Mortgage Production
Our Mortgage Production segment provides private label mortgage services to financial
institutions and real estate brokers. We generate revenue through fee-based mortgage
loan origination services and the origination and sale of mortgage loans into
the secondary market. PHH Mortgage generally sells all saleable mortgage loans
that it originates to secondary market investors, which include a variety of institutional
investors, and initially retains the servicing rights on mortgage loans sold.
The mortgage loans are typically sold within 30 days of origination and classified
as held for sale until sold.
We source mortgage loans through our retail and wholesale/correspondent platforms.
Within our retail platform, we operate through two principal business channels:
(i) private label and (ii) real estate. A summary of these platforms and channels
follows, with the percentage of our loan closings that each represents:
Retail - Private Label: We offer complete mortgage outsourcing solutions to wealth
management firms, regional banks and community banks, including Merrill Lynch
Home Loans, a division of Bank of America, National Association, Morgan Stanley
Private Bank, N.A. and HSBC Bank USA, of our total mortgage loan originations.
All loans originated in this channel are originated and funded in the private
label clients' names. Fee-based loans originated in this channel are retained
by the private label client, whereas saleable loans originated in this channel
are purchased by PHH Mortgage and subsequently sold into the secondary market.
We principally generate revenue in this channel through the receipt of origination
assistance fees from our private label clients, earned as a stated amount per
loan for all fee-based and saleable loans, as well as the gain on loans sold
into the secondary market for saleable loans, earned as a percentage of the
unpaid principal balance sold. During 2015, we completed our contract negotiations
and executed revised agreements with our private label clients.
Saleable loans are originated in this channel through PHH Home Loans, PHH Mortgage
or their affiliates. PHH Home Loans sells its loan originations to third parties
or to PHH Mortgage, and PHH Mortgage sells loans to, or pursuant to programs
sponsored by, Fannie Mae, Freddie Mac and Ginnie Mae, or sells loans to private
investors. We principally generate revenue from the receipt of origination and
application fees, earned on a per loan basis, as well as the gain on sale of
loans sold into the secondary market, earned as a percentage of the unpaid principal
balance of loans sold.
Wholesale/Correspondent: We purchase closed mortgage loans from community banks,
credit unions, mortgage brokers and mortgage bankers, and also acquire mortgage
loans from mortgage brokers that receive applications from and qualify the borrowers.
We principally generate revenue from the receipt of underwriting fees from
correspondents earned on a per-unit loan basis as well as the gain on sale of
loans sold into the secondary market, earned as a percentage of the unpaid principal
balance of loans sold. The gain on the sale of loans in this channel is reduced
for the loan premium paid to acquire the loan from correspondents.
Realogy Relationship
The Mortgage Production segment includes PHH Home Loans, LLC (together with
its subsidiaries, “PHH Home Loans”), which is a joint venture that
we maintain with Realogy Corporation. We own 50.1% of PHH Home Loans through
our subsidiaries and Realogy owns the remaining 49.9% through their affiliates.
We have the right to use the Century 21, Coldwell Banker, ERA and Sotheby’s
brand names in marketing our mortgage loan products through PHH Home Loans and
other arrangements that we have with Realogy.
PHH Home Loans originates and sells loans primarily sourced through real estate
brokers associated with NRT Incorporated, Realogy’s owned real estate
brokerage business. NRT Incorporated is the largest owner and operator of residential
real estate brokerages in the U.S. and Realogy is a franchisor of some of the
most recognizable residential real estate brands. In this channel, we also work
with Cartus Corporation, Realogy’s relocation business, to provide mortgage
loans to employees of Cartus’ clients. Cartus is an industry leader of
outsourced corporate relocation services.
Mortgage Servicing
Our Mortgage Servicing segment services mortgage loans originated by PHH Mortgage
and acts as a subservicer for certain clients that own the underlying servicing
rights. We service loans on behalf of the owners of the underlying mortgage,
and we have limited exposure to credit risk because we do not hold loans for
investment purposes. We principally generate revenue in our Mortgage Servicing
segment through contractual fees earned from our servicing rights, which are
a stated percentage of the unpaid principal balance of current, performing loans,
or from our subservicing agreements, which are typically a stated fee per loan
that varies based on the delinquency status. In circumstances where we own the
right to service a mortgage loan, we recognize a mortgage servicing right asset;
whereas we do not recognize an asset associated with our subservicing agreements.
Accordingly, subservicing agreements are less capital intensive.
Costs to service both performing and delinquent loans have significantly increased
over the past five years, which has negatively impacted the results of our Mortgage
Servicing segment. Evolving regulatory changes have increased the cost of compliance;
however, there has been no increase in the compensation structure for owners
of mortgage servicing rights. While we are monitoring various proposals for
servicing compensation reform over the longer term, in the near term we have
focused on proactively managing the composition of our servicing portfolio and
the underlying expense drivers to improve profitability. While we continue to
pursue a long-term strategy of being a more capital light, fee-based business,
in the near term we may take actions to proactively rebalance our capitalized
portfolio composition to reduce delinquent servicing expenses and improve scale.
Such actions may include evaluating the need to sell, retain or acquire servicing
rights with specific characteristics. We expect that costs to service may continue
to exceed revenue from the capitalized portfolio in the short-term. Further,
absent compensation reform, improvements in our costs to service, execution
of our strategies to achieve scale, and depending on the actual progression
of future interest rates compared to current projections, there can be no assurances
whether the mortgage servicing right asset will yield its modeled value over
the long term.