Despite a drop in originations, PHH Corp. (PHH) is forecasted to return to mortgage profitability soon as the company looks for possible acquisitions to boost profit, FBR Capital Markets and Company said in its company report.
PHH reported a net loss from continuing operations of $191 million, or $3.47 per basic share, in 2014. It was a sharp reversal from PHH’s performance in 2013 when the company reported a net income of $69 million from continuing operations.
Originations fell 5% over third-quarter 2014, while lock volumes declined 13%, resulting in lower origination-related revenues.
This dent was futher harmed by less profitable fee-based closings rising to 68% of closings. “We expect that once the company is finished renegotiating its PLS contracts, mortgage profitability could return,” said Paul Miller, an analyst with FBR. “Additionally, management noted that it is on the lookout for purchase-focused retail platforms that it can acquire to boost its originations ability, which we think would be a positive for the company.”
Meanwhile, PHH servicing profitability declined given lower rates in the quarter and a $3 billion distressed MSR sale.
“On the bright side, subservicing now represents 50% of the company's overall servicing book, which is encouraging as it represents a capital-light fee-income stream. We expect PHH to continue exploring MSR financing, which could further lower its financing costs while retaining fee income,” Miller said.
FBR reiterated its outperform rating and $28 price target on shares of PHH Corporation following the company's 4Q14 earnings release. The company is expected to return to profitability as its restructuring plan kicks in. Following the fourth quarter earnings, FBR adjusted its FY15 EPS estimate to ($0.18) from ($0.15) and maintained its FY16 EPS estimate of $2.00.
“We continue to believe that the success of management's restructuring initiatives will be key in determining the future profitability of the company, especially as management has already guided to negative core earnings through mid 2015,” Miller said.