Servicing Weighs on PHH

PHH Corp., which is in the midst of an accounting restatement, recently advised investors that financial performance for 2006 will be held in check by the high cost of hedging its mortgage servicing portfolio and a weak loan origination market.

PHH Corp.'s recent update on its accounting restatement suggests the restatement will have less impact than previously expected, according to analysts at Friedman Billings Ramsey. But they also said in a report that guidance for pretax breakeven results was disappointing. Nonetheless, FBR continues to rate PHH Corp. as an "outperform" stock with a price target of $31.

The outlook for breakeven results this year reflects lower mortgage banking earnings and higher costs related to the restatement, FBR noted. PHH is expected to release its restated 2005 results in mid-November. However, PHH said it is not yet ready to announce when its 2006 quarterly results will be finalized.

Terry Edwards, president and chief executive office of PHH, said in the company's announcement that "assuming no significant swings related to hedging the servicing portfolio, 2006 pretax results for the company overall are estimated at breakeven." He added that the "significant downswing in mortgage origination volume year-over-year that accelerated in the third quarter combined with continued pressure on origination margins will result in a negative pretax result for the full year for our mortgage operations.

"As we stated in July, we were disappointed with first-half results for the mortgage business. The lack of a traditional seasonal lift during the third quarter plus the high cost to keep the servicing asset properly hedged due to the flat yield curve has caused year-to-date results to be significantly below our expectations. While we have been actively reducing costs all year, in the past month we identified additional areas of focus to right-size the origination segment of the mortgage business." (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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