Just three months after Bank of America and PHH renewed their agreement for PHH to continue servicing Merrill Lynch clients, BofA decided to pull the origination of new applications for certain mortgages; both of the moves take the mortgages into internal operations.
PHH disclosed the information earlier today to investors.
This change represents about 20% of Merrill Lynch’s closing dollar volume, and about 5% of PHH’s closing dollar volume. Merrill Lynch will now perform these new mortgages internally starting on April 25, 2016. Merrill Lynch’s closing volume accounted for about 26% of PHH’s total volume for 2015.
In December, Bank of America Merrill Lynch agreed to continue using PHH’s services starting on January 1, 2016, however the terms of the agreement were not disclosed.
PHH received no assurances regarding the remainder of the Merrill Lynch origination activity, which could also be subject to change at any time during 2016 or beyond.
In addition, Merrill Lynch intends to insource its sub-servicing portfolio by December at the latest. Their sub-servicing contract with PHH expires on December 31, 2016. This will be a loss of $40 billion in unpaid principal balance for PHH, about 32% of its sub-servicing portfolio and 18% of its total servicing portfolio as of December 2015.
“While we are disappointed with these changes, we intend to take appropriate measures to adjust our operations and incorporate these developments in our review of strategic options,” PHH president and CEO Glen Messina said in a note to investors disclosing the news.
"We believe these decisions reflect the broader dynamics in our industry, including higher compliance and other costs associated with a more onerous regulatory environment,” he added.
“We remain focused on implementing the priorities we laid out for 2016 and the evaluation of all options, including capital structure and deployment alternatives, to maximize value for shareholders,” Messina said.
Since Bank of America’s announcement, PHH is now unsure of its earnings, and retracted its previously disclosed earnings guidance for 2016. PHH has no intentions of providing a new earnings guidance until its comprehensive review of strategic options.
In addition, the company took another hit by Morgan Stanley who, though renewing their current contract until October 31, 2017, informed PHH that it will be assessing the agreement upon the completion of that contract.
These losses do not bode well for PHH after its history, where it said that its mortgage servicing segment reported a loss in the third quarter of 2015 of $77 million, compared to a segment loss of $46 million and $71 million in the second quarter of 2015 and third quarter of 2014, respectively.
PHH expects to provide an update on the impacts of this loss in their private label client relationships as well as its strategic options during the first quarter of 2016 earnings call on May 5, 2016.