PHH Corp. (PHH) reported a net loss from continuing operations of $191 million, or $3.47 per basic share, in 2014. It was a sharp reversal from PHH’s performance in 2013, when the company reported a net income of $69 million from continuing operations.
In the fourth quarter, PHH reported a net loss attributable to PHH Corp. of $33 million or $0.66 per basic share. Additionally, PHH reported a net loss from continuing operations attributable to PHH Corp. of $32 million or $0.62 per basic share in the fourth quarter.
The net loss from continuing operations was due, in part, to a “$12 million pre-tax unfavorable market-related fair value adjustment to our mortgage servicing rights,” the company said.
For the year, PHH reported a net income attributable to PHH Corp. was $81 million or $1.47 per basic share.
“In 2014, we took an important step forward with the sale of our fleet business, which provided us with the financial flexibility to return significant capital to our shareholders, lower our unsecured debt level to our target range, and reinvest in the future success of our mortgage business,” PHH President and CEO Glen Messina said.
“I am excited about 2015 and beyond for PHH,” Messina continued. “We intend to operate more efficiently, maintain our focus on quality, compliance and customer service, as well as diversify and expand our revenue opportunities.”
PHH elected to sell its fleet management business to Element Financial Corporation in June for approximately $1.4 billion in cash.
The sale brought months of speculation to an end. In October 2013, it was first reported that PHH was considering a split of its fleet management and mortgage operations.
When the company released its 2013 year-end earnings report in February 2014, the murmurs of a split continued after the company reported that its mortgage applications declined by 18% in the fourth quarter.
"After carefully evaluating strategic alternatives, the board and management team believe this transaction best positions our fleet and mortgage businesses to capitalize on their distinct strategic opportunities while maximizing value for our shareholders,” Messina said when the deal was completed.
“We are pleased to have reached an agreement with Element, which has a strong commitment to the fleet management industry and to delivering the outstanding customer service PHH Arval (the company’s fleet business) customers have come to expect."
Despite those changes and the injection of cash, the company still suffered through a tough year.
According to PHH’s earnings release, the company had losses in its mortgage production division. PHH’s mortgage production segment loss in the fourth quarter of 2014 was $26 million, compared to a segment loss of $28 million in the third quarter of 2014 and a segment loss of $45 million in the fourth quarter of 2013.
The $2 million improvement in segment loss during the fourth quarter of 2014 compared to the third quarter of 2014 was primarily due to declines in total expenses that were partially offset by declines in mortgage fees and gain on mortgage loans, PHH said. The reduced segment loss in the fourth quarter of 2014 compared to the fourth quarter of 2013 was due to reductions in salaries and related expenses and other operating expenses.
PHH’s mortgage closings were down, too. According to PHH, its total fourth-quarter mortgage closings were $9.4 billion, down 5% from the third quarter of 2014 and down 1% from the fourth quarter of 2013.
Retail closings also decreased 5% from the third quarter of 2014 but increased 1% compared to the fourth quarter of 2013. Fee-based closings as a percentage of total closings continued to trend higher in the fourth quarter of 2014, increasing to 68%. This was up from 65% of total closings in the third quarter of 2014 and 61% of total closings in the fourth quarter of 2013.
The high percentage of fee-based closings continues to adversely affect the profitability of the company’s mortgage production segment, as the revenue per loan on fee-based closings is generally lower than the revenue per loan on saleable closings.
The company reported a loss in its mortgage servicing segment as well. PHH reported a loss of $13 million in its mortgage servicing segment in the fourth quarter. The figures were up sharply from the third quarter, when the company reported a loss of $71 million, but down drastically from 2013’s fourth quarter, when the company reported a profit of $85 million from mortgage servicing.
The fourth quarter of 2014 segment loss included a $68 million unfavorable market-related fair value adjustment to our mortgage servicing rights, as mortgage rates declined during the quarter, partially offset by a $56 million net derivative gain related to MSRs, the company said.
This compares to a $40 million unfavorable market-related fair value adjustment to the company’s MSRs in the third quarter of 2014 and a $50 million favorable market-related fair value adjustment to its MSRs partially offset by a $2 million net derivative loss related to MSRs in the fourth quarter of 2013.
“We are pleased that we are at or near the end of contract negotiations and have achieved our target objectives with clients representing approximately 50% of our 2014 total PLS closing volume,” Messina said.
“For our remaining PLS clients, we have extended our negotiations to address their unique program requirements and potentially expand the scope of services to be provided,” Messina added.
“In addition, we remain on track on our re-engineering and growth initiatives,” Messina concluded. “I want to recognize and thank the PHH Board of Directors and my colleagues at PHH for their continued hard work and enduring commitment, and we believe these efforts put PHH in a strong position to continue to deliver value for our shareholders.”
