Discover:Acquisition 'Low-Cost Low-Risk Way' To Enter Mortgages

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; [e-mail]