Ellie Mae — the operator of a network connecting mortgage originators, lenders and settlement services providers — is planning to go public. The company has filed supporting documents with regulators that provide a glimpse into the future of electronic mortgage originations, and how the shakeout from the financial crisis has impacted the lending industry.

Pleasanton, Calif.-based Ellie Mae, which also provides mortgage management software, Encompass, to loan originators, filed a slew of documents with the Securities and Exchange Commission last week.

The number of shares to be offered in the initial public offering and price range weren’t disclosed in the company’s S-1 registration statement for an initial public offering (the offering will be made only by means of a prospectus, to be made available by Goldman Sachs & Co.).

But the document reveals some of the obstacles to greater industry adoption of electronic mortgage origination, and shows the challenges facing companies that provide services to a downsized mortgage industry.

Ellie Mae’s network allows Encompass loan originators to submit loan applications and entire files electronically to lenders, and order and receive settlement services.

Electronic processing of mortgages could reduce origination costs by about $700 a loan, the company said, but less than 1 percent of mortgages are processed completely electronically.

On average, Encompass users currently use the Ellie Mae network to handle about three in 10 transactions per loan file, including ordering credit reports and accessing the automatic underwriting systems of Fannie Mae and Freddie Mac.

"This limited use is in part due to the fact that many providers of other settlement services, such as title reports and appraisals, do not provide electronic solutions that are superior to traditional processes," the company said.

Increasing the number of transactions ordered through the Ellie Mae network "depends in large part on our ability to educate providers of settlement services of the benefits" of electronic origination, and to convince them to deliver their services electronically.

The company’s goals include increasing the number of users of the Ellie Mae network, encouraging Encompass users to order more settlement services through the network, and acquiring businesses that complement its Encompass software and services offerings.

Competing providers of mortgage origination software include Calyx Technology Inc., Byte Software Inc., Del Mar DataTrac Inc. and Harland Financial Solutions. Competing providers of networking services connecting loan originators, lenders and settlement services providers include Calyx, MGIC Investment Corp. and RealEC Technologies. …CONTINUED

Ellie Mae’s network, which connects approximately 55,000 mortgage originators to lenders, investors and service providers, handled more than 2.8 million residential mortgage applications in 2009 — about 20 percent of all applications, the statement said.

But the number of potential Encompass users has declined dramatically — from 495,000 mortgage originators at the end of 2006 to 253,000 by the end of 2009, the company said.

Those loan originators worked for about 20 "mega lenders" (large commercial banks with retail channels), 7,500 smaller commercial banks, mortgage banks, thrifts, and credit unions, plus 15,000 independent mortgage brokerages originating loans for multiple lenders.

Last year, the "mega lenders" originated about 48 percent of all mortgages through their own retail channels, up from 38 percent in 2006.

The "extreme turmoil" in the mortgage industry that began in 2007 "has adversely affected and may continue to adversely affect our business," the company warned potential investors.

The number of Encompass users is down 29 percent from 79,000 loan originators on board at the end of 2006, and 30 of the 44 lenders accepting loans through the Ellie Mae Network went out of business or stopped funding loans for other mortgage originators between March 2007 and August 2009, the company said.

"If conditions in the mortgage industry were to deteriorate further, our business would be materially adversely affected," the company said.

Revenue from Encompass users is on the rise, however, with average revenue per user up from $331 in 2007 to $556 in 2009. Total Encompass-related revenue grew from $27.5 million in 2007 to $32.9 million last year, the company said.

In 2009, Ellie Mae had revenues of $37.7 million and net income of $1.7 million. The company ended the year with 176 full-time employees, including 87 in sales and marketing and 21 in general and administrative functions.

Ellie Mae said it employs 54 dedicated software engineers and support staff in its research and development group, which had a budget of $7.9 million in 2009, up 14 percent from the year before.

Co-founder and CEO Sigmund Anderman was a co-founder of home warranty giant American Home Shield Corp. Board member Jerald Hoerauf founded TRW Property Data, a predecessor of First American CoreLogic Inc., where he is a board member and senior vice president of business development at First American CoreLogic Inc.


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