PHH Corporation Announces Third Quarter 2009 Results

PHH Corporation (NYSE: PHH) today announced results for the three and nine months ended September 30, 2009.

Consolidated Results

Third Quarter – 2009

• Net revenues for the third quarter of 2009 were $507 million compared to Net revenues of $533 million for the third quarter of 2008.
• Loss before income taxes was $(80) million for the third quarter of 2009, compared to $(141) million for the third quarter of 2008. Net loss attributable to PHH Corporation for the third quarter of 2009 was $(52) million compared to $(84) million for the third quarter of 2008.
• Both Basic and fully diluted loss per share attributable to PHH Corporation were $(0.94) for the third quarter of 2009 compared to $(1.56) for the third quarter of 2008.
• The improved third quarter 2009 results as compared to the same period last year were primarily a reflection of higher margins on mortgage loans, higher volumes of more profitable first mortgage retail originations and interest rate lock commitments (“IRLCs”) expected to close and more favorable economic hedge results associated with our IRLCs and mortgage loans held for sale (“MLHS”), combined with cost efficiency efforts by both of our businesses. These improvements combined to dampen the impact of a higher negative change in the value of mortgage servicing rights (“MSRs”) due to market-related valuation adjustments, prepayments and portfolio decay, as well as lower earnings from mortgage escrow balances. The third quarter 2008 results included a $61 million impairment of PHH Home Loans’ Goodwill.

Consolidated Results

Nine Months – 2009

• Net revenues for the nine months ended September 30, 2009 were $1.9 billion compared to Net revenues of $1.8 billion for the nine months ended September 30, 2008. During the nine months ended September 30, 2008, Net revenues included a $30 million benefit of adopting fair value accounting pronouncements and the receipt of a reverse termination fee from Blackstone Capital Partners V L.P. (“Blackstone”) of $50 million.
• Income (loss) before income taxes was $111 million for the nine months ended September 30, 2009, compared to $(65) million for the nine months ended September 30, 2008. Loss before income taxes for the nine months ended September 30, 2008 included a $30 million benefit of adopting fair value accounting pronouncements and the receipt of a reverse termination fee from Blackstone, net of terminated merger related expenses, of $42 million that were partially offset by a $61 million Goodwill impairment related to PHH Home Loans.
• Net income (loss) attributable to PHH Corporation for the nine months ended September 30, 2009 was $56 million compared to $(38) million for the nine months ended September 30, 2008.
• Basic and fully diluted earnings per share attributable to PHH Corporation was $1.03 and $1.02, respectively, for the nine months ended September 30, 2009 compared to both basic and fully diluted loss per share attributable to PHH Corporation of $(0.70) for the nine months ended September 30, 2008.
• The improved year-to-date 2009 results as compared to the same period last year were primarily a reflection of higher margins on and volumes of mortgage loans and higher volumes of more profitable first mortgage retail originations and IRLCs expected to close, more favorable economic hedge results associated with our IRLCs and MLHS and a favorable MSR market-related valuation adjustment. Additionally, efforts by the Fleet Management Services segment to improve leasing margins and cost efficiency efforts by both of our businesses favorably impacted results. All of these combined to more than offset a higher negative change in the value of MSRs due to prepayments and portfolio decay, lower earnings on mortgage escrow balances and the impact of volume declines in our Fleet Management Services segment. The comparable prior year period results included the impact of the receipt of a reverse termination fee from Blackstone and the benefit of adopting fair value accounting pronouncements, which were partially offset by the impairment of PHH Home Loans’ Goodwill.

Management Comments and Outlook

Jerry Selitto, PHH’s new president and chief executive officer, stated, “PHH delivered solid operating performance across our mortgage and fleet businesses during the third quarter, though those improved results were more than offset by the valuation adjustments on MSRs. PHH has been making steady progress in recent quarters, including the signing of a major new private-label account with $1.5B in annualized potential origination volume, but we are not satisfied with our financial performance – and we need to move quickly and aggressively to make PHH as competitive as possible for the long term, while staying true to our core, client-focused values.

“The Board and the management team have taken a fresh look at every aspect of PHH’s business over the past three months. That review process has made clear that the markets in which we operate are experiencing profound change. It also has made clear that we have substantial opportunities to build value for our shareholders, our clients and our employees by fundamentally changing the way we do business. This will include capturing new revenue opportunities, further enhancing the client experience, and driving efficiencies and improved processes across every level of our business. This will be an ambitious effort, but I am confident there are significant opportunities to make PHH an even stronger, more competitive, and more client-focused company, now and over the long-term.”

Sandra Bell, executive vice president and chief financial officer, stated, “Our Mortgage Production segment posted its third consecutive quarterly profit, driven by healthy margins and solid volumes across the business, as well as continued progress in shifting to a more flexible cost structure. However, results in our Mortgage Servicing segment were dampened by the negative impact of MSR valuation adjustments from lower mortgage rates and higher prepayment rates, as well as by continued negative trends in delinquency and foreclosure costs and the impact of very low short-term interest rates on our escrow balances that reduced interest income. We expect higher delinquency rates to continue to impact credit-related charges through the balance of the year and into 2010, which will likely negatively impact our Mortgage Servicing segment.

“Our Fleet Management Services segment delivered solid results again this quarter, as we made continued progress in bringing lease pricing in line with market rates and reducing costs, while also benefitting from improvements in funding costs. Given the solid performance we have achieved year-to-date, we expect to deliver even stronger full-year Fleet Management Services segment profit than we previously anticipated.

Under Jerry’s leadership, we look forward to driving change across both businesses, seizing new revenue opportunities, driving further innovation for our clients, and building a more competitive cost structure.

“We have also been taking important steps this year to broaden and strengthen our funding, making additional progress during the third quarter – as we raised nearly $1.2 billion in funding. While we have a strong capital and funding position right now, we are going to be opportunistic in continuing to diversify our financing structure.”

Segment Results – Third Quarter 2009

Mortgage Production Segment

• Segment profit of $46 million for the Mortgage Production segment was driven primarily by higher margins on mortgage loans, higher volume of IRLCs expected to close and favorable economic hedge results associated with our IRLCs and MLHS. Segment profit includes a $3 million net unfavorable change in the fair value of jumbo and second-lien loans.
• Total originations were $9.0 billion during the third quarter of 2009, which were comprised of $6.6 billion of loans closed to be sold, substantially all of which were conforming, and $2.4 billion of fee-based closings.
• IRLCs expected to close were $5.5 billion for the third quarter of 2009.
• Purchase closings represented 50% of total originations during the third quarter of 2009.

Mortgage Servicing Segment

• Segment loss for the third quarter of 2009 of $(139) million includes a $97 million reduction in the value of MSRs due to prepayments and portfolio decay and an $89 million unfavorable non-cash market-related MSRs valuation adjustment, primarily due to the decrease in mortgage rates during the third quarter of 2009. Segment loss also included $35 million of credit-related charges which was comprised of foreclosure-related charges of $25 million and reinsurance-related charges of $10 million.

Fleet Management Services Segment

• Segment profit of $14 million for the third quarter of 2009 was driven primarily by improved lease margins, resulting from lease re-pricing, and the impact of ongoing cost reduction initiatives.
• The cost reduction initiatives implemented during the fourth quarter of 2008 in anticipation of expected volume declines favorably impacted segment profit for the third quarter of 2009 by $2 million.

Segment Results – Nine Months 2009

Mortgage Production Segment

• Segment profit of $241 million for the Mortgage Production segment was driven primarily by higher margins on mortgage loans, higher volume of IRLCs expected to close and favorable economic hedge results associated with our IRLCs and MLHS. Segment profit includes a $17 million net unfavorable change in the fair value of scratch and dent, second-lien, construction, Alt-A and jumbo loans.
• Total originations were $28.9 billion during the nine months ended September 30, 2009, which were comprised of $22.9 billion of loans closed to be sold, substantially all of which were conforming, and $6.0 billion of fee-based closings.
• IRLCs expected to close were $20.0 billion for the nine months ended September 30, 2009.
• Purchase closings represented 38% of total originations during the nine months ended September 30, 2009.

Mortgage Servicing Segment

• Segment loss for the nine months ended September 30, 2009 of $(171) million includes a $309 million reduction in the value of MSRs due to prepayments and portfolio decay and a $15 million favorable non-cash market-related MSRs valuation adjustment.
• Segment loss also included credit-related charges of $95 million, which were comprised of foreclosure-related charges of $59 million and reinsurance-related charges of $36 million, and a $21 million decline in fair value of Investment securities.

Fleet Management Services Segment

• Segment profit of $39 million for the nine months ended September 30, 2009 was driven primarily by improved lease margins resulting from lease re-pricing and the impact of ongoing cost reduction initiatives.
• Cost reduction initiatives implemented during the fourth quarter of 2008 in anticipation of expected volume declines favorably impacted segment profit for the nine months ended September 30, 2009 by $6 million.

Liquidity

• As of September 30, 2009, we had $501 million of unused available capacity under our unsecured committed credit facilities.
• During the third quarter of 2009, Chesapeake Funding LLC (“Chesapeake”), our wholly owned subsidiary, issued $910 million in asset-backed term notes, and we issued $250 million in 4.0% convertible senior notes due 2014.
• We are actively engaged in evaluating various sources of funding for our Fleet Management Services segment in the U.S. and Canada. Term Asset-Backed Loan Facility (“TALF”) eligibility criteria permit the issuance of up to an additional $1.65 billion of asset-backed securities by Chesapeake.
• As of September 30, 2009, we had mortgage warehouse capacity (including uncommitted facilities) of $4.3 billion, $974 million of which was utilized.
• On October 8, 2009, the Chesapeake Series 2006-1 variable funding notes were paid in full.

Conference Call

The Company will conduct a conference call for investors on Thursday, November 5, 2009 at 10:00 a.m., Eastern Standard Time. Investors will be able to access the third quarter 2009 downloadable slide presentation that will accompany management’s remarks by visiting the Investor Relations page of the Company’s website at www.phh.com prior to the conference call. Investors may also request copies via fax by calling the investor hotline at 1-856-917-7405.

Interested investors can access the conference call by dialing 1-877-219-9989 or 1-706-758-6450, using conference ID 39945724, ten minutes prior to the start time. The conference call will also be broadcast on the Company’s website at www.phh.com. A replay will be available beginning shortly after the conclusion of the live call and ending on November 20, 2009 by dialing 1-800-642-1687 or 1-706-645-9291, using conference ID 39945724, or by logging on to the Company’s website.

About PHH Corporation

Headquartered in Mount Laurel, New Jersey, PHH Corporation is a leading outsource provider of mortgage and vehicle fleet management services. Its subsidiary, PHH Mortgage, is one of the top five retail originators of residential mortgages in the United States1, and its subsidiary, PHH Arval, is a leading fleet management services provider in the United States and Canada. For additional information about the company and its subsidiaries please visit our website at www.phh.com.

1 Inside Mortgage Finance, Copyright 2009

Forward-Looking Statements

Statements in this press release that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You should understand that these statements are not guarantees of performance or results and are preliminary in nature. Statements preceded by, followed by or that otherwise include the words “believes”, “expects”, “anticipates”, “intends”, “projects”, “estimates”, “plans”, “may increase”, “may result”, “will result”, “may fluctuate” and similar expressions or future or conditional verbs such as “will”, “should”, “would”, “may” and “could” are generally forward-looking in nature and not historical facts.

You should consider the areas of risk described under the heading “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in our periodic reports filed with the Securities and Exchange Commission under the Exchange Act and those risk factors included in our Current Report on Form 8-K/A filed with the Securities and Exchange Commission on September 23, 2009 in connection with any forward-looking statements that may be made by us and our businesses generally. Except for our ongoing obligations to disclose material information under the federal securities laws, applicable stock exchange listing standards and unless otherwise required by law, we undertake no obligation to release publicly any updates or revisions to any forward-looking statements or to report the occurrence or non-occurrence of anticipated or unanticipated events.