Capital One Financial (NYSE:COF) really stunk things up in the third quarter. After spending $13.2 billion dollars to acquire North Fork Bancorp last year, it recently decided to close North Fork's GreenPoint Mortgage unit, triggering an $898 million loss. Naturally, this spilled red ink all over the quarter, resulting in a $0.21-per-share loss. But despite the GreenPoint debacle, I think it might actually be time to start buying. Here's why.

What happened?
The quarter wasn't so bad if you exclude the GreenPoint losses. Earnings from continuing operations were $2.09, which is actually up 11% versus the prior-year period. It made a lot of sense for Capital One to close GreenPoint, a wholesale mortgage originator. The secondary markets have literally dried up. As of now, it's nearly impossible to bundle together a package of mortgages and sell them off at a profit, because there are no buyers.

Even if that wasn't the case, I'd argue that Capital One shouldn't be in the business anyway. Wholesale origination involves sourcing loans via brokers, and it doesn't involve any contact with the actual borrower.

Thus, the brokers often have incentive to push for volume at the cost of credit quality. Meanwhile, Capital One doesn't develop a deep relationship with the borrower, and basically has no competitive advantage, especially compared to massive lenders like Countrywide Financial (NYSE:CFC), which is struggling, or Wells Fargo (NYSE:WFC), which has face-to-face relationships with many of its borrowers.

What's next?
Where does Capital One go from here? I like the way the company has been shooting for cost savings of $700 million by 2009, which is always a good thing.

In addition, it's been slowing its growth, with total managed loans held for investment remaining flat compared to last quarter. Capital One has decided to focus on customers better equipped to weather an economic downturn. It's also reduced its focus on teaser rates in its marketing, which should improve its credit quality.

This should help the company partially stave off increased credit losses, even as the economy teeters on the brink of recession and the housing market continues to slump. Sure, if the economy slides into recession, credit card losses -- which are sensitive to the economic environment -- will rise. However, I like that Capital One actively underwrites with a recessionary environment in mind.

I also appreciate that Capital One has been buying shares back hand over fist, completing a whopping $2.2 billion of buybacks year to date. It's nice, as a potential shareholder, to see management rewarding investors when it thinks its shares are undervalued.

Credit card doldrums
Despite all of that, Capital One, as well as American Express (NYSE:AXP) and Inside Value selection Discover Financial (NYSE:DFS), face some headwinds A spike in bankruptcy filings, triggered by stricter bankruptcy legislation in 2005, made 2006 look unnaturally strong, but now the normalizing credit environment has hurt results. Loan-loss provisions shot up 29% in the last quarter, to $1.14 billion, while the national lending delinquency rate rose to 4.7% from 3.89% in the same period. Capital One believes that its charge-offs will continue to increase in 2008.

Ultimately, I think Capital One looks tempting right now. However, I should also caution that with the threat of recession looming, only long-term shareholders need apply.

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