its sister company, Watterson said First Financial is well capitalized and is recovering. Additionally, despite rumors to the contrary, Watterson said only one originator has left the company to accept a position elsewhere.

“In terms of the mortgage industry, I definitely feel that the concept of Internet originations will happen somewhere along the way. But I think the industry jumped the gun on it,” said Dean C. Caso, president of Homevest Mortgage Corp. Customers still need a lot of personal help.

Caso said Watterson’s idea of creating a market niche within the dot-com world was a good one. “I just think the timing wasn’t there for it just based on the way a loan gets originated. I think it was just a little before its time,” said Caso.