MBNA Corp., in an effort to rev up its home equity business and further its strategy of selling noncard products through its network of affinity partners, said Wednesday it has agreed to buy the private-label mortgage outsourcer Nexstar Financial Corp.
The deal is another example of credit card issuers’ embracing home equity as an attractive way to branch out. After all, such lending has hindered the growth of receivables as consumers have tapped their home equity to replace expensive card debt.
The largest independent card issuer, MBNA originated $1.5 billion of mortgages last year, most of them home equity loans, and Ed Murphy, a spokesman, said it plans to double that amount this year.
It has said its top business objective is to leverage its affinity relationships to diversify its asset mix and earnings stream. In a January investor presentation, executives outlined plans to expand home equity and other noncard loans to leverage the network of 5,000 affinity groups for which it issues cards.
MBNA says that the groups have been receptive to other marketing offers; 20% of its customers hold more than one MBNA product. One example it gave is its relationship with the National Education Association. More than a third of all U.S. teachers carry an MBNA card, and those teachers now have $2.7 billion of card loans and $675 million of other loans, MBNA says.
Helen Garrity, an executive vice president at Nexstar, said in an interview Wednesday that buying Nexstar would let MBNA offer the affinity partners more customized home equity programs that make use of their brands.
Richard K. Struthers, a MBNA vice chairman, said in a press release that the partners would also get “confidence that the loan origination process will be handled smoothly and efficiently.”
At the January presentation, MBNA called slowing growth in cards its primary challenge for the coming years.
Last year revolving consumer credit grew only 4.6%, to $793.6 billion. Meanwhile, the outstanding value of home equity loans and lines rose 28%, to $881.3 billion, according the Federal Reserve. (The figure excludes loans held by mortgage companies and individuals.) From 2000 through 2004, home equity lending surged 80%, while revolving consumer credit grew only 17%.
MBNA, which said recently that it has set aside several billions of dollars this year for acquisitions, did not say how much it would pay for Nexstar. The deal is expected to close next month. Ms. Garrity said her outfit would take over MBNA’s home equity operations in Cleveland and Delaware.
Anthony Polini, an analyst at FTN Midwest Securities Corp, said the worry about cannibalizing customers, which has long kept issuers from doing much in home equity, is now moot. Consumers are using home equity either way, and often for different purposes than card debt, he said.
“You can be stubborn, beat your head against the wall, and whine, or you can evolve,” Mr. Polini said.
In October, Capital One Financial Corp.’s chairman and chief executive, Richard Fairbank, called the rise of home equity lending a “structural hindrance” to the growth of card issuers and a primary reason for his company’s diversification into home equity and other lending. This year Capital One bought National Bank of Kansas City’s online home equity lender, eSmartloan, for $155 million. (A much bigger deal, the $5.3 billion acquisition of Hibernia Corp., is still pending.)
Also this year, Providian Financial Corp. said it was negotiating a partnership with Countrywide Financial Corp., which in recent years has provided private-label home equity outsourcing to both MBNA and Capital One.
“Five years ago home equity was a product that was being marketed almost exclusively as a product for debt consolidation” and mostly to subprime customers, said Jerome J. Selitto, a consultant and the former CEO of the Cleveland home equity lender DeepGreen Financial Inc.
Now the marketing is nearly ubiquitous, he said; prime customers are being offered the loans to pay for college tuition, second homes, or cars. And the consumers are taking the offers, because the rates are better than those of other loan products — even before tax advantages are considered.
The rapid growth of the housing market in recent years has built up trillions of dollars of equity to tap, Mr. Selitto said. “With the average price of housing starting to hit $200,000 to $300,000, 10% of the home can be $30,000. That’s the price of a car.”
According to Ms. Garrity, Nexstar would continue to offer its private-label mortgage outsourcing to other companies. Becoming part of MBNA is “really a broadening of what our focus is today.”
Mr. Murphy said Nexstar’s clients had been informed about the deal, and “basically they were OK with that.” Nexstar does not work with other card issuers, he said.
MBNA says it plans to sell some of its home equity loans but hold the higher-quality ones. It would probably sell, for example, its “risk mitigation loans,” which consumers take out to pay off several lenders, Mr. Murphy said.
Kenneth Posner, an analyst at Morgan Stanley, wrote in a report Wednesday that the risk-adjusted returns on economic capital for home equity lines are now running close to 40%. And despite the expected increase in credit losses as the housing market cools, Morgan Stanley expects the returns to drop only to 20%; credit card returns now average around 18%.
“I don’t know if MBNA came to the same conclusion, but sometimes actions speak louder than words,” Mr. Posner said in an interview.
MBNA originated 470,000 noncard consumer loans last year. At yearend it managed $121 billion of loans, including $11.5 billion of noncard consumer receivables.
MBNA, of Wilmington, Del., also offers financing for dentists, doctors, and other professionals through Sky Financial, which it bought in March of last year. Two months earlier it acquired Premium Credit Ltd., which finances insurance premiums. MBNA also offers business lines of credit and personal aircraft loans.
Nexstar would keep its name, its approximately 370 employees, and its management team. It was founded in 1999 and has about 25 customers, including Thornburg Mortgage Inc., A.G. Edwards & Sons Inc., and Morgan Stanley.
The St. Charles, Mo., company has been steadily adding customers, in part because profitability in the mortgage business has been falling since the refinancing boom peaked in 2003. Ms. Garrity said last month that Nexstar expected its transaction volume to double this year, to 50,000 loans.
Mr. Selitto said card companies probably are looking to leverage their traditional expertise: data mining for credit quality and marketing purposes.
Mr. Posner agreed with that assessment. “They’re very good at using information to fine tune product offerings.”
