Discover Financial Enters The Mortgage Business At Just The Right Time

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DFS: Discover Financial Services logo
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Discover Financial Services

Discover Financial Services (NYSE:DFS) announced its entry into the home loan business in the U.S. as the company began originating mortgages earlier this week. [1] The company will offer variable and fixed interest rates loans that conform to Freddie Mac (OTC: FMCC) and Fannie Mae (OTC: FNMA) standards for sale in the secondary markets. With a solid reputation in the finance industry as a leverage to attract customers, Discover Financial is looking to capitalize on the recovering housing markets through this venture.

See our complete analysis of Discover Financial here

Right Here, Right Now

We believe that Discover Financial has entered the mortgage business at just the right time as the delinquency rate across the U.S. has dropped to a seasonally adjusted average of 7.4%, the lowest it has been since the recession in 2008. [2]

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With the worst of the crash behind it, the housing industry continues to recover as consumer confidence rebounds and home sales rise. Housing prices, a measure of demand have been falling rapidly since the bubble burst in 2008, but have now turned the corner as the economy recovers. The Federal Housing Finance Agency (FHFA) reported a 0.5% y-o-y rise in seasonally adjusted purchase-only house price index (HPI), in the first quarter of 2012. [3] An expected sustained annual growth rate of 2.5% in housing prices holds Discover Financial in good stead as it ventures into this domain. [4]

We expect Discover Financial’s loan financing division to show a rise in revenues through our forecast period as market conditions continue to improve.

Encouragement From Prior Loan Ventures

Discover Financial, which is best known for its credit card services plans to diversify its business to offer an array of financial products and reach out to a broader customer base. It became the largest originator of private student loans in the U.S., with the acquisition of Citigroup’s (NYSE:C) $2.5 billion student-loan portfolio, last year. [5] The company’s performance in the first quarter of 2012 showed encouraging signs as student loans produced much lower average credit losses than the card product with over $10 billion accumulated in receivables from student and personal loans. [6]

We will keep a close eye on Discover Financial’s progress as our $26 price estimate for the company’s stock is 20% below the current market price.

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Notes:
  1. Discover Launches Home Loans Business, Press Release, June 12, 2012 []
  2. Mortgage Delinquency Rate Hits A 4-Year Low, Business Insider, May 16th, 2012 []
  3. FEDERAL HOUSING FINANCE AGENCY, News Release, May 23rd, 2012 []
  4. The Shifting Nature of U.S. Housing Demand, Demand Institute, May 2012 []
  5. Discover to Buy Citi Student Loan Portfolio, Wall Street Journal, 1st September, 2011 []
  6. Discover Financial Services’ CEO Discusses Q1 2012 Results – Earnings Call Transcript, Seeking Alpha, March 21st, 2012 []