PHH Corporation's CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: PHH Corporation (PHH)

PHH Corporation (NYSE:PHH)

Q3 2011 Earnings Call

November 2, 2011 10:00 AM ET

Executives

Jim Ballan – VP, IR

Jerome Selitto – President and CEO

David Coles – Interim EVP and CFO

Glen Messina – COO

Luke Hayden – EVP, Mortgage

John Erdmann – VP and Controller

Analysts

Bose George – KBW

Paul Miller – FBR

Henry Coffey – Sterne Agee

Phil Dumas – Geode Capital

Operator

Good morning, ladies and gentlemen, welcome to the PHH Corporation Third Quarter 2011 Earnings Conference Call. Your lines will be in a listen-only mode during remarks by PHH management. At the conclusion of the company’s remarks, we will begin the question-and-answer session at which time I will give you instructions on entering the queue to ask your questions. Today’s call is also being webcast and recorded for replay purposes. The audio replay can be accessed either on the company’s website at www.phh.com or by telephone at 719-457-0820 or 888-203-1112 using conference ID 4951297 beginning shortly after the conclusion of the call. It will be available until November 16th, 2011. This access information is also described in the company’s earnings release and I’ll repeat it again at the end of our session.

At this time Jim Ballan, Vice President of Investor Relation will proceed with the introduction.

Jim Ballan

Good morning and welcome to the PHH Corporation’s third quarter 2011 earnings conference call. Please note that statements made during this conference call include forward-looking statements within the meaning of the Private Securities Litigation Form Act of 1995 as further described in slide two of our third quarter 2011 Investor Presentation. Such forward-looking statements represent only our current beliefs regarding future events and are not guarantees of performance or results.

Actual results, performance or achievements may differ materially from those expressed or implied such forward-looking statements due to a variety of factors including but not limited to the factors under the headings cautionary note regarding forward-looking statements and risk factors in our periodic reports filed with the US Securities and Exchange Commission, including our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which are available in the Investors section of our website at www.phh.com and are also available at www.sec.gov. Investors are cautioned not to place undue reliance on such forward-looking statements.

We will also be discussing various non-GAAP financial measures including core earnings pre-tax, core earnings after-tax, core earnings per share, tangible book value and tangible book value per share. Please refer to our earnings release and accompanying Investor Presentation for a description of these non-GAAP financial measures as well as a reconciliation of such measures to their respective most directly comparable GAAP financial measures.

The earnings release we issued yesterday may be accessed from our website or you may request a faxed or mailed copy by calling our investor hotline at 856-917-7405. In addition the Investor Presentation is posted on our website at www.phh.com in the Investors section under Webcast and Presentations.

Speaking on the call today will be Jerry Selitto, President and Chief Executive Officer who will provide a brief discussion of performance in the quarter. He will be followed by David Coles, Interim Chief Financial Officer, who will review our financial results; and Glen Messina, Chief Operating Officer who will provide perspective on the Mortgage and Fleet businesses. Luke Hayden, Executive Vice President of Mortgage and George Kilroy, Executive Vice President of Fleet and other members of the management team are also with us today and will be available to take your questions.

I will now turn the call over to Jerry Selitto.

Jerome Selitto

Thank you, Jim, good morning everyone and thank you for joining our third quarter 2011 earnings call. Before we get started, I’d like to welcome Jim Ballan to PHH as our new Vice President of Investor Relations. Jim joins us after spending more than 20 years on Wall Street as both a sell side research analyst and an investment banker. We’re really pleased to have Jim join us, so welcome, Jim.

The third quarter of 2011 was a great example of a key theme that we’ve been talking about for some time that is our ability to create long-term value even in a highly volatile interest rate environment by taking advantage of the significant runway for profitable growth provided by our business franchise.

There are four things that I want to point out about our Mortgage business this morning. First, we experienced a surge of refinancing in the third quarter and the process improvements that we put in place last year enabled us to handle the spike in volume and continue to provide excellent service to our clients. As I’ve indicated in the past, spikes in volume typically result in wider margins as lenders increase price to handle the surge. Our ability to handle the volume and take advantage of the higher margins enabled us to significantly increase our core earnings results on a sequential basis.

At the same time, we were able to leverage our franchise to grow our origination market share to an estimated 3.9%. We have the capabilities and the resources in place to continue to make progress toward our market share goal. Our focus is to drive profitable growth and create long-term value for our shareholders.

Second, the drop in interest rates had sparked a refi surge was the key driver of our GAAP net loss in the quarter which was due to unrealized losses associated with the valuation mark on our MSR. Our MSR replenishment rate continues to be well in excess of 100% and we believe the lower coupon assets underlying our MSR will produce increased cash flows when interest rates begin to rise. The UPB of our total Mortgage Servicing portfolio stood at $178 billion, a 12% increase over the third quarter 2010. But what I really focus on is the UPB of our capitalized MSR because it is the primary driver of serving cash flow and reflective of the sustainability and growth of our servicing business. The UPB of our capitalized MSR was up 9% over the third quarter, 2010.

Third, for the first time in a few years in the third quarter, we decided to hedge a small portion of our MSR financial instruments. We did this to ensure that in the event that interest rates continue to decline that we would maintain our target cushion relative to our leverage and net worth debt covenants while taking advantage of growth opportunities.

And fourth, we are on track to achieve our 2011 closing volume target of between $50 billion and $55 billion. While our POS channel has exceeded expectations, and our corresponding channel is opportunistic based on margins. Our real estate channel hasn’t produced as expected this year due to a slower recovery of the purchase market.

Our third quarter market share is up nearly a full percentage point on a year-over-year basis and our closing volumes continue to be up in a down market. Our 5% to 5.5% market share goal for 2011 that I stated early in the year, assumed $1 trillion in total industry originations and industry forecast are now higher than that, which could cause our market share to come in under our goal.

In our Fleet segment, we continue to focus on profitable growth in both our leasing business in our fee-for-service business. Management fees increased to $42 million in the quarter compared to $38 million in the same period last year, reflecting an increase in maintenance service, fuel cards and accident management services. The results for the quarter were strong core earnings despite a GAAP net loss.

Overall, with regard to our strategic direction, we are constantly reviewing our investment thesis and at this time we intend to invest our capital in both our Mortgage and Fleet businesses to drive long-term growth and profitability.

With that I’ll turn the call over to David to discuss our financial results.

David Coles

Thank you, Jerry and good morning everyone. On a GAAP basis the net loss attributable to PHH Corporation for the third quarter was $148 million or $2.62 per share. Core earnings after-tax for the third quarter was $64 million and core earnings per share for the third quarter was $1.14. Core earnings after-tax represent GAAP earnings adjusted for unrealized fair value adjustments on our MSR and related hedges which I will discuss in a moment.

Interest rate lock commitments or IRLC is expected to close which are the primary driver of revenues in the Mortgage Production segment were $11.4 billion compared to $14.4 billion in the third quarter of last year but up sequentially from $7.5 billion in the second quarter.

In the Mortgage Servicing segment, we continue to build our capitalized servicing portfolio, which increased to $144 billion in UP this quarter up from $132 billion at the end of the prior year quarter and $142 billion at the end of the second quarter 2011.

As, Jerry mentioned when interest rates decline sharply, we typically experience a spike in refinancing volume and enjoy wider margins. We also utilize more of our liquidity in managing the pipeline of our IRLCs and funding loans on our warehouse lines pending sale. In response to the need to post collateral against our pipeline hedges, our quarter end liquidity position reflects consumption of cash and a drawer of $80 million on our revolver. This working capital need is anticipated to reverse as we convert our pipeline of IRLCs and funded loans to sold loans.

A little more color on our MSR hedge. The use of a financial instrument to hedge is not a change to our overall hedging strategy. We continue to believe that our production, our Mortgage Production business is an affective natural hedge for the MSR, but at times of intense interest rate volatility, we may choose to employ financial instruments to manage our interest rate risk, allowing us to access – allowing us access to the working capital necessary to fund the Mortgage Production business and acquire coupon MSR. The financial hedge resulted in a $1 million gain during the quarter. This gain is excluded from core earnings and is shown in a separate line item in the income statement titled net derivative gain related to Mortgage Servicing rights.

Turning to our Fleet segments, this business also continues to be a key contributor to our consolidated results. Fleet segment profit was $21 million for the quarter up 24% from the third quarter of 2010. Fleet net revenues increased by $35 million in the third quarter 2011 compared to the third quarter 2010 primarily the result of a $31 million increase in truck lease syndication revenue increases in both Fleet management fees and gains on the sale of used vehicles offset by a modest reduction in Fleet lease income due to a decrease in the leased vehicle average unit count. That same increase in truck lease syndication revenue resulted in an increase in the cost of goods sold which increased $30 million over the third quarter 2010.

At the end of the third quarter, our liquidity included $434 million of availability under our committed revolving credit facilities plus $84 million in cash, totaling $580 million. As previously mentioned, our use of cash and revolver during the quarter was expected given the refinancing activity we experienced in the quarter and we anticipate this to reverse as our pipeline of locks and funded loans converts to cash.

Under the terms of the revolver, the quarter end levels of liquidity would be sufficient to extend the maturity of the revolver to February 2013 and assuming such extension, the revolver could be used if necessary to retire the outstanding convertible notes due April 2012.

I’d add that our liquidity also included $1.4 billion of available capacity under committed asset backed arrangements, $2.1 billion of available capacity under uncommitted asset backed debt arrangements and $777 million available under committed off balance sheet Mortgage gestation facilities as of the end of the third quarter. As always, we continue to evaluate the capital markets and other sources of funding to opportunistically extend the maturities of our liability structure.

And now, Glen will provide commentary on the Mortgage and Fleet segments.

Glen Messina

Thanks, David, and good morning everyone. Starting with our Mortgage segment, as Jerry said, we delivered a strong third quarter on an operating basis. We took $23 billion in loan applications and closed $13 billion in loans this quarter, expanding our market share to an estimated 3.9%. Our business mix for the third quarter was almost evenly split between purchase driven and refinancing driven closings.

At the end of the third quarter, our Mortgage pipeline stood at more than $9 billion up $5 billion versus the end of the second quarter. Most of these loans should close in the fourth quarter, but please keep in mind that much of the related earnings were already recognized in the third quarter.

We are pleased with this volume growth especially because our pricing margin also expanded by more than 47 basis points as compared to the second quarter. In addition as Jerry mentioned, the capacity management plans we put in place at the beginning of the year allowed us to take on this volume surge while maintaining high call answer rates and customer satisfaction scores. It’s this operational performance and proactive engagement that makes us a key partner for our clients and helps drive new business.

We also made significant progress in growing our nationwide sourcing footprint over the past two quarters signing five new private label accounts. The new relationships include Barclays which we mentioned on last quarter’s call and today we’re pleased to announce that we’ve added Ameriprise and Morgan Stanley Private Bank along with two other financial institutions all as new PLS partners. For Barclays and the two other firms these are the first Mortgage programs they are offering their customer bases so it will take 6 to 12 months to get them launched and fully ramped up. Ameriprise was a client of ours from 2003 to 2005 and we’re proud to serve them again.

This program has launched and we assumed responsibility for taking all new loan applications in September. Morgan Stanley has had a captive Mortgage effort for more than 20 years and going forward all of their Mortgage business will be supported by PHH. We’ll begin taking conforming loan applications later this month and expect to begin taking jumble applications by January.

Now we mentioned in a recent press release that we were unable to come to mutually acceptable terms on a renewal of our relationship with Charles Schwab Bank, a contract which was originally entered into eight years ago. The Mortgage business has changed dramatically over that time resulting in a necessity for updated terms in the agreement. While both parties negotiated in good faith in the end, we could not reach an agreement.

The contract expires later this month, but there is a six-month transition period thereafter for a part of which we will still originate new loans. We regret that we will not able to come to mutually agreeable terms with our long time partner.

We expect the five new PLS accounts in the aggregate based on their 2011 production and taking into account ramp up time and anticipated launch schedules to produce about 7 billion in closing volume in 2012, about double what we predicted for Schwab. And while we will continue to service the loans from Schwab in our owned servicing portfolio, we expect them to transfer away to sub-servicing of approximately 9 billion of loans, however the earnings contribution from these sub-service loans was insignificant.

I want to point out that on balance from our new PLS accounts we have access to 25,000 net new financial advisors in our sourcing footprint and we’ve already started to gain incremental business from these new relationships. They will be a key vehicle for us to continue to increase our share at the Mortgage originations market. We also believe the current environment is supportive of incremental opportunities for us to continue to add PLS clients and we are in discussions with several more PLS clients both large and small.

Our Mortgage Servicing segment posted solid operating performance this quarter while pay up volume for our MSR owned portfolio was up 37% from the second quarter. The strength of our origination franchise enabled us to have a 167% replenishment rate. The quality of our Mortgage Servicing portfolio also continues to be strong with total delinquency rates excluding foreclosures and real estate owned at 3.24% up just two basis points as compared to the end of the second quarter. Foreclosure related charges were down $4 million for the quarter as compared to the second quarter while our defense rate, the portion of loans put back to us that we successfully defend remained high at 67% through the end of the third quarter. However, we expect these charges and loan in purchase demands to remain at an elevated level for the foreseeable future.

Switching over to Fleet, we continue to improve our returns with the fee based services to increase penetration of our existing accounts and new client signings. Fleet management fees were up $4 million or 11% from the same period last year driven by increases in all of our fee-for-service units including maintenance service cards which is up 13% from the third quarter 2010. In addition our new vehicle orders year-to-date are also up over 2010.

You may recall that our focus of fee-for-service strategy has been to expand our government business and to that end I am pleased to report that in the third quarter we signed a five-year contract with the State of Maryland that includes over 5000 units for maintenance and accident management services. We also signed corporate clients representing 7,000 vehicles in the third quarter. We’re transitioning these vehicles into our portfolio in the fourth quarter and we expect to be fully ramped up by the first quarter of 2012.

We plan to invest further in our heavy duty truck business which continues to have a successful year based on increased demand in that segment of the market. In fact, a leading industry trade publication is projecting double-digit growth for this market segment in both 2012 and 2013. The key measurement for this business is the volume of leases funded which has more than doubled so far this year as compared to last year.

We’re also pleased with the solid margins we earned in the quarter from our vehicle re-marketing activities. Although I’d emphasize that income from these sources can vary from quarter to quarter. Fleet also continues to develop and introduce new technologies to the marketplace. We recently introduced a new Fleet Manager mobile app that will help client access critical information about their vehicles and drivers as well as access our services more efficiently. We intend to continue to invest in technology to enhance the value proposition to our Fleet clients.

Now looking forward after a strong third quarter operating performance, there are some headwinds we’re facing in the fourth quarter. With interest rates increasing since the end of the third quarter, the pace of refinancing loan applications has declined and consequently total pricing margins have narrowed. In addition, our Fleet business we anticipate robust used vehicle re-marketing gains we generated in the third quarter will not recur in the fourth quarter. Even though the fourth quarter environment may not be as favorable as the third quarter, we expect 2011 to be a solid year for PHH

With that I’ll turn it back over to Jerry.

Jerome Selitto

Thanks, Glen. As you know PHH operates a unique business model as a leading business process manager in both the Mortgage and Fleet businesses. These franchises are built upon long-term relationships. Our clients view us as valued partners and look to our expertise to develop and manage end-to-end business process solutions that provide quality service to their customers. We believe we have a significant runway for growth in both businesses and that innovative technology and best practices at each business drive synergistic benefits for the company as a whole. The current interest rate and regulatory environment should bode well for our private label business and our relationship with Realogy should service well when the purchase market regains strength. Our leadership in Fleet especially in the area of innovation also continues to benefit our business.

Thank you for your continued interest in PHH. And with that we’re ready to take questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll go first to Bose George with KBW.

Bose George – KBW

Hi guys good morning. I had a couple of things, first I just wanted to confirm, you’ve guided to closings of $50 billion to $55 billion for the year. And also you’re indicating that the rate lock commitments on gain on sale margins are slightly weaker in the fourth quarter versus the third, is that right?

David Coles

Yes, good morning, Bose. That’s correct, I mean our IRLCs are about $11.4 billion in the quarter versus about $14 billion last year at the same period.

Bose George – KBW

Okay. Great, and then just wanted to switch to the comments you made about Schwab, I was just curious, are there any other negotiations going on with existing clients that could result in either a lost relationship or declining economics is there anything we should look out there?

Jerome Selitto

No, not at this time Bose, and I think as Glen mentioned we negotiated in good faith both sides, it was a contract that was entered into eight years ago, so there were new terms I mean the market has changed dramatically, there are new terms that were introduced and unfortunately we just weren’t able to reach mutual agreement.

Bose George – KBW

Okay, great. And then actually I wanted to switch to rep and warranty just wanted to see if are there any changes you’re seeing in the way the GSE are behaving in terms of putting loans back and also just wanted to ask about the FHA, whether there is any change in the behavior from the FHA?

Jerome Selitto

On the GSEs I think I was quoted in Bloomberg in a recent interview, I mean, the GSEs now where we are seeing that change is that they’re actually looking at more recent production and they’re actually looking at current pace loans. So it’s not just delinquent loans that they’re looking at. So I think as Glen had mentioned, we believe we’re going to see elevated – that repurchase requests are going to remain at elevated levels. On the FHA side, I’ll actually ask Luke about that, are we seeing anything on the FHA side.

Luke Hayden

Nothing significant at this point in time, Bose.

Bose George – KBW

Okay, great. Thank you.

Operator

We’ll go next to Paul Miller with FBR.

Paul Miller – FBR

Yes, thank you very much. Can you talk about the hedging again a little bit? It was a very small hedge, but is this, and you said and mentioned something about purchasing – does that allow you purchase MSRs going forward. I added on the call a little bit late, so I’m just wondering did I miss something or can you address that a little bit in more detail?

Jerome Selitto

Yes, good morning, Paul. Actually, first of all, it wasn’t really a change in our strategy. We still believe that our natural hedge works very effectively, especially this quarter we had a replenishment rate of about 167%. What we do, and I think I had mentioned this in a number of calls when I – I pay attention to GAAP results as it relates to our net worth covenants and our leverage covenants. And so, when we see dramatic increases – decreases in interest rate, demand increases dramatically, margins also increase and so we draw down on our warehouse lines to fund that capacity so warehouse needs actually increase.

So our short-term liquidity needs increase at the same time and that’s occurring at the very same time that our GAAP net worth is declining as a result of the mark in the MSR. So we look at that, we have internally have a targeted cushion over our net worth requirements and our leverage requirements. And so what we look at is a sensitivity, if interest rates continue to decline in the 50 basis points or 100 basis points are we able to maintain that cushion? And so as a result of that we decided to put on a very small hedge just to ensure that we continue to maintain our target cushion to the extent that interest rates continue to decline. Does that answer the question?

Paul Miller – FBR

Yes, it does. So this is not something that it’s – we’re going to see it as a significant part of the business, it’s just something that’s out there that you have to do from time to time to hedge other parts of the balance sheet?

Jerome Selitto

That’s exactly right, it’s really just our prudent management of our capital.

Paul Miller – FBR

And then talking about the MSR valuation itself. I think it’s down to what 80 basis points right now? And most banks out there that have MSRs are down there. I mean, how much lower can you (inaudible) write this down like I mean it’s not a linear relationship but yet again it seems like on the accounting side you have to – you force it to be more of a linear than it really is. I mean let’s say, I’m not saying out if rates dropped another 50, 75 basis points out there, I mean would the economics of this thing really drop by half on the MSR? Would you have to write it down to like 50 or is it 70 just about as low as you can get it?

Jerome Selitto

Yes. Let me first of all it’s like 83 basis points revenue, the 80 that’s not significant. Let me have John Erdmann sort of address that.

John Erdmann

Hi, Paul how are you doing?

Paul Miller – FBR

How are you doing?

John Erdmann

You’ll see when we send out our 10-Q the quantitative market risk session gives us again an instantaneous shock of how assuming a parallel shift in the yield curve of what that would do. So what that will show is from this point down 50 we would estimate that the servicing rates will go down on another $200 million.

Paul Miller – FBR

Okay.

John Erdmann

But again that assumes a parallel shift so there’s not – to your point it’s not all linear so that’s kind of more hypothetical but that’s kind of the best estimate that’s out there.

Paul Miller – FBR

Yes. I know most analysts out there including ourselves and I think by your models you correct me if I am wrong) it’s almost a linear relationship but there is a lot of convexity in this thing, right? And I’m just wondering is the convexity change versus the linear change I know I’m getting a little detail we can take this off-line, they must be getting really wide here?

John Erdmann

Yes. I mean if you look at the current shock that’s down 50 that’s minus 203 and then the up 50 it’s plus 191 so it’s almost flat so you have very little negative convexity at that point in time.

Paul Miller – FBR

And then one last question Morgan Stanley. That’s another big shop that you guys get. Do you seem – do you feel excited as a Merrill Lynch relationship? Could this be as – could this be as market share basis could you have as much production as you got out of the Merrill Lynch operations for this one?

Jerome Selitto

Yes. I think that our expectation is that we’re really coming very, very close to where we are with Merrill Lynch with some of the new accounts that we’re adding. Morgan Stanley Private Bank is a major client and we alluded to that in the last earnings call that we were talking to another premier name, this was the premier name that we’re talking to. Again, when we look at the combination of Barclays, Morgan Stanley, Ameriprise, we’re adding to our footprint a net 25,000 FAAs.

So, we’re very excited about this. We think this is really going to help us in our drive to profitable market share growth. The thing I want to touch on you’re asking really good questions and I think it gets back to when we’re talking about MSR, what’s the economic reality versus our GAAP marks that we have to take? And I think I keep on stressing in these calls that I am focused on core earnings and economic value rather than unrealized gains or losses affected by GAAP accounting. But you’re onto the right questions.

Paul Miller – FBR

And, yes, okay. Thank you very much, gentlemen.

Jerome Selitto

Yes, thank you.

Operator

We’ll go next to Henry Coffey with Sterne Agee.

Henry Coffey – Sterne Agee

Yes, good morning everyone and let me add my congratulations on a really solid quarter. Couple of questions, all tied around the servicing business and maybe I can lay them out. First, if we had some sort of vintage analysis, what would the coupon deck look like over the last couple of years? Obviously the stuff you’re putting on today is very low coupon going to be with you a long time, some of the trailing stuff which is probably a relatively smaller part of the business is higher coupon. Can you give us a sense of both the average coupon and if we had vintage data what it would look like?

Jerome Selitto

Yes, I think, I am going to give you – I’ll turn it to Luke for maybe more specifics, but basically we started the year with a weighted average coupon in our portfolio of about 5.25. That weighted average coupon today is down to about 490. So we’ve seen major decline in the weighted average coupon in the portfolio. As we’ve said in the past, when you’re looking at this – and by vintage, you can assume the earlier vintages in our portfolio are carrying higher coupon, right and that’s how we get to that weighted average 5.25.

Henry Coffey – Sterne Agee

Right.

Jerome Selitto

But you know, Henry you and I have discussed this, I mean as interest rates increase which we believe at some point in time and I’ve got a bet on the table with some people sitting around the table now – not when, but if interest rates increase that we’re really going to extent our duration and our earnings power of the MSR portfolio.

Henry Coffey – Sterne Agee

Sort of building on that as a second issue, are there mechanisms in place to tie MSR to more sort of peer or market comps. I mean if rates start to go up and you decide to – and your interest rate models tell you to greatly increase the value of your MSR, are we going to see the volatility on the other side or is there some sort of mechanism in place in terms of how you place the value on that that would keep it closer to quote “market bids” or however you’d like describe it to avoid it. You add $5 and you take away $5 I think you’ve actually done that in one year where you wrote it both ways and can we get away from that in some fashion?

Jerome Selitto

Yes. I mean the first part of your question is we’re actually using models for a fair market value and that’s how we mark the portfolio each quarter, so what’s the – remind me your second part of your question?

Henry Coffey – Sterne Agee

Just as rates start to rise, your models are going to predict a big “increase in value” and I was wondering if there is any mechanism in place to sort of modify that so we’re not constantly living with this much volatility?

Jerome Selitto

I’m going to ask John to address that.

John Erdmann

Yes, I mean we do evaluate other market inputs and – that there was trading activity in the market, we would calibrate the model to that trading activity. But as you know, it’s very illiquid markets, there’s not a lot of activity there.

Henry Coffey – Sterne Agee

And then finally, looking at the business operation you were talking about replacement rate which obviously has been very strong. What mechanisms do you have in place with your correspondents and your private label relationships and your real estate network so that when party A goes to refi, you increase the probability that you refi “through PHH” that you don’t have a net loss servicing from that transaction and what does that part of the business look like?

Jerome Selitto

Yes, it’s really – it’s an interesting question and it’s something where we are working very closely with our partners, whether it’s the Merrill Lynches of the world or the UBSs of the world in terms of how we actually manage their business and both in heavy refi markets and also how we could be more proactive in working with them in terms of looking at their business and book of business in terms of generating refi activity through their existing book.

I think I’ve said publicly, I have said publicly that when we look at our major clients, their penetration of their customers that have mortgages and those customers that have mortgages with them are really in the low single-digits and that’s across a majority of our PLS clients. Our arrangement with our PLS clients as you knows is an exclusive arrangement, I mean, we are the only provider of Mortgage Services for them. So, a long winded answer but basically we are working with our PLS clients to ensure that that refi activity if their customers are refying they are refying through them, and in turn refying through us.

Henry Coffey – Sterne Agee

So, I mean when, for example a credit bureau score – a credit bureau has ordered, there’s a little light go off that allows you to then call Merrill Lynch and say, Fred looks he is about to refi, we need to give him a call, or is it more subtle than that?

Jerome Selitto

Well, the one thing we look at is what’s the weighted average coupon and we do it on a loan by loan basis, not weighted average, but let’s look at their portfolio, interest rates, if interest rates are 50 basis points below current customers’ rate, that is a target for a refi call, an outbound. Again, I think the evidence that we do this and very effectively and efficiently is really the fact that our replenishment rate is well in excess of 100%. And if you look at our competition, the big three, their rates, (inaudible) very affective job but their rates – replenishment rate is still below 100% and then it really declines when you look at some of the other competitors in the market.

Henry Coffey – Sterne Agee

And then just a more down to earth question, I noticed a big jump in Fleet overhead, but that’s tied to cost to goods sold on the syndicate operation may be you can give us a sense of what real operating cost was like in that unit?

Jerome Selitto

Yes. I think you’re exactly right when you look at that increase in expense it really was the cost of goods sold in our truck syndication business. That accounted for the majority of that increase. The was also some movement in terms of shared services, G&A expenses but the bulk of that really was the cost of goods sold in the truck leasing business.

Henry Coffey – Sterne Agee

Thank you.

Jerome Selitto

All right, thank you.

Operator

(Operator Instructions). We’ll go next to Paul Miller with FBR.

Paul Miller – FBR

Hey, thank you very much. On the big news, well I don’t know how big the news was but there was a lot of news flow out there about capacity being taken out of the business especially in the correspondent side and it’s one of these areas that you’ve been able to enter off and on for some pretty good profitable product. With Bank of America pretty much saying, they’re going to exit by year-end. What are your thoughts there? Do you think there’s going to better opportunities or not in that space?

Jerome Selitto

Yes I’m going let – yes the answer to the question is yes, we think there are better opportunities but once again we’re really pretty opportunistic in that channel. So we pay close attention to margins in that channel. As you know it’s probably the most cost competitive channel, it is the most cost competitive channel that we operate in and we’ve seen some really strange behavior in that market in terms of where margins are being priced. Some of our competitors are in the market, when they are in the market they’re very aggressive in terms of their pricing and then they back off and they’re out of market and that’s why we stay really opportunistic in that market. Luke, do you want to add anything?

Luke Hayden

No, that’s really it. I think as you look at our numbers over the past year, you’ll see when margins are narrow we’re not much of a participant, when margins are wide we’re much more aggressive. So, we hope that with the departure of BofA and the rumor is others that we’ll have more opportunities in that marketplace.

Paul Miller – FBR

Okay. Thanks, guys.

Jerome Selitto

Thank you.

Operator

We’ll go next to Bose George with KBW.

Bose George – KBW

Hi, thanks. I just had a question on HARP, I was wondering how much impact do you think HARP could have on your volume, I mean is that the kind of stuff that you see much of through your channels?

Jerome Selitto

Yes, I think, in HARP I mean we’re paying very close attention to it, we think it’s going to be a net positive for us and for the industry. But again I hate the cliché but the devil is in the details, we haven’t seen the details yet. But overall, we think it’s a net positive. We are – we have been and we continue to sort of aggressively pursue HARP I. We have a plan in place for HARP I and we just think with what we’re seeing and what we’re – what’s being reported, we think that there’s going to be some increased benefits in HARP II, loan to value is one of those major benefits, streamlined underwriting is another. So overall, we think it’s going to be a net positive, but we really have to see the details to determine just what effect that might have on our business going forward.

Bose George – KBW

Okay, great. Thank you.

Jerome Selitto

Thank you.

Operator

We’ll go next to Phil Dumas with Geode Capital.

Phil Dumas – Geode Capital

Yes, good morning, guys.

Jerome Selitto

Good morning.

Phil Dumas – Geode Capital

You talked a bit about the 2012 convert on the call. What are your – can you sort of expand on your plans for that maturities sort of a rethink and will there be a refi opportunity or will you just use the facility to pay that down?

Jerome Selitto

Yes, I think in April 2013 is when that comes, 2012 sorry.

Phil Dumas – Geode Capital

All right. April.

Jerome Selitto

Our intentions at this point are to pay that down and I think as David alluded to in his remarks, we could do that with our available liquidity today, if we had to we could use the revolver to pay that down. We continue to look at the market for other financing opportunities, but if we could ever get the Greek situation settled and the Euro situation settled, there might be opportunities for us to enter the bond market. But we pay very close attention to that.

Phil Dumas – Geode Capital

Okay. So you mean the straight bond market not the convert market?

Jerome Selitto

Straight bond market yes. But the...

Phil Dumas – Geode Capital

Okay. Thank you.

Jerome Selitto

Thank you.

Operator

And at this time there are no further questions. I’ll turn the call back to Jerry Selitto.

Jerome Selitto

Thank you very much. We look forward to speaking to you in the next quarter. Just a couple of things that I want to mention, we have an extremely strong business franchise. As I’ve mentioned in the past, we really – we believe that we have a strong runway for growth in both our business segments. We are committed to both businesses and to grow both businesses and I really look forward to talking to you next quarter. Thank you.

Operator

This concludes the PHH Corporation third quarter 2011 earnings conference call. Once again ladies and gentlemen the replay will be available beginning later today at the company’s website at www.phh.com or by dialing 719-457-0820 or 888-203-1112 using conference ID 4951297. It will be archived until November 16th, 2011. You may now disconnect.

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