Relentless price competition, falling market share, and a decision to maintain capacity to handle private-label mortgage outsourcing clients it hopes to sign are making the year a challenging one for PHH Corp.
The Mount Laurel, N.J., company lost money in the first quarter because of charges related to its Jan. 31 spinoff from Cendant Corp. More notable is that executives said on a conference call Friday that unless price competition lets up, PHH will lose $45 million to $55 million in the mortgage production business this year even if it hits its origination target of $48 billion.
The mortgage and fleet-management company posted a $26 million loss for mortgage production in the first quarter, when originations fell 16%, to $9.4 billion. The Mortgage Bankers Association estimates that originations dropped 4.8% industrywide in the three months.
Some lenders, such as Countrywide Financial Corp., have said that price competition for prime loans has eased, but PHH executives say otherwise. Despite a large servicing valuation gain in the first quarter, it left its full-year profit forecast unchanged, meaning it does not count on loan pricing improving.
"We don't want to overpromise and underdeliver, so at this point we're holding our guidance steady," PHH chief executive Terry Edwards said on the conference call. Mr. Edwards, who is also the company's president, partly blamed its tight gain-on-sale margin - which fell 2 basis points from a year earlier, to 75 basis points - on large companies' practice of using servicing profits to subsidize loan pricing.
Executives also pointed to PHH's relatively scant offerings of subprime and niche products, where margins are wider and volumes healthier. They said PHH is considering rolling out an option adjustable-rate mortgage, a hot product that allows for negative amortization.
In a March interview, Mr. Edwards had disparaged option ARMs as dangerous for consumers. On Friday he acknowledged that PHH would not have considered offering such loans 18 months ago, but said that "at some point, 'If you can't beat them, join them' has to come into play."
PHH is adjusting its technology to make it easier for the sales force to make piggyback home equity loans, and it has been looking to make larger loans, executives said.
It is also expanding the sales force that calls on agents of Cendant's Coldwell Banker, ERA, and Century 21 realty brands, to 500 by yearend (from 380 now and 250 at the beginning of the year) and retraining those salespeople. It is making them fully commissioned and letting them take applications, as opposed to sending consumers to Web sites and call centers.
Mr. Edwards said PHH is optimistic that by next year it will have a better "balance" in its private-label business by adding clients. It was "hampered by the for-sale sign" last year, he said - potential customers were scared off by Cendant's deal discussions with other financial institutions.
(The loss in the past year of private-label clients USAA Federal Savings Bank, which had been switching to in-house operations, and of FleetBoston Financial Corp., which merged with Bank of America Corp., cost PHH about $1 billion of originations.)
PHH said Cendant has agreed to extend by two years, to 12, the minimum term of a joint venture that will make loans to clients of Cendant's realty and relocation business. The venture will start Aug. 1.
Excluding $280 million of spinoff-related expenses, pretax income from continuing operations surged more than twelvefold from a year earlier, to $76 million.
Including charges for goodwill impairment of its fleet management business and for debt prepayments, and losses from Wright Express and Cendant Mobility (operations that remained with Cendant), the first-quarter loss was $250 million, or $4.75 a share. For the year-earlier period PHH reported a $23 million profit.
Helped by a $58 million rise in the value of servicing rights net of hedging losses, servicing contributed $87 million of pretax income, more than 10 times the year-earlier amount. PHH still expects to earn $170 million to $190 million, or $1.90 to $2.13 a share, of pretax income this year after minority interests, excluding spinoff-related items.
