Being on the block for much of last year complicated PHH Mortgage's efforts to sign up outsourcing clients.
The lender, then called Cendant Mortgage, added no sizable private-label accounts last year, though it did lose one: FleetBoston Financial Corp., which merged with Bank of America Corp.
Another problem was that mortgage rates didn't rise as quickly as expected, and instead bounced around where they started the year. That was an issue for PHH because interest in outsourcing tends to increase during a downturn, and although industry volumes did fall by 25%, some had predicted a much steeper decline. Nevertheless, other outsourcers reported more success bringing in new customers.
Now that Cendant Corp. has spun PHH off (along with a vehicle fleet management business), the renamed lender sees 2005 as a transition year. It anticipates adding some small accounts - it added a handful last year - and making headway in discussions that will lead to bigger ones, with the help of a market in flux.
"There will be a lot of people who will wake up and say, 'We can't be in this business anymore,' " said Terence W. Edwards, the president and chief executive of PHH Corp., the new holding company for the mortgage and fleet businesses.
"Refis are still 30% to 40% of the action out there," he added. "That's not going to last forever."
While few homeowners may recognize the names Cendant or PHH, the lender is a top-10 retail originator. It fulfills mortgage requests from behind the scenes for customers of better-known financial companies, including American Express Co., Merrill Lynch & Co., Charles Schwab Corp., PNC Financial Services Group Inc., and American International Group Inc.
In a recent interview at PHH Mortgage's Mount Laurel, N.J., headquarters, Mr. Edwards and other executives talked about life after the Jan. 31 spinoff; landing business in a refi slump; and why it has not jumped on the bandwagon of making so-called option adjustable-rate mortgages.
Realty Revisions
PHH has long been the lender that makes home loans in connection with the big real estate brokerage brands run by its former parent: Coldwell Banker, ERA, and Century 21.
Executives say no noticeable changes have occurred in its relationship with Cendant's realty businesses, which include franchisees as well as company-owned stores and accounted for 41% of the lender's originations last year.
Joseph E. Suter, PHH Mortgage's president and chief executive, said that at recent conventions of the three Cendant realty brands PHH works with, "We told the same story to each one: It's business as usual."
There's one background change, however: Lending is now done through a joint venture with Cendant that gives each side a near-even split of its bottom line. (PHH owns 50.01%. The venture also provides loans for customers of Cendant's relocation business.)
The setup eliminates Cendant's exposure to the often volatile servicing side of the business (which was a big part of its motivation for the split) while enabling it to still benefit from realty agents' important role in driving loan decisions.
Another adjustment: PHH's title and settlement service provider, Cendant Settlement Services Group LLC, is now a vendor, not a sister company (aside from the appraisal business, which became part of PHH).
PHH has also begun a transition that will leave mostly only employees originating loans with Cendant businesses in Mount Laurel. Most employees who focus on the private-label relationships will be in the Jacksonville, Fla., office. In New Providence, R.I., back-office work is done for clients with loan officers.
Corporate Culture
PHH originated about $53 billion of mortgages last year, meaning it touched about one out of every 50 new mortgage dollars. (Its volume dropped by about a third from 2003.) Because of its private-label emphasis, however, making a name for itself among consumers has never been a goal for the lender.
Despite the lack of retail name recognition, Mr. Suter said, PHH has a known track record in outsourcing. Its hope is that when prospective clients "find an overwhelming share of the market on our book of business," they will trust it with their brands, too.
Last month Mr. Edwards ceded responsibility for the unit to Mr. Suter, who has been with the outfit for more than 20 years.
Other clients that use PHH to offer mortgages include Mellon Financial Corp., Independence Community Bank Corp., and Northern Trust Corp. The mortgage unit has about 6,000 employees, or about 80% of PHH's total.
The lender's mission statement asks employees to "promise" to treat customers as "family," and the company courts a family atmosphere internally as well.
Much of the art on the walls at the Mount Laurel office consists of blown-up photos of employees and their relatives. PHH seeks to staff up with employee referrals before other means, with 50% of its workers coming from them. Only three executives have private offices; the rest work in cubicles.
For its clients, PHH Mortgage feels a need to offer a broad product menu, and it now has more than 100 offerings. That PHH has not been making option ARMs is perhaps surprising, considering its focus on serving the customers of realty agents and several financial brands linked with more sophisticated borrowers.
In many hot real estate markets, consumers buying homes have been increasingly turning to these loans, which offer lower minimum monthly payments to combat higher home values and can create negative amortization. But PHH executives said they do not view them as consumer-friendly.
"Our acid test is, 'Would we sell this to a family member?' " Mr. Suter said.
"And neg-am loans don't pass that test," Mr. Edwards finished. The loans "might be helping others for the short term," he added, "but in the long term we don't think it's the place to be."
Mr. Suter said that PHH, by having most of its realty business done under the agents' own brands, faces less pressure from the agents.
"Our real estate partners seem to understand so far that it's not good to put a customer in the wrong loan," he said.
Mr. Edwards said PHH might one day offer the loans, but only if it can find a way to feel comfortable that borrowers taking them could afford to "gamble" somewhat.
On the other hand, the executives said, PHH has embraced interest-only loans, and for a mortgage bank without a portfolio, it has always done a disproportionate share of ARMs. Interest-only loans accounted for 14% of 2004 originations. PHH sells loans to a dozen or so active whole-loan buyers and also does its own securitizations.
Roelof Slump, a senior director of residential mortgage-backed securities at Fitch Ratings, said the lender's pool performance is enhanced by its servicing, which the agency gives its highest ratings for prime and Alt-A loans.
Because of what they call their loans' higher quality, the PHH executives said they been able take part in pilot programs offered by Fannie Mae and Freddie Mac, and earn trust from other investors.
One factor they said contributes to quality is the compensation structure for PHH's call-center originators, who accounted for about 60% of its volume last year. (Sales agents are generally devoted to a single brand, though one might serve a few smaller clients of similar nature.)
The phone consultants receive small commissions per unit, when a potential borrower enters a pipeline and when the loan closes. Pay is not tied to a loan's rate or size or product type.
In addition, sales reps "don't help process the loan" and "they don't select the appraiser. They don't do a lot of things that a traditional loan broker in the outside world would do," Mr. Suter said. "That has a positive influence on the ultimate quality of the loan."
However, PHH has not been immune from operational missteps, including a quality-control citation involving Federal Housing Administration loans in the early stages of the recent refi boom. According to a Department of Housing and Urban Development audit, PHH submitted more than 1,000 loans for insurance even though the borrowers had missed payments. It indemnified FHA for losses on them.
There was another regulatory incident last year when Sunbelt Lending Services Inc., a Clearwater, Fla., unit, settled Federal Trade Commission charges that it failed to protect personal customer data.
The Competition
PHH is not the only company poised to benefit from the shifting market, and other outsourcers report already seeing the fruits of it.
"We see the interest in moving forward … to be very strong," said Helen Garrity, an executive vice president of Nexstar Financial Corp., a St. Louis mortgage outsourcer with about 25 clients, including Thornburg Mortgage Inc., A.G. Edwards & Sons Inc., and Morgan Stanley.
Indeed, over the past year "we have signed a number of new clients, some of which are quite large" and many of which had existing mortgage operations, she added. Partially due to the increase, Nexstar expects its transaction volume to double this year, to 50,000 loans. (It does not provide origination figures on a dollar basis.)
And though lower volume means new opportunities for PHH, it can also pique other lenders' interest in offering such services to correspondents, Mr. Suter said. Outsourcing "tends to get more competitive when the low-hanging fruit like refis stops being around in such plentiful supply."
PHH Mortgage has one advantage in wooing clients. Unlike Countrywide Financial Corp., a growing force in the niche, and other providers like ABN Amro Holding NV, it doesn't aspire to its own retail presence and has no other products to cross-sell, nor a bank subsidiary to gather deposits.
That advantage was said to have made PHH a tough sell to financial institutions when Cendant was shopping it around. After all, would its clients have remained if the outsourcer suddenly became their competitor? (Countrywide was rumored to have come close to buying the unit.)
PHH might one day seek a bank charter, executives said, but it has no plans to do so and would only want to use the bank to hold escrow deposits.
The executives also said PHH can expand its roughly $150 billion servicing book as needed. Part of what it offers is private-label servicing to protect clients' customers from being poached by cross-selling from another servicer.
