E*Trade (NYSE:ETFC) made its bed of nails. Now it has to lie on it.

The discount broker is paying the price for its exposure to the battered mortgage market. Last night's third-quarter report found the company posting a loss of $0.14 per share as a result of a $0.30-per-share mortgage writedown.

One can add that back to arrive at a profit of $0.16 per share, but don't assume the showing stacks up favorably against Wall Street's expectation of $0.10 a share. Analysts knew all about the charge, hosing down estimates from as high as $0.42 a share just last month.

Net revenue fell to $321.2 million for the period, weighed down by a $197.1 million net loss on the sale of loans and securities. Yes, that bite does come out of a broker's net revenue figure.

The pity here is that the retail brokerage side of E*Trade is doing great. If you pull yourself away from the devalued loans you will find a company in which:

  • Total accounts rose by 6%.
  • Client assets rose by 18%.
  • Daily average revenue trades rose by 44%.

In other words, E*Trade didn't just grow its account base. The typical client entrusted E*Trade with more assets and conducted far more trades than at this point last year.

That's the same kind of vibe that investors got from Charles Schwab (NASDAQ:SCHW) earlier this week. It's the same favorable momentum that you will likely see when TD AMERITRADE (NASDAQ:AMTD) reports next week.

So how badly is E*Trade being burdened by its decision to bankroll home loans? Let's see how all three of the leading discount brokers are doing this year.

10/17/07

YTD
Gain/(Loss)

E*Trade

$12.47

(44%)

TD AMERITRADE

$19.08

18%

Charles Schwab

$22.43

23%

Ouch! I'm not suggesting that E*Trade should get a free pass for its free-falling mortgages. Companies like E*Trade and H&R Block (NYSE:HRB) that reached out of their core strengths to originate mortgages have to take their lumps.

However, I would much rather use this space to discuss the resilience of the discount brokerage industry. It's impressive. The market was worried a year ago that blue-chip bankers like Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) would leave a mark by offering commission-free trading to their large retail banking accounts.

If we go by the stock brokerage reports out of Schwab and E*Trade, we can see the discounters are doing just fine in this environment. That's comforting, but why should I bring up comfort when the market prefers to see E*Trade grimace as it balances precariously on a bed of nails?

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Longtime Fool contributor Rick Munarriz has been trading exclusively through discount brokers since 1990, but he does not own shares in any company mentioned in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.