Mortgage Ramp Profitability.
In a horrendous year when online mortgage companies were dropping like, well, like Internet startups, another Web-based company called MortgageRamp, Charlotte, North Carolina, coolly pulled down $50 million in second-round financing. * Whoa! Had venture capitalists lost their collective minds? Not really. Actually, sanity did prevail here. * What initially appeared to be a huge gamble by an "A" list of financial companies was, as it turned out, a fairly safe investment--as safe as anything involving the Internet is these days. The reason being, MortgageRamp was a startup of Horsham, Pennsylvania--based GMAC Commercial Mortgage, initially funded to the tune of a $25 million commitment. GMAC Commercial Mortgage was also a big customer. * Moreover, the financing could not be considered a desperate move to stay financially afloat. In February, four months after the transaction was completed, Michael Greco, MortgageRamp's president and chief executive officer, casually admitted, "We have not used any of the $50 mi llion. We still have some of the initial $25 million commitment left."
Eventually, of course, MortgageRamp will tap into its second round of financing--but there were two other strategic reasons why the company dove into the capital markets at just about the worst possible time. The company needed to establish an independence from GMAC Commercial Mortgage, plus it wanted to develop alliances with other firms that would drive business in its direction.
Back in mid-1999, Greco left The WMF Group, Vienna, Virginia, to form his own consulting company, Lake Norman Capital Advisors, in Charlotte, North Carolina. Within a year, he was hired by GMAC Commercial Mortgage to help it build a conduit in Canada. At about the same time, GMAC Commercial Mortgage also decided to jump into the e-commerce arena.
In 1999, GMAC Commercial Mortgage put together an internal group to study the Internet, and at some point created a small Web site that was buried deep within the company's intranet. The idea was, first, to see if anyone would find it and, second, once it was found, to see if anyone would use it. It became a test. Would the people using GMAC's intranet need an online financial services company?
The results were encouraging enough that GMAC Commercial Mortgage decided to go ahead with an e-commerce venture--but it wanted it as an "outside" enterprise, not tied to the internal politics of the parent company. Once again, the company turned to Greco.
"I didn't know if I wanted to give up my consulting business, but I said, 'Let's try it for 90 days and if I like it, I'll do it.' So I put together a business plan literally on the back of a napkin," says Greco. Not only did GMAC fund the new venture with a commitment of $25 million, but almost as important, it also allowed Greco to borrow whatever technology he could beg, use or steal from the parent company.
After studying the market, Greco realized there were no big players in the field yet, and secondly, the companies then in existence were technology-oriented startups. "There were no industry professionals building e-commerce platforms," says Greco. "It was obvious someone big was going to figure it out, and GMAC Commercial Mortgage decided it would rather be driving the bus than be run over by it."
The new enterprise, which became MortgageRamp, took the view that it had to differentiate itself from the other companies in the space. "We wanted a more diversified business plan, because I didn't think you could build a successful company just originating fixed-rate, commercial loans on the Internet," says Greco. "I knew in my heart that there would be resistance to immediate adoption and it would take three to five years to build a successful origination business."
Eventually, the business plan focused on increasing the efficiency of the mortgage process, offering due diligence, origination, consulting, third-party reports and closing services. Not all of it would be Internet-based; it would be a clicks-and-bricks plan.
"We realized early on that if we were just an Internet company, we would not survive," says Ned Finkenstaedt, an executive managing director with MortgageRamp. "We needed to have a combination of the old and the new, recognizing that there exists a huge element of human interaction in commercial real estate finance."
Finkenstaedt, a founding member of MortgageRamp, had been a senior vice president of lending programs at GMAC Commercial Mortgage when Greco asked him to join the new company. Finkenstaedt also had been working on the e-commerce venture in GMAC. "We had dramatic results and it demonstrated to us the power of the Internet as related to loan production," he says.
A view to a company
The difference between MortgageRamp and previous online commercial mortgage companies is that it was built to encompass the complete mortgage process--not just origination. In addition to origination, the company also performs closing, delivery and even securitization support. In short, MortgageRamp will handle every step of a commercial real estate financing deal. On top of all that, MortgageRamp (www.mortgageramp.com) provides a forum where borrowers, brokers, lenders and vendors can connect and access all the tools of the process
MortgageRamp runs the following five different business units:
* MortgageRamp.com. The flagship service. The site receives information, double-screens--by calling back to the data provider to verify information and putting data through an underwriting process review--and then matches the submitted data with the optimal lenders. The lender then receives the information, prepackaged in its own templates. The automated screening process includes safeguards to ensure impartiality. After prescreening and prescrubbing the data, it is then "mapped" into the underwriter's own templates, which allows the underwriter to use its own systems and underwrite the loan quickly.
* QuickRamp. A product breakthrough. Using technology to re-engineer the commercial lending process, QuickRamp lets borrowers on a tight schedule secure financing in as few as 10 days: Credit and title reports ordered before loan application are issued; in-house underwriting, third-party oversight and closing are started the day the application is executed; the title company delivers title with the requirement of survey or zoning report in seven days; proprietary Web-based software allows lenders and other parties to view data simultaneously; and the B-piece investor commits to hold the first-loss portion of the loan.
* Realty Service International (RSI). Bricks, not clicks. Appraisers and other experts provide a wide array of services, including standard appraisals, special consultation, market analysis and market surveillance.
* Back-Office Services and Systems (BOSS). An outsourcing solution for back-office services and systems. The application service provider-based (ASP-based) model offers clients the ability to outsource the entire back office or just customized pieces.
* Virtual Package Delivery System. The latest program provides users the ability to build an electronic loan package and submit it to multiple lenders.
The company also does private labeling, also in an ASP model. This gives any size institution the ability to provide the same services and financing opportunities that bigger companies offer.
As an example of MortgageRamp's ability to offer an outsourcing solution, the company provides a full-service commercial loan origination platform for America's Community Bankers (ACB), Washington, D.C., an organization that represents the nation's community banks of all charter types and sizes. ACB members now offer MortgageRamp services directly to their customer base on a turnkey basis.
"ACB, which represents about 1,200 banks nationwide, picked up our entire platform," says Finkenstaedt. "We took our Web-based origination platform and stuck it inside ACB's Web site so all of their banking constituents have access to all of our resources. Many do not offer loan programs geared for commercial real estate finance due to regulatory restrictions and, in some cases, no concentrated expertise in this industry."
The agreement between the two companies allows MortgageRamp to integrate its technology with ACB's platform, supplying access to capital markets and products. MortgageRamp also offers ACB its commercial lending expertise in areas such as underwriting, processing and closing of commercial mortgage loans. MortgageRamp employs 100 people.
"Certainly we have a business model that is very viable going forward," says Michael Kuczborski, MortgageRamp's chief financial officer. "What investors like is the diversity of the revenue stream. Of the five business units, there won't be one that will be far and away the biggest revenue producer. Revenue will be fairly balanced across the five units."
Also, Kuczborski says, GMAC Commercial Mortgage has been "driving significant business through MortgageRamp in terms of those five business units. Other investors are just now contracting with MortgageRamp to use the full array of MortgageRamp products."
A big deal
"You never want to say you do not need the money," says Greco. "You can always use it for growth." MortgageRamp's chief executive maintains the company's capital raising was really all about other strategic aims.
The first goal was to drive business to MortgageRamp without a costly advertising campaign. While this seems like an unusual objective to come out of a capital-raising program, it really does make a lot of sense.
Basically, explains Greco, there are two places to get money: from venture capitalists or strategic partners. "Venture capitalists were certainly the flavor of the day, but I was nervous about them because venture capital is not patient money," he says. "We had a business plan that required patient money.
Greco's idea was to instead go to the industry professionals and try to convince them that they would need MortgageRamp's technology and services and, if they would invest in the company, the business could be profitable in about two years. The underlying idea here was that if the industry invested in MortgageRamp, as did GMAC Commercial Mortgage, it would also drive business to it.
The second strategic goal was to attain a degree of neutrality. "Our competition at the time we started raising money really could not speak negatively about us, except that we were a feeder system of GMAC Commercial Mortgage products," says Greco.
MortgageRamp began looking for second-round financing in June 2000. At the beginning of its search for second-round financing, there was still a host of mortgage origination companies in the market and, toward the middle of the capital search, companies like CapitalThinking and Red-Bricks abandoned their business-to-consumer model, switching over to a business-to-business approach and thus competing with MortgageRamp on the technology side.
"When we engaged in the capital-raising process, we wanted to establish our independence from GMAC Commercial Mortgage," says Kuczborski. That is exactly what happened due to the capital raising, although GMAC Commercial Mortgage still owns a majority of the company.
With the second round of financing, MortgageRamp can boast some other equally well-known and well-esteemed owners. Buying into the MortgageRamp concept were Banc of America Mortgage Capital Corporation, Deutsche Bank, Allied Capital Corporation, Bank United, Compaq Computers Corporation, Fannie Mae, Goldman Sachs, Moody's Investors Services Inc., Standard & Poor's and VerticalNet.
It is easier to profess your neutrality, notes Greco, when the board of directors consists of independent investors.
"In regard to capital raising, we saw our investors as strategic partners, not just venture capital partners," says Kuczborski. "All of our partners brought something to the table in terms of making MortgageRamp a success. Our investors are either business partners who are going to drive traffic and business through MortgageRamp, or technology partners that will help us build out an industry-leading platform."
MortgageRamp is one of the few Internet real estate companies that has in its revenue model a very low percentage attributable to mortgage origination, according to Lawrence Brown, president and chief executive officer of Deutsche Banc Mortgage Capital, New York. "While it is a vibrant part of their business, it is not the lion's share of their model. The company is much more than just that. We, at Deutsche Banc Mortgage, have seen so many companies that relied solely on Internet origination as their revenue model go out of business. So, we like MortgageRamp's model."
While the financing round worked out well for MortgageRamp, considering the environment for dot-coms in 2000, it still seems to Greco almost a miracle that he was able to pull it off.
"It could have been easy for potential investors to lump MortgageRamp into the group of dot-coms that was obviously struggling," says Greco, "but I said, 'Give me a half-hour and let me show this five-page PowerPoint [presentation], and if you still think MortgageRamp is one of those, I'll leave.'
"Some people said, 'If I take this to my board they'll think I'm an idiot,'" says Greco, "but about 85 percent gave me the time. I was thankful for that 85 percent hit rate."
Greco speculates that investors understood the main differentiation between MortgageRamp and some of the failed dot-coms (e.g., iOwn, OnLoan.com, AppOnLine, mortgage.com). "This was a much broader business plan," he says. "The other companies were operating in one little piece of the process. It was a flawed approach."
The ties that bind
Even with a host of important new partners, GMAC Commercial Mortgage, with a majority ownership position, still weighs heavily in the decision-making processes of MortgageRamp. In fact, a number of the strategic deals into which the new company has entered have a lot to do with the imprimatur of its biggest investor.
In one of MortgageRamp's most recent deals, it formed a strategic alliance with Univest Financial Services LLC, Atlanta, which was done to strengthen its commercial and real estate technology--particularly in its BOSS unit. The BOSS unit allows companies to use MortgageRamp's resources to augment or outsource their own back office. In other words, a company could outsource its entire back office or just select individual services--such as loan inquiry and submission review, postclosing services or portfolio loan analysis--that complement its existing structure. In 2000, Univest was acquired by McCracken Financial Software, Billerica, Massachusetts, a subsidiary of GMAC Commercial Holding Corporation.
"We work with McCracken in the technology area," says Joseph Mosley, executive vice president of Univest. "We sell our systems--in an ASP format--to entities interested in having a cradle-to-grave, Web-based underwriting system."
With MortgageRamp, says Mosley, Univest assists in its back-office service support division. "We are combining our financial services capability for contract underwriting, for due diligence and information flow to rating agencies and investors of whole-loan transactions. We are basically pooling our personnel and contacts."
Univest, which has been around for a considerably longer period of time than MortgageRamp, comes to the table with a much larger customer and personnel base. Still, Mosley says, "this is a good deal for both parties. Our technology is going to work out for BOSS." Mosley says Univest has committed to pooling its sales and production skills with BOSS, and will run all its financial services revenue through BOSS.
MortgageRamp's approach to the Internet is much different from the other companies in the field, says Mosley. "Their overall business strategy is much deeper and broader. Not only do they have a process for bringing product to potential lenders, but they have a financial services division with a very deep bench. A lot of revenue today is being generated by the financial services group."
One of the online companies with which MortgageRamp now holds a strategic relationship is Alhambra, California- based PropertyFirst.com's commercial real estate multiple listing service, propertyfirst.com. In July, the two companies formed a mutually exclusive arrangement in which MortgageRamp will be the only provider of online commercial real estate mortgage services for propertyfirst.com, and PropertyFirst will be the only multiple listing service (MLS) service provider that MortgageRamp uses for potential borrowers.
It is no coincidence that one of the major investors in propertyfirst.com was GMAC Commercial Mortgage.
"First of all, we share a common investor in GMAC Commercial Mortgage. It had invested in us before they had done the printout of MortgageRamp," says Don Miller, chief operating officer of PropertyFirst.com. "GMAC had done that because of potential synergy in what we are doing and some of their other business units."
As PropertyFirst.com developed, it wanted to provide a complete set of services so that buyers and sellers could actually go all the way through and complete a transaction. One of the key services it needed involved commercial mortgage availability. "We looked at a dozen of the little dotcom mortgage service companies that were popping up, and we were pleased to find MortgageRamp," says Miller. "We felt it was the most robust given its GMAC heritage and the heft and technology that they had right from the get-go. We felt they were going to be the winners in that particular space, so they were the ones that we wanted to team with."
Miller says one of the things he liked about MortgageRamp is that its business plan assumes the Internet is not going to replace, in a wholesale fashion, the offline process. "It is going to be an additional, convenient channel for the mortgage broker, mortgage banker and borrower," he says. "With the MortgageRamp model, you really only start part of the process online and then you shift offline as the back-office people help you facilitate that loan. We do not see this being a totally automated and completely online process. There is going to be an offline component at least in the foreseeable future."
Can it make money?
Kuczborski began his career with Arthur Andersen, working in its Enterprise Group and dealing with companies just like MortgageRamp. The Enterprise Group specialized in capital raising and private equity, also doing a lot of mergers and acquisitions work and eventually taking companies public.
Kuczborski was used to seeing a lot of startup companies, some of which had a good game plan or good technology, but had a difficult time getting their footing in the marketplace. It doesn't appear that he or Greco is willing to let the same thing happen to MortgageRamp.
Deutsche Banc Mortgage, which has a seat on the board and on the operating committee, has so far been pleased with MortgageRamp's performance.
"The early returns--and I see the numbers--look like the company is soon to break even, ahead of all the projections that it made when we were looking to invest," says Brown. "And we took the projection the client gave us and beat the tar out of it to come up with our own, more conservative, version. They are certainly exceeding our conservative model."
"My goal," says Greco, "is to be profitable this year."
That, itself, is a surprising objective considering the number of technology and Internet companies that went public in the late 1990s without ever crossing the line into profitability Eventually, these young firms faced what has now become known as the "burn rate"--the amount of time it would take a young company to burn through its capital funding.
MortgageRamp has other ideas. "With the $50 million in second-round funding, our current burn rate provides years of funding," says Kuczborski, "although there are some numbers that can impact that in terms of adding new business units."
Still, Kuczborski is not too concerned, as he too asserts, "We have a good revenue stream with the appraisal business and outsource services. We are not starting from ground zero. It is our goal to reach profitability from operations in 2001.
It won't be much in terms of profits, but symbolically it would mean something. Or, as Greco says with some amusement, "I'm not sure I could throw a large party with these profits, but I want to make it this year."
The key to this path to profitability has been finding the right business partners that will drive business to MortgageRamp. Also, MortgageRamp has created partnerships with solid Internet companies where each partner brings something important to the table. For example, in December, MortgageRamp and EquityCity, a premier global investment site, hooked up to allow users of MortgageRamp to access EquityCity's equity placement resources while EquityCity users can access MortgageRamp's suite of products--including valuation, underwriting and due diligence.
EquityCity uses the Internet to connect experienced real estate developers and entrepreneurs with individual and institutional investors now participating on the EquityCity site who collectively hold more than $90 million allocated to real estate equity investment.
The objective for EquityCity, says Matthew Blumberg, the company president, is to provide ever-deepening tools and services for investors to evaluate equity investment opportunities in commercial real estate.
Going forward, however, there maybe one more shift in MortgageRamp's game plan. "We have an aggressive business plan," says Kuczborski. "One that calls for both organic and external growth."
Does that mean there are some acquisitions ahead for the company? Kuczborski says, "Additions are something we are evaluating. We are looking at the execution of our business plan and trying to figure out whether we want to buy, build or partner to reach our goal. Acquisitions might be a strategy."
It's a fair bet that any acquisitions would be fairly small, as Kuczborski also says the company has no present plans for further capital raising.
"We are balancing the growth of the business," he says, "with making the appropriate business decisions. So far, that challenge has gone very well." MB
Steve Bergsman is a freelance writer based in Mesa, Arizona.
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|Date:||May 1, 2001|
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