Weak mortgage production drags PHH down again
Company posts loss of $59 million despite fleet business sale
After months of speculation, PHH Corporation (PHH) finally agreed to the sale of its fleet management business in June, in an effort to salvage its floundering mortgage business.
When the sale was announced, PHH said that it expected the sale to Element Financial Corporation for approximately $1.4 billion in cash to be completed by July 31.
Despite that expected influx of cash, PHH reported a loss of $59 million (or $1.02 per basic share) in the second quarter, driven in part by a $27 million loss in the company’s mortgage production segment.
“While our second quarter results continue to reflect a highly-challenging industry environment, we are reducing costs and gaining share in the retail home purchase mortgage market,” Glen Messina, PHH’s president and CEO, said.
“With the successful sale of the Fleet Management Services business, we are focused on returning capital to shareholders, reducing leverage and executing our strategy in the Mortgage business,” Messina added. “We are implementing the right cost and operating structure and working to improve the profitability of our Private Label contracts to capture opportunities and sustain a strong competitive position across mortgage cycles, including in the current home purchase driven mortgage market.”
On the positive side, the $27 million loss from the mortgage production segment was an improvement from the $60 million loss suffered by the segment in the first quarter of 2014. By contrast, though, the segment pulled in a profit of $44 million in the second quarter of 2013.
PHH’s total second quarter 2014 mortgage closings were $9.3 billion, up 26% from the first quarter of 2014 and down 37% from the second quarter of 2013.
Retail closings increased 29% from the first quarter of 2014 but declined 33% compared same time period last year. Retail closings increased to 97% of total closings in the second quarter of 2014 from 94% in the first quarter of 2014, reflecting the company’s continued emphasis on its retail channels, the company said.
“The increased mix of fee-based closings continues to adversely affect the profitability of our mortgage production segment as the revenue per loan on fee-based closings is generally lower than the revenue per loan on saleable closings,” the company said.
The company’s mortgage servicing segment earned a profit of $10 million in the second quarter of 2014, compared to a segment loss of $29 million in the first quarter of 2014 and a segment profit of $81 million in the second quarter of 2013.
“The second quarter of 2014 segment profit included a $12 million unfavorable market-related fair value adjustment to our mortgage servicing rights, as mortgage interest rates declined in the quarter, and a $20 million net derivative gain related to MSRs,” the company said.
The company reported that the unpaid principal balance of its mortgage servicing portfolio continued to fall. “At June 30, 2014, the UPB of our capitalized servicing portfolio was $124.0 billion, down 3% from March 31, 2014, and 7% from June 30, 2013,” the company said. “Although prepayments have declined over the past four quarters, they continue to exceed additions from new loan production.”
The company’s tangible book value per share was $26.49 as of June 30, 2014, down 3% from $27.34 on March 31, 2014, and down 6% from $28.14 on June 30, 2013.
The company said that including the estimated gain on the fleet management services transaction; its pro forma book value per share was $31.34 as of June 30, 2014.
Other highlights of PHH’s 2Q earnings:
- Interest rate lock commitments expected to close declined 62% from 2Q13 to $2.1 billion. Fee-based closings constituted 65% of total closings, up from 47% in 2Q13
- Total loan margin of 273 bps, a 75 bps decrease from 2Q13
- Total purchase closings of $5.7 billion, a 7% increase from $5.3 billion in 2Q13, compared to a 5% decrease in purchase closings for the industry
- Total mortgage production segment expenses in 2Q14 declined 27% compared to 2Q13, and total quality-related costs declined 90% in 2Q14 compared to 2Q13
- Mortgage Servicing core earnings of $2 million in 2Q14, up $75 million compared to a core loss of $73 million in 2Q13