A turnaround project: Jerry Selitto, chief executive officer of PHH Corporation, Mount Laurel, New Jersey, has taken the reins of this unique company and gotten solid results.
Flash-forward three decades to another millennium and to another crash-and-burn victim--this time not the Six Million Dollar Man, but rather a trillion dollar (give or take) residential mortgage industry.
This is the story of one company that, instead of burning up when the market crashed, re-engineered itself from the top down in an effort to become better, stronger, more profitable than ever (bionics not included).
The company, PHH Corporation, Mount Laurel, New Jersey, really isn't a household name except in the housing and mortgage finance space, but it's a firm that challenges conventional description.
The 30-second, trade-show convention elevator speech a PHH executive might give to the uninformed might go something like this: PHH Corporation is a leading outsource provider of mortgage and vehicle fleet-management services. Its subsidiary, PHH Mortgage, is one of the top-five retail originators of residential mortgages in the United States, according to Inside Mortgage Finance, while its other subsidiary, PHH Arval, is a leading fleet-management services provider in the United States and Canada.
That speech would be an accurate, if incomplete, sketch of a company that has spent more than a year in the midst of a "transformation effort." PHH's transformation began amid uncertainty and turmoil--both from outside and within the company--and now the company ended 2010 with a new vision and the determination not just to survive but to thrive in an ambiguous, unprecedented, market environment.
The vision and the will behind PHH's transformation comes courtesy of mortgage industry veteran Jerome J. "Jerry" Selitto, who became PHH Corporation's president and chief executive officer (CEO) near the end of October 2009.
"We took a hard look at every aspect of our business in 2009, which indicated that we have significant challenges to confront as well as tremendous opportunities to pursue," Selitto wrote in his April 30, 2010, message to stockholders in PHH's last annual report.
"In order to succeed in our efforts, we need to fundamentally and aggressively change the way we do business. We cannot simply keep pace with the changes in our industries--we must stay well ahead of them. We need to make PHH a stronger, more profitable and more flexible company that is also more focused than ever on delivering to our customers," Selitto added.
Help wanted: 'change agent'
Selitto was tapped following a comprehensive search by PHH's new board to be a steady hand at the helm. He was hired to reinvigorate an underperforming company that had been shaken by a series of turbulent events. Those included an agreement to sell and split the company that fell apart and the resulting proxy fight that swept away top management and much of the board of directors, as well as the global financial crisis, according to Jim Egan, a PHH director and non-executive chairman of the board.
"One of the things we looked for in a new CEO [was], we needed somebody who was a visionary, who could look into the future and develop a road map [for] where to take the business so that it could outperform its respective industries," Egan, who lead the company's CEO search process, told Mortgage Banking.
"It was very clear that we needed to get a change agent in [the CEO's office]. The board wanted someone who was going to bring about a whole new set of management disciplines, practices and better use of more sophisticated management tools in the running of the business," Egan said.
PHH was founded in 1946 by Duane Peterson, Harley Howell and Richard Heather, when the trio formed a partnership to manage automobile fleets. After many years of growth, expansion and diversification into other areas, including real estate management services, the current incarnation of PHH emerged in 2005 when PHH Mortgage and PHH Arval were spun off from New York-based Cendant Corporation as an independent, publicly traded company.
Life as a new public company
"The company was spun out in 2005 from Cendant, and it wasn't given a lot of preparation to go public. They took two divisions and said, 'You guys are now formed under one legal entity,' and pushed it out to the public markets," explained Egan, who joined the PHH board in March 2009.
PHH Corporation operates three major segments of the business under two subsidiaries--mortgage production and mortgage servicing under PHH Mortgage, and vehicle fleet-management services under PHH Arval.
PHH Mortgage's production segment originates, purchases and sells mortgage loans through PHH Mortgage Corporation and its subsidiaries, which include PHH Home Loans LLC and Speedy Title & Appraisal Review Services LLC (STARS).
It also provides outsourced, private-label mortgage services to financial institutions and real estate brokers, and offers appraisal services, credit research, flood certification and tax services.
PHH Mortgage's servicing segment services mortgage loans originated by PHH Mortgage and PHH Home Loans, purchases mortgage servicing rights (MSRs) and acts as a subservicer for clients that own the underlying MSRs. Its activities include collecting loan payments, remitting principal and interest payments to investors, and holding escrow funds for payment of mortgage-related expenses, according to PHH.
The company's servicing segment also includes its mortgage reinsurance business--Atrium Insurance Corporation, Centennial, Colorado, a wholly owned subsidiary and monoline mortgage guaranty insurance company.
Throughout much of 2007, PHH was engaged in talks to sell the company, but the deal died when one of the would-be buyers was inhibited by the credit crisis from raising money to cover its part of the purchase. After the deal collapsed, a shareholder revolt ensued, prompting PHH's then-CEO to step down.
Replacing the CEO
By mid-2009, Egan and PHH's board were actively seeking a leader who could guide PHH forward. They needed someone who could take a company that in many ways still operated as two separate business divisions--and shape it into a single cohesive unit.
"While we didn't want someone who was tainted in the industry based on the bad decision-making that had gone on over a couple years with subprime, we did want somebody who understood the mortgage business, who had some background in the fleet business, and someone who could come in and help build these additional corporate capabilities that we didn't have before," says Egan.
"We wanted someone who had the ability to provide leadership to a team to drive for operational excellence and win in the marketplace, and who had a consistent track record of doing that. We found that in Jerry," Egan adds.
Enter Jerry Selitto. From a field of 80 initial candidates, Egan says, Selitto was the first of eight would-be CEOs to be interviewed by the board, where he made an immediate and positive impression. For Selitto, the feeling was mutual.
"I looked at [the company] and I saw a strong foundation with a lot of possibility but without a lot of major renovation needed, and I thought it was an excellent opportunity," Selitto told Mortgage Banking.
"I'm sort of more of an entrepreneur, As a result, it was exciting to come into a company that wasn't at the time running on all eight cylinders and where it was going to take some fixing. That's the reason I joined," he says.
Selitto has more than 40 years of experience in the mortgage industry and in capital markets. Prior to joining PHH, he worked at loan origination technology firm Ellie Mae Inc., Pleasanton, California, as a senior consultant and as a member of the senior management team. He also served as CEO of the now-defunct DeepGreen Financial, Cleveland, an innovative Web-based federal savings bank and mortgage company that grew to become one of the nation's most successful online home-equity lenders. And earlier in his career, he helped found and served as vice chairman of Amerin Guaranty Corporation (now Radian Guaranty, Philadelphia).
With the board having found its change agent, Selitto went to work re-engineering the company with an eye toward wringing out inefficiency and improving operating results throughout the company.
"Let's face it. If you look at the mortgage business [and], especially today, it's a commodity business. We are the only freestanding, non-bank-affiliated public company operating as a major player in the mortgage sector. Our competition is [CitiMortgage], Wells Fargo and Chase," says Selitto. "Obviously, they have a funding advantage over us and they have size over us. How do we compete in that marketplace? The way we compete is by being the most efficient provider. That's why efficiency was the top priority."
With just seven days on the job, PHH Corporation's new CEO held his first investor conference call and it was then that he publically laid out a series of performance goals for the company.
This included a commitment to deliver $100 million to $120 million in cost savings off a $600 million expense base. He also pledged to deliver a progress report on this every quarter.
"I told them in that call that 'I will give you a number and my objective is to build credibility with you--the investors. The way you build credibility is to do what I say I'm going to do. So I will give you clear objectives by which you can measure me,'" Selitto recalls saying.
Changing the corporate culture
Selitto's credibility-building gesture wasn't just aimed at investors, but also at PHH staffers at all levels, who the new CEO saw as a critical component in moving the company in a new direction.
"I wanted to change the culture. The company had been through a lot, and there was a bit of a victim mentality within the company. I wanted a renewed focus on accountability, discipline and professionalism within the company. That was sort of my mantra. It still is," says Selitto.
"[Former General Electric Chairman and CEO] Jack Welch had it right--people want to be on a winning team. I think the fact that we started making progress on all fronts and that we're delivering on things that we said we're going to do--that we're building volume, building revenue, building success stories--that made it a lot easier to change that culture and to get people on board," adds Selitto.
Selitto launched a wide range of initiatives across the entire business. At the corporate level, he adopted a "one PHH" approach by streamlining back-office functions--eliminating redundancy in the company's information technology, human resources, legal and finance areas--as well as creating a shared services environment that leverages best practices across the entire corporation.
In PHH's mortgage business, Selitto says he focused on reducing the sources of friction between the borrower and investor by removing touch points in the mortgage production process that do not add value--and might even cause confusion and delay. To that end, he says, the company is investing in technology to improve the productivity of its mortgage-collection function and enhance the efficiency of loan-modification and loss-mitigation activities.
In July 2010, for example, PHH Mortgage and Ellie Mae jointly announced that PHH Mortgage was added as a lender to Ellie Mae's Encompass 360[TM] Select program, which enables a two-way flow of communication between preferred Encompass customers and PHH Mortgage.
Egan credits Selitto's efforts to build a deep and quality bench at the corporate and management level, in particular by adding the position of chief risk officer to the ranks of PHH management.
"Jerry's really gone about the task of bringing in strong industry experience and talent into the company, which is what he said he was going to do," says Egan. "He said he would recruit people at a high level into this organization, and he's delivered on the promise."
From assembly line to job shop
Among those recruits, Selitto tapped mortgage industry veteran Luke Hayden, former CEO of New York-based Mortgage Renaissance Investment Trust, as the new president of PHH Mortgage in May.
Hayden told Mortgage Banking he had long admired PHH's business model and customer value proposition.
Even as he was fully on board with Selitto's and the board's vision of an aggressive new direction for the company's mortgage sales and marketing strategy, Hayden says he inherited an operation that didn't need an overhaul so much as some "tweaking" and recalibration for the current market reality.
"A lot of small process improvements were the order of the day. They weren't missing on any of the fundamentals, but there were tweaks to the process and modest adjustments that allowed me to fine-tune the operation and make it hum a little better," explains Hayden.
"Some of those tweaks were larger than others, but there had been a lot of processes and procedures that had evolved over time that really needed to be rethought," he says.
One such tweak, Hayden notes, was converting what had been a proverbial assembly-line approach to mortgage loan processing to a job-shop method in order to conform to the new lending environment.
"The prior workflow was very much established as an assembly line, where you do one task over and over, then it goes on to the next seat. That's no longer the case in today's environment," he says. "Now that we're no longer in the world of validating three to five credit-income and asset documents per file, but rather we're looking at 15 to 25 documents per file and, importantly, there's an inter-relationship between documents, the whole process workflow had to be rethought."
The solution was elegant in its simplicity, says Hayden. PHH staffers were directed to physically rearrange their desks to establish work squads where underwriters and processors sat together, and the process changed where the same underwriter/processor team would become intimately familiar with the details of the file.
"We're kind of going back to the basics ... organizing yourself around those basics is what needed to be done," says Hayden. "Now, the good news is that PHH never strayed far from the basics."
In order to affect the company's new direction for mortgage sales and marketing strategy, Selitto says PHH has been working more closely with Parsippany, New Jersey-based Realogy Corporation--a real estate brokerage and owner of various brands, including Coldwell[R] Banker[R], ERA[R] and CENTURY 21[R]--to increase penetration and build better volume in PHH's real estate channel.
PHH's joint venture with Realogy is maintained through joint ownership of PHH Home Loans, where PHH Corporation owns 50.1 percent and Realogy owns the remaining 49.9 percent.
PHH's strategic relationship agreement with Realogy calls for PHH to get home loan referrals by exclusive arrangement. According to the company's Securities and Exchange Commission (SEC) filing, PHH's relationship with Realogy represented 37 percent of mortgage loan originations for the year ending Dec. 31, 2009.
"The relationship we have with Realogy, I believe, is our crown jewel," says Selitto. "It really differentiates PHH from any other mortgage company or mortgage originator out there."
The problem for PHH, Selitto noted when he first arrived, was that despite PHH having mortgage advisers located inside CENTURY 21, ERA and Coldwell Banker offices to capture referrals, the franchise operation only had 3 percent penetration, while PHH financed about 18 percent of home purchases by customers of Realogy-owned real estate offices.
"We actually had very high turnover with our mortgage advisers, so it seemed to me that our crown jewel was broken and that it really needed to be fixed," says Selitto.
"The way I fixed [the problem] was to bring in a very disciplined and very focused sales manager [Bruce Van Fleet, senior vice president, real estate sales] to rebuild the relationship with Realogy's management, and that was a No. 1 priority. I have to say that's been successful."
Going forward, PHH isn't looking to expand into new areas of business, but rather to grow in areas of proven success. During that first investor call in the fall of 2009, Selitto announced the company's goal of increasing mortgage production market share from 2 percent to 3 percent.
"It was all about building sustainable income, and the way to do that was by increasing market share," Selitto says. "We've been a consistently 2 percent market-share player. I said the only way we can show that we can build sustainable income is by increasing market share, and given the consolidation in the market, it seemed like the perfect time to do that."
During PHH's third-quarter 2010 earnings report, the company, citing figures by Inside Mortgage Finance, reported its market share had reached 2.9 percent on a year-to-date basis even as overall volume grew by 5.9 percent for the same period, while its competitors showed a year-over-year decline in market share.
"By increasing penetration of new and existing clients, we have profitably grown market share without compromising our high credit standards," Selitto noted in PHH's third-quarter 2010 earnings statement.
PHH reported that total mortgage closings were $12.7 billion for the third quarter of 2010, up 26 percent from the second quarter and up 41 percent from the third quarter of 2009. With closed loans for the first nine months of 2010 at $30.6 billion and a robust pipeline of interest-rate lock commitments, PHH revised its guidance for production volume for the full year from $39 billion to approximately $45 billion.
On the servicing side
On a whole different side of PHH's business, following a comprehensive review, Selitto says PHH has not halted foreclosures and has no plans to initiate a foreclosure moratorium. As of Sept. 30, Selitto says, PHH had less than 17,000 first-mortgage loans in foreclosure, representing less than 1.7 percent of the loans the company services.
According to numbers provided to Mortgage Banking by PHH, as of Sept. 30, 2010, PHH's total servicing portfolio was $159,411 billion, with loans subserviced for others totaling $24,037 billion and PHH's owned servicing portfolio totaling $135,374 billion.
The mortgage mix, according to PHH, was $132,393 billion in conventional loans, $20,179 billion in government loans and $6,839 billion in home-equity line of credit (HELOC) loans for the first nine months ended Sept. 30, 2010.
"We undertook a comprehensive review of our foreclosure processes in light of problems experienced by other mortgage companies and, based on that review, we have not halted foreclosures in any states," said Selitto in PHH's third-quarter 2010 results press statement.
"We experienced a decrease in foreclosure provisions during the quarter as we began to see stability in repurchase trends. Based on the high credit quality of our servicing portfolio, our volume of foreclosure activity is small compared to our largest competitors," Selitto added in the company statement.
While re-engineering with an eye toward creating and refining efficiencies remains an ongoing effort, Selitto says most of the substantial rehab work on the "House of PHH" has mostly been completed.
The key to success going forward, he says, is to remain focused on maximizing the company's conservative business model and prudent underwriting culture.
"This year--2010--was spent making sure we have the processes right, while 2011 is going to be about automating as much of those processes as possible," says Selitto.
"In December 2011, I want to be in a position looking back where we have achieved our earnings goals, our buy-in goals, our market-share goals--that we've increased productivity and we've built a flexible and scalable business model. So if I look back and we've achieved our goals, I'm going to be a pretty happy camper."
Charles Wisniowski is a contributing writer based in Frederick, Maryland. He can be reached at email@example.com.
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|Comment:||A turnaround project: Jerry Selitto, chief executive officer of PHH Corporation, Mount Laurel, New Jersey, has taken the reins of this unique company and gotten solid results.(Profile)|
|Article Type:||Company overview|
|Date:||Feb 1, 2011|
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