The Strange Case of PHH, Jerry Selitto, and MSRs

Did perceived liquidity problems at PHH Corp. lead to this week's ouster of company president and CEO Jerry Selitto? I'm told that PHH doesn't have any liquidity problems and the company said as much in a recent SEC filing. Then again, that same SEC filing warns that Fannie Mae could yank an “early funding committed facility” it has with the nonbank, though no one in the market truly believes the GSE would pull such a stunt. But some PHH observers note that the publicly traded mortgage firm's biggest problem is its mortgage servicing rights. Thanks to falling interest rates it's been marking down the value of its MSRs big time. In 3Q the MSR hit was $361 million. Ouch. You would think that PHH would hedge its MSRs but it doesn't, not really. But one source noted that if rates rise, the company will then “mark up” its MSR holdings by hundreds of millions of dollars. Of course such an event will come too late for Jerry Selitto who either resigned or got bounced. (We don't know which.) We're told that he was growing tired of fighting with company's board, a board that includes former MBS maven Greg Parseghian, a Wall Street and Freddie Mac veteran who knows a thing or two about hedging.