Mortgage

PHH takes another hit as BofA Merrill Lynch pulls mortgage servicing portfolio

Bank of America terminates agreement without cause

It only took a little more than six months for Bank of America Merrill Lynch to decide to pull the rest of its mortgage servicing business from PHH Mortgage Corporation, marking another devastating blow for the company.

PHH Mortgage, a wholly-owned subsidiary of PHH Corp., announced in an 8-K filing with the Securities and Exchange Commission that it received written notice from Bank of America that it is terminating its agreement with PHH, meaning the company will no longer provide private label origination services on behalf of Merrill Lynch, effective March 31, 2017.

Less than a year ago, PHH and Bank of America announced a new agreement for PHH to continue providing mortgage origination services to Merrill Lynch clients.

The agreement renewed a deal that was set to expire on Dec. 31, 2015, and announced a new deal that would begin on Jan. 1, 2016.

However, at the time, the terms of the deal were not disclosed. And according to the latest 8-K filing, Bank of America was allowed to terminate without cause.

The first sign of trouble came just three months after Bank of America and PHH renewed their agreement. PHH disclosed to its investors that BofA decided to pull the origination of new applications for certain mortgages in April 2016.

At the time, the change represented about 20% of Merrill Lynch’s closing dollar volume, and about 5% of PHH’s closing dollar volume. Merrill Lynch’s closing volume accounted for about 26% of PHH’s total volume for 2015.

The news in April came with the potential threat of Merrill Lynch pulling the rest of its serving since 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 the most recent 8-K filing, PHH reiterated that earlier this year Bank of America disclosed its intent to insource an estimated 60% of Merrill Lynch’s volume based on closing dollar volume for the year ended Dec. 31, 2015, and PHH expressed its belief this insourcing trend from Merrill Lynch would continue.

PHH president and CEO Glen Messina said at the time in a note to investors disclosing the news, “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.”

"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.

Due to the first time Merrill Lynch pulled its business, PHH became unsure of its earnings, and retracted its previously disclosed earnings guidance for 2016. PHH said it had no intentions of providing new earnings guidance until its comprehensive review of strategic options.

But before PHH could even get to this point, it had to go through a few more hurdles, announcing in August 2016 that it was about to lose another large portion of its mortgage-subservicing portfolio.

PHH disclosed that it received notice from HSBC Bank that it plans to sell the mortgage servicing rights on approximately 139,000 mortgage loans currently subserviced by PHH Mortgage Corporation on behalf of HSBC.

PHH said that HSBC informed the company that the purchaser of the mortgage servicing rights does not plan to continue using PHH as a subservicer.

It wasn’t too long after the HSBC news that PHH said it would cut one-third of its local workforce in Amherst, New York, where it employed 294 people.

Due to this latest termination, PHH said it estimates Merrill Lynch originations will contribute approximately $45 million of pre-tax earnings for fiscal year 2016 based on PHH's estimate of Merrill Lynch loan closing volume for 2016.  

As a result, PHH said in the 8-K filing that it is “taking actions to reduce its facilities footprint and intends to take actions to realign operating costs in response to the loss of Merrill Lynch production volume, including by re-allocating excess originations capacity to portfolio retention efforts and to clients other than Merrill Lynch.”

 

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