--Discover is cross-marketing mortgages to existing
borrowers
--Investors view move as low-risk entry into home lending
--Exits by big banks could present opportunities
(Adds executive comments and new information throughout.)
By Andrew R. Johnson
Discover Financial Services (DFS) will initially target existing
customers as it prepares to ramp up its newly created mortgage
business, the credit-card lender's latest effort to broaden its
consumer banking operations.
Discover will market mortgage loans to customers via email and
direct mail, including the use of statement stuffers to existing
borrowers, Carlos Minetti, president of consumer banking and
operations, said in an interview Tuesday.
It also plans to enter marketing partnerships with real-estate
services companies, home builders and developers potentially in six
to 12 months out, Mr. Minetti said, adding that his goal is to
become one of the largest originators in the country.
"We're building one channel at a time," he said.
Discover said Tuesday that it launched its home-loan origination
business, plans for which it first disclosed last year when it said
it was buying assets from Tree.com Inc. (TREE), an online lending
platform. Tree.com last week said it completed the sale, for which
Discover paid $45.9 million. It also is set to pay an additional
$10 million due after the first anniversary of the closing. The
sale included business assets but didn't include any of the
loans.
The company is offering prime variable- and fixed-rate loans,
and web access to documents and loan status will be provided on
www.discoverhomeloans.com.
Discover's entrance into the mortgage business comes as some
large banks have scaled back their origination businesses and sold
the servicing operations to its portfolios.
The Riverwoods, Ill.-based company plans to originate loans that
conform to Freddie Mac (FMCC), Fannie Mae (FNMA) and Federal
Housing Administration standards and sell them to investors.
Discover doesn't plan to retain the servicing rights to the
loans, which alleviates potential pressures facing other banks
because of new international standards requiring banks to hold more
capital for mortgage servicing rights and regulatory requirements
for how servicers interact with borrowers.
Given that, investors see Discover's strategy as a low-risk way
to enter the business, said Sanjay Sakhrani, an analyst with Keefe,
Bruyette & Woods.
"We think it's a nice complement to the existing business model
with not a whole lot of credit risk involved," Mr. Sakhrani said.
"It is a good cross-sell mechanism to their existing customers,
whether it be on the banking side or the card side."
Originating a portfolio from scratch could be highly profitable
for a player such as Discover, said Guy Cecala, chief executive of
Inside Mortgage Finance, an industry newsletter.
"There's not a lot to not like about mortgage lending these
days, particularly if you're building a ... portfolio from scratch
because you don't have any of the legacy problems" facing big
lenders such as Bank of America Corp. (BAC) and Ally Financial
Inc., Mr. Cecala said.
Bank of America has been saddled with litigation over soured
mortgage securities. Ally's mortgage subsidiary Residential Capital
filed for Chapter 11 bankruptcy last month for similar reasons, a
move Ally hopes will allow it to sever itself from the
business.
Discover hasn't disclosed specific goals for how big it wants to
grow the mortgage-lending business, but Mr. Minetti has said the
company is striving over time to become as large as Quicken Loans
Inc., an online lender that originated $10.9 billion in mortgages
in the first quarter, according to Inside Mortgage Finance.
"I'm not getting into this business to be number two," Mr.
Minetti said. "I'm not going to be happy until I get to be number
one."
The move into mortgages is in line with the lender's push to
diversify into a full-scale bank. In recent years, Discover has
begun offering private student loans and personal loans. It also
offers an array of deposit accounts online, and plans to offer
checking accounts later this year.
Discover's shares are up more than 36% this year. The stock was
up 1.1% at $32.75 in recent trading Tuesday.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
-Kristin Jones contributed to this article.