Servicing Hedge Proves Costly for PHH

PHH Corp., Mount Laurel, N.J., has been the subject of some unwelcome headlines recently because of accounting issues that have dogged the company.

But sometimes lost amid the big picture of PHH's accounting review is the role that mortgage servicing has played in the company's lackluster results recently.

In the company's most recent financial filing, PHH said that poor performance of its mortgage servicing hedge depressed the company's overall operating performance in the fourth quarter of 2006.

The company also said it has undertaken a major cost-cutting initiative to try to return its mortgage operations to profitability.

At a time when most lenders reported generally stable mortgage servicing and hedging results, PHH president and CEO Terry Edwards said that a tightening in the relationship between mortgage rates and 10-year swap rates tightened by 6 basis points during the quarter, leading to a negative $20 million cost in the mortgage servicing segment.

But the fourth quarter's bad news could turn into good news someday, if only things got back to normal.

"Should the spread relationship between swaps and mortgages revert to historical trends, we expect that our hedge position would allow us to recoup this loss in future periods," Mr. Edwards said in a company statement.

PHH said that it expects to be current with quarterly and annual financial statements filing requirements by the middle of this year.

Mr. Edwards said that PHH's fleet management services business performed "at or above expectations for 2006," but that the success of the vehicle fleet management services unit was more than offset by a loss experienced by the company's mortgage business.

The company's mortgage production business may not have fared much better than the servicing unit.

PHH said its cost-cutting efforts include a reduction in staffing, lower IT spending, increased outsourcing of operations and a reduction in administrative expenses. Mr. Perry said the company expects to shave $50 million in costs from its mortgage production and mortgage servicing units as a result.

"We believe these actions, combined with an expected improvement in gain-on-sale margins, will return our combined mortgage segments to profitability in 2007," Mr. Edwards said. "We continue to evaluate additional steps to reduce costs in the combined mortgage segments."

But PHH isn't giving up on the mortgage business, at least not according to the company's most recent statements on the business. And so far, investors seem to be confident about the ability of the firm to turn around its mortgage results as well.

PHH, a provider of private-label mortgage origination and servicing options, said it hopes to originate $41 billion of home loans in 2007. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com