In shopping its huge mortgage operation during the past year, Cendant Corp. learned that two factors had dramatically limited the pool of potential buyers.
One was the Mount Laurel, N.J., operation's focus on private-label outsourcing for financial services clients. Observers said that was an obstacle for potential buyers in the financial services industry, because of private-label clients' concerns that such an owner might be tempted to poach their customers.
The other factor: To continue to profit from referrals generated by its massive real estate brokerage business, Cendant wanted to form some sort of partnership with whoever bought the mortgage operation, and it was insisting that the buyer give a high priority to protecting Cendant's interest in such a partnership.
Henry R. Silverman, Cendant's chairman, chief executive, and president, said in a conference call Wednesday that its biggest fear was losing agents if their customers could not get "seamless and timely" service from the partnership. "That's not an acceptable risk to leave with unknown management, and we were unable to develop this level of comfort with the several potential purchasers."
Therefore, Cendant announced late Tuesday a plan that was perhaps inevitable from the start: It will spin off to shareholders its PHH Corp.'s mortgage operations, along with its fleet management business, which manages about a million vehicles for clients.
Cendant plans to form a joint venture with the spinoff. The structure of that venture remains uncertain, but Cendant executives said it would likely result in an even split of the profits from originating and servicing mortgages generated from referrals from its realty and relocation business, which make up about a third of the mortgage operation's production.
As of June 30, Cendant Mortgage was the 10th-largest originator and servicer, according to National Mortgage News.
The realty business, which Cendant says is involved in roughly a quarter of all home sales, includes brokerages it owns and franchise brands like Coldwell Banker, Century 21, and ERA. Mortgage outsourcing clients include Merrill Lynch & Co., Charles Schwab Corp., and American Express Co.
A Merrill spokesman wrote in an e-mail that Cendant has assured it that it will be "business as usual" after the spinoff.
Mr. Silverman said that the sale talks had made it harder for Cendant Mortgage to sign up new clients, as such discussions "stalled because of the uncertainty of who the new owners might be."
A spokesman for a Cendant outsourcing rival, Nexstar Financial Corp. of St. Louis, confirmed Wednesday that it has recently been hired to provide private-label processing for Morgan Stanley Dean Witter's residential lending unit.
PHH is already a separate debt issuer (Standard & Poor's warned of possible downgrades Wednesday) and filer with the Securities and Exchange Commission. Terence W. Edwards, the mortgage division's CEO, is expected to become the new company's CEO.
The spinoff, which a spokesman said would leave Cendant with no stake in PHH, is expected to occur in the first quarter.
Spinning off the mortgage operations would fit with the New York conglomerate's broader goal of focusing on travel and residential real estate. Among other deals, it held an initial public offering for its Jackson Hewitt Tax Service Inc. in June. Last month it said it would buy the travel Web site operator Orbitz Inc.
Complicated accounting and volatile earnings from the mortgage business also make it expendable. Mr. Silverman called the business "an anchor on our multiple" that "receives 95% of the attention of investors" while providing just 5% of the parent's earnings.
The spinoff would involve a tax-free distribution of common shares of PHH. Cendant would retain PHH's relocation and fuel card businesses, as well as a settlement services division.
On the call, Ronald L. Nelson, Cendant's chief financial officer, said the two deals that have been announced within the last month do not reflect a return to "aggressive dealmaking."
Paul Keung, an analyst with Canadian Imperial Bank of Commerce's CIBC World Markets, said that whether agents would work as closely with the joint venture as they would with a wholly owned lender remains uncertain, he said, but "I think the intention's clearly there" to make it work.
Chris Gutek, an analyst at Morgan Stanley, wrote in a research note Wednesday that Cendant could bring in roughly $25 million annually from the joint venture, while the new company would have generated $100 million to $125 million of net income this year had it already been spun off.
In July, Cendant said it was close to selling the mortgage operation to an unnamed party. The next month it announced that the talks were off.
Sources have said Cendant came close to a deal with Countrywide Financial Corp. in the first half, but that then discussions stalled, reportedly over the price tag.
Cendant's predecessor, HFS Inc., bought PHH and its mortgage unit in 1997. Shortly before that it had bought out the stake PNC Mortgage Corp. (now part of Washington Mutual Inc.) held in a joint venture with HFS.
Top Spot
Minorities turned more frequently to Countrywide's home loans unit than they did to any other lender last year for mortgages, according to Home Mortgage Disclosure Act data the Calabasas, Calif., company touted Wednesday.
Countrywide said it took part in 440,870 mortgages worth $74.7 billion granted to African-American, Hispanic, Asian/Pacific Islander or American Indian/Alaskan Native homeowners. The number of loans to minorities rose 65.5% from 2002, it said.
Countrywide said its increased outreach to "emerging markets" includes stepped-up hiring of bilingual and multicultural employees, more marketing and advertising in ethnic communities, educational initiatives with community and church groups, and new products.
It said it provided 12.6% of all home loans for Hispanics, 9.6% for African-Americans, 13.7% for Asians, and 27.3% for American Indians last year.
Coming and Going
The Federal Housing Administration has sold 37 first-, second- and third-lien multifamily and health-care mortgages, its second sale of such loans this fiscal year, and third loan sale in six months.
The FHA has also committed to insure its second-largest loan ever. The $401 million construction loan for the Medical University of South Carolina in Charleston will finance a four-story diagnostic and treatment center, a cardiology center, and a seven-story patient tower.
