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Jerome J. Selitto, the newly installed chief executive at PHH Corp., has far-reaching plans to resuscitate the mortgage outsourcer, starting with its funding sources and cost structure.
October 28
In his first major initiative since taking the helm at PHH Corp., Jerome Selitto laid out his strategy for transforming the company, the financial services industry's behind-the-scenes mortgage machine.
On a conference call Tuesday, Selitto, who became chief executive in October, said he plans to slash expenses by $100 million to $120 million annually. The effort will include combining back offices and upgrading technology.
Companies in a broad swath of industries have taken a knife to expenses during the downturn. But PHH's move is significant because mortgage lenders have long been notoriously slow to automate processes, and because the company's management overhaul was triggered by its out-of-control costs.
Selitto came to PHH "with a mandate from the board to turn this underperforming company into a high performer," said Steve DeLaney, a managing director and mortgage finance research analyst at JMP Securities. "He's sending the message that he's cleaning up, and that he's going to do whatever it takes to make the company profitable."
PHH's mortgage business originates home loans behind the scenes for a range of financial services companies, including Charles Schwab Corp., Comerica Inc., Northern Trust Corp., Allstate Corp. and UBS AG.
PHH was the eighth-largest originator in the third quarter of 2009, with $9 billion of production, according to National Mortgage News. It was the ninth-largest servicer on Sept. 30, with $149 billion of loans.
The Mount Laurel, N.J., company also owns a business that leases fleets of cars to a variety of companies for assorted purposes. (PHH was spun off from the conglomerate Cendant Corp. in 2005.)
Until now, the mortgage and fleet management businesses have been run separately, but Selitto said he will combine their back-office support functions. He also plans to consolidate data centers across the company. All told, the plans should boost pretax earnings by about $40 million this year and $100 million the next year, PHH said.
In the mortgage business, PHH is targeting $40 million in cost cuts. Part of those savings will involve upgrading collections and loan modification technology.
PHH also plans to reduce the layers of employees who deal with each loan applicant, for example by having a single underwriter handle each loan from start to finish.
"The mortgage industry has been described as having two players: the borrower and the investor," Selitto said on the conference call. "And the processes that stand between them are sources of friction. Our job is to reduce that friction."
The CEO stressed that the cost savings won't come just from reducing staff.
"This really isn't about just cutting heads," he said. "It's about improving efficiencies. And the key here is to build up a more flexible and scalable operating platform so we can be more responsive to changes in market conditions." Selitto also said he would consider relocating the company's headquarters to a cheaper location, or moving more work offshore.
Expenses at PHH totaled $1.75 billion through the first nine months of 2009. Revenue was $1.9 billion for the period. Net income was $56 million, versus a loss of $38 million during the year-earlier period.
Terry Wakefield, the president of Wakefield Co., a Grafton, Wis., consulting firm that focuses on the residential mortgage industry, said PHH's focus on upgrading technology puts it on the right path.
"Anything they're doing to increase their operational agility … moves in absolutely the right direction," he said. "The infrastructure that supports mortgage lending is very antiquated."
In June, activist shareholder Pennant Capital Management LLC successfully ousted the company's chairman, Alvin B. Krongard, and CEO Terence W. Edwards from the board.
In their place, Pennant's nominees Gregory J. Parseghian (a former CEO of Freddie Mac) and Allan Z. Loren were elected as board members. James O. Egan, who was already a director, became the chairman.
Pennant, which owns about 10% of PHH, had criticized it for being too slow to reduce mortgage production costs during the housing downturn and spending too much to please its private-label customers.
After being stripped of his board position, Edwards stepped down as president and CEO later that month. (He has since taken a key servicing job at Fannie Mae.)
Announcing the initiative ahead of the company's fourth-quarter results later this month was a way for Selitto to establish his management style, DeLaney said.
"Rather than getting tied up in all the noise of an earnings call, this was an opportunity for him to give a message of how he's approaching restructuring the company," he said.
DeLaney pointed out that the company titled the presentation "Transforming PHH."
"It's pretty much a complete rebuild of the company strategically, or a re-evaluation of everything the company does," the analyst said.
Like other lenders, PHH has tackled mounting losses from bad loans, and it has reported losses in five of the past 11 quarters.
A surge of refinancings spurred by low interest rates and other federal initiatives helped give the mortgage production unit its first profit in nearly three years during last year's first quarter. But with refinancings tapering off and mortgage origination volumes falling, the business must continue to adapt.
Since arriving at PHH, Selitto has also appointed a number of people he previously worked with to crucial management roles, and said additional executive announcements could be made in the future.
On Monday, PHH said Jeff Bell had been named chief information officer. As a former executive vice president at Countrywide Financial Corp.'s consumer markets division, he helped combine Countrywide's technology platform with that of Bank of America Corp. after the Charlotte company bought the mortgage originator.
Bell also held a senior management role at DeepGreen Bank, an online bank and home equity lender that Selitto started in 2000.
Selitto also recruited Michael Dirrane, who helped him establish Amerin Corp., a mortgage insurer that merged with CMAC Investment Corp. in 1999 to become Radian Group Inc. Selitto served as Amerin's vice chairman.
Dirrane, who most recently served as a vice president of marketing at Fannie Mae, was hired as PHH's executive vice president of mortgage sales in January.
His hiring was "a direct response of trying to better penetrate some of our existing clients, and to build market share in the mortgage arena," Selitto said during the conference call.
