PHH Corp., Mt Laurel, N.J. is the only independent mortgage loan servicer that can internally generate new unpaid principal balances for its platform and thus its loan production unit can generate MSRs at a discount compared to the cost to purchase them, an analyst for Sterne Agee said.
Henry Coffey commented that PHH's "direct cost of servicing (collecting payments, making distribution, monitoring insurance and escrow balances) is relatively low, 3-4 bps, with the rest of the company's actual servicing cost tied to managing delinquencies and loan resolution. The goal is to replace runoff volume with additional investments in home-grown MSRs. Subservicing is viewed as an opportunity, but the company would rather originate servicing assets underwritten to its standards than buy MSRs."
He expects PHH is likely to write its MSR values down to between 2.75 and 3 times servicing fees or to $21.25 to $23 per share because of the low interest rate environment. But the same drop in interest rates should keep PHH's core earnings high due to originations.
Coffey's valuation for PHH common stock price gives an implied value of 2.2 times servicing fees for its MSRs, but attributes no value to the production business and reflects book value for its fleet business.
