The explosive growth of home equity lending is emerging as a competitive threat that credit card issuers cannot ignore.
In the latest sign that card companies may decide on an “if you can’t beat ’em, join ’em” strategy, MBNA Corp. has been telling analysts and investors that it will ramp up home equity lending as part of a diversification plan.
“We’ve found in the years we’ve been offering these products [that] customers are accepting of them and they are profitable for us,” spokesman James Donahue said Monday.
“We’re not going to share specific business strategies, but we’re obviously going to be doing what’s necessary to originate and retain a larger number of home equity loans.”
The Wilmington, Del., company has been holding on to more home equity loans in recent months.
Analysts said MBNA is also interested in buying a home equity business. Mr. Donahue said it is always on the lookout for deals.
Employees who talk with customers over the phone in a variety of “operating areas” will originate about $1 billion of home equity loans or lines of credit this year, Mr. Donahue said. (Sources have said it originates home loans with private-label back-office help from Countrywide Financial Corp.)
Capital One Financial Corp. has also signaled an aggressive home equity push. Analysts say the McLean, Va., company, which has branched out into auto lending and is eyeing retail banking, is more diversified than MBNA.
Last week Capital One announced a $155 million deal to buy eSmartloan. The company expects its purchase of the home equity lender to close next quarter.
Card companies may be fearing what Morgan Stanley analyst Kenneth Posner has called the “home equity hegemony” of coming years. In a Nov. 29 report, he said consumers’ changing appetites and banks’ growing emphasis on home equity lending — including selling more of the loans with first mortgages — bode ill for the companies.
Mr. Posner raised his forecast for home equity lending growth to 20% a year through 2010 and slashed his five-year forecast for credit card receivables growth to 2%, from 5%.
“I think the monoline card companies risk facing a shrinking market if they don’t find a way to get into this business,” he said Monday. “I think their actions suggest they see the writing on the wall.”
Because they do not have first-mortgage production shops, branch networks, or mortgage servicing portfolios, “the card companies have their work cut out for them if they’re going to become more than niche players in this industry,” Mr. Posner warned.
But their experience with behavioral analysis, risk management, and target marketing can help them in home equity lending, he said. Mr. Posner said MBNA executives have told him they could originate $1.5 billion to $2 billion of the loans annually.
Anthony Polini, an analyst at FTN Midwest Securities Corp., said in a research note Monday that in a meeting Friday with investors MBNA executives stressed a “desire to gain a foothold in home equity” to diversify.
The officials said they want to expand on MBNA’s fee-based origination setup — which will generate $100 million to $200 million in revenue this year, compared with total revenue of about $15 billion — and are “actively looking” for deals, Mr. Polini wrote.
Student and small-business lending and unsecured consumer loans represent other possible areas of diversification, said Mr. Polini, who raised his rating on MBNA to “buy,” from “neutral.”
Mr. Donohue said MBNA is also holding on to more of its home equity originations and would begin retaining an even larger percentage. Mr. Polini said that MBNA also used to sell those loans to Household International Inc., a unit of HSBC Holdings PLC that recently changed its name to HSBC Finance Corp.
MBNA’s “other consumer” loan receivables rose 3.9% in November, to $9.1 billion. Its total managed portfolio grew $1.9 billion, to $119.5 billion — mostly because of its purchase of AmSouth Bancorp’s portfolio and foreign exchange adjustments. Reflecting the tough environment, the portfolio shrank 1% in the first three quarters.
Chris Brendler, an analyst at Legg Mason Wood Walker, Inc., said he has also heard MBNA’s management talk about looking for opportunities in home equity.
But Mr. Brendler said that he expects both MBNA and Capital One to be cautious in what is now a “frothy” market, where banks are bidding aggressively for the loans.
“No way do I think it will be meaningful for years to come” at MBNA, he said. It appears that the company has traditionally done most of the marketing for its home equity loans through its collections department, he said.
MBNA must first dip further into originations to see if expanding the business “makes sense” and must watch the performance of a test bucket of home equity assets, he said. He agreed that MBNA would target an acquisition to help increase its originations.
Though home equity has been hurting card portfolio growth, he said, it “certainly remains to be seen” whether consumers will continue to turn to such loans with a flatter yield curve and slower home price appreciation.
Though the tax-advantaged borrowing should theoretically have more appeal than cards, some data suggest that only a subsegment of consumers “use it more aggressively” than in the past, Mr. Brendler said.
It also remains unclear whether card companies’ growing interest in home equity lending is good for private-label outsourcers. The trend may rob them of opportunities to produce and then buy the loans. But it also could mean more emphasis on pushing sales through private-label relationships, though with fewer loan purchases from such correspondents.
Countrywide also outsources for Capital One, a spokeswoman for the card company said last week. (Countrywide’s home equity production in November rose 89% from a year earlier, to $3.1 billion.)
A Countrywide spokeswoman would not confirm a relationship with either MBNA or Capital One.
Mr. Donahue said he did not know whether Countrywide handles back-office work on MBNA’s behalf. Still, “at this point we don’t foresee any changes in the relationships we maintain with other organizations,” including the company that services its home equity loans.
Mr. Polini said in his report that the loans MBNA has begun retaining are originated under Countrywide and HSBC guidelines.
