Blackstone Group is making its first major foray into the home-loan industry through a deal in which General Electric Co. would buy PHH Corp. for $1.8 billion and sell that company's core mortgage business to the private-equity firm.
GE would keep PHH's fleet services unit. Blackstone would enter the mortgage market at a time when more than a dozen lenders are seeking buyers and subprime lenders are shutting their doors on a daily basis.
"This is perfect timing for private equity," said Brenda White, a managing director at Deloitte & Touche Corporate Finance LLC. "We'll start seeing the private-equity side buying into mortgage banking, especially now with many companies going into some sort of pre-packaged bankruptcy situation."
Several private-equity firms have jumped into the mortgage business recently. The Chicago hedge fund Citadel Investment agreed this month to buy the bankrupt subprime lender ResMae Mortgage Corp. KeyCorp sold its Champion Mortgage nonprime origination platform in December to Fortress Investment Group LLC, a New York private-equity firm. Fortress folded the platform into its Nationstar Mortgage LLC. Fortress bought the Dallas lender, then known as Centex Home Equity, last year for $575 million.
Christopher Wolfe, a senior director at Fitch Inc., said that he was not surprised private-equity firms have emerged as bidders for troubled lenders, but that not every lender would prove attractive to such investors.
"It's going to take some brave souls to make those bets, and private equity can be more patient, because they can wait it out, but I don't see them coming to the rescue," he said.
Calls to Blackstone, GE, and PHH were not returned.
PHH, of Mt. Laurel, N.J., provides private-label mortgage origination services to financial institutions, including Merrill Lynch & Co. Inc., TD Banknorth Inc., and Charles Schwab Corp. In 2005, roughly 24% of PHH's loan production was for Merrill, according to its annual report.
Only a small portion of PHH's originations are subprime — Sharon Fuller, the senior vice president of business development there, said in an interview this month that less than 5% of its originations fall into that category.
That relatively low subprime exposure was highlighted in Blackstone's announcement of the deal.
"We view PHH Mortgage, which is a predominantly prime lender, as an exciting entry into the mortgage industry," Chinh Chu, a senior managing director of Blackstone, said in a press release. "We are attracted to its platform and business model."
Still, PHH has been grappling with problems that long predate the recent market turmoil. It is still working through accounting issues that stemmed from its 2005 spinoff from Cendant Corp. PHH has delayed filing quarterly and annual reports with the Securities and Exchange Commission since finding deficiencies in its internal controls last year.
Ms. Fuller said pressure on both net interest margins and costs had caused more banks to look for a mortgage outsourcer like PHH, though many banks still have large mortgage operations.
"This is the first time we've seen really tough times that is impacting both our purchase volume as well as delinquency rates within the servicing portfolio," she said.
In the past two months PHH has reduced its work force, cut technology spending, and outsourced back-office work to curb the loss of $22 million to $29 million it expects to report for last year.
Ms. White said the deal appeared to be structured to allow PHH shareholders to get better consideration for their shares through a public transaction, as opposed to having the company split itself up and try to value PHH's two units individually.
The deal is expected to close in the third quarter.
