The endosomal sorting complexes required for transport (ESCRTs) mediate the budding of intralumenal vesicles (ILVs) at late endosomes. ESCRT dysfunction causes drastic changes in endosome morphology, which are manifested in Saccharomyces cerevisiae by the formation of aberrant endosomes known as class E compartments. Except for the absence of ILVs, the mechanistic basis for class E compartment biogenesis is unknown. We used electron microscopy to examine endosomal morphology in response to transient ESCRT inactivation and recovery in yeast expressing the temperature-sensitive mutant vps4(ts) allele. Our results show class E compartments accumulate fourfold the amount of membrane normally present at multivesicular bodies and that multivesicular bodies can form directly from class E compartments upon recovery of ESCRT function. We found class E compartment formation requires Vps21, which is orthologous to the Rab5A GTPase in metazoans that promotes fusion of endocytic vesicles with early endosomes and homotypic fusion of early endosomes with one another. We also determined that class E compartments accumulate GTP-bound Vps21 and its effector, the class C core vacuole/endosome tethering (CORVET). Ypt7, the yeast ortholog of Rab7 that in metazoans promotes fusion of late endosomes with lysosomes, also accumulates at class E compartments but without its effector, the homotypic fusion and protein sorting (HOPS), signifying that Ypt7 at class E compartments is dysfunctional. These results suggest that failure to complete Rab5-Rab7 conversion is a consequence of ESCRT dysfunction, which results in Vps21 hyperactivity that drives the class E compartment morphology. Indeed, genetic disruption of Rab conversion without ESCRT dysfunction autonomously drives the class E compartment morphology without blocking ILV budding.