Discover Financial Chief Executive David Nelms may be ready to throw in the towel on mortgage lending.
Just three years ago, Nelms heralded the purchase of LendingTree Loans as a milestone in Discover's evolution from a strictly credit-card company to a broad-based consumer lender. Nelms had hoped to gain a toehold in the mortgage market by selling home loans online to its credit card customers, just as it has successfully done with personal and student loans.
But offering home loans — as opposed to refinancings — online has been a tougher sell than anticipated, and Nelms is now hinting that the Riverwoods, Ill., company might exit the fiercely competitive mortgage business. He stopped short of saying that the home-loan unit is up for sale, but did say that Discover is "considering all options" and that he believes the mortgage market is ripe for consolidation.
"There's going to be a lot of overcapacity in the industry generally," he said in an interview with American Banker.
Surprisingly, Discover has not blamed its mortgage woes on a badly timed acquisition — though it certainly could. Home purchases plunged 36% last year, to their lowest levels since 1997.
Instead, Nelms said that Discover wrongly assumed that online mortgage lending would take off. Consumers find it easy to refinance existing loans online, but Nelms acknowledged that when it comes to buying a home, they still largely have to work with a banker or mortgage broker.
"We've not cracked the nut on purchase-money mortgages," Nelms said.
"Not very many people get purchase mortgages from direct models," he continued. "They're more likely to go through their local bank, their local in-market mortgage broker or maybe someone that their Realtor referred them to. So we've been working to break into that market."
Weakness in mortgage lending has dragged down Discover's results. Earnings plunged 33% in the fourth quarter, to $404 million, largely because the company took a $27 million goodwill impairment on its acquisition of LendingTree Loans.
"Their direct model has worked with credit cards, student lending and they're rolling out a personal loan product that has 20% year-over-year growth, but mortgages just never was a growth story for them," said Vincent Caintic, an analyst at Macquarie Capital. "Mortgage may not be a space for direct lending."
He added that the impairment charge "implies they expected more profitability out of the business than they got."
Discover originated roughly $2.5 billion in home loans last year, making it a top 100 mortgage lender, but the business is heavily dependent on refinances.
Initially, during the big refi wave in 2013, the business "exceeded our expectations," Nelms said. When interest rates started rising, Discover thought it would be "the first to crack the purchase origination market in a direct channel," he said.
But a meaningful jump in home purchases never materialized, Mark Graf, Discover's CFO, told analysts on an earnings call last month.
"We have not diversified beyond refinance volume into purchase money originations in a meaningful way, and, therefore, we aren't driving a level of originations that we expected," Graf said. "Going forward, we'll continue to evaluate our home loan strategy."
Discover remains a partner of LendingTree, which is still in the business of advertising mortgage rates advertiser and generating leads for lenders.
"They are a successful lender and from where we sit, it's not a failure at all," said Doug Lebda, the chairman and CEO of LendingTree in Charlotte, N.C. "They have a robust business, competitive rates, a great process and happy customers."