PHH Mortgage Corporation -- Moody's affirms PHH Mortgage Corporation's Caa1 corporate family rating and B2 senior secured rating; outlook changed to positive

Rating Action: Moody's affirms PHH Mortgage Corporation's Caa1 corporate family rating and B2 senior secured rating; outlook changed to positiveGlobal Credit Research - 16 Aug 2022New York, August 15, 2022 -- Moody's Investors Service ("Moody's") has affirmed PHH Mortgage Corporation's (PMC) Caa1 corporate family rating (CFR) and B2 senior secured rating. PMC's outlook was changed to positive from stable.Affirmations:..Issuer: PHH Mortgage Corporation.... Corporate Family Rating, Affirmed Caa1....Senior Secured 1st Lien Regular Bond/Debenture, Affirmed B2Outlook Actions:..Issuer: PHH Mortgage Corporation....Outlook, Changed To Positive From StableRATINGS RATIONALEThe affirmation of PMC's ratings reflects the firm's currently weak but improving profitability and modest capital levels.PMC's profitability has been weak due to a cost structure intended for a larger servicing portfolio. However, the company has significantly reduced costs. Furthermore, its mortgage servicing rights' (MSRs) joint venture with Oaktree, its recent acquisitions to grow its lending and servicing businesses, along with the extension of debt maturities, should provide the firm with the means and the runway to grow its businesses and improve its profitability.The company's capitalization, as measured by tangible common equity to adjusted tangible managed assets (which excludes the Ginnie Mae loans eligible from repurchase from the capital ratio) was 4.6% as of 30 June 2022. PMC's modest reported capitalization is partly due to its inclusion of securitized Home Equity Conversion Mortgages (HECMs) and related liabilities on its balance sheet, in accordance with US GAAP accounting standards. While the company does not own the underlying assets of the securitizations, as a servicer it is required to repurchase the FHA-insured HECM mortgages from the Ginnie Mae pools under certain circumstances. Moody's views the credit risk of securitized HECM loans to be modest due to the FHA insurance, which carries the full faith and credit of the US government. When also adjusting the capital ratio for reverse mortgage loans and securitizations on its balance sheet, the company's capital levels were more solid at 12.0% as of 30 June 2022.The change in PMC's outlook to positive from stable reflects the progress the company is making in transitioning its strategy to focus on originations and servicing of non-delinquent forward and reverse mortgages from the servicing of seriously delinquent loans, which should lead to a more resilient business model and more stable earnings profile. The positive outlook also reflects Moody's expectation that PMC will maintain stable financial metrics in the next 12-18 months with respect to capitalization and liquidity, continue to strengthen its servicing and origination franchises and make progress with respect to its strategic plan to improve profitability.Moody's said the potential for an upgrade of PMC's Caa1 CFR implied by its positive outlook does not necessarily extend to its B2 senior secured rating. PMC has expanded and increasingly utilized its MSR revolving credit facilities, increasing the ratio of outstanding debt under these facilities to its total corporate debt, a negative factor for senior secured note holders. The affirmation of the B2 senior secured rating reflects that this negative factor is currently offset by the improvement in the company's credit fundamentals, which are reflected in PMC's positive outlook.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSPMC's CFR could be upgraded if the firm improves its financial performance, such as increasing its profitability, as measured by a ratio of net income to average managed assets, to consistently above 0.5%, while maintaining its TCE to adjusted tangible managed assets (which excludes the Ginnie Mae loans eligible from repurchase from the capital ratio) above 4% and TCE to adjusted tangible assets (which excludes loans eligible for repurchase and home equity conversion mortgages) above 10.0%, without a weakening of its liquidity profile or any material, negative regulatory developments.PMC's senior secured rating could be upgraded should its CFR be upgraded, and its funding mix shifts towards unsecured debt and away from secured debt. However, in the event of an upgrade of the CFR, if the ratio of the outstanding first lien senior secured debt divided by the sum of the first lien senior secured debt and the second lien secured notes remains consistently above 15%, then the senior secured rating likely would remain unchanged.The ratings could be downgraded if the firm is unable to sustainably maintain at minimum breakeven profitability or if capitalization weakens, as measured by TCE to adjusted tangible managed assets (excluding the Ginnie Mae loans eligible from repurchase from the capital ratio), to below 3.0% and TCE to adjusted tangible assets (excluding loans eligible for repurchase and home equity conversion mortgages) falls below 7.5%, or in the event that regulatory action or litigation materially restricts the company's business activities, or harms its franchise and reputation, or if the company is subject to regulatory or legal actions resulting in material fines or judgments. In addition, the senior secured rating could be downgraded if PMC's outlook returns to stable from positive and the ratio of the debt under the company's first lien senior secured debt to total corporate debt remains consistently above 15%. The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/65543. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.PMC is a wholly-owned operating subsidiary of Ocwen Financial Corporation, (Ocwen, NYSE: OCN).REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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