PHH Corp., best known for originating mortgages behind the scenes for household names like Charles Schwab Corp. [SCHW] and Merrill Lynch [BAC], plans to expand other home lending channels as industrywide volume tanks.
The Mt. Laurel, N.J., company said Monday that this year it is looking to do more business through mortgage brokers, correspondents and its partnership with Realogy Corp., which owns the Century 21 and Coldwell Banker real estate brokerage franchises.
Doing so would enable PHH, a top-10 lender, to maintain revenue at 2009 levels this year and increase its market share by a percentage point, to 3%, despite an expected 32% decline in industrywide originations, to $1.3 trillion, the company said.
Many big lenders have quit or scaled back from the wholesale mortgage market in recent years. This means PHH faces less competition for brokered loans, which have made up a minuscule portion of the company's business. But there are also fewer brokers around, so achieving growth will be a challenge.
"The problem is, brokers are leaving the channel in droves," said David Olson, the president of Access Mortgage Research and Consulting Inc. "We see a big shift going in to retail."
The number of mortgage brokers has dropped 56% from a peak of 148,200 in April 2006, to 65,400 last November, Olson said, citing the Bureau of Labor Statistics. According to National Mortgage News, brokers now account for 13% of all loans funded in the U.S. Three years ago, brokers arranged about one in every three home loans.
Brokers traditionally have specialized in two areas: refinancings, which are considered an unreliable source of volume, dependent on low interest rates, and subprime and other high-risk loan types that led to a wave of losses in the industry and that most lenders have discontinued.
But Jerome Selitto, PHH's president and chief executive, contended in an interview that the broker market is an "opportunity that was too large for us to ignore."
"Looking at price competitiveness and the types of products that were in the channel, we did not feel historically that was our sweet spot," he said. "But that has changed now. A lot of players are out of the market completely. It's not as price competitive as it once was, and the mix of products is different."
Bose George, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said he expects the wholesale business to contribute modestly to PHH's volume in 2010.
"Given their historic conservative stance on credit, I don't see them moving here very aggressively," he said. "It sounds like there are some opportunities given the pullback from some of the bigger players."
Selitto said he continues to see strong demand for PHH's outsourcing services, especially among smaller regional banks and credit unions.
Last year, about 35% of the company's production volume came from Realogy brokers, Selitto said. He would not specify his target for expanding that figure.
PHH, which also has a unit that leases fleets of cars to a variety of companies, said solid results in its mortgage business helped it swing to a profit in the fourth quarter.
Net income attributable to common shareholders totaled $97 million, or $1.74 per share, compared with a loss of $216 million, or $3.98 per share, a year earlier.
Revenue more than tripled, to $744 million.
Amid a broad market rally, PHH's stock jumped 11.6% Monday, to $20.66 a share.
The mortgage business, comprising production and servicing units, made $151 million, after losing $382 million a year earlier. That loss was due primarily to a hefty charge related to a change in valuation of the company's mortgage servicing rights.
Excluding gains and losses from mortgage servicing rights, core earnings in the mortgage business were $80 million.
The mortgage production unit posted its fourth straight quarterly profit, earning $65 million. In the fourth quarter of 2008, the unit broke even.
Delinquencies on the loans the company services as a percentage of unpaid balances rose to 4.68% at Dec. 31, from 4.54% in the previous quarter and 3.67% the year earlier.
Selitto joined PHH in October after a proxy fight led to a shake-up of the board and the departure of CEO Terry Edwards. Last month, Selitto outlined a plan to cut costs this year by $100 million to $120 million through streamlining and consolidations of back-office operations. Fourth-quarter expenses declined 3.5% from a year earlier, to $575 million.
"This is really now largely a story of executing on this plan that they put into place," said KBW's George.