Representations and warrants provisions are rising at PHH Corp. (PHH). As a results, analysts at Compass Point warn this could be a make or break risk for any company looking to acquire a mortgage servicing and origination operation.
Compass Point states the reps and warrants risk is, of course, a hypothetical and maintains its neutral stance on the company.
PHH posted a reps and warrants provision of $41 million in the third quarter results, which was higher than Compass Points projection of $35 million. Provisions were $39 million in the previous quarter. The increase was because of a higher rate of effective claims against the company.
However, total claims did decline from $297 million to $250 million, which indicates that the provisions are going to continue to decrease.
Compass Point forecasts PHH will sustain $129 million worth of provisions through the end of 2013, which would add an additional $188 million of provisions over existing reserves.
PHH released its third quarter results, indicating the company posted a net loss of $42 million, or 74 cents a share, due to changes in mortgage servicing rights, foreclosure-related charges and other derivatives.
Mortgage servicer and originators are in a period of acquistion and consolidation.
Recently, Ocwen Financial and Walter Investment Management submitted a joint winning bid to the rights of Residential Capital for $3 billion. Nationstar Mortgage is also seeing its servicing pipeline grow.
