E*Trade (NASDAQ: ETFC) should have stayed with what it knows. It seems, though, that the discount broker found the profits in the mortgage business a temptation as home prices spiked up earlier in the decade. Now it is paying the price.

The firm will cut a number of businesses that are not part of its core discount broker operation, and according to CNN Money, "among the units that will be affected are E-Trade's wholesale mortgage operations and direct mortgage lending business." The mortgage business could post a loss as high as $345 million.

As part of its announcement, E*Trade cut its earnings forecast for the year by 31%.

Fee competition among discount brokers has already pushed E*Trade shares down from a 52-week high of over $26 to the current price just about $14. The news is not likely to do the stock any favors.

The discussions of consolidation among large discount brokers is also likely to resurface. Over a month ago there were rumors about an E*Trade merger with TD AmeriTrade (NASDAQ: AMTD).

Watch for a big discount broker merger. There is real reason for it now.

Douglas A. McIntyre is a partner at 247wallst.com.