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On Tuesday, Discover Financial Services (DFS - Analyst Report) expanded its product portfolio to include residential mortgage with the launch of Discover Home Loans. The announcement comes close on the heels of the company’s takeover of almost all the operating and related assets of Home Loan Center, a subsidiary of Tree.com Inc. (TREE - Snapshot Report). Home Loan Center originates and processes residential mortgage loans across all 50 U.S. states as well as the District of Columbia.

With the launch of the new unit, Discover now offers commercial and Federal Housing Administration loans with both variable and fixed rates. Earlier, the company offered only credit cards, personal and student loans and deposit products.

Discover intends to establish a strong foothold in the home loan market through its customer-focused approach. The company has developed an organized application process with licensed mortgage officers to assist customers through the entire application process. The company also has a dedicated website to help customers upload documents securely and check the status of their loan.

Moreover, Discover will offer credit of up to $1,000 toward closing costs in case it fails to close a loan on schedule. Moreover, it will reward customers who return for home loans or refinancing through a Welcome Back Bonus credit of up to $2,000 toward closing costs.

The home loan unit is expected to boost the earnings of Discover’s Direct Banking segment, which is already showing substantial growth. The segment reported pre-tax income of $962 million in the first quarter of 2012, reflecting a $285 million increase from the year-ago quarter.

The Zacks Consensus Estimate for the company’s second-quarter 2012 earnings is currently pegged at 95 cents per share, down about 12.5% year over year. For full-year 2012, the Zacks Consensus Estimate stands at $4.01 per share, down 1.3% from 2011.

We maintain a long-term Outperform recommendation on the shares of Discover. Currently, the company caries a Zacks #2 Rank, implying a short-term Buy rating.

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