Discover:Acquisition 'Low-Cost Low-Risk Way' To Enter Mortgages
May 13 2011 - 11:29AM
Dow Jones News
Discover Financial Services (DFS) said Friday its $55.9 million
acquisition of the mortgage assets of Home Loan Center, a unit of
Tree.com Inc. (TREE), is a "low-risk, low-cost way" to get into the
home loans business.
Discover plans to originate home loans that it will sell in the
secondary market. "We will not be confronting challenges in
servicing and [mortgage] put-back risk," said senior executives in
a call early Friday.
U.S. lenders and loan-servicers, plagued by evidence of improper
foreclosure procedures, are facing stricter rules and
investigations by regulators. In addition, banks have also been
forced to buy back improperly underwritten mortgages at steep
losses from investors such as mortgage finance giants Fannie Mae
(FNMA) and Freddie Mac (FMCC).
The foray by Riverwoods, Ill.-based Discover, primarily a credit
card lender, into mortgages marks its latest effort to grow its
book of business, as it seeks new ways to boost revenue. To this
end, it has also been doing personal loans and private student
loans.
For lenders, including Discover, credit-card revenues have
shrunk along with loans outstanding. For many quarters now,
lenders' profits have been helped by loss-reserve releases as
credit trends improve, rather than growing from an actual increase
in revenue.
The acquisition, announced Thursday, is slated to close by the
end of the year. It will have a nominal impact on its 2012
earnings, Discover said.
In March, Discover swung to a record first-quarter profit as
improving credit trends allowed the company to free up funds in
reserves and cardholders spent more.
Unlike most other card companies that either issue plastic or
process the transactions, Discover and bigger rival American
Express Co. (AXP) do both. Therefore, in addition to the interest
Discover earns on its loans, a chunk of its revenue comes from fees
it charges banks and merchants, such as grocery stores or gas
stations, to process card payments.
Discover's shares recently traded at $24.23, up 0.1%. The shares
have gained about 30% so far this year.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com
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