As the origination market is expected to shrink to $1.1 trillion (or even less, depending on the spring home sales season) from $1.7 trillion in 2013, there is too much capacity and not enough demand to meet it, says Dave Stevens, president and chief executive of the Mortgage Bankers Association.
It will not be just the large originators (PHH is the seventh largest in the business) but it will include mortgage bankers of all sizes.
Basel III capital rules could cause more banks to try to unload servicing rights. Those banks that particularly rely on mortgage banking could be forced to seek partnerships with more diversified institutions.
Then there are some independent mortgage bankers that are "too small to comply," Stevens says. They need to get bigger to be able to hire the attorneys in their own shop who can help guide them on compliance issues.
PHH's decision, disclosed Tuesday, to explore strategic alternatives for its mortgage and fleet businesses marks a departure from what the company said just a few months ago.
At that time, the company said a possible separation could consume up to $920 million in cash.
Since then the company has analyzed the tax complexities of doing such a transaction, found that such a move could be done on a more favorable basis and so it hired some advisors, said Glen Messina, the company's chairman and CEO, during a conference call Wednesday morning.
However, even if the mortgage unit is separated from PHH, the company is not considering a further separation of the mortgage origination and mortgage servicing businesses.
During the conference call, Messina noted the success of the off-balance sheet mortgage servicing rights transaction PHH has entered into with an affiliate of Two Harbors Investment. It has hired advisors to look into an on-balance sheet MSR financing transaction. MSR financing deals had been one of the demands of activist investor Orange Capital.
PHH also has been attempting to renegotiate its private-label outsourcing contracts to reflect the changing economics of the business. It has been successful with eight of its customers. Those changes include the right to refinance consumers whose loans came in through the private-label channel. It is continuing to negotiate with other clients, Messina said.
The private label contracts might be affected by a change of control provision. Such a provision could be triggered depending on the structure of any transaction, but right now it is too early to tell, he said.