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PHH sinks as low interest rates destroy mortgage servicing

Just like Ocwen, Nationstar and Walter

The first quarter’s historically low interest rates already pulled down the performance of Nationstar Mortgage, Walter Investment, and Ocwen Financial thanks to the impact of negative adjustments to the “fair value” of each company’s mortgage servicing rights portfolio, and now PHH Corporation is joining that unfortunate list as the company posted a loss in the first quarter.

PHH announced Wednesday that it posted a net loss attributable to PHH Corporation of $30 million, or $0.56 per basic share, in the first quarter.

That loss includes $18 million of pre-tax notable items and a $10 million pre-tax unfavorable market-related fair value adjustment to the company’s mortgage servicing rights, net of derivatives related to MSRs.

Last week, Ocwen posted a net loss of $111.2 million (or $ 0.9 per share) and a pre-tax loss of $102.1 million for the first quarter, driven in part by losses of $32.7 million in “unfavorable interest rate driven fair value changes” for its Ginnie Mae, Fannie Mae, and Freddie Mac mortgage servicing rights.

Walter Investment joined Ocwen this week, posting a GAAP net loss of $172.7 million, or $4.85 per share. The company said that its servicing segment recorded negative revenue of $63.3 million in the first quarter of 2016, which was a stark reversal from the first quarter of 2015, when the company’s servicing segment recorded nearly $144 in revenue.

According to the company’s report, the decrease in revenue reflects the “impact of fair value charges” to its mortgage servicing rights.

And earlier Wednesday, Nationstar reported a GAAP net loss of $132 million, or a loss of $1.28 per share, of which $161 million or $1.56 per share, after tax, was primarily attributable to changes in fair value impacting its MSR portfolio.

While PHH’s “fair value” adjustment loss was less than Ocwen, Walter, and Nationstar, the company’s MSR portfolio still dragged down the company.

And the company has apparently decided that it won’t let that happen again, as Glen Messina, president and CEO of PHH Corporation, said that the company plans to “evaluate all options to substantially reduce our owned MSR investment.”

Messina added, "Our first quarter financial results are consistent with our prior guidance of a core loss before notable items due to seasonally weak closing volume, seasonal expense variances, and the expected timing for the realization of the full run rate re-engineering benefits in the second quarter of 2016.”

Messina also said that the company is making “solid progress” in it strategic review process.

“We have decided to suspend our inorganic growth initiatives as we reassess our previously communicated scale objectives,” Messina continued.

“In addition, we have decided to evaluate all options to substantially reduce our owned MSR investment,” Messina added. “While we are committed to returning excess capital to our shareholders, we are evaluating multiple contractual, debt and tax complexities to ensure the sequence and timing of actions we may take will not limit our objective of maximizing shareholder value. As a result, we have decided not to take any capital actions including share repurchases at this time."

The company added that its mortgage production segment loss in the first quarter of 2016 was $26 million, compared to a segment loss of $21 million in the fourth quarter of 2015 and a segment loss of $19 million in the first quarter of 2015.

The company said that the $5 million unfavorable change in segment results for the first quarter of 2016 compared to the fourth quarter of 2015 was due to a $13 million decrease in net revenues that was partially offset by a $5 million decrease in total expenses.

Additionally, PHH’s mortgage servicing segment posted a loss in the first quarter of 2016 was $21 million, compared to a segment loss of $65 million in the fourth quarter of 2015 and a segment profit of $57 million in the first quarter of 2015.

PHH said that the $44 million favorable change in segment results for the first quarter of 2016 compared to the fourth quarter of 2015 was primarily a result of a favorable change in the fair value of MSRs, net of related derivatives, of $42 million.

The unfavorable change in segment results of $78 million compared to the first quarter of 2015 is a result of net revenues decreasing to $44 million, down $77 million, or 64%, primarily driven by an unfavorable change in our MSR market-related fair value adjustments, net of derivatives and a decline in loan servicing income.

“Over the next three months, we believe we will make substantial progress towards completing our strategic and capital review process,” Messina added. “During this time, we intend to take the necessary actions to drive organic growth through our most profitable channels, manage operational capacity and fixed costs as necessary, and preserve our balance sheet. We will continue to provide material updates on our progress as appropriate.”

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