Prepays Hurting PHH's Net

Mount Laurel, NJ-PHH Corp. here was a victim of mortgage servicing rights prepayments as the company's first-quarter net income was well below that from the same period one year prior.

The $118 million segment loss for the company's mortgage servicing business more than cancelled out what Terry Edwards, president and chief executive, termed "the strongest quarter since the spin-off" for its mortgage production segment. PHH had been a part of Cendant Corp. until the end of January 2005.

Overall, the company, whose third line of business is fleet management services, earned $2 million, or $0.04 per share, for the first quarter of 2009, down from $30 million, or $0.55 per share, for the first quarter of 2008.

The loss on the servicing side ompares with a loss of $16 million one year prior. Part of the culprit then was that PHH did not hedge its servicing portfolio, something that is still the case today.

In the most recent quarter, PHH took a $71 million non-cash writedown of the MSR asset due to the decline in mortgage rates during the quarter. It also took a $92 million reduction in the value of its MSRs due to prepayments and portfolio decay.

Plus, PHH had foreclosure-related charges of $21 million and reinsurance-related charges of $14 million.

"The decrease in mortgage rates during the first quarter adversely impacted our modeled MSR value, and further rate changes may create additional volatility in our earnings during the remainder of 2009 for our mortgage servicing segment while our MSRs remain unhedged.

"In the event that government initiatives positively impact credit markets and the residential real estate market, we would expect that the frequency and severity of credit losses, including reinsurance, would decline during the remainder of 2009. We also expect that our mortgage servicing segment could be positively impacted by loan modification incentives available to mortgage loan servicers through the Homeowner Affordability and Stability Plan during the remainder of 2009," Mr. Edwards said.

The mortgage production segment had a profit of $113 million for the first quarter of 2009, compared with a loss of $8 million for the same period one year ago. The most recent quarter segment profit takes into account a $10 million writedown of scratch-and-dent, second-lien and construction loans.

Originations compared to the year-ago period were off slightly, $8.9 million vs. $10 million. The first-quarter production included $7.3 billion of loans to be sold on the secondary market, almost all of which were conforming, as well as $1.6 billion in fee-based closings.

PHH has a pipeline of $6.7 billion as of March 31, 2009, up 60% from the end of 2008 and 48% from the end of the first quarter of 2008. Loans for purchases were 29% of the first quarter production.

Mr. Edwards said positive momentum for the origination business should continue into the summer. A sign of good news for the production segment: PHH has warehouse capacity of $4.5 billion, of which $2.9 billion is available. The company said that should be sufficient to fund its production for the next 12 months.

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