Discover to Halt Mortgage Lending

June 17, 2015 No Comments »
Discover to Halt Mortgage Lending

If you’re wondering how difficult it is to enter the business of originating mortgages, just take a look at Discover.

The credit card company turned mortgage lender is exiting the business after just three years.

The departure coincides with a spike in mortgage rates, which should reduce the pool of borrowers eligible to refinance, the bread and butter of Discover Home Loans.

In fact, it was just a few months ago that Discover Financial CEO David Nelms called purchase-money mortgages a difficult nut to crack.

Call it a failed experiment, or perhaps an unexpected breakdown for a company that seems to be making big gains in its primary line of business.

Regardless, they’re done. They made an announcement on their website yesterday, saying they will focus on their “profitable direct banking products for which the company sees greater opportunities for growth.”

They also noted that the mortgage origination business Discover acquired in 2012 from LendingTree is no longer projected to meet their financial expectations as a result of “ongoing challenges” in their operating model.

It’s unclear what that actually means aside from purchase mortgages being more challenging to acquire/originate, but Carlos Minetti, president of consumer banking for Discover, called it a “difficult decision.”

I can tell you from personal experience that a lot of people were unhappy with Discover Home Loans, as evidenced by the many comments on my blog.

This didn’t really come as much of a surprise, given how unique the mortgage industry is. It’s certainly not the same as slinging credit cards.

As I’ve mentioned before, the credit card industry is very accommodating, whereas mortgage lenders are highly regulated and don’t have tons of room to appease borrowers if they aren’t 100% satisfied.

And if a Discover credit card customer decided to work with the company because they enjoyed their other products and customer service, they probably didn’t receive the same treatment via their home loan department.

This divergence in expectations probably resulted in a lot of unhappy customers.

Nearly 500 Will Lose Their Jobs

The closure will result in about 460 layoffs at locations in Irvine, California and Louisville, Kentucky. The affected employees will all receive severance packages.

The Irvine office stopped accepting new applications yesterday but will continue to process and fund loans already in progress.

The Louisville office will accept new applications through July 31st, after which time Atlanta-based AmeriSave Mortgage Corporation will finish processing remaining applications.

AmeriSave seems to be taking over that mortgage office and is expected to offer jobs to 125 existing Discover employees.

The closure of the mortgage business will result in a charge of $0.04 per share of Discover stock, currently priced at just over $58 and valued at nearly $26 billion.

The company plans to continue offering home equity loans through Discover Bank.

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