Even though the management at Mount Laurel, N.J.-based PHH Corp. said its mortgage origination business lost market share during the second quarter, the analysts at FBR Capital Markets believe the company is becoming even more aggressive in bringing in new business as the larger servicers such as Bank of America and Wells Fargo are losing origination clients.
A report from Paul Miller, Kevin Barker and Jessica Ribner agrees with PHH president and CEO Jerry Selitto's statement that PHH, now with a 3.7% market share, will be up at the 5% level by yearend. And that, the analysts note, "will position the company well to continue to be successful even in a sluggish housing market."
They make the case for Selitto's prediction on market share to come true as the FBR Capital Markets report noted, "Next quarter, we expect rate locks to increase slightly to $8 billion due to the increase in mortgage applications in the second quarter. Meanwhile, gain-on-sale margins should settle down to the 1.2% to 1.4% level as interest rates stabilize and increasing competition puts pressure on the market."
It was not a good second quarter for PHH as it lost $41 million as the fair value of its mortgage servicing rights declined by $117 million during the period. This is an improvement over the $133 million loss for the same period last year, when the fair value of its MSRs declined by $274 million.
Take away the MSR adjustment, Selitto said, and the mortgage servicing business had strong revenue for the period, with servicing income up $20 million from the same period last year to $117 million. As of June 30, PHH had a $174 billion MSR portfolio, up from $156 billion one year prior.
Also affecting the servicing business this quarter was that foreclosure charges "remain elevated" at $24 million, Selitto said (versus $20 billion last year). He said this was driven by increased repurchase requests.
The mortgage origination business had a profit of $25 billion for PHH, down 49% from $49 billion one year ago; this is due to an 11% decline in the number of loan commitments expected to close plus lower gain on sale margins, which were off 14%.
The company closed $9.7 billion during the quarter, down from $10.1 billion one year prior. "Heading into the third quarter, we believe our application volume is trending higher than that of our largest competitors and we are working actively with our partners on sales and account penetration initiatives to drive profitable volume," he said.
PHH's private-label business is growing as it launched a new client in the second quarter and has several additional prospects, Selitto continued.
The FBR Capital Markets analysts did cut their full-year earnings per share estimates for PHH to $1.44 from $1.65 for this year and to $3 from $3.10 for 2012 due to those elevated foreclosure costs.
The analysts make a point that the proposals on servicing standards reform and fee structure favor the large mortgage servicing platforms which can benefit from the economies of scale.
Smaller servicers like PHH could be pushed out of the business "as costs rise and margins collapse," FBR said. However, the discussion in this area has just begun, the analysts note, and thus it is a down-the-road risk for investors in the company's stock.
