MOUNT LAUREL, N.J. (
is a company that is misunderstood by the market, according to its CEO Jerome 'Jerry' Selitto.
"Anytime you operate in the mortgage space you're a misunderstood company," Selitto said Monday in an interview with
Selitto, a former executive at Ellie Mae and co-founder of Amerin Guaranty (the predecessor to mortgage insurer
), is hoping that the mortgage outsourcer and fleet management company can move forward from its troubled past. Seliito came on board slightly more than a year ago.
On the one hand, PHH is the only independent nonbank entity operating in the mortgage space that survived the financial crisis, he says. That is primarily due to limited credit risk (it does not portfolio any loans) and tight underwriting guidelines, even during the heady days of mortgage froth.
That being said, the company is not without its troubles.
"This company has been through some real trials and tribulations," Selitto said during a Nov. 30 presentation to investors. "I stepped into the company last year and quite frankly this was a turnaround operation. There are a lot of reasons for the problems the company had."
Selitto continued: "The company did not participate in the high-margin, high-risk mortgage origination
business. As a result of that margins were really compressed. The company should have done a better job of reducing expenses -- it didn't. Those are the facts. But I have to tell you this company in 2010 is a very different company than when I stepped in 2009."
PHH is comprised of two businesses - its mortgage outsourcing platform, PHH Mortgage, and its fleet management services business, PHH Arval.
PHH Mortgage provides mortgage services to financial institutions, real estate brokers, affinity groups, credit unions and corporations, according to its website. PHH was originally a subset of Cendant Corp., which spun out the business in 2005.
Clients include traditional banks like
First Horizon National
, banks that have decided that the risk/reward proportion for originating mortgages in-house these days was not worth the effort.
PHH Mortgage's clients also include more traditional brokerages and wealth advisors like
banking clients and Merrill Lynch Wealth Advisors.
While the mortgage platform is the larger contributor to earnings of the two businesses, the steady cash flow obtained from the fleet services justifies the combination of the two, the company says.
But PHH Mortgage is no small peanuts. As of September 30, it was the seventh largest mortgage originator, with 2.9% market share, according to the latest ranking by
Inside Mortgage Finance
. It is also the eighth largest mortgage servicer, according to the company.
The company is basically competing with the largest banks like
Bank of America
on the origination front.
But unlike its gorilla size competitors, Guy Cecala, CEO and publisher of
Inside Mortgage Finance
, said in an e-mail last week that PHH was the only top 10 lender to post an increase in mortgage originations on a year-over-year basis, up 5.9% vs. a decline of 24.9% for overall originations.
This year, PHH was focused on reducing costs and improving productivity, Selitto said during the interview.
One of the first things that Selitto implemented this year was a cost savings initiative, which is currently on target to achieve the $100 million in annualized savings.
The company is also on track to see mortgage production volume up 20% from a year earlier.
"We are well positioned for 2011," Selitto said during the presentation.
The firm has "just started to tap the potential" with some of its larger private label clients as well as through the network of realtors it currently works with, to increase market share, he said.
Next year, "the focus is going to be on building a low-cost, flexible, more importantly, scalable business," Selitto added during the interview. "Scalable means taking those improvements in processes and automating as much as possible" on the mortgage side.
PHH apparently now has more solid funding, a renewed focus on increasing penetration both with new and existing mortgage clients and on the fleet side of the business -- building out its consultative services list to increase shareholder returns.
Where PHH does have potential risk is with reps and warranties as well as some credit risk through its reinsurance subsidiary. Still Selitto says, the reps and warranties issue is "controllable risk."
"We're either underwriting strictly to guidelines of our investors or we're not," he said during last week's presentation. "That's something we take very seriously and we do an excellent job as evidenced by our low delinquency and our success at defending repurchases."
A major priority for Selitto and the company is to educate investors on how PHH makes money. PHH still somewhat flies under the radar screen for most investors. It's three-month average daily trading volume is less than one million shares. And just two equity analysts cover the stock.
While the company has been gaining market share in its mortgage origination business, PHH still posted a loss during its latest quarterly earnings. The loss was attributed to unfavorable market changes in the value of mortgage servicing rights at quarter end, but investors didn't respond well. PHH's so-called core earnings, on the other hand, were profitable.
"The company has always not been run for equity holders, but debt holders," says FBR Capital Markets analyst Paul Miller. "It was spun out of a company that probably senior management didn't really care a lot about equity holders."
Miller, who has a buy rating on PHH, says that until recently, the company never really had a clear message on how it would obtain sustainable profitability and provide shareholder returns.
"It's a very under-covered, misunderstood company," he says. "I still think the company has a ways to go to clarify its message but it's getting there."
But Miller is of the camp that investors should pay more attention to the firm.
While earnings are still volatile, "the new management is taking the correct steps," Miller says.
Keefe Bruyette & Woods analyst Bose George has an outperform rating on the firm, which he attributes to the roughly 30% discount the stock is trading at vs. its book value. He too is optimistic that new management will ultimately improve the company's returns.
"If you can run the business well, get to reasonable profitability, there is no reason it shouldn't trade at book value," George says.
"A big thing for them is they've got a couple of years of earnings
growth just from getting their costs under control," he adds. "And at some point when things recover broadly, they will recover."
Both analysts are predicting the company to post a profit in 2011.
-- Written by Laurie Kulikowski in New York.
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