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PHH Corp. poised to gain market share

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With the decline in Treasury rates, mortgage servicer PHH Corp. (PHH) is likely to gain market share over its larger bank competitors and to see higher gains on loan sales, according to a research note released Friday. The company, based in Mt. Laurel, N.J., is working to expand its three origination channels, said the research note from Sterne Agee & Leach, a financial services firm based in Birmingham, Ala. PHH generates loans through a brokerage and real estate services company; a private-label business for institutional clients; and correspondent banks and credit unions. "Currently, PHH is the only independent servicer with the ability to internally generate new (unpaid principal) balances for is servicing operation, and its production unit can generate (mortgage servicing rights) at a discount to likely purchase cost," said Sterne Agee analysts Henry Coffey and Jason Weaver. "The goal is to replace run-off volume with additional investments in home-grown MSRs," the analysts said. Run-off refers to the shrinkage in loan volume as borrowers refinance or otherwise move their loans out of a servicer's portfolio. PHH also runs a vehicle fleet management and servicing business, and aims to increase that unit's contribution to earnings to 50% of total income from between 30% and 40%. Even with that goal, Sterne Agee values the unit at just book value. "In our view, the company's share price is dominated by the mortgage operation with the focus on core earnings per share, (which should be high given trends in mortgage rates/demand) and the value of its MSRs,” Sterne Agee analysts said. The brokerage firm reiterated its price target of $24 on PHH, and its buy rating on the stock. Fitch Ratings which rates residential mortgage servicers on a scale of 1 to 5, with 1 the highest, affirmed PHH Mortgage Corp.'s primary servicer's ratings at 2+ Friday. Fitch downgraded the firm's special servicer rating because of changes in the Fitch benchmarks and weightings and "not to the deterioration in PHH's subservicing performance." "The ratings also reflect Fitch's overall concerns for the U.S. residential servicing industry which include the ability to maintain high performance standards while addressing the rising cost of servicing and changes to industry practices, which are likely to be mandated by regulators and other parties," a statement from the ratings agency said. Write to Liz Enochs.

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