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Executives

Jim Ballan – VP of IR

Glen Messina – President & CEO

Robert Crowl – EVP

Dave Tucker – President of Mortgage

Analysts

Paul Miller – FBR

Bose George – KBW

Henry Coffey – Sterne

Steven Halperson – Compass Point

Chris Gamaitoni – Millennium Partners

Ryan Butkus – Citigroup

PHH Corporation (PHH) Q3 2012 Earnings Call November 8, 2012 10:00 AM ET

Operator

Good morning ladies and gentlemen, welcome to the PHH Corporation’s Third Quarter 2012 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 the 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/invest or by telephone at 888-20-311-12 or 719-457-0820 and using conference id 6417933 beginning shortly after the conclusion of the call. It will be available until November 23, 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

Thanks, Tasha. Good morning and welcome to PHH Corporation’s Third 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 third 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.

During this call, we may also discuss various non-GAAP financial measures including core earnings pretax, core earnings after-tax and core earnings per share. 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, an 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 third 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. In the first nine months of 2012, we have made solid progress in the execution of our four key strategies which remain discipline growth in our three franchise platforms, operational excellence, and unwavering commitment to customer service, and in the near term the prioritization of generating liquidity, cash flow and deleveraging.

We believe the implementation of these strategies will maximize for our shareholders by positioning us for growth and making us a more competitive more profitable and more capital efficient company. We’re pleased to have once again delivered solid operating performance in the third quarter. On a GAAP basis we reported a net loss of $42 million or $0.74 per share, but core earnings after-tax which excludes the net MSR mark with a positive $42 million or a positive $0.74 per share.

Our results would have been even higher, if not for a $13 million pretax or $0.14 per share after-tax charge in the quarter from the early retirement of our 2013 unsecured debt. Retail applications and mortgage loan origination volume in our retail platforms remain at high levels and fleet continuous to provide recurring segment profit and operating cash flow in the quarter.

This was also a strong quarter from a leverage and liquidity standpoint. If you recall, this time last year there were concerns over our ability to repay our 2013 unsecured debt maturity. I’m now proud to report that we have fully repaid our 2013 unsecured debt maturity with the combination of proceeds of a successful debt offering and cash on hand.

We closed the third quarter with $677 million and unrestricted cash and cash equivalents. For our mortgage business, the environment remained highly favorably and the combined core earnings of our two mortgage segments mortgage production and mortgage servicing reflect that. We see significant growth opportunities in our mortgage franchise channels, Private Label Services and real estate through both increased penetration of our existing clients and expansion of our client base.

We have accessed to abroad of more than 55,000 financial advisors throughout PLS clients and we believe our real estate relationship provides us with access to approximately one and every four home purchase transactions throughout the U.S. which should position us well once the purchase market recovers. We believe a combination of high customer service levels and the demonstration to financial advisors and real estate brokers of the ancillary benefits of selling mortgages creates attractive growth potential within our existing client base.

We expect the integration a ramp up of our relationship with HSBC which is expected to come online in the first quarter of next year to contribute to growth at our mortgage business as well. As a reminder upon launch, we will resume approximately $52 billion of subservicing UPB from HSBC and begin operating as the HSBC is outsourced mortgage services provider for to the U.S. operations. Once fully ramped, HSBC is expected to be among our top PLS clients.

We remained committed to our corresponded channel and the current market environment this channel is profitable and cash efficient. We have now and we’re focusing correspondent to business partners we believe will consistently deliver high quality loans, and we continue to hold them to strength and standards including delinquency rates, prepayment rates and defect rates.

Although this has reduced volumes in the short-term, we must consider these risks when acquiring NSR via this channel. We believe our mortgage model is well positioned for the current trends and at the mortgage industry is evolving toward our strengths. Residential mortgages remain a cornerstone consumer financial product and an important source of fee based revenue for U.S. banks. And we believe increased regulation and increasing complexity in the mortgage business favor outsourcing.

Further, we believe our scale and specialized expertise make our customized product and service offerings highly attractive then create high barriers to entry. These dynamics contributed to our solid operating performance in the third quarter but we have more work to do. As I have said in the past, we believed both our mortgage and fleet businesses should be able to achieve low to mid team core returns and equity.

While our fleet business is approaching net level, our mortgage business has room for improvement. We believed the bridge from today’s return to meeting our potential in the mortgage business is reducing our mortgage quality related costs. Year-to-date results of our combined mortgage segment were negatively impacted by $201 million in year-to-date mortgage quality related cost.

If not for the mortgage quality related cost, our pretax core earnings for the combined mortgage segment so far this year would have booked more than double what we are reporting. This is why we continue to invest in operational excellence and while we’re committed to defect reduction and process simplification.

As we’ve mentioned last quarter, Fannie Mae has significantly reduced its loan review sample size for our performing loans as a result of our progress in reducing defects and new loan originations which we believe should reduce performing loan repurchases going forward. We believed defect reductions are especially important given the FHFAs new requirements on repurchases and in the third quarter we’ve made continue progress in this area.

The largest of our mortgage quality related costs is the provision for loan repurchase and indemnification liabilities. Mortgage repurchases and repurchase demands remain at an elevated level in the third quarter and we’ve recorded $41 million in foreclosure related charges during the quarter, a slight increase from $39 million in the second quarter.

Our foreclosure related reserves at quarter end was a $176 million. We have also updated our estimate for reasonably possible future losses related to repurchase and indemnification requests to $70 million which would be above and beyond our recorded foreclosure related reserves. This is down $35 million from our estimate of $105 million at the end of the second quarter. The assumption we used to estimate reasonably possible losses are substantially unchanged including that repurchase demands remain at elevated levels for the end of 2013 and that our success rate in defending against such claims is lower than what we have experienced.

Based on our ongoing discussions with the GSEs, we continue to believe that by the end of 2013 there may be substantially complete with their review of our seriously delinquent and defaulted loans related to origination years 2008 in prior which at quarter end represented 87% of our outstanding agency invested repurchase request.

With respect to regulatory matters, as we’ve previously discussed since 2010 we have seen a height and level of focus from governmental bodies in reviewing past mortgage origination and servicing practices. We are providing comments and responding to increase and request for information and connection with these activities, and we continue to invest in our compliance and servicing functions and information systems.

Specifically, the New Jersey Attorney general has conducted an investigation of our mortgage servicing practices and has recently informed us that they believe we have violated New Jersey State Law in connection with customer service and other matters related to laws mitigation activities for certain borrowers in the wake of the financial crisis.

We have also undergone a regulatory examination by a multistate coalition of certain mortgage banking regulators and such regulators have alleged various violations of federal and state laws related to our mortgage servicing practices prior to July 2011. We believe we have meritorious defenses to these various allegations. However, there can be no assurance that claims or litigation will not arise from these inquiries or similar inquiries by other governmental authorities or that fines or penalties will not be assessed against us in connection with these matters.

We believe outstanding customer service is one of the most critical drivers of improved penetration rates in our franchise channels. In the mortgage business, maintaining a quality customer experience is a top priority for us and we remained committed to continually raising the bar on the quality of customer service. It is also clear that a high quality customer experience is a critical deliverable from a regulatory perspective.

For fleet, our call centers handle approximately 2 million calls per year from drivers who have had an accident on a maintenance event, we’ll have a question concerning their company’s fleet policy. We continually invest in employee training for these extremely important call center roles and regularly evaluate our effectiveness.

We’ve received eight separate customer service awards in fleet in the past nine months, including most recently the exceptional Customer Support Performance Award. This is the highest possible rating from the Fraser Group, a leading management consulting firm focused on customer support process improvement and we are the first of their partners to ever have earned this award.

We’ve made significant progress on our liquidity and financing objective so far this year. Our next unsecured debt maturity is our convertible debt too in 2014. We ended the third quarter with nothing drawn on our revolving credit facilities and with the successful execution of our liquidity plans we believe we are well positioned to fund upcoming maturities and estimated repurchase demands with existing liquidity and cash flow from operations.

We also ended the third quarter with an uncovered asset ratio of 2.64 times continuing with our progress towards our target ratio of three times or better. As we’ve discussed before, diversification of our funding sources is an important component of our liquidity plan including exploring funding options for MSR. We believe MSR funding structures recently used by others, work for highly delinquent portfolios, but may not be a medley transferable to ours.

We continue to explore MSR financing structures that we believe could make sense for our high quality low delinquency MSR and deliver acceptable returns for our shareholders.

With that, I’ll turn the call over to Rob, to discuss our results for the quarter.

Robert Crowl

Thanks, Glen. On a GAAP basis, net loss attributable to PHH Corporation for the third quarter 2012 was $42 million or $0.74 per share, which included a $150 million negative mark-to-market adjustment on our MSR asset partially offset by $8 million in derivative gains, which we’re driven mainly by a 37 basis point drop in the primary mortgage rate.

Core earnings which exclude the net MSR mark was a positive $42 million on an after-tax basis or $0.74 per share. In addition, this quarter’s results were impacted by a pretax loss of $13 million or $0.14 per share after-tax, as a result of the early repayment of our 2013 medium term notes. Regarding mortgage, core earnings for the combined mortgage production and servicing segments was $59 million in the third quarter, up $34 million from the $25 million earned in the second quarter of this year.

The primary drivers of this sequential quarter improvement were mortgage production margins of 420 basis points, up 39 basis points from the second quarter, great pipeline hedge gains and the $16 million non-recurring loss related to our reinsurance subsidiary in the second quarter. Partially offsetting these increases and production profitability was higher prepayments in our capitalized servicing portfolio.

While we benefited from record production margins in the third quarter, margins are volatile and the sustainability at these levels is difficult to predict. Retail applications in the third quarter were $15.6 billion and retail interest rate lock commitments expected to close in the third quarter were $4.8 billion, both consistent with solid levels in the second quarter.

Although we continue to see an environment supportive of strong demand, we expect reduced activity in the fourth quarter due to seasonal factors especially in the purchase market. Correspondent loan application volume was up slightly from the second quarter but down 62% from last year, consistent with our strategy to narrow our focus and our correspondent platform to business partners we believe will consistently deliver high-quality results.

Our correspondent channel represented 13% of total closings in the quarter and 20% in the first three quarters of this year, in line with our expectations at this channel, will represent approximately 15% to 20% of total closings for the full year. Competition for volume has increased and tighter margins are possible for lenders in this channel.

Our total loan servicing portfolio has grown 4% over the past four quarters to $185 billion reflecting much more rapid growth in our subservicing UPB. Subservicing UPB declined relative to the second quarter due to an $8 billion transfer in subservicing related to our previously announced termination of an agreement with Charles Schwab.

We expect to more than double our subservicing UPB from the third quarter level with the assumption of approximately $52 billion in subservicing UPB related to our private label agreement with HSBC in the first quarter of next year. We view this growth in subservicing as a positive because there is less capital intensive and has limited rep and warranty risk.

Our capitalized servicing portfolio of $145 billion in UPB at the end of the third quarter is essentially unchanged from the end of the third quarter of 2011. As our replenishment rate has continued to be below 100% primarily from the scaling back of our correspondent channel and higher prepayment rates.

We anticipate returning to a replenishment rate in excess of 100% in 2013 with the ramping up of our PLS relationship with HSBC in the first quarter. 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.

Out total delinquency rate at quarter end excluding foreclosure and real estate owned was 3.04%, down from 3.24% at September 30, 2011 and up from 2.77% in the second quarter of 2012. Our portfolio’s particularly low delinquency rate helps us keep our prolonged servicing cost low and reduce the potential for future cost related to delinquent mortgage loan put backs.

At September 30, 2012, we valued our MSR at 69 basis points of our capitalized loan servicing portfolio, representing a 2.3 times capitalized servicing multiple. These valuations are down from 78 basis points and 2.6 times respectively at the end of the second quarter. The value decline was primarily driven by a decrease in mortgage rates.

Meanwhile our fleet business continued to provide recurring segment profit and operating cash flow in the quarter. Third quarter segment profit for fleet was $21 million consistent with the third quarter of 2011. Growth in fleet management fees due to growth in average service units and lower interest expense were offset by a decline in fleet lease income due to a 3% decline in the average number of leased vehicle units and lower operating lease syndication volumes.

We are pleased with the significant progress we’ve made on our liquidity objective so far this year. In the third quarter, we issued $275 million in senior notes due 2019 and use the net proceeds along with cash on hand to fully repay all of our 2013 unsecured debt. We also closed new multi-year revolving credit facilities including $300 million in unsecured U.S. revolving credit facilities and a Canadian C$125 million three-year secured revolving credit facility to provide working capital for our fleet businesses Canadian operations.

As Glen said, we closed the third quarter with $677 million in unrestricted cash and cash equivalents. The decrease some $700 million at the end of the second quarter was due to the repayment of a portion of our 2013 debt with cash and higher collateral postings, mostly offset by improved efficiency in our secured debt financing and cash flow from our business segments.

And now I’ll turn it back over to Glenn.

Glen Messina

Thanks Rob. We continue to demonstrate solid execution against our four key strategies. Our franchise platforms continue to demonstrate growth and position PHH for continued success. With regard to operational excellence, we are achieving significant progress in reducing defects in new loan originations which should reach significant benefits going forward. We remain focused on delivering excellent customer service in both fleet and mortgage and we are committed to continuous improvement in this area.

And finally, we are pleased with our cash generation and deleveraging over the past few quarters putting us in a considerably better position from both the financing and operating perspective.

I want to recognize and thank my colleagues at PHH for the hard work and enduring commitment. And with that, we’re ready to take questions. Tasha?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from Paul Miller with FBR. Please go ahead.

Paul Miller – FBR

Yeah, thanks a lot guys and good quarter. I want to go back to the comment you made on, Glen, about repaying the debt that’s due next April. I believe it’s about $500 million. So you’re planning to pay that at a current cash and cash generation over the next two quarters?

Glen Messina

Good morning, Paul. We actually prepaid our 2013 debt maturities with cash flow from operations and proceeds from our debt issuance earlier in the second quarter. So that’s already been done.

Paul Miller – FBR

Okay. Is there any other debt – you made a comment, is there any other debt that can be prepaid, that can be paid down?

Glen Messina

Right now we’re evaluating alternatives on looking at our liabilities structure and perhaps restructuring our maturity latter, but for now we’ve dealt with our 2013s.

Paul Miller – FBR

Okay. And then on the MSR, is there a floor where you can write, where you’re able, I mean, is there a floor how well you can right this down, 69 basis points roughly two times servicing fee. It looks like grades are going to stay flat to down here a little bit, but is there a relative floor of how low this MSR could go?

Glen Messina

Paul there is no, from an accounting perspective range like that, there is no floor it really is driven by the assumptions and the model. And as you know, prepayment speeds and interest rates are the biggest driver. So to the extent that your weighted average coupon in your portfolio comes very close to current market interest rates that provide some natural refinancing burnout so to speak in evaluation of the model and with tamper potentially some valuation adjustments. But there is no natural floor so to speak.

Paul Miller – FBR

Okay. And then what was your percentage of HARP? I don’t think you’ve been a big HARP player, am I correct? You just don’t have a lot of HARP eligible loans in your portfolio.

Glen Messina

That’s right Paul. As we’ve talked about before, maybe 15%, 20% of our portfolio is HARP eligible. We did see an uptick in HARP volume in the third quarter. So HARP volume was up 6% vis-à-vis the second quarter. And right now it’s about 6% of our total refi volume.

Paul Miller – FBR

Now that’s 15%, what about the HSBC portfolio? Does that have a bigger chunk of HARP eligible loans?

Glen Messina

Right now, we’re probably not have liberty to discuss the details of what we’re going through in the integration of HSBC. So I’ll wait till that portfolio is boarded.

Paul Miller – FBR

Okay. Thank you very much gentlemen.

Glen Messina

Thank you, Paul.

Operator

Thank you. We’ll take our next question from Bose George with KBW. Please go ahead.

Bose George – KBW

Hey guys, good morning. Actually I just wanted to first go back to the prepared remarks – the comment you made in your prepared remarks about the actions that by the New Jersey regulators. Is there any – in terms of that, is there something qualitatively different in some of these actions or is this similar to stuff that you’ve seen over the last two years and should we see that as being fairly routine?

Glen Messina

That when you look specifically at the New Jersey action for example. The New Jersey action is focused on very small cross-section of ours focused on customer service and loss mitigation, legacy customer service and loss mitigation practices. And really is focused on specific matters to New Jersey State Law. So I’d say it’s a much more narrow focus.

Bose George – KBW

Okay. So it’s reasonable to make that it’s, I mean it’s obviously important to rectify it, but it’s not, in the scheme of things it’s not hugely detrimental to what you guys are doing.

Glen Messina

I look at, bear in mind, we’re not the size and magnitude of the big banks. We don’t have trillions of dollars of servicing here. We didn’t do subprime, didn’t do option arms, didn’t do portfolio loan and we’ve got the lowest delinquencies in the industry. So, on a scale basis it’s much different.

Bose George – KBW

Okay. Now that’s fair. Thanks. And then just going back to the MSR question, just in terms of the MSR, potential MSR mark in the fourth quarter, it looks like mortgage rates are roughly flat, primary rates the farnichar (ph) and coupon is up since quarter-end. Given that scenario, is it fair to think it’s unlikely you’ll have a negative mark in the fourth quarter?

Glen Messina

Bose, we can’t speculate on what’s going to happen to the market going forward. As you know there is a number of assumptions that go into the valuation of mortgage servicing rights. There are option-adjusted spread there is the difference between primary and secondary mortgage rate shapes, low to the yield curve so on and so forth. So I really can’t forecast or predict what the mark would be on the servicing.

Bose George – KBW

Okay. That’s fair. Actually then one last thing on switching to HARP. I mean historically I guess you guys didn’t do HARP refis of – didn’t refi HARP loans from others. I’m wondering is anything changed there, like I said, have they’ve done anything out in the refi and working side that maybe makes you more comfortable to do that?

Glen Messina

There’ve been no changes to-date and I go back, our focus is growth in our franchise channel. So we’re going to continue to focus on our, the business that we originate it through PLS and (indiscernible) and continue to invest in those channels and obviously take advantage of the HARP opportunities that we have within our portfolio and new clients as we bring them on board.

Bose George – KBW

Okay, great. Thanks Glen. Nice quarter guys.

Glen Messina

Thank you.

Operator

Thank you. We’ll take our next question from Henry Coffey with Sterne. Please go ahead.

Henry Coffey Sterne

Yeah, let me go back some of Bose’s questions and the questions on the MSR and then I’ll get on the hoard and listen in. In the state of New Jersey, is that part of a systematic enquiry they’re doing across the board with all the banks that are active in that region as services?

And then on the MSR bid, we’re starting to see cash bids that are sort of lining up with where you have the, your MSR valued. Is that sort of a function – part of your thinking when you look to value? And I’m going to get on hold and listen on. Thank you.

Glen Messina

Okay. I think I heard both two separate questions in there or two separate comments in there. Related to the New Jersey matter, I can’t comment or speculate on whether New Jersey is focused on others beyond us. We’re really focused on our matters here with the State of New Jersey, so that’s all I could add the comment on that one.

Relative to what we’re seeing in the marketplace in terms of some of the M&A activity. I do think the industry is evolving towards our strength. I really do see the importance of the transactions that they – that are been done, kind of exemplify the importance of having a strong originations channel which we do have. We see people exiting the business because they don’t the responsibility or the investments to put in place the compliance infrastructure to service their assets.

And obviously more recently we’re seeing increased activity around high quality performing GSE related servicing. And that’s where our portfolio is focused on. So I think it’s all positive for our business and again it demonstrates our industry continues to evolve towards the strength that we have.

Henry Coffey Sterne

Thank you.

Operator

Thank you. We’ll take our next question from Kevin Barker with Compass Point. Please go ahead.

Steven Halperson – Compass Point

Hi, this is Steven Halperson from Kevin’s stand. I had a question regarding the economic head results and the gain on sale margin. Do you think that’s revenue is sustainable or is this something that could go back down to low single-digits? Should rates go up or be flat?

Robert Crowl

Are you talking about the economic, Steven, this is Rob, are you talking about the economic pipeline head results?

Steven Halperson – Compass Point

Yes.

Robert Crowl

Yeah, it’s, as you can tell from the supplement, it has and can be volatile. There are times when we have better pull-through experience and that tends to improve that number. So best I can tell you is, it’s a number that does jump around but we’ve been benefiting recently from better pull-through.

Steven Halperson – Compass Point

Great. Thank you so much.

Operator

We will take our next question from Ryan Butkus from Citigroup. Please go ahead.

Ryan Butkus – Citigroup

Good morning. Two questions, the first, could you please provide a liquidity update as of the end of the October? And the second, during 2012 you’ve executed on your liquidity plan by addressing near-term maturities such as the 2013 notes, extended revolvers, it seems to be addressing what the rating agencies had concerns about at the end of last year and the start of this year. Can you provide briefing about maybe ongoing discussions you’ve had with the ratings agencies more recently?

Glen Messina

Sure Ryan. We really don’t discuss interim quarter pro forma results from a liquidity perspective that’s not been a practice of the company and so we’re focused really on what our performance was at the end of the quarter.

With regards the progress that we’ve made, I feel I’m very proud of the team here and I feel very comfortable with the progress that we’ve made in our liquidity objectives in 2012. We obviously do have ongoing discussions with the credit rating agencies. We do expect to meet with them towards the end of this quarter and the end of the fourth quarter to September timeframe. And obviously, we’re going to be partitioning for everything that we’ve done and we’ve made strong progress here, we’ve deleveraged the balance sheet, we’ve prepaid our obligations, we’ve got plenty of cash on hand, plenty of liquidity and we’ve got a valid and executable liquidity plan for the business with a demonstrated track record. So obviously I’m going to be putting forth the campaign at a minimum, we ought to be coming off on negative outlook.

Ryan Butkus – Citigroup

Thank you.

Operator

Thank you. We’ll take our next question from Chris Gamaitoni from Millennium. Please go ahead.

Chris Gamaitoni Millennium Partners

Thanks guys. My questions have already been answered.

Glen Messina

Thanks Chris.

Operator

Thank you. We’ll move next to Ryan Stevens with Philadelphia Financials. Please go ahead.

Jordan Hymowitz – Philadelphia Financials

Hey guys. It’s Jordan Hymowitz actually.

Glen Messina

Oh, hey Jordan.

Jordan Hymowitz – Philadelphia Financials

Question, can you comment on, you mentioned that in the upcoming quarter the margins might be more pressured. Is that because there is less HARP volume or is it on a constant product basis?

Glen Messina

Jordan, I think we’re seeing, I would call it margin compression relative to the third quarter. Margin still remain in the relatively high level as compared to historic levels. I’m not sure it’s limited to anyone product or product mix, it’s pretty much across the board.

Jordan Hymowitz – Philadelphia Financials

And is some of the margin product is obviously more loans closed in the third quarter than you would have expected because rates fell. So some of it was on hedged and ends up closing with bigger gains again if you standardize for that is at the same pressure?

Glen Messina

I’m not sure we necessarily look at it that way. We look at priced in margins and as you know report the economic hedge results in terms of gain or loss on a hedge separately. So when I talk about what we’re seeing in terms of margins, I’m really talking about priced in margins exclusive of any benefit of detriment from pull-through.

Jordan Hymowitz – Philadelphia Financials

Got it. And different type of real question. Are you guys bidding on some of the servicing books that have been offered in the market and if so, is it across the board or would it only be more prime servicing?

Glen Messina

I really can’t comment on the activity that we’re seeing. I think I mentioned before on previous calls, we continue to be focused in our PLS channel on looking at opportunities to pickup private label business that does include bidding on subservicing or servicing as those opportunities present themselves.

Jordan Hymowitz – Philadelphia Financials

But would you also be interested in subprime or would it only be prime?

Glen Messina

Prime. We just don’t have the operational configuration for subprime.

Jordan Hymowitz – Philadelphia Financials

Got it. Thank you.

Glen Messina

You’re welcome.

Operator

(Operator Instructions) We’ll take a follow-up question from Paul Miller with FBR.

Paul Miller – FBR

Yeah, hey thanks. Hey Glen, so going back to the gain on sales, so you’re basically saying that, these gains on sales margins are at all-time record levels and we know they got to come in, but are you saying you’re seeing pressure rate now on these gain on sales margin from what we saw in the third quarter? And is it mainly driven by seasonality or just capacity you think.

Glen Messina

Paul, we are, what I am saying is, since the close of the quarter, we have seen margins tighten up a bit from the 420 basis points I’ve reported at the end of the quarter, but they’re still very, very high relative to historic levels. I think the timing does have to do with little bit of seasonality, so I’m, at this stage of the game not necessarily alarmed or panic that there is anything, any major seed changes that’s happening within the industry relative to margins.

Paul Miller – FBR

And then what about, you might have said this and I missed it but what about volumes, are you seeing any decline in volumes at this point or is it not relatively steady?

Glenn Messina

We are seeing some seasonal drop off, so pause, particularly within the real estate channel, the reality channel, that just really tends to fall off in the fourth quarter.

Paul Miller – FBR

Yeah.

Glenn Messina

And in the fourth quarter you’ve got the holidays, right, you’ve got Thanks Giving holiday, you’ve got Christmas holiday as well, we’re seeing a little bit of a slowdown in closings related to Hurricane Sandy and those days that were affected, the GSEs put forth requirements for homes in those areas that they do need to have a secondary inspection. So if they were in the area they have to get a secondary inspection before they close.

So the majority of it is seasonal with a little bit of impact from Sandy.

Paul Miller – FBR

And do you know at the top of your head what type of exposure, I mean what is the percentage of the originations in the North East and the affected states of Sandy?

Glenn Messina

Yeah, at this state – I’m going to turn it over to Dave Tucker and who runs our mortgage platform, Dave, percentage of our originations relative to the North East that was affected by Sandy.

Dave Tucker

Yeah, if you just go on the states it’d be in the low 20% range, but you’ve got to really kind of break down different counties and think about it that way, that’s looking at it from a total state perspective.

Paul Miller – FBR

I know most mortgage banks had told me that they think it might, it won’t probably have a material impact if anything that just moves some production into the next quarter.

Dave Tucker

Yeah that’s correct, that’s correct.

Glenn Messina

Yeah it’s basically the county difference, did you guys hold on it closely to do the secondary inspection.

Dave Tucker

That’s correct

Paul Miller – FBR

Yeah. Okay, and can you remind us again when does – when do you guys start doing the HSBC portfolio, is that in January or you starting to work on that now?

Glenn Messina

Well the integration has been ongoing for several months, we are going to throve it, boarding a portfolio of $52 billion of UPB at subservicing is no small and ever, plus we got to build all the connections for financial reporting and all those things back HSBC, particularly to support all of the servicing but the origination side. But we expect to be completed with that by the end of the first quarter and Dave taking originations probably at the end of the first quarters well too.

Dave Tucker

That’s right, 1st of April.

Paul Miller – FBR

So, you would start – you can start reifying that portfolio at April 1st?

Glenn Messina

Yeah, we would – that portfolio would become ours in the effect of March 31st, April 1st.

Paul Miller – FBR

So is HSBC actively refine that portfolio, do you know or they’re just ignoring it?

Dave Tucker

I can’t comment on that.

Paul Miller – FBR

Okay. Okay, hey guys, thanks a lot.

Glenn Messina

Thanks, Paul.

Paul Miller – FBR

Yeah.

Operator

Thank you. We’ll take another follow-up from Chris Gamaitoni with Millennium. Please go ahead.

Chris Gamaitoni – Millennium Partners

Hi guys. On the HSBC portfolio, if you reified those loans are you going to recapture the MSR or is it like a closing and either HSBC were captured the MSR and you just kept paid for the processing?

Glenn Messina

Dave, do you want to address that?

Dave Tucker

Yeah, I would go back and then basically back into their portfolio, so we do a reify financing for lot of our PLS clients. This goes back to their process and these that we get off that and that they get off of our, with that activity would continue.

Chris Gamaitoni – Millennium Partners

So, basically you’ll get the processing kind of hard work dollars and they’ll get the gain?

Dave Tucker

That’s correct, it’s just like our origination activity and volume today with them on a new origination.

Chris Gamaitoni – Millennium Partners

All right, so let me clear about that, thank you.

Operator

Thank you. And it appears we have no further questions at this time.

Glenn Messina

Thank you, Tasha. Thank you to our shareholders and all the people who’ve joined the call, we look forward to speaking with you next quarter.

Operator

This concludes the PHH Corporations third 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 888-203-1112 or 719-457-0820 and using conference Id 6417933. It will be archived until November 23, 2012. You may now disconnect. Thank you.

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