PHH Corporation's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: PHH Corporation (PHH)

PHH Corporation (NYSE:PHH)

Q2 2012 Earnings Call

August 08, 2012 10:00 a.m. ET

Executives

Glenn Messina – President & CEO

David Coles – Interim EVP & CFO

Robert Crowl – EVP

George Kilroy – EVP of Fleet

Jim Ballan – VP of IR

Analysts

Bose George – KBW

Paul Miller – FBR

Henry Coffey – Sterne Agee

Richard Eckert – B. Riley and Company

Steven Iceman – Emry’s Partners

Sean George

Operator

Good morning ladies and gentlemen and welcome to the PHH Corporation’s Second Quarter 2012 earnings conference call. Your lines will be in a listen-only mode during today’s 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 the instructions on entering the queue and asking 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/invest or by telephone at 719-457-0820 or 888-20-311-12 and using conference id 4280688 beginning shortly after the conclusion of the call. It will be available until August 22, 2012. This access information is also described in the company’s earnings release and I will repeat it again at the end of our session.

At this time, Jim Ballan Vice President of Investor Relations will proceed with the introductions.

Jim Ballan

Thank you Catherine. Good morning and welcome to PHH Corporation’s Second Quarter 2012 earnings conference call. Please note that statements made during this conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as further described in slide three of our second quarter 2012 investor presentation of supplemental schedules.

Such forward-looking statements represent only our current beliefs regarding future events and are not guarantees of performance of results. Actual results, performance or achievements may differ materially from those expressed or implied in 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 U.S 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 investor’s section of our website at www.phh.com. Investors are cautioned not to place undue reliance on such forward looking statements.

We may also discuss various non-GAAP financial measures. Please refer to our earnings release and accompanying investor presentation of supplemental schedules for 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. In addition, the investor presentation of supplemental schedules is posted in the investor’s section of our website under webcast and presentations.

Speaking on the call today will be Glen Messina, President and Chief Executive Officer and Rob Crowl, Chief Financial Officer, George Kilroy, President of Fleet and Dave Tucker, President of Mortgage along with other members of the senior management team are also with us and will be available to take your questions.

First, Glen will discuss the company’s performance in the second quarter and our strategic objectives. Then Rob will review our financial results and provide an update on our liquidity position, after which we will take questions. With that, I will turn the call over to Glen Messina.

Glen Messina

Thank you Jim. Good morning everyone and thank you for your interest in PHH. Before I get into the quarter, I would like to introduce Dave Tucker, who has taken over the role of president of our mortgage business. Dave joined us in May with more than 25 years experience in various management positions at General Electric. He brings tremendous experience in service businesses including private label business and has a successful track record of growing and strengthening organizations through focus on customer relationships.

His background in lean Six Sigma frameworks to improve operating performance as well as business development should also contribute to our success at PHH. Welcome Dave.

Dave Tucker

Thanks Glen. I'm very pleased to join PHH and to work directly with you again. I'm also excited to be joining at a time of unprecedented change in the mortgage industry and I look forward to working with the team as we shape and grow the business.

Glen Messina

Thanks Dave. Dave succeeds Smriti Popenoe, who has been serving as interim president of our mortgage business. Smriti has now returned to her role as Chief Risk Officer for PHH and we are grateful to her for the great job she did during that transition period.

We remain laser focused on our four key strategies which I outlined earlier this year. Disciplined growth in our three franchise platforms, operational excellence, and unwavering commitment to customer service, and in the near term a priority of generating liquidity and cash flow. The company continues to make solid progress in executing against these strategies, which we believe will maximize value for our shareholders.

We are pleased to have delivered solid, positive co-earnings in the second quarter. Our retail loan origination platforms demonstrated strong double digit growth, offsetting our planned decrease in corresponding loan originations. Meanwhile, fleet continues to execute well on a number of fronts and is delivering strong year-over-year growth in segment profit.

We continue to experience elevated repurchase related costs, namely $39 million foreclosure related charges and $11 million average mark-to-market adjustment on loans we purchased from the GSEs.

Our estimate of recently possible losses in excess of our foreclosure related reserves has declined to $105 million. We closed the second quarter with $700 million in unrestricted cash and have achieved a significant number of our liquidity objectives which Rob and I will talk more about later.

The mortgage originations environment remained favorable and margins remain very wide by historical standards in the second quarter, enabling us to originate MSRs with minimal use of cash. Retail loan application volume was up 52% over last year and up 11% sequentially, benefitting from continued refinancing activity, growth from our existing clients and the ramping up of our new PLF clients.

Correspondent loan application volume was down 42% over last year and down 22% sequentially consistent with our strategy to narrow our focus in our correspondent platform to business partners we believe will consistently deliver high quality loans.

Our correspondent channel represented 14% of our total closings from the quarter, and we expect it to represent approximately 15% to 20% of our closings for the year. Our total loan servicing portfolio at $193 billion was up 11% over last year, driven primarily by our subservicing UPB, which increased by almost 50% over the past year. We expect to more than double our subservicing UPB from the current level, with the assumption of approximately $52 billion in subservicing and/or private label agreement with HSBC in the first quarter of next year. Subservicing is less capital intensive and has limited rep and warranty risk.

The combination of reduced volume in our correspondent channel and low interest rates driving prepayments reduced our replenishment rates in the quarter to just under 100%, which causes a slight sequential quarter decline in our capitalized portfolio. The replenishment rate in our retail channels was greater than 100% and going forward we anticipate that the overall replenishment rate should exceed 100% for the full year based on our current expectation for prepayments.

A greater than 100% replenishment rate generally should coincide with growth in our capitalized servicing portfolio. The credit quality of our servicing portfolio continues to be strong. As our delinquency rate remains less than half the level reported for large residential mortgage servicers. Our total delinquency rate excluding foreclosure and real estate owned was down 45 basis points from the second quarter 2011 to 2.77%.

Also the percentage of loans in foreclosure and real estate owned was down 26 basis points from the second quarter of 2011 to 1.87%. These exceptionally low delinquency rates help us keep our prolonged servicing costs low and reduce the potential for a future cost related to delinquent mortgage loan put backs.

As a result of our progress in reducing defects in new loan originations, Fannie Mae has informed us that they expect to significantly reduce the loan review sample size for our performing loans going forward. We believe this will help reduce the potential for repurchases of performing loans in a related rework cost to correct defects and potential losses related discretions and loan sales.

Mortgage repurchases and repurchase demands remained at an elevated level on the second quarter although they were at a lower level than in the first quarter. We recorded $39 million in foreclosure related charges during the second quarter of 2012, down from $65 million in the first quarter of this year, but still high relative to the $24 million in the second quarter of 2011. Our total foreclosure related reserve at the end of the quarter was $175 million which represents unrealized losses which we believe are probable.

We have also updated our estimate for reasonably possible future losses related to repurchase and indemnification requests to $105 million which would be above and beyond our recorded foreclosure related reserves. This is down $35 million from our estimate of $140 million at the end of the first quarter.

The reasonably possible estimate assumes elevated repurchase demands and lower success rate than those we have historical experience in defending against claims through the end of 2013. Our assumptions related to estimated loses that remain reasonably possible through the end of 2013 are substantially unchanged.

As a reminder, the estimate of reasonably possible losses is not included in our reserves because the level of certainty for those losses does not rise to the level of being probable. Only probable losses are included in the reserves.

While we witness positive trends in the second quarter related to repurchase activity we have also realized we are in an environment of uncertainty concerning GSE focus and activity. Based upon our ongoing discussions with the GSEs we continue to believe that by the end of this year they may be substantially complete with the review of our seriously delinquent and defaulted loans related to origination years 2005 and prior, and by the end of 2013 they may be substantially complete with the review of our seriously delinquent and defaulted loans related to origination years 2008 and prior. Approximately 80% of our outstanding repurchase requests at quarter end were related to the 2005 through 2008 origination years.

We have continued to see a heightened level of focus from governmental bodies in reviewing mortgage originations and servicing practices and in establishing the requirements for mortgage originators and services. We continue to provide comments and respond to inquiries and request for information in connection with these activities and we continue to invest in our compliance and servicing functions.

We believe that our $700 million in unrestricted cash on hand at the end of the quarter and the execution of our liquidity plan will provide sufficient liquidity to meet our 2013 debt service obligations and fund estimated repurchase and indemnification request and required collateral postings.

Moving to our fleet business, segment profit was up 16% in the second quarter compared to the same period last year, and our net investment and fleet leases grew by 5% from the second quarter of 2011. New units ordered was up 4% over the prior year and fuel, maintenance and accident management units were all up over the prior year.

Our fleet business continues to experience a shift in mix of our leased units to more truck and service type vehicles that have a higher value per unit and now constitute more than 70% of our net investment and fleet leases. We believe this is beneficial to our fleet business as these types of vehicles tend to be leased over longer time periods and typically utilize a higher number of services.

We anticipate continuing to balance our service units with leased units, which should continue to drive segment profit growth for the fleet. Our fleet business provides a mission critical component and many our clients operations, takes on minimal credit and least residual risk that has high barriers to entry.

Our focus on customer service and technology innovation makes PHH a leader in the fleet management industry and we are continually innovating and introducing time saving productivity tools for our clients such as mobile connections and applications. We believe these innovations make our offerings more competitive and facilitate customer retention. These efforts were recognized by our peers in the second quarter when we won the 2012 customer experience innovation award from the customer experience professionals association.

We continue to execute on our liquidity objectives. We reported another quarter with strong cash flow generation including positive adjusted cash flow despite elevated repurchases and a significant increase in collateral postings related to our mortgage origination pipeline. We monetized a portion of our mortgage reinsurance assets and made significant progress on the financing front. This includes increasing the financing capacity of our Canadian fleet, lease securitization structure, extending the maturity of certain mortgage warehouse facilities, and with respect to our Fannie Mae arrangements, extending the maturity of our servicing advanced facility and amending our $1 billion committed to early funding letter agreement.

We also repaid the balance of our convertible debt that came due in April. Further, on August 2nd, we closed a $300 million multi-year unsecured U.S. revolving credit facility and we have obtained commitments for $125 million multi-year secured Canadian credit facility. These credit facilities are intended to replace our former $525 million revolving credit facility that was set to mature next February.

Now, I will turn the call over to Rob.

Robert Crowl

Thanks Glen. On a GAAP basis net loss attributable to PHH Corporation for the second quarter 2012 was $57 million or $1 per share. During the quarter we experienced $143 million negative mark to market adjustment on our MSR asset net of derivative gains driven mainly by a 36 basis point drop in the primary mortgage rate. Core earnings which excludes the net MSR mark equaled $27 million on an after tax basis for $0.49 per share. On a pre-tax basis core earnings totaled $48 million versus $76 million last quarter, a decline of $28 million. As I will explain more – in more detail in a moment this quarter’s results were impacted by lower pipeline head results, the planned reduction in correspondent channel originations and $16 million pre tax laws related to the termination of our mortgage reinsurance agreement with Genworth Financial. This transaction generated $24 million in unrestricted cash.

Core earnings for the combined mortgage production and servicing segments was $25 million in the second quarter down $28 million from the first quarter of this year due to $39 million decline in the production segment partially offset by $11 million increase in the servicing segment. With regards to our production segment, profit in our retail channel grew due to 10% increase in interest rate lock commitments and wider priced-in margins. However this was mostly offset by reduced profits in correspondent due to planned reductions and originations. In addition, the benefit of wire margins was offset by lower economic pipeline head results of $29 million and higher changes in the fair value of scratch and dent loans totaling $11 million.

The mortgage servicing segment had a GAAP segment loss of $196 million. The core loss of $53 million was $11 million better than the first quarter due to $26 million improvement in foreclosure related expenses partially offset by the $16 million loss on the reinsurance termination. Our capitalized servicing portfolio of $148 billion in UPB at the end of the second quarter was up 4% from the end of the second quarter 2011, but down slightly from the $150 billion at the end of the first quarter 2012. Our total loan servicing portfolio however was up 4% from the end of the first quarter to a $193 billion reflecting the transfer to the company of $8.4 billion of sub-servicing UPB in the second quarter.

At June 30th we valued our MSR at 78 basis points of our capitalized loan servicing portfolio, representing a 2.6 times capitalized servicing multiple. These valuations are down from 87 basis points and 2.9 times respectively at the end of the first quarter. The valuation decline was primarily driven by a decrease in mortgage rates.

While we believe our production franchise remains our single best source of prepayment risk mitigation, we continue to experience high levels of economic and interest rate uncertainty related to recent credit events in Europe, persistent economic recovery slowness in the U.S, and the Federal Reserve’s willingness to take extreme measures to support economic growth.

As a result, in August, we executed a series of interest rate hedges in order to provide supplemental protection against very low rates. Assuming a 50 basis point parallel shock down in rates these hedges would provide an 18% reduction to the negative mark in the MSR asset. The hedges are primarily option-based, which minimizes cash consumption in a rising rate scenario.

Our fleet management segment remains a key contributor to our consolidated results. Second quarter profit in the segment was $22 million, down $2 million on a sequential quarter basis but up $3 million from the second quarter of 2011. Compared to the first quarter, fleet revenues were flat as higher leasing revenues were offset by slightly lower fee and syndication income.

Depreciation expense on operating leases was $2 million higher due to growth in net investment and leases.

Now, I would like to provide an update on our liquidity position. At the end of the second quarter, our liquidity included $700 million in unrestricted cash. Our quarter-end cash balance represents $175 million decrease from the end of the first quarter, mostly driven by the repayment of the $199 million April 2012 convertible notes, partially offset by $24 million in cash from the reinsurance termination.

As Glenn mentioned, on August 2nd, we closed a new $300 million unsecured U.S revolving credit facility consisting of $250 million tranche that matures in 3 years and a $50 million tranche that matures in approximately 2 years. We also have commitments for $125 million three-year secured Canadian revolving credit facility that is expected to close by the end of the third quarter.

Adjusted cash flow in the second quarter was $26 million compared to $269 million in the first quarter. Adjusted cash flow is intended to illustrate the cash generated from business activities that is available for unsecured debt and equity holders. And as you can see that this figure can be somewhat volatile quarter-to-quarter.

The variance of the first quarter is attributable to higher pipeline, collateral postings and timing differences between mortgage closings and sales and growth in net investment and leases. Most of these variances reverse themselves in due course. We continue to manage both the fleet and mortgage businesses to be cash positive through efficient financing arrangements and superior operating disciplines. Now I will turn it back over to Glen.

Glen Messina

Thanks Rob. In the second quarter, we continued to demonstrate solid execution against our four key strategies. With regard to growth in our franchised platforms, retail mortgage production volumes are up double digit over the last year, fleet segment profit is up double digit over last year and our plan B emphasis of correspondent originations is on track.

With regard to operational excellence, as a result of our progress in reducing defects to new loan originations, Fannie Mae has informed us that they expect to significantly reduced loan review sample size of our performing loans going forward.

With regard to customer service, fleet won the 2012 customer experience innovation award from the customer experience professionals association. And finally with regard to liquidity, we closed the quarter with $700 million in unrestricted cash and has completed many of our liquidity objectives.

I want to thank and recognize many of my colleagues at PHH for their hard work and enduring commitment. With that, we are ready to take questions. Catherine?

Question-and-Answer Session

Operator

Thank you gentlemen. [Operator Instructions] We will take our first question from Bose George with KBW.

Bose George – KBW

Hey guys, good morning. I have got a couple of questions. First, just on the hedges that Jim put on this quarter, you said that it provides an 80% reduction if rates fall 50 basis points. Just curios what the other side of it is, the impact if rates go up.

Glen Messina

Yeah good morning Bose, it’s Glen. How are you?

Bose George – KBW

Good, thanks.

Glen Messina

I think that’s a little bit of a misquote. I think Rob had said –

Bose George – KBW

80.

Glen Messina

An 18% reduction in losses rather than 80.

Bose George – KBW

Yes, sorry. And yes again still curious like what the impact’s symmetric on the other side?

Glen Messina

No, it’s asymmetric. So it provides more downside protection than the cost upside. And that was why we used an option-based strategy. It minimizes the consumption of cash if freights go up.

Bose George – KBW

Okay great. And then just switching to that reinsurance chart you guys took, are you exploring selling the remainder of your reinsurance exposure as well?

Glen Messina

At this stage of the game we continue to focus on the execution of the bulk of our liquidity plan, which includes a number of items which potentially if we believe the economics are appropriate would be exiting the reinsurance business completely, but I would have to comment that it is a specialized asset and if that opportunity presents itself, if the economics are right we would take advantage of it.

Bose George – KBW

Okay, great. Thanks a lot.

Operator

Thank you very much and we will take our next question from Paul Miller with FBR.

Paul Miller – FBR

Yeah, thank you very much. Talking about the credit facilities, you made a comment that the new credit facilities of which is 250, I guess another one coming from Canada, 125 is intended to replace the one that’s on the books right now, which is 525. Do you need to replace the 525 completely? Are you talking to other banks or do you think that roughly with a 215, 125, to 325 plus the 50 that’s two-year, Is that adequate to run the business?

Glen Messina

Paul, we are thrilled with the progress we made in closing the revolver. It accomplished a number of key objectives that we had in replacing or updating or amending the revolver and that was namely a multi-year facility, unsecured as well as broad bank (Inaudible) participation. We believe the total of $425 million is adequate to fund the liquidity needs of the business going forward.

Paul Miller – FBR

So you don’t feel the need to get it any higher than that or talk to other banks?

David Coles

I believe the $425 million is sufficient to fund liquidity needs of the business.

Paul Miller – FBR

Okay. And then the debt that’s due next April I guess with – I know some clients have told me that they felt you will prepay that debt. I'm not sure if you made those comments or they are just comments out in the market? Can you prepay the debt, will you prepay the debt or you will just wait till it matures next April, the $400 million?

David Coles

Paul, one of the objectives of our liquidity plan was to look to restructure the liability ladder so to speak of our remaining debt maturities. We continue to look at opportunities in the market and options to do that. We do believe that our cash on hand plus our liquidity plan would give us sufficient liquidity to address all of our debt maturity needs through the end of 2013.

Paul Miller – FBR

In 2013 and then have you been in talks with the rating agencies in any sense with all of this to us or to me you have really strengthened a lot of the liquidity issues that S&P brought up in the downgrade I believe nine months ago. Are you in talks with them for an attempt to get an upgrade on your debt stuff?

David Coles

Paul, we could make it a habit of continually being in contact with the credit rating agencies and reviewing the performance of our business both from an operating and a financial perspective. And you know we continue to update them on the progress we are making in executing our liquidity plan. Those discussions have continued to progress appropriately. And overall I think we have had good positive discussions with the rating agencies.

Paul Miller – FBR

Okay. Thank you very much gentlemen. Great quarter.

David Coles

Thank you Paul.

Operator

Thank you. We will continue on to Henry Coffey with Sterne Agee.

Henry Coffey – Sterne Agee

Yeah. Good morning everyone. Let me add my congratulations as well. I find it a big accomplishment. Two items, one is real easy. The footage in mortgage revenue just from looking at the press release, was most of that due to the inclusion of that $16 million insurance adjusted write-off or whatever you would call it?

David Coles

Henry there was a number of things that you should consider. So clearly the $16 million in insurance related loss, this was a big piece of it. You know there was as Rob mentioned $29 million of hedge pull-through gains in the first quarter that did not repeat in the second quarter and then there was a slight increase in unfavorable mark to market adjustment in loans repurchase in the GSEs.

Henry Coffey – Sterne Agee

That’s not – so far I'm just looking at the servicing item, not the adjusted. So all of that impacted the servicing side of the business.

David Coles

No. I'm sorry. The mortgage -- servicing only would be the Atrium, $16 million to Atrium.

Henry Coffey – Sterne Agee

Right. Yeah that’s what we thought. And sort of a broader question in terms of trying to really understand the business, application volumes were up on a sequential basis but locks were down. Do the application volumes, are they only tied to the retail business and how do we – can we look at the application number and assume a stronger September quarter?

David Coles

So retail applications clearly were as we said previously in the call. Retail locks as well too were up correspondingly both 34% year-over-year as well as 10% sequentially. You know locks do drive current period revenues, but as I mentioned Henry we are seeing a kind of a mixed shift. Our retail is growing is growing as we are executing our planned de-emphasis of correspondence. So right now the growth and retail is being offset by the shrinkage in correspondence.

Henry Coffey – Sterne Agee

Yes. So the decline in locks is tied to correspondent business the application volume is all retail and that’s up. In terms of sort of looking forward, how much rate compression do you think it would take to seriously alter your current MSR evaluation?

Glen Messina

Henry, I don’t know that I could speculate on what rate compression may exist going forward. You know what I can say is, I feel great about the progress for making on our four key strategies. We are demonstrating growth in our franchise platforms. We have recognized defect reduction by Fannie Mae, we continue to execute positively on customer service and fleet, and we are working to improve our position in mortgage and we are executing on liquidity objectives.

I believe we will be entering 2013 significantly stronger from both an operating and financial perspective that we entered 2012.

Henry Coffey – Sterne Agee

Sounds good. Thank you very much.

Operator

Thank you. And Richard Eckert with B. Riley and Company has our next question.

Richard Eckert – B. Riley and Company

Yeah. I had a question about the origination mix. It seems this year even though picking on sale margins eroded a little quarter-over-quarter, you know they are still well above levels observed last year, and it would strike me that you would be a little more aggressive in the wholesale correspondent channel with margins this wide, maybe not as aggressive as you had been in the past, but more aggressive than you are in the second quarter. Was that a conscious decision to further deemphasize the production in that channel or where the margins just not there in that particular channel?

Glen Messina

Margins are wide in the correspondent channel relative to where they are historically. But the primary focus for us in correspondent is ensuring we maintain high quality originations. So when we talked about operational excellence making sure that we partner with those correspondents who can consistently deliver high quality loans is one of the most important things for us in correspondent and we are you know executing against the strategy of maintaining relationships with high quality originators limiting our loan originations correspondent to those originators who have the highest quality loan delivery.

Richard Eckert – B. Riley and Company

Okay. You know second question is even after you take the $16 million charge into account in the servicing business, the servicing income line was lower than I would have expected. Once again even after taking into account $60 million I believe it declined quarter-over-quarter and I was just wondering if that was you know due to a shift and mix between you know your own capitalized mortgage servicing rights and subservice loans.

Glen Messina

During the second quarter in addition to the $16 million adverse charge to the servicing segment as a result of termination of our reinsurance contract, we did continue to experience elevated foreclosure related costs to include reserves for repurchase loans as well as the ordinary operating cost for loans going through foreclosure. So we do think there was additional cost pressures in the portfolio not as severe as what we experience during the first quarter, but still elevated relative to prior periods.

Richard Eckert – B. Riley and Company

Yeah. I was more focused on the income line than the expenses. Expenses are actually less than I had expected, which seems that there was a you know small erosion in margin there and I was wondering if it you know is it had something to do with you know a shift in the mix or you know between the loans that you originated and you know loans that you are subservicing for others. It would have seem that you are making substantial move forward in growing that subservicing business.

Glen Messina

The mix is different year-over-year. In subservicing versus PHH invested servicing that is correct. And as well, you know as we continue to grow subservicing more aggressively than servicing there is other revenue elements that don’t come along with subservicing such as late fees and [inaudible] which would appear as a result of the mix shift of subservicing.

Richard Eckert – B. Riley and Company

Okay. Fair enough. Thank you very much.

Operator

Thank you. We will take our next question from Steven Iceman with Emry’s partners.

Steven Iceman – Emry’s Partners

Hi this is Steve Iceman. Thank you for taking my question. I have more of a strategic question to ask. You said earlier in the call there is some big changes going on in the mortgage business. You have a very unique franchise both from the origination and servicing side, but because of your capital constraints. You are only really able to participate on the subservicing growth in the mortgage servicing business.

You are only really able to participate on the subservicing growth in the mortgage servicing business and not in terms of buying servicing assets which I think we have a world that acknowledge as huge opportunity. So I just want to know how you think about strategic opportunity whether it makes sense perhaps either to sell the company to someone who does has capital to take up that opportunity or to join or partner with someone who can provide that capital? Thank you.

Glen Messina

Steve as I said earlier this year and continue to emphasize on our you know sense taking over as CEO, we are focused on our four key strategies. So discipline growth in our franchise platforms which includes PLS, our Private Label Services, mortgage origination, and servicing platform, our realty platform, and fleet. We continue to be focus on improving operational excellence and reducing defects across the company. Would continue to maintain on the wavering commitment to customer service and we are focused in near term on improving a liquidity position of the business. I feel great about the progress we are making in those four key strategies and I believe the business will be entering 2013 significantly stronger monopoly in financial perspective when we enter 2012.

Steven Iceman – Emry’s Partners

Why don’t exactly answer my question. I mean you are not participating in a massive opportunity in terms of buying servicing and I'm trying to understand that you are looking through some way to do that.

Glen Messina

As I said before our growth focus is going to be discipline growth in our franchise channels of PLS and realty on the mortgage side.

Steven Iceman – Emry’s Partners

That doesn’t answer my question, but thank you.

Operator

Thank you. [Operator Instructions]. Jim Thaller [ph] with Harvest Capital will go to you next.

Steven Iceman – Emry’s Partners

Good morning Glen. Thank you for taking the question. I wanted to take a look at page 14 of the slide and just ask you a couple of questions about the trends from the first quarter to the second quarter. If I look up a change in the open to review of $157 in the first quarter versus $94. That’s a significant decline. I don’t see a commensurate increase in the claims pending. So I mean which is obviously very good news. I'm wondering, historically, you’ve been the number suggests about a 70% appeal rate and about a 90% success rate on appeals on GSE file reviews. I mean I know you have given some guidance that you think that those numbers may change a bit. But could you give some context around how much of a change those metrics you were thinking as you are discussing what may occur because the numbers seem to continue to be very favorable relative to you know you reveal and appeal and approved appeal process.

Glen A. Messina

Jim you are correct. As we mentioned before we did see a lower level of repurchase activity, repurchase request in the second quarter as compared to the first quarter. And in fact our backlog of loans – loan repurchase request actually quarter-over-quarter is down about 6%. You know we have seen that come down. With regard to our defense rate, we’ve averaged about like I said about 70% of our you know loan repurchase request we do go back and argue on and was about 90% successful with that.

Over our longer term average that has been relatively consistent, but as we talk about during the first quarter I do think the GSEs have gotten smarter in terms of their focus on what loans they put back to us based upon our success rate in defending against those loans. As well as they are becoming more stringent in applying their criteria in our defense of their claims. So you know we have seen over the course of the second quarter perhaps a slight deterioration in that combined cost, 60ish percent rate, defense rate, but nothing material.

Steven Iceman – Emry’s Partners

Okay. And then I wanted to just ask a quick question on – bear with me there is like a couple of pages here. On your priced-in margin. I'm looking at page seven on the slide deck. The priced-in margin expanded in the first quarter to the second quarter. As far as I can tell primary to secondary markets schedule relatively stable during the same period. So it looks like you are able to achieve an improved priced-in margin with I'm guessing that a lot of that is due to capacity constraints and the like. But I'm wondering as you look forward from here given the significant increase from the fourth quarter to the second quarter what would you think the period over which my normal lies would be, and I know a lot of that has to do with where mortgage rates are going to go and refi volumes and the like.

Then do you have in your in your strategic plan or your thinking what you think that these rates becomes when it has reached its trough. I mean is it back in the fourth quarter, second quarter, you know $160 – $175 range or is it $200 – $225? Thanks.

Glen Messina

Yeah. You know I really can't speculate as to what the future directionality of interest rates are and our mortgage spreads and we have talked about before this and the number of times things that impact mortgage spreads. Not only the you know current what I would call imbalance of demand for mortgage refinancing versus capacity or supply of mortgage capacity in the industry. But there has been fundamental cost structure changes in the industry which also impact margins. And you know there is things that impact interest rates by what happens in Europe and you know the government’s policy and economic stimulus and what they want to do with interest rates that’s too difficult to predict or to [inaudible] get that. You know we continue to stay focused on our four strategies. We believe those strategies position accompany best from both an operating and financial perspective to [inaudible] shareholder value creation through multiple cycles within the industry and interest rates.

Steven Iceman – Emry’s Partners

Thank you for that. Let me ask it may be a little different way. As you position the company today and are thinking about it from a staffing point of view, from a liquidity point of view what margin would still meet with satisfactory returns given how you are thinking about the expense inside the business and the liquidity that you have?

Glen Messina

Yes. As I said before Jim, I do believe you know liquidity position for the business were in great shape. You have adequate liquidity considering our cash needs are available. And the execution of our liquidity plans to satisfy our debt requirements through the end of 2013. And, yeah, as I talk about historically right now we are investing in the infrastructure will support the growth in the originations environment and are key strategies of operational excellence and customer service. But we do maintain flexible staffing plans so that if necessary in volume where to rapidly shrink within the industry we can reduce our capacity commensurate with the level of activity that’s in the industry.

Steven Iceman – Emry’s Partners

Okay. Thanks a lot.

Operator

Thank you. We will take a follow-up from Bose George.

Bose George – KBW

Yes. Just a quick question on your share cap. I assume this quarter there was no dilution because you lost money on a GAAP basis. But I was wondering do you have a number – what your share cap would have been had you made money?

Glen Messina

Off the top of my – I don’t have that stat off the top of my finger tips here. So might do.

David Coles

Yeah. It’s about 59.4 million shares.

Glen Messina

59.4 million shares?

Bose George – KBW

Right. Thank you.

Operator

And we will take another question from Sean George. Please go ahead.

Sean George

Hi. Could you tell me on the reinsurance termination what was the change in the ultimate loss exposure and is there any change in the restricted cash on that?

Glen Messina

Yes. As a matter of fact, yeah, Mike can you help the team with that.

David Coles

Sure. There is change in restricted cash. So we remitted about $63 million in restrictive cash and we got 24 of that. And the ultimate loss exposure our research came down by about $21 million as a result of termination.

Sean George

Okay. And then can you walk me through your thoughts on the [inaudible] I guess on the high end of probable losses went from 140 to 105. Can you just walk me through the rational for I guess the $35 million change?

David Coles

Our methodology for forecasting reasonably parts of the losses was based upon three critical assumptions. Those assumptions were that the elevated delivery purchases that we saw in the first quarter of 2012 continued through the end of 2013. Second, that our defense rate against repurchase demands would decline and third that the severity, mortgage loan severity, loss severity for loan repurchases or repurchase demands made would be consistent with the levels that we have seen historically. Those three elements have remained unchanged that is still consistent with our view and nationally with the passage of time. What we seeing happen is we have recorded provision for foreclosures or foreclosure related reserves that reflect the activity that has taken place during the second quarter and since our assumption that the elevated level of repurchases would not extend beyond the end of 2013 stays the same. You know our estimate for reasonably possible office would in fact come down.

Sean George

So it’s really a quarter went by and you didn’t see any of the kind of the higher end losses. Is that safe to assume?

Glen Messina

That is correct.

Sean George

Okay. All right. Thank you.

Operator

Thank you. And we will now go back to Paul Miller with FBR.

Paul Miller – FBR

Yeah. Thank you very much. On the write downs on the MSR you had two different write downs. One is due to the economic change and the other is due to your natural amortization. And that doubled like from roughly 30 and changed to 60 and changed. Can you add some color to that because that’s the number that’s usually relatively stable that really jump this quarter.

Glen Messina

Sure. Mike can you give additional information [inaudible].

David Coles

Prepays are up over a little over 100% in year-over-year or quarter-over-quarter. And that was partially offset by the decline in the value of the service rents. So it’s driven by prepayments.

Paul Miller – FBR

That number jumped around that much before because I think around models. We don’t have it jumping around that high and you know the refi is all over the place over the last couple of years.

Glen Messina

Paul, I mean what we see in national amortization well logically follow what happens with respect to actual prepayments. So you should see that number moving consistent with actual prepayment activity within the portfolio.

Paul Miller – FBR

Okay. Thanks a lot gentlemen.

Operator

Thank you. We have no additional questions in the queue. I would like to return the floor back over to our speakers for any additional or closing remarks.

Glen Messina

Great Catherine. Look everyone thank you again for your interest in PHH and for joining us on the call. And we look forward to speaking with you next quarter.

Operator

Thank you. This does conclude the PHH Corporations second quarter 2012 earnings conference call. Once again ladies and gentleman the replay will be available beginning later today at the company’s website at www.phh.com/invest or by dialing 719-457-0820 or 888-203-1112 and news conference Id of 4280688. It will be archived until August 22nd, 2012. You may now disconnect.

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