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Servicing

PHH earnings show MSRs mix results

Mortgage servicer PHH Corp. (PHH) posted a deeper loss than expected in the third quarter on fair value changes assigned to mortgage servicing rights, other derivatives and foreclosure-related charges.

The company's challenges with MSRs highlight just how much of a double-edged sword mortgage servicing rights can be for financial firms.

While servicers are gobbling up MSRs – with recent key acquisitions like the Residential Capital MSR bankruptcy sale – the margins on MSRs remain tight, according to Scott Sambucci, vice president of advisory and valuation services for the CoreLogic (CLGX) Advisory and Valuation Group.

MSRs may be a risky proposition if not factored in carefully, but the market is still showing them to be a valuable asset when the deal is right.

Analysts with FBR Capital noted that PHH's loss was deeper than expected due to MSR write-downs from higher prepayments and lower interest rates, but still the research firm has PHH listed as outperform going forward.

PHH's earnings report shows the servicing segment alone reporting a $205 million loss associated with a $217 million negative change in the fair value of MSRs and $41 million in foreclosure-related charges. Overall, the company posted a net loss of $42 million, or 74 cents a share, for the third quarter.

"PHH took a $200 million MSR write-down in the quarter, most of which is associated with falling mortgage rates," wrote Paul Miller with FBR Capital. "We continue to believe PHH will benefit into 2013 as mortgage rates level off and the company builds cash at a meaningful rate given a continuation of elevated cash gain-on-sale margins and origination volumes."

Prepayments alone caused $75 million in losses in the third quarter for PHH. Add to that a $150-million change in valuation adjustments to MSRs, and the risks and tight margins tied to MSRs becomes readily apparent.

Still, even with PHH on a GAAP basis reporting a 74 cent-a-share loss, FBR Capital said "MSRs written down to 69-basis points positions the company well for several quarters of strong earnings."

And regardless, FBR Capital maintains an outperform rating with a $25-price target for PHH in the wake of its earnings and losses on MSRs.

MSRs may quickly lead to value loss,  but there are still buyers wanting to acquire servicing rights.

Among them is Ocwen (OCN) and Walter Investment Management (WAC), which worked together to secure the winning bid for ResCap's assets in bankruptcy last month.

Nationstar (NSM) also continues to grow its base of mortgage servicing rights.

kpanchuk@housingwire.com

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