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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





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|þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the quarterly period ended September 30, 2017





OR





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|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the transition period from                              to





Commission File Number: 1-7797





PHH CORPORATION


(Exact name of registrant as specified in its charter)


MARYLAND52-0551284(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification Number)3000 LEADENHALL ROAD08054MT. LAUREL, NEW JERSEY(Zip Code)(Address of principal executive offices)





856-917-1744


(Registrant’s telephone number, including area code)








Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer  þ  Accelerated filer  o  Non-accelerated filer  o  (Do not check if a smaller reporting company) Smaller reporting company  o Emerging growth company  o





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ





As of November 1, 2017 , 32,547,258 shares of PHH Common stock were outstanding.








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TABLE OF CONTENTSPageCautionary Note Regarding Forward-Looking Statements1PART I – FINANCIAL INFORMATIONItem 1.Financial Statements3Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations40Item 3.Quantitative and Qualitative Disclosures About Market Risk72Item 4.Controls and Procedures73PART II – OTHER INFORMATIONItem 1.Legal Proceedings74Item 1A.Risk Factors74Item 2.Unregistered Sales of Equity Securities and Use of Proceeds75Item 3.Defaults Upon Senior Securities76Item 4.Mine Safety Disclosures76Item 5.Other Information76Item 6.Exhibits76Signatures77Exhibit Index78








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Except as expressly indicated or unless the context otherwise requires, the “Company,” “PHH,” “we,” “our” or “us” means PHH Corporation, a Maryland corporation, and its subsidiaries.





CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS





Certain statements in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements may also be made in other documents filed or furnished with the SEC or may be made orally to analysts, investors, representatives of the media and others.





Generally, forward-looking statements are not based on historical facts but instead represent only our current beliefs regarding future events.  All forward-looking statements are, by their nature, subject to risks, uncertainties and other factors. Investors are cautioned not to place undue reliance on these forward-looking statements.  Such statements may be identified by words such as “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could.”  Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements concerning the following:





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|▪ | our expectations related to our actions and their outcomes resulting from our strategic review, including the timing of any such actions, our estimates of transaction proceeds, operating losses and exit costs, the amount, timing and our expected use of any proceeds, and any other anticipated impacts on our results, client and counterparty relationships, debt arrangements, employee relations or expected value to shareholders;

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|▪ | our projected financial results and expected capital structure for the remaining business after executing the actions resulting from our strategic review, based on our assessment of the market for subservicing and portfolio retention services, our business strategy and our competitive position;

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|▪ | our expectations related to any future strategic actions after completion of the contemplated actions resulting from the strategic review;

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|▪ | the method, amounts and timing of any capital returns to shareholders;

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|▪ | the potential results of our subservicing business development efforts;

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|▪ | anticipated future origination volumes and loan margins in the mortgage industry;

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|▪ | our expectations of the impacts of regulatory changes on our business;

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|▪ | our assessment of legal and regulatory proceedings and the associated impact on our financial statements and liquidity position;

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|▪ | our expectations around future losses from representation and warranty claims, and associated reserves and provisions; and

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|▪ | the impact of the adoption of recently issued accounting pronouncements on our financial statements.

Actual results, performance or achievements may differ materially from those expressed or implied in forward-looking statements due to a variety of factors, including but not limited to the factors listed and discussed in “Part II—Item 1A. Risk Factors” in this Form 10-Q, and “Part I—Item 1A. Risk Factors” in our 2016 Form 10-K and those factors described below:


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|▪ | the effects of our strategic actions, and any associated transactions, on our business, management resources, customer, counterparty and employee relationships, capital structure and financial position;

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|▪ | our ability to execute and complete the actions resulting from our strategic review and implement changes to meet our operational and financial objectives, including (i) restructuring our remaining business and shared services platform; (ii) achieving our growth objectives and assumptions; and (iii) resolving our legacy legal and regulatory matters;

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|▪ | any failure to execute any portion of the remaining sales of MSRs under our existing agreements, or realize estimated proceeds from the transactions, which may be driven by the following reasons, among other factors:  (i) not receiving required regulatory, investor, agency, private loan investor and/or client (originations source) approvals for any portion of the sale portfolio; (ii) changes in the composition of the portfolio and related servicing advances outstanding on each sale date; and (iii) not meeting any other conditions precedent to closing, as defined in the respective agreements;

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|▪ | any failure to execute the sale of certain remaining assets of PHH Home Loans and its subsidiaries, or realize estimated proceeds from the transactions, which may be driven by the following reasons, among other factors: (i) not receiving required regulatory and agency approvals; and (ii) not meeting any other conditions precedent to closing, as defined in the respective agreements;




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|▪ | available excess cash from our strategic actions is dependent upon a variety of factors, including the execution of the sale of our remaining MSRs, the monetization of our investment in PHH Home Loans, the successful completion of our PLS exit activities at a certain total expense, the resolution of our outstanding legal and regulatory matters and the successful completion of other restructuring and capital management activities, including any unsecured debt repayments, in accordance with our assumptions;

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|▪ | the effects of any termination of our subservicing agreements by any of our largest subservicing clients or on a material portion of our subservicing portfolio;

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|▪ | the effects of market volatility or macroeconomic changes and financial market regulations on the availability and cost of our financing arrangements, the value of our assets and the housing market;

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|▪ | the effects of changes in current interest rates on our business, the value of our mortgage servicing rights and our financing costs;

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|▪ | the impact of changes in U.S. financial conditions and fiscal and monetary policies, or any actions taken or to be taken by the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System on the credit markets and the U.S. economy;

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|▪ | the effects of any significant adverse changes in the underwriting criteria or the existence or programs of government-sponsored entities, such as Fannie Mae and Freddie Mac, including any changes caused by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other actions of the federal government;

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|▪ | the ability to maintain our status as a government sponsored entity-approved seller and servicer, including the ability to continue to comply with the respective selling and servicing guides, our ability to operationalize changes necessary to comply with updates to such guides and programs and our ability to maintain the required minimum capital;

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|▪ | the effects of changes in, or our failure to comply with, laws and regulations, including mortgage- and real estate-related laws and regulations and those that we are exposed to through our private label relationships until the complete exit from this business channel;

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|▪ | the effects of the outcome or resolutions of any inquiries, investigations or appeals related to our mortgage origination or servicing activities, any litigation related to our mortgage origination or servicing activities, or any related fines, penalties and increased costs, and the associated impact on our liquidity;

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|▪ | the ability to maintain our relationships with our existing clients, including our ability to comply with the terms of our private label and subservicing client agreements and any related service level agreements;

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|▪ | the inability or unwillingness of any of the counterparties to our significant customer contracts, hedging agreements, or financing arrangements to perform their respective obligations under such contracts, or to renew on terms favorable to us, if at all;

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|▪ | the impacts of our credit ratings, including the impact on our cost of capital and ability to access the debt markets, as well as on our current or potential customers’ assessment of our long-term stability;

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|▪ | the ability to obtain or renew financing on acceptable terms, if at all, to finance our mortgage loans held for sale and servicing advances;

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|▪ | the ability to operate within the limitations imposed by our financing arrangements and to maintain or generate the amount of cash required to service our indebtedness and operate our business;

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|▪ | any failure to comply with covenants or asset eligibility requirements under our financing arrangements; and

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|▪ | the effects of any failure in or breach of our technology infrastructure, or those of our outsource providers, or any failure to implement changes to our information systems in a manner sufficient to comply with applicable laws, regulations and our contractual obligations.

Forward-looking statements speak only as of the date on which they are made.  Factors and assumptions discussed above, and other factors not identified above, may have an impact on the continued accuracy of any forward-looking statements that we make.  Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements.  For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.








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PART I  — FINANCIAL INFORMATION





Item 1. Financial Statements








PHH CORPORATION AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(In millions, except per share data)


Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016REVENUESOrigination and other loan fees$33$75$114$215Gain on loans held for sale, net3587129212Loan servicing income, net353996138Net interest expense(10)(7)(23)(23)Other income283318Net revenues121197347550EXPENSESSalaries and related expenses6286223268Commissions13193849Loan origination expenses9182752Foreclosure and repossession expenses4101626Professional and third-party service fees253592111Technology equipment and software expenses9102730Occupancy and other office expenses8112635Depreciation and amortization441113Exit and disposal costs8—49—Other operating expenses573310464Total expenses199226613648Loss before income taxes(78)(29)(266)(98)Income tax benefit(36)(8)(103)(38)Net loss(42)(21)(163)(60)Less: net income attributable to noncontrolling interest13659Net loss attributable to PHH Corporation$(55)$(27)$(168)$(69)Basic and Diluted loss per share attributable to PHH Corporation$(1.14)$(0.50)$(3.25)$(1.28)















































See accompanying Notes to Condensed Consolidated Financial Statements .





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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(Unaudited)


(In millions)





Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016Net loss$(42)$(21)$(163)$(60)Other comprehensive income, net of tax:Change in unfunded pension liability, net—1—1Total other comprehensive income, net of tax—1—1Total comprehensive loss(42)(20)(163)(59)Less: comprehensive income attributable to noncontrolling interest13659Comprehensive loss attributable to PHH Corporation$(55)$(26)$(168)$(68)





























































































































See accompanying Notes to Condensed Consolidated Financial Statements .





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CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)


(In millions, except share data)





September 30, 2017December 31, 2016ASSETSCash and cash equivalents$494$906Restricted cash5257Mortgage loans held for sale590683Accounts receivable, net9466Servicing advances, net413628Mortgage servicing rights500690Property and equipment, net2436Deferred taxes, net80—Other assets54109Total assets(1)$2,301$3,175LIABILITIESAccounts payable and accrued expenses$218$193Subservicing advance liabilities228290Mortgage servicing rights secured liability440—Debt, net6531,262Deferred taxes, net—101Loan repurchase and indemnification liability3849Other liabilities86157Total liabilities(1)1,6632,052Commitments and contingencies (Note 11)Redeemable noncontrolling interest (Note 1 and Note 13)4433EQUITYPreferred stock, $0.01 par value; 1,090,000 shares authorized;none issued or outstanding——Common stock, $0.01 par value; 273,910,000 shares authorized;32,543,288 shares issued and outstanding at September 30, 2017;53,599,433 shares issued and outstanding at December 31, 2016—1Additional paid-in capital558885Retained earnings46214Accumulated other comprehensive loss(2)(10)(10)Total PHH Corporation stockholders’ equity5941,090Total liabilities and equity$2,301$3,175



































See accompanying Notes to Condensed Consolidated Financial Statements .





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CONDENSED CONSOLIDATED BALANCE SHEETS-(Continued)


(Unaudited)


(In millions)








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|(1) | The Condensed Consolidated Balance Sheets include assets and liabilities of variable interest entities which can be used only to settle the obligations and liabilities of the variable interest entities which creditors or beneficial interest holders do not have recourse to PHH Corporation and subsidiaries.  These assets and liabilities are as follows:

September 30, 2017December 31, 2016ASSETSCash and cash equivalents$60$67Restricted cash1824Mortgage loans held for sale239350Accounts receivable, net179Servicing advances, net80150Property and equipment, net—1Other assets712Total assets$421$613LIABILITIESAccounts payable and accrued expenses$14$11Debt258399Other liabilities65Total liabilities$278$415





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|(2) | Includes amounts recorded related to the Company’s defined benefit pension plan, net of income tax benefits of$6 millionas of bothSeptember 30, 2017andDecember 31, 2016.  During both thethree and ninemonths endedSeptember 30, 2017andSeptember 30, 2016, there were no amounts reclassified out of Accumulated other comprehensive loss.















































































See accompanying Notes to Condensed Consolidated Financial Statements .





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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


(Unaudited)


(In millions, except share data)





PHH Corporation Stockholders’ EquityTotalEquityCommon StockAdditionalPaid-InCapitalRetainedEarningsAccumulatedOtherComprehensiveLossRedeemable Noncontrolling InterestSharesAmountNine Months Ended September 30, 2017Balance at December 31, 2016$1,09053,599,433$1$885$214$(10)$33Total comprehensive (loss) income(168)———(168)—5Distributions to noncontrolling interest——————(22)Adjustment to redemption value of noncontrolling interest (Note 13)(28)——(28)——28Stock compensation expense6——6———Reclassification of stock awards(4)——(4)———Stock issued under share-based payment plans(1)157,283—(1)———Repurchase of Common stock(301)(21,213,428)(1)(300)———Balance at September 30, 2017$59432,543,288$—$558$46$(10)$44Nine Months Ended September 30, 2016Balance at December 31, 2015$1,31655,007,983$1$909$416$(10)$32Total comprehensive (loss) income(68)———(69)19Distributions to noncontrolling interest——————(3)Adjustment to redemption value of noncontrolling interest (Note 13)1——1——(1)Stock compensation expense6——6———Stock issued under share-based payment plans (includes $9 benefit from excess tax shortfall)(9)86,354—(9)———Repurchase of Common stock(23)(1,508,772)—(23)———Balance at September 30, 2016$1,22353,585,565$1$884$347$(9)$37


















































See accompanying Notes to Condensed Consolidated Financial Statements .





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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In millions)





Nine Months EndedSeptember 30,20172016Cash flows from operating activities:Net loss$(163)$(60)Adjustments to reconcile Net loss to net cash provided by operating activities:Capitalization of originated mortgage servicing rights(28)(45)Change in fair value of mortgage servicing rights and related derivatives93133Change in fair value of mortgage servicing rights secured liability(27)—Loss on early extinguishment of debt34—Gain on PHH Home Loans asset sales(28)—Origination of mortgage loans held for sale(5,689)(7,848)Proceeds on sale of and payments from mortgage loans held for sale5,9928,029Net gain on interest rate lock commitments, mortgage loans held for sale and related derivatives(182)(219)Depreciation and amortization1113Deferred income tax benefit(181)(75)Other adjustments and changes in other assets and liabilities, net16592Net cash (used in) provided by operating activities(3)20Cash flows from investing activities:Net cash (paid) received on derivatives related to mortgage servicing rights(45)121Proceeds on sale of mortgage servicing rights1227Proceeds on sale of servicing advances31—Proceeds from PHH Home Loans asset sales28—Purchases of property and equipment(1)(13)Decrease (increase) in restricted cash5(3)Other, net—5Net cash provided by investing activities140117Cash flows from financing activities:Proceeds from secured borrowings7,4089,301Principal payments on secured borrowings(7,527)(9,319)Proceeds from mortgage servicing rights secured liability420—Principal payments on unsecured borrowings(496)—Cash tender premiums for debt extinguishment(28)—Repurchase of common stock(301)(23)Cash paid for debt issuance costs(2)(3)Distributions to noncontrolling interest(22)(3)Other, net(1)—Net cash used in financing activities(549)(47)Net (decrease) increase in Cash and cash equivalents(412)90Cash and cash equivalents at beginning of period906906Cash and cash equivalents at end of period$494$996














See accompanying Notes to Condensed Consolidated Financial Statements .





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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








1. Summary of Significant Accounting Policies





Nature of Operations





PHH Corporation and subsidiaries (collectively, “PHH” or the “Company”) operates in two business segments: Mortgage Production, which provides mortgage loan origination services and sells mortgage loans, and Mortgage Servicing, which performs servicing activities for originated and purchased loans, and acts as a subservicer for certain clients that own the underlying mortgage servicing rights.





During 2016, the Company entered into an agreement to sell substantially all of its existing mortgage servicing rights ("MSRs") to New Residential Investment Corp. (“New Residential”), and a number of sales under this agreement were completed during the second and third quarters of 2017.  The Company has determined that New Residential has not acquired all ownership rewards since the terms of the subservicing contract limit New Residential’s ability to terminate the contract within the first three years.  As a result, while there was a legal true sale of the MSRs from the Company to New Residential, the Company accounted for such sale of servicing rights as a secured borrowing.  Under this accounting treatment, the MSRs transferred to New Residential remain on the Condensed Consolidated Balance Sheets and the proceeds from the sale are recognized as a Mortgage servicing rights secured liability .





The Company elected to record the MSRs secured liability at fair value consistent with the related MSR asset.  Changes in fair value including the market-related fair value adjustments and actual prepayments of the underlying mortgage loan and receipts of recurring cash flows, and the estimated yield on the related MSR asset, are recorded in Loan servicing income, net in the Condensed Consolidated Statements of Operations.  Implied interest cost on the MSRs secured liability is recorded in Net interest expense in the Condensed Consolidated Statements of Operations which offsets the estimated yield on the MSR asset, both of which represent non-cash amounts.  Proceeds from the sale of these MSRs are included in financing activities in the Condensed Consolidated Statements of Cash Flows.  Refer to Note 4, 'Servicing Activities' and Note 12, 'Fair Value Measurements' for further information.





Basis of Consolidation





The Condensed Consolidated Financial Statements include the accounts and transactions of PHH and its subsidiaries, as well as entities in which the Company directly or indirectly has a controlling interest and variable interest entities of which the Company is the primary beneficiary.  PHH Home Loans, LLC (“PHH Home Loans”) and its subsidiaries are consolidated within the Condensed Consolidated Financial Statements and the ownership interest of Realogy Services Venture Partner LLC, a subsidiary of Realogy Holdings Corp. ("Realogy") is presented as a redeemable noncontrolling interest.  In February 2017, the Company announced it has entered into agreements to sell certain assets of PHH Home Loans and its subsidiaries, including its mortgage origination and processing centers and the majority of its employees.  Refer to Note 13, 'Variable Interest Entities' for further information on the sale transactions.





Intercompany balances and transactions have been eliminated from the Condensed Consolidated Financial Statements .





During the third quarter of 2017, the Company identified an error in the balance sheet presentation and measurement of Redeemable noncontrolling interests.  Realogy’s ownership interests in PHH Home Loans have previously been reported as a Noncontrolling interest and presented as a component of Total equity; however, the Company has determined the balance should have been presented as a Redeemable noncontrolling interest within Mezzanine equity.  This presentation reflects Realogy’s right, beginning on February 1, 2015, to require that the Company purchase all of Realogy’s interest in PHH Home Loans upon two years notice at fair value, as outlined in the PHH Home Loans Operating Agreement.  In addition, since the redemption value of the Redeemable noncontrolling interest exceeded the historical carrying amount, the correction also includes an adjustment to Additional paid-in capital to re-measure the Redeemable noncontrolling interest at its redemption value.  While the Redeemable noncontrolling interest is adjusted to the redemption value at the end of each reporting period, the Company continues to allocate Realogy its portion of income or loss and distributions for each period.  See Note 19, 'Variable Interest Entities' in the Company’s 2016 Form 10-K for further discussion of Realogy's termination rights and the related agreements.





The Company has evaluated the materiality of this error on its prior period financial statements from a quantitative and qualitative perspective.  Management has concluded that the error was not material to any prior annual or interim period or the trend of financial results; therefore, amendments to previously filed reports are not required.  The Company has corrected the error for all prior periods presented by revising the Condensed Consolidated Financial Statements appearing herein.  Periods not presented herein will be revised, as applicable, in future filings.  The impact of this revision to the Condensed Consolidated Balance Sheets





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 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





and Condensed Consolidated Statements of Changes in Equity was a reduction to Total equity of $32 million , $37 million and $33 million as of December 31, 2015, September 30, 2016 and December 31, 2016 , respectively, with an offsetting increase to amounts presented as a Redeemable noncontrolling interest within Mezzanine equity.  The reduction to Total equity included a decrease to amounts reported as Additional paid-in capital of $2 million , $1 million and $2 million as of December 31, 2015, September 30, 2016 and December 31, 2016 , respectively.  There was no effect to reported totals for assets, liabilities, cash flows or net loss.  Refer to Note 13, 'Variable Interest Entities' for further information.





Unaudited Interim Financial Information





The Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements.  In management’s opinion, the unaudited Condensed Consolidated Financial Statements contain all adjustments, which include normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the interim periods presented.  The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period.  These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2016 Form 10-K.





Unless otherwise noted and except for share and per share data, dollar amounts presented within these Notes to Condensed Consolidated Financial Statements are in millions.





Use of Estimates





The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates and assumptions include, but are not limited to, those related to the valuation of mortgage servicing rights and the related secured liability , mortgage loans held for sale and other financial instruments, the estimation of liabilities for commitments and contingencies, mortgage loan repurchases and indemnifications and the determination of certain income tax assets and liabilities and associated valuation allowances.  Actual results could differ from those estimates.





Accounting Pronouncements Adopted During the Period





In March 2016, the FASB issued ASU 2016-06, “Contingent Put and Call Options in Debt Instruments.”  This update clarified that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is only required to perform a specific four-step decision sequence and is no longer required to assess whether the contingency for exercising the option is indexed to interest rate or credit risk.  The Company adopted this update on January 1, 2017 using a modified retrospective approach, and there was no impact to the financial statements or disclosures.





In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting."  This update simplified several aspects of the accounting for share-based payment transactions, including accounting for income taxes, the classification of awards as either equity or liabilities and the classification of excess tax benefits and payments for tax withholdings on the statement of cash flows.  The Company adopted this update on January 1, 2017 using either a prospective, modified retrospective or retrospective approach, depending on the area of change with the more significant provisions described below:





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|• | Accounting for income taxes.The Company recognized all excess tax benefits and tax deficiencies as income tax expense or benefit in the statement of income and applied this provision prospectively.  The tax effects were treated as discrete items to calculate the effective tax rate and resulted in$2 millionof income tax expense during thenine months ended September 30, 2017.

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|• | Forfeiture rates.The Company elected to account for forfeitures as they occur and applied this provision using a modified retrospective approach.  The impact to opening retained earnings was not significant.

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|• | Statement of Cash Flows.On a retrospective basis, the Company classified cash paid by an employer when directly withholding shares for tax withholding purposes as a financing activity which totaled$1 millionduring thenine months ended September 30, 2017.  The amount of tax withholding was not significant for thenine months ended September 30, 2016.  In addition, on a prospective basis, the Company will classify excess tax benefits as an operating activity which did not have an impact to the statement of cash flows.







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 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





In October 2016, the FASB issued ASU 2016-17, "Interests Held through Related Parties That Are under Common Control."  This update required an entity to include indirect interest held through related parties that are under common control on a proportionate basis when evaluating if a reporting entity is the primary beneficiary of a variable interest entity.  The Company adopted this update on January 1, 2017 using a retrospective approach.  This adoption did not change any of the Company's consolidation conclusions, and there was no impact to the financial statements or disclosures.





Recently Issued Accounting Pronouncements Not Yet Adopted





There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements and disclosures, from those included in the Company’s 2016 Form 10-K, except for the following:





Effective for the First Quarter of 2018





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers.”  The core principle requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods or services.  The FASB has issued several amendments to provide additional clarification and implementation instructions relating to (i) principal versus agent considerations, (ii) identifying performance obligations and licensing, (iii) narrow-scope improvements and practical expedients and (iv) technical corrections and improvements.  These updates are to be applied retrospectively to all prior periods presented or through a cumulative adjustment in the year of adoption, and are effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted.




The Company has reviewed the scope of the guidance and determined that a majority of the Company's revenue streams associated with origination and servicing activities are not within the scope of the standard because the standard does not apply to revenue on contracts accounted for under ASC 860, "Transfers and Servicing of Financial Assets" or ASC 825, "Financial Instruments".  However, the Company has identified select revenue streams that are within scope of the revenue standard, including origination assistance fees associated with fee-based closings in our private label channel, and certain ancillary fees associated with subservicing contracts such as boarding and deboarding fees. While there may be some impact on revenue recognition, at this time, the Company currently does not expect the adoption of this guidance to have a material impact on the consolidated financial statements or result in a significant transition adjustment upon adoption; however, the Company continues to evaluate other potential effects this guidance may have including, changes in footnote requirements and the impact to internal controls.  The amount of in-scope revenue streams associated with our private label channel are expected to continue to decrease as the Company completes the exit of this business during 2018.  The Company will adopt this standard using a modified retrospective approach in the first quarter of 2018 with a cumulative effect adjustment to retained earnings.





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | In March 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost."  This update changes the income statement presentation of defined benefit plan expense by requiring the service cost component to be presented in the same line item as other compensation costs and all other components (including interest cost, amortization of prior service cost, settlements, etc.) to be presented separately from the service cost component.  This update is effective for the first interim and annual periods beginning after December 15, 2017, with early adoption permitted.  At adoption, this update will be applied retrospectively.  The Company's defined benefit pension plan and the other post-employment benefits plan are frozen, wherein the plans only accrue additional benefits for a very limited number of employees.  As a result, the Company does not expect the adoption of this update to have a significant impact on its financial statements.




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | In May 2017, the FASB issued ASU 2017-09, "Scope of Modification Accounting."  This update clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification.  Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.  This update is effective for the first interim and annual periods beginning after December 15, 2017, with early adoption permitted.  At adoption, this update will be applied prospectively.  The Company does not expect the adoption of this update to have a significant impact on its financial statements.










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2. Exit Costs





PLS Exit





In November 2016, the Company announced its plan to exit the private label solutions ("PLS") business within the Mortgage Production segment.  This business channel provides end-to-end origination services to financial institution clients, and represented 79% of the Company's total mortgage production volume (based on dollars) for the year ended December 31, 2016.  Due to elevated operating losses, increasing regulatory and client customization costs and a shrinking market for financial institution origination services, the Company determined the exit of the business was necessary.  The Company expects that it will be in a position to substantially exit this channel by the first quarter of 2018, subject to transition support requirements.





The following is a summary of expenses incurred to date for the PLS exit program within Exit and disposal costs in the Condensed Consolidated Statements of Operations , including an estimate of remaining and total program costs:


Nine Months Ended September 30, 2017Severance and Termination BenefitsFacility Exit CostsContract Termination & Other CostsNon-Cash Charges & Impairments(1)Total(In millions)Costs incurred in current year:First quarter$4$4$—$—$8Second quarter4—8(4)8Third quarter3———31148(4)19Cumulative costs recognized in prior year22—41541Estimate of remaining costs5187—30Total$38$22$19$11$90


______________


|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During the second quarter of 2017, the Company recorded$4 millionto reverse previously accrued liabilities associated with the Jacksonville facility.




The following is a summary of the PLS program costs by segment as of September 30, 2017 :


Mortgage ProductionOtherTotal(In millions)Costs incurred in current year:First quarter$7$1$8Second quarter718Third quarter12315419Cumulative costs recognized in prior year33841Estimate of remaining costs27330Total$75$15$90





Reorganization





In February 2017, as an outcome of its strategic review, the Company announced its intention to operate as a smaller business that is focused on subservicing and portfolio retention services.  Costs estimated for this Reorganization exit program, which are presented separately from the PLS exit program, include severance, acceleration of existing retention and incentive awards and other costs to execute the reorganization and change the focus of the Company's operations.  The Company expects it will incur the remaining exit costs through the first quarter of 2018.





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The following is a summary of expenses incurred to date for the Reorganization exit program within Exit and disposal costs in the Condensed Consolidated Statements of Operations , including an estimate of remaining and total program costs:


Nine Months Ended September 30, 2017Severance and Termination BenefitsFacility Exit CostsContract Termination & Other CostsNon-Cash Charges & Impairments(1)Total(2)(In millions)Costs incurred in current year:First quarter$17$—$—$—$17Second quarter42—28Third quarter4—1—52521230Cumulative costs recognized in prior year—————Estimate of remaining costs51—28Total$30$3$1$4$38


______________


|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|(1) | During the second quarter of 2017, the Company recorded a$2 millionimpairment for an equity method investment.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Exit Costs related to Reorganization include amounts attributable to noncontrolling interest, representing$5 millionof Costs incurred during thenine months ended September 30, 2017, and$8 millionof expected Total program costs.  Refer toNote 13, 'Variable Interest Entities'for further information regarding agreements to sell certain assets of PHH Home Loans and its subsidiaries and exit the Real Estate channel.




The following is a summary of the Reorganization program costs by segment as of September 30, 2017 :


Mortgage ProductionMortgage ServicingOtherTotal(In millions)Costs incurred in current year:First quarter$6$2$9$17Second quarter3—58Third quarter5——51421430Cumulative costs recognized in prior year————Estimate of remaining costs6118Total$20$3$15$38








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Exit Cost Liability





The Company's Exit cost liability is included in Accounts payable and accrued expenses within the Condensed Consolidated Balance Sheets .  A summary of the aggregate activity for both the PLS exit program and the Reorganization exit program is as follows:


Nine Months Ended September 30, 2017Severance and Termination BenefitsFacility Exit CostsContract Termination & Other CostsTotal(In millions)Balance, beginning of period$22$—$3$25Charges366951Paid(9)(6)(2)(17)Adjustments(1)5——5Balance, end of period$54$—$10$64


______________


|    |                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This adjustment represents previously accrued amounts of existing retention and incentive awards for exiting employees that will be paid out upon termination and other non-cash charges.










3. Earnings Per Share





Basic earnings or loss per share attributable to PHH Corporation was computed by dividing Net income or loss attributable to PHH Corporation by the weighted-average number of shares outstanding during the period.  Diluted earnings or loss per share attributable to PHH Corporation was computed by dividing Net income or loss attributable to PHH Corporation by the weighted-average number of shares outstanding during the period, assuming all potentially dilutive common shares were issued.





In the nine months ended September 30, 2017, the Company's Board of Directors authorized share repurchases of our common stock of up to $300 million .  As part of that authorization, on August 11, 2017, the Company announced the commencement of a modified “Dutch auction” self-tender offer to purchase shares of its common stock for an aggregate amount of up to $266 million in cash representing the remaining authorized amount, with the right to purchase an additional 2% of its outstanding shares for an additional purchase price.  Any shares received under the share repurchase program are retired upon receipt and reported as a reduction of shares issued and outstanding as of each settlement date, and the cash paid is recorded as a reduction of stockholders' equity in the Condensed Consolidated Balance Sheets .





Weighted-average common shares outstanding includes the following activity:





|  |                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | the repurchase of2,450,466common shares for$34 millionunder an open market program during thenine months ended September 30, 2017, of which689,502common shares for$10 millionwere repurchased during thethree months ended September 30, 2017;

|  |                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------
|• | the repurchase of18,762,962common shares for$267 millionunder a modified "Dutch auction" self-tender offer during  September 2017; and

|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|• | the repurchase of1,508,772common shares under an open market program during January 2016.




The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method excludes the effect of any contingently issuable securities where the contingency has not been met and excludes the effect of securities that would be anti-dilutive.  Anti-dilutive securities may include: (i) outstanding stock-based compensation awards representing shares from restricted stock units and stock options and (ii) stock assumed to be issued related to convertible notes.





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The following table summarizes the calculations of basic and diluted earnings or loss per share attributable to PHH Corporation and anti-dilutive securities excluded from the computation of diluted shares for the periods indicated:


Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions, except share and per share data)Net loss attributable to PHH Corporation$(55)$(27)$(168)$(69)Weighted-average common shares outstanding — basic & diluted48,210,09953,578,04451,724,91153,616,403Basic and Diluted loss per share attributable to PHH Corporation$(1.14)$(0.50)$(3.25)$(1.28)Anti-dilutive securities excluded from the computation of diluted shares:Outstanding stock-based compensation awards(1)1,006,2131,971,0551,006,2131,971,055





———————


|    |                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For thethree and ninemonths endedSeptember 30, 2017, excludes52,698shares that are contingently issuable for which the contingency has not been met.










4. Servicing Activities





Total Servicing Portfolio





The following table summarizes the total servicing portfolio, which consists of loans associated with capitalized MSRs owned and secured, loans held for sale, and the portfolio associated with loans subserviced for others:


September 30, 2017December 31, 2016Fair ValueUPBFair ValueUPB(In millions)Capitalized MSRs owned$60$8,906$690$84,657Capitalized MSRs under secured borrowing arrangements and subserviced(1)44051,465——Total capitalized MSRs$500$60,371$690$84,657Subserviced90,35489,170Other owned servicing757815Total$151,482$174,642


———————


|    |                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Accounted for as a secured borrowing arrangement.  Refer toNote 1, 'Summary of Significant Accounting Policies'for additional information.







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Loan Servicing Income, Net





The following table summarizes the components of Loan servicing income, net:





Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Servicing fees from capitalized portfolio(1)$22$67$125$204Subservicing fees17173853Late fees and other ancillary revenue692127Loss on sale of MSRs(3)—(16)(2)Curtailment interest paid to investors—(4)(6)(11)Loan servicing income4289162271Change in fair value of MSRs, net of related derivatives(2)(35)(50)(93)(133)Change in fair value of MSRs secured liability28—27—Loan servicing income, net$35$39$96$138


____________________


|    |                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Servicing fees from capitalized portfolio include$14 millionand$15 millionrelated to the estimated yield on capitalized MSRs treated as a secured borrowing arrangement for thethree and nine months endedSeptember 30, 2017, respectively.  This is fully offset by theMSRs secured interest expenseincluded within Net interest expense.

|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Net of derivative losses of$4 millionand derivative gains of$139 millionfor thethree and nine months endedSeptember 30, 2016, respectively.  Derivative gains for thethree and nine months endedSeptember 30, 2017were not significant.




Sales of MSRs





While the Company has historically retained MSRs on its balance sheet from the majority of its loan sales, the Company has entered into contracts to sell substantially all of its existing MSR assets in a series of transactions as part of the conclusions reached from the strategic review process.  If the sales of these MSRs are completed, the Company does not anticipate retaining a significant amount of capitalized MSRs owned in the future.  The final proceeds the Company may receive from each MSR sale are dependent on the portfolio composition and market conditions at each transfer date and are also dependent upon the extent to which consent is received from the GSEs, private loan investors, PLS clients and other origination sources.





The following table summarizes the Company's MSRs and its commitments under sale agreements, based on the portfolio as of September 30, 2017 :


September 30, 2017UPBFair Value(In millions)MSR commitments:New Residential Investment Corp.$6,430$38Other counterparties5485MSRs capitalized under secured borrowing arrangements and subserviced51,465440Non-committed1,92817Total MSRs$60,371$500





In addition, the Company has commitments to transfer approximately $145 million of  Servicing advances to the counterparties of these agreements (based on the September 30, 2017 portfolio).





For the three and nine months ended  September 30, 2017 , the Company received $31 million and $122 million , respectively, in cash from sales of MSRs that have been removed from the Condensed Consolidated Balance Sheets .  For the three and nine months ended  September 30, 2017 , the Company received an additional $318 million and $420 million in cash from sales of MSRs that have been accounted for as a secured borrowing arrangement.  As of September 30, 2017 , the Company has recorded $42 million in Accounts receivable, net related to holdback from executed MSR sales and transfers, to address indemnification claims and mortgage loan document deficiencies.





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Lakeview/GNMA Portfolio. In November 2016, the Company entered into an agreement to sell substantially all of its Ginnie Mae ("GNMA") MSRs and related advances to Lakeview Loan Servicing, LLC ("Lakeview").  On February 2, 2017, the initial sale of GNMA MSRs under this agreement was completed, representing $10.2 billion of unpaid principal balance, $74 million of MSR fair value, and $11 million of Servicing advances with total expected proceeds of $85 million from the initial transfer.  On May 2, 2017 , an additional sale of GNMA MSRs was completed, representing $1.0 billion of unpaid principal balance, $7 million of MSR fair value, and $1 million of Servicing advances with total expected proceeds of $8 million from this transfer.  On August 2, 2017, the final transfer under this agreement was completed, representing $2.0 billion of unpaid principal balance, $12 million of MSR fair value, and $2 million of Servicing advances with total expected proceeds of $14 million .





New Residential. On December 28, 2016, the Company entered into an agreement to sell substantially all of its portfolio of MSRs and related advances, excluding the GNMA MSRs sold to Lakeview, to New Residential Mortgage LLC ("New Residential"), a wholly-owned subsidiary of New Residential Investment Corporation.  On June 16, 2017, the sale of substantially all of the committed Freddie Mac MSRs under this agreement was completed, representing $13.2 billion of unpaid principal balance, $113 million of MSR fair value, and $8 million of Servicing advances with total expected proceeds of $121 million .  On July 3, 2017, the sale of substantially all of the committed Fannie Mae MSRs under this agreement was completed, representing $39.5 billion of unpaid principal balance, $342 million of MSR fair value, and $24 million of Servicing advances with total expected proceeds of $366 million .  During September 2017, two additional sales of Fannie Mae and Freddie Mac MSRs under this agreement were completed, representing $1.3 billion of unpaid principal balance, $12 million of MSR fair value, and $1 million of Servicing advances with total expected proceeds of $13 million .  All of the preceding sales with New Residential have been accounted for as a secured borrowing arrangement, which is further described in Note 12, 'Fair Value Measurements' .





The consummation of substantially all of the remaining MSRs and related advances contemplated by this sale agreement is subject to the approvals of multiple counterparties, including origination sources, investors and trustees, as well as other customary closing requirements.





In connection with the agreement, the Company entered into a subservicing agreement with New Residential, pursuant to which the Company will subservice the loans sold in this transaction for an initial period of three years, subject to certain transfer and termination provisions, which includes 377,000 units as of September 30, 2017 as part of the secured borrowing arrangement.  Additionally, there are 30,000 units in the owned portfolio that are committed to sell to New Residential as of September 30, 2017 .





Other counterparties. Commitments to sell MSRs to other counterparties may include:  (i) agreements to sell a portion of the Company's newly-created MSRs to third parties through flow-sale agreements, where the Company will have continuing involvement as a subservicer; (ii) agreements to sell a portion of MSRs to clients that were the origination source of the MSRs that were previously part of the New Residential commitments; and (iii) agreements for small portfolio sales of existing MSRs, consistent with its intention to not retain a significant amount of MSRs in the future.  For the nine months ended September 30, 2017 , $31 million of MSR fair value was sold to other counterparties.





In addition to the commitments presented on the table above, as of September 30, 2017 , the Company had commitments to sell MSRs through third-party flow sales related to $31 million of the unpaid principal balance of Mortgage loans held for sale and Interest rate lock commitments that are expected to result in closed loans.








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Mortgage Servicing Rights





The activity in the total loan servicing portfolio unpaid principal balance associated with capitalized mortgage servicing rights consisted of:





Nine Months EndedSeptember 30,Nine Months EndedSeptember 30,201720162017MSRs OwnedMSRs Secured Asset(In millions)Balance, beginning of period$84,657$98,990$—Additions from loans sold with servicing retained2,5434,476—Payoffs and curtailments(7,249)(14,102)(2,494)Sales that have been derecognized(17,086)(742)—Sales accounted for as secured borrowing(53,959)—53,959Balance, end of period$8,906$88,622$51,465





The activity in total capitalized MSRs consisted of:


Nine Months EndedSeptember 30,Nine Months EndedSeptember 30,201720162017MSRs OwnedMSRs Secured Asset(In millions)Balance, beginning of period$690$880$—Additions from loans sold with servicing retained2845—Sales that have been derecognized(125)(8)—Sales accounted for as secured borrowing(467)—467Changes in fair value due to:Realization of expected cash flows(57)(98)(21)Changes in market inputs or assumptions used in the valuation model(9)(174)(6)Balance, end of period$60$645$440








Sales of Mortgage Loans





Residential mortgage loans are sold through one of the following methods: (i) sales to or pursuant to programs sponsored by Fannie Mae, Freddie Mac and the Government National Mortgage Association (collectively, the "Agencies") or (ii) sales to private investors.  The Company may have continuing involvement in mortgage loans sold by retaining MSRs and/or recourse obligations, as discussed further in Note 11, 'Commitments and Contingencies' .





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The following table sets forth information regarding cash flows relating to loan sales in which the Company has continuing involvement:


Nine Months EndedSeptember 30,20172016(In millions)Proceeds from new loan sales or securitizations$2,685$4,647Servicing fees from capitalized portfolio(1)115229Purchases of previously sold loans(2)(20)(232)Servicing advances(3)(847)(1,217)Repayment of servicing advances(3)1,0581,241


____________________


|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(1) | Includes servicing fees, late fees and other ancillary servicing revenue in which the Company has continuing involvement.

|    |                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes purchases of repurchase eligible loans and excludes indemnification payments to investors and insurers of the related mortgage loans.

|    |                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Outstanding servicing advance receivables are presented in Servicing advances, net in theCondensed Consolidated Balance Sheets, except for advances related to loans in foreclosure or real estate owned, which are included in Other assets.  Repayment of servicing advances includes the$66 millionreceived for advances from sales of MSRs executed in thenine months ended September 30, 2017.




During the three and nine months ended September 30, 2017 , pre-tax gains of $44 million and $139 million ,  respectively, related to the sale or securitization of residential mortgage loans were recognized in Gain on loans held for sale, net in the Condensed Consolidated Statements of Operations .





During the three and nine months ended September 30, 2016 , pre-tax gains of $77 million and $185 million , respectively, related to the sale or securitization of residential mortgage loans were recognized in Gain on loans held for sale, net in the Condensed Consolidated Statements of Operations .











5. Derivatives





Derivative instruments and the risks they manage are as follows:





|  |                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------
|▪ | Forward delivery commitments— Related to interest rate and price risk for mortgage loans held for sale and interest rate lock commitments




|  |                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------
|▪ | Option contracts— Related to interest rate and price risk for mortgage loans held for sale and interest rate lock commitments




|  |                                                                                     
|- | ------------------------------------------------------------------------------------
|▪ | MSR-related agreements— Related to interest rate risk for mortgage servicing rights.




Derivative instruments are recorded in Other assets and Other liabilities in the Condensed Consolidated Balance Sheets .  The Company does not have any derivative instruments designated as hedging instruments.





The following table summarizes the gross notional amount of derivatives:


September 30, 2017December 31, 2016(In millions)Interest rate lock commitments$689$862Forward delivery commitments1,2792,104Option contracts75120MSR-related agreements(1)—260


______________


|    |                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In the fourth quarter of 2016, the Company significantly reduced its MSR-related derivative hedge coverage as a result of the MSR sale agreements that fix the prices the Company expects to realize at future transfer dates.  The remaining MSR-related derivatives were settled during thenine months ended September 30, 2017.  For further discussion of the MSR sale agreements, seeNote 4, 'Servicing Activities'.




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The following tables present the balances of outstanding derivative instruments on a gross basis and the application of counterparty and collateral netting:


September 30, 2017Gross AssetsOffsettingPayablesCash CollateralNet Amount(In millions)ASSETSSubject to master netting arrangements:Forward delivery commitments$1$(1)$—$—Not subject to master netting arrangements:Interest rate lock commitments13——13Total derivative assets$14$(1)$—$13





Gross LiabilitiesOffsettingReceivablesCash CollateralNet AmountLIABILITIESSubject to master netting arrangements:Forward delivery commitments$2$(1)$—$1Total derivative liabilities$2$(1)$—$1





December 31, 2016Gross AssetsOffsettingPayablesCash CollateralPaidNet Amount(In millions)ASSETSSubject to master netting arrangements:Forward delivery commitments$13$(43)$31$1MSR-related agreements19(22)41Option contracts1(1)——Derivative assets subject to netting33(66)352Not subject to master netting arrangements:Interest rate lock commitments18——18Forward delivery commitments1——1Derivative assets not subject to netting19——19Total derivative assets$52$(66)$35$21





Gross LiabilitiesOffsettingReceivablesCash CollateralReceivedNet AmountLIABILITIESSubject to master netting arrangements:Forward delivery commitments$4$(10)$11$5MSR-related agreements65(55)212Option contracts—(1)21Derivative liabilities subject to netting69(66)1518Total derivative liabilities$69$(66)$15$18








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The following table summarizes the gains (losses) recorded in the Condensed Consolidated Statements of Operations for derivative instruments:





Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Gain on loans held for sale, net:Interest rate lock commitments$62$100$175$278Forward delivery commitments(6)(6)(11)(41)Option contracts——(1)(1)Loan servicing income, net:MSR-related agreements—(4)—139











6. Other Assets





Other assets consisted of:


September 30, 2017December 31, 2016(In millions)Real estate owned, net(1)$21$16Derivatives (Note 5)1321Prepaid expenses1011Equity method investments710Repurchase eligible loans(2)113Mortgage loans in foreclosure, net(3)—21Income taxes receivable—14Other23Total$54$109


______________


|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As ofSeptember 30, 2017andDecember 31, 2016, Real estate owned is net of Adjustment to value for real estate owned of$19 millionand$14 million, respectively.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Repurchase eligible loans represent certain mortgage loans sold pursuant to GNMA programs where the Company, as servicer, has the unilateral option to repurchase the loan if certain criteria are met, including if a loan is greater than90days delinquent and where it has been determined that there is more than a trivial benefit from exercising the repurchase option.  Regardless of whether the repurchase option has been exercised, the Company must recognize eligible loans within Other assets and a corresponding repurchase liability within Accounts payable and accrued expenses in theCondensed Consolidated Balance Sheets.

|    |                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | As ofSeptember 30, 2017, the balance of Mortgage loans in foreclosure is not significant since a majority of the loans and associated reserves have been transferred to Mortgage loans held for sale pursuant to the Company's marketing of and intentions to sell those assets.  As ofDecember 31, 2016, Mortgage loans in foreclosure is net of Allowance for probable foreclosure losses of$10 million.







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7.  Accounts Payable and Accrued Expenses





Accounts payable and accrued expenses consisted of:


September 30, 2017December 31, 2016(In millions)Exit cost liability (Note 2)$64$25Income taxes payable (Note 10)50—Accrued payroll and benefits4750Accounts payable4177Accrued servicing related expenses1212Repurchase eligible loans (Note 6)113Accrued interest and other316Total$218$193














8. Other Liabilities





Other liabilities consisted of:


September 30, 2017December 31, 2016(In millions)Legal and regulatory matters (Note 11)$58$114Pension and other post-employment benefits1111Income tax contingencies88Liability to deliver MSRs (Note 12)2—Derivatives (Note 5)118Other66Total$86$157











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9. Debt and Borrowing Arrangements





The following table summarizes the components of Debt:


September 30, 2017December 31, 2016BalanceInterestRate(1)AvailableCapacity(2)Balance(In millions)Committed warehouse facilities$4053.4%$195$556Uncommitted warehouse facilities782.9%222—Servicing advance facility523.2%1399Term notes due in 2019977.375%n/a275Term notes due in 2021226.375%n/a340Unsecured credit facilities——3—Unsecured debt, face value119615Debt issuance costs(1)(8)Unsecured debt, net118607Total$653$1,262


______________


|    |                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Interest rate shown represents the stated interest rate of outstanding borrowings, which may differ from the effective rate due to the amortization of premiums, discounts and issuance costs.  Warehouse facilities and the servicing advance facility are variable-rate.  Rate shown for warehouse facilities represents the weighted-average rate of current outstanding borrowings.

|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Capacity is dependent upon maintaining compliance with, or obtaining waivers of, the terms, conditions and covenants of the respective agreements, including asset-eligibility requirements.




Assets pledged as collateral or funded by subservicing clients that are not available to pay the Company’s general obligations as of September 30, 2017 consisted of:


WarehouseFacilitiesServicingAdvanceFacilitySubservicing Advance Liabilities(1)MSRs Secured Liability(2)(In millions)Restricted cash$6$14$—$—Servicing advances—80228—Mortgage loans held for sale (unpaid principal balance)502———Mortgage servicing rights———440Total$508$94$228$440


______________


|    |                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Under the terms of certain subservicing arrangements, the subservicing counterparty is required to fund servicing advances for their respective portfolios of subserviced loans.  A subservicing advance liability is recorded for cash received from the counterparty to fund advances and is repaid to the counterparty upon the collection of the mortgage servicing advance receivables.

|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Represents MSRs that are accounted for as a secured borrowing arrangement.  Refer toNote 1, 'Summary of Significant Accounting Policies'for additional information.







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The following table provides the contractual debt maturities as of September 30, 2017 :





WarehouseFacilitiesServicingAdvanceFacilityUnsecuredDebtTotal(In millions)Within one year$483$52$—$535Between one and two years——9797Between two and three years————Between three and four years——2222Between four and five years————Thereafter————$483$52$119$654





See Note 12, 'Fair Value Measurements' for the measurement of the fair value of Debt.





Net Interest Expense


The following table summarizes the components of Net interest expense:





Three Months Ended September 30, 2017Nine Months Ended September 30, 20172017201620172016(In millions)Interest income$10$11$30$32Secured interest expense(6)(8)(19)(24)MSRs secured interest expense(1)(14)—(15)—Unsecured interest expense—(10)(19)(31)Net interest expense$(10)$(7)$(23)$(23)


_____________


|    |                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | MSRs secured interest expenseis the estimated yield on theMSRs secured liabilityas a result of the secured borrowing arrangement, as discussed inNote 4, 'Servicing Activities'.MSRs secured interest expensefully offsets the estimated yield on capitalized MSRs treated as a secured borrowing arrangement, which is included within Loan servicing income, net.




Mortgage Warehouse Facilities





The Company has entered into shorter term committed repurchase facilities with certain of its lenders to allow both the Company and the lender to continually evaluate facility needs and agreement terms during the execution of the Company's strategic actions and business changes. Upon expiration of these existing agreements, the Company expects to negotiate terms for repurchase facility commitments to meet its forecasted capacity needs and negotiate terms for covenants or conditions precedent to borrowing to support its intended strategic and capital actions.





On March 27, 2017 , the committed mortgage repurchase facility of $100 million and the uncommitted mortgage repurchase facility of $100 million with Barclays Bank PLC were extended to July 31, 2017.  On July 31, 2017, the committed and uncommitted mortgage repurchase facilities were extended to January 31, 2018.





On March 31, 2017 , the committed mortgage repurchase facilities of $450 million with Wells Fargo Bank were extended to June 30, 2017.  On June 30, 2017, the committed mortgage repurchase facilities were reduced by $100 million to $350 million at the Company's request, and the facilities were also extended to December 1, 2017, with a capacity decrease to $250 million on October 1, 2017 and to $200 million on November 1, 2017.





On March 31, 2017 , the committed mortgage repurchase facility of $150 million with Fannie Mae expired and was not renewed by mutual agreement, and the uncommitted mortgage repurchase facility was increased to $2.0 billion .  On April 30, 2017, the uncommitted mortgage repurchase facility was reduced by $1.8 billion to $200 million to better align capacity with anticipated needs.








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On March 31, 2017, the committed repurchase facility with Bank of America was reduced by $150 million to $200 million at the Company's request, and the facility was extended to June 30, 2017.  On June 30, 2017, the $200 million committed repurchase facility was extended to September 29, 2017.  On September 29, 2017, the committed repurchase facility was reduced by $50 million to $150 million at the Company's request, and the facility was extended to December 29, 2017.





Servicing Advance Facility





On June 15, 2017, PHH Service Advance Receivables Trust 2013-1 ("PSART"), an indirect, wholly-owned subsidiary of the Company, extended the revolving period and revised the final maturity date of the note purchase agreement with Wells Fargo Bank for the Series 2015-1 variable funding notes to March 15, 2018 and reduced the aggregate maximum principal amount by $55 million to $100 million . On September 8, 2017, at the Company's request, the aggregate maximum principal amount was reduced by $35 million to $65 million . The notes bear interest, payable monthly, based on LIBOR plus an agreed-upon margin.





Unsecured Debt





On June 19, 2017, the Company commenced a tender offer and consent solicitation to purchase for cash any and all of its outstanding Term Notes due in 2019 and due in 2021.  The early tender offer included cash consideration of $1,100.00 for the 2019 Notes and $1,031.88 for the 2021 Notes for each $1,000 in principal amount (in dollars), plus accrued and unpaid interest. On July 3, 2017, $178 million of the 2019 Notes and $318 million of the 2021 Notes were tendered, and the Company repaid these notes for an aggregate $524 million in cash, plus accrued interest. On July 17, 2017, the tender offer expired with an insignificant amount of additional Term Notes being tendered. In connection with the tender offer, the Company recognized a loss of $34 million in Other Operating Expenses in the Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2017.





Debt Covenants





During 2017 , financial covenants in certain of the Company's committed mortgage repurchase facility agreements have been modified to reduce the minimum consolidated tangible net worth covenants to $450 million from $750 million , and to reduce the minimum committed mortgage warehouse financing capacity to $300 million from $750 million , which committed capacity must be provided by at least three warehouse lenders. In addition, the Company obtained amendments to certain negative covenants in its mortgage warehouse facilities and unsecured debt indentures to the extent necessary to permit the MSR sale transaction with New Residential and the sale of certain assets of PHH Home Loans.  There were no other significant amendments to the terms of the debt covenants during the nine months ended September 30, 2017 .





The Company was in compliance with all financial covenants related to its debt arrangements for the third quarter of 2017 .











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10. Income Taxes





Deferred Taxes





Deferred tax assets and liabilities represent the basis differences between assets and liabilities measured for financial reporting versus for income tax returns' purposes.  The following table summarizes the significant components of deferred tax assets and liabilities:


September 30, 2017December 31, 2016(In millions)Deferred tax assets:Federal loss carryforwards$23$23State loss carryforwards and credits3739Accrued legal and regulatory matters2346Reserves and allowances3136Exit cost liability2610Other accrued liabilities1224Gross deferred tax assets152178Valuation allowance(48)(44)Deferred tax assets, net of valuation allowance104134Deferred tax liabilities:Mortgage servicing rights20234Other41Deferred tax liabilities24235Net deferred tax asset (liability)$80$(101)





The deferred tax balance represent the future tax asset or liability generated upon reversal of the differences between the tax basis and book basis of certain of the Company's assets.  Deferred liabilities related to the Company's MSRs arise due to differences in the timing of income recognition for accounting and tax purposes for certain servicing rights, which generate an associated basis difference between book and tax.  The decrease in the MSR deferred tax liability during the nine months ended September 30, 2017 is a result of the Company's execution of the MSRs secured borrowing arrangement with New Residential that resulted in the sale of the Company's MSR portfolio for tax purposes generating taxable income and tax liability.





Effective Tax Rate





For the three and nine months ended  September 30, 2017 , interim income tax benefits were recorded by applying a projected full-year effective income tax rate to the quarterly Loss before income taxes for results that are deemed to be reliably estimable.  Certain items are considered not to be reliably estimable, and therefore, discrete year-to-date income tax provisions are recorded on those items.  The resulting effective tax rate for the three and nine months ended  September 30, 2017 were (45.8)% and (38.8)% , respectively.  The difference between the Company’s effective tax rate and the statutory 35% rate was primarily due to:





|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(i) | state and local income taxes determined by the mix of income or loss from the operations by entity and state income tax jurisdiction;

|     |                                                                                                                                                                                                                                                                                                                                                   
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii) | the net increase in the valuation allowance was driven by certain cumulative non net operating loss deferred tax assets for which state and federal valuation allowance is warranted, partially offset by a decrease in the valuation allowance due to state taxable income generated during thethree and nine months endedSeptember 30, 2017; and

|      |                                                                                                         
|----- | --------------------------------------------------------------------------------------------------------
|(iii) | tax benefits related to income attributable to noncontrolling interests for which no taxes are provided.




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For the three and nine months ended  September 30, 2016 , interim income tax benefits were recorded using the discrete effective tax rate method.  Management believes the use of the discrete method for this period is more appropriate than applying the full-year effective tax rate method due to the actual results for the nine months ended September 30, 2016 compared to the expected results for the full year and the sensitivity of the effective tax rate to small changes in forecasted annual pre-tax income or loss.  Under the discrete method, the Company determines the tax provision based upon actual results as if the interim period were a full-year period.  The resulting effective tax rates for the three and nine months ended September 30, 2016 were (27.5)% and (39.1)% , respectively.  The difference between the Company’s effective tax rate and the statutory 35% rate was primarily due to:





|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(i) | state and local income taxes determined by the mix of income or loss from the operations by entity and state income tax jurisdiction;

|     |                                                                                     
|---- | ------------------------------------------------------------------------------------
|(ii) | a decrease in the valuation allowance driven by the utilization of state tax losses;

|      |                                                                                   
|----- | ----------------------------------------------------------------------------------
|(iii) | an increase in nondeductible expenses related to legal and regulatory matters; and

|     |                                                                                                         
|---- | --------------------------------------------------------------------------------------------------------
|(iv) | tax benefits related to income attributable to noncontrolling interests for which no taxes are provided.










11. Commitments and Contingencies





Legal and Regulatory Matters





The Company and its subsidiaries are routinely, and currently, defendants in various legal proceedings that arise in the ordinary course of PHH's business, including class actions and other private and civil litigation.  These proceedings are generally based on alleged violations of consumer protection laws (including the Real Estate Settlement Procedures Act ("RESPA")), employment laws and contractual obligations.  Similar to other mortgage loan originators and servicers, the Company and its subsidiaries are also routinely, and currently, subject to government and regulatory examinations, investigations and inquiries or other requests for information.  The resolution of these various legal and regulatory matters may result in adverse judgments, fines, penalties, injunctions and other relief against the Company as well as monetary payments or other agreements and obligations.  In particular, legal proceedings brought under RESPA and other federal or state consumer protection laws that are ongoing, or may arise from time to time, may include the award of treble and other damages substantially in excess of actual losses, attorneys' fees, costs and disbursements, and other consumer and injunctive relief.  These proceedings and matters are at varying procedural stages and the Company may engage in settlement discussions on certain matters in order to avoid the additional costs of engaging in litigation.





The outcome of legal and regulatory matters are difficult to predict or estimate and the ultimate time to resolve these matters may be protracted.  In addition, the outcome of any legal proceeding or governmental and regulatory matter may affect the outcome of other pending legal proceedings or governmental and regulatory matters.





A liability is established for legal and regulatory contingencies when it is probable that a loss has been incurred and the amount of such loss can be reasonably estimated.  In light of the inherent uncertainties involved in litigation, legal proceedings and other governmental and regulatory matters, it is not always possible to determine a reasonable estimate of the amount of a probable loss, and the Company may estimate a range of possible loss for consideration in its estimates.  The estimates are based upon currently available information and involve significant judgment taking into account the varying stages and inherent uncertainties of such matters.  Accordingly, the Company’s estimates may change from time to time and such changes may be material to the consolidated financial results.





As of September 30, 2017 , the Company’s recorded liability associated with legal and regulatory contingencies was $58 million and is presented in Other liabilities in the Condensed Consolidated Balance Sheets .  Given the inherent uncertainties and status of the Company’s outstanding legal proceedings, the range of reasonably possible losses cannot be estimated for all matters.  For matters where the Company can estimate the range, the Company believes reasonably possible losses in excess of the recorded liability are no t significant as of September 30, 2017 .





There can be no assurance that the ultimate resolution of these matters will not result in losses in excess of the Company’s recorded liability, or in excess of the estimate of reasonably possible losses.  As a result, the ultimate resolution of any particular legal matter, or matters, could be material to the Company’s results of operations or cash flows for the period in which such matter is resolved.








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The following are descriptions of the Company’s significant legal and regulatory matters.





MMC Examination. The Company has undergone a regulatory examination by a multistate coalition of certain mortgage banking regulators (the “MMC”), and such regulators have alleged various violations of federal and state consumer protection and other laws related to the Company’s legacy mortgage servicing practices.  In July 2015, the Company received a settlement proposal from the MMC, proposing payments to certain borrowers nationwide where foreclosure proceedings were either referred to a foreclosure attorney or completed during 2009 through 2012, as well as other consumer relief and administrative penalties.  In addition, the proposal would require that the Company comply with national servicing standards, submit its servicing activities to monitoring for compliance, and other injunctive relief.





In the fourth quarter of 2016, the Company entered into a consent order and paid a civil monetary penalty with the New York Department of Financial Services to close out New York's pending examination report findings, including New York findings stemming from the MMC examination.





In the fourth quarter of 2017, the Company reached agreements in principle to close out findings from the MMC examination; however, the final documents have not been executed.  As of September 30, 2017 , the Company included an estimate of probable losses in connection with the MMC matter in the recorded liability.





HUD Subpoenas. The Company previously disclosed that it had received document subpoenas from the Office of Inspector General of the U.S. Department of Housing and Urban Development (“HUD”) requesting production of certain documents related to, among other things, the Company’s origination and underwriting process for loans insured by the Federal Housing Administration (“FHA”) during the period between January 1, 2006 and December 31, 2011.  As part of the investigation, HUD has also requested documents related to a small sample of loans originated during this period.  The Company also previously disclosed that this investigation could lead to a demand or claim under the False Claims Act, that the Company was cooperating in the investigation, and that the Company had engaged in substantive settlement discussions with the government towards resolving this matter.





On August 8, 2017, the Company announced it reached a settlement of this matter with the U.S. Department of Justice for $65 million without any admission of liability, which amount was paid during the third quarter of 2017.





CFPB Enforcement Action. In January 2014, the Bureau of Consumer Financial Protection (the “CFPB”) initiated an administrative proceeding alleging that the Company’s reinsurance activities, including its mortgage insurance premium ceding practices, have violated certain provisions of RESPA and other laws enforced by the CFPB.  Through its reinsurance subsidiaries, the Company assumed risk in exchange for premiums ceded from primary mortgage insurance companies.





In June 2015, the Director of the CFPB issued a final order requiring the Company to pay $109 million , based upon the gross reinsurance premiums the Company received on or after July 21, 2008.  Subsequently, the Company filed an appeal to the United States Court of Appeals for the District of Columbia Circuit (the “Court of Appeals”).





In October 2016, the Court of Appeals issued its decision, vacating the decision of the Director of the CFPB, and finding in favor of the Company’s arguments, among others, around the correct interpretations of Section 8 of RESPA, the applicability of prior HUD interpretations around captive re-insurance and the applicability of statute of limitations to administrative enforcement proceedings at the CFPB.  The Court of Appeals remanded the case to the CFPB to determine the Company's compliance with provisions of RESPA specific to whether any mortgage insurers paid more than reasonable market value to the Company for reinsurance.  The Company continues to believe that it has complied with RESPA and other laws applicable to its former mortgage reinsurance activities.


In February 2017, the Court of Appeals granted the CFPB's request to rehear the case en banc and oral arguments took place in May 2017; however, the decision has not yet been issued.


Given the nature of this matter and the current status, the Company cannot estimate the amount of possible loss, or a range of possible losses, if any, in connection with this matter.





Other Subpoenas and Investigations. The Company previously disclosed that it had received document subpoenas from the U.S. Attorney’s Offices for the Eastern and Southern Districts of New York.  The subpoenas requested production of certain documents related to, among other things:  (i) foreclosure expenses that the Company incurred in connection with the foreclosure of loans insured or guaranteed by FHA, Fannie Mae or Freddie Mac and (ii) the origination and underwriting of loans sold pursuant to programs sponsored by Fannie Mae, Freddie Mac or Ginnie Mae.








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In addition, in October 2014, the Company received a document subpoena from the Office of the Inspector General of the Federal Housing Financing Agency (the “FHFA”) requesting production of certain documents related to, among other things, its origination, underwriting and quality control processes for loans sold to Fannie Mae and Freddie Mac.





On August 8, 2017, the Company announced that, with respect to the investigations involving the U.S. Attorney’s Office for the Eastern District of New York and the Office of Inspector General of the FHFA, it reached a settlement of these matters with the U.S. Department of Justice, without any admission of liability, for $9.5 million , which was paid during the third quarter of 2017.





There can be no assurance that claims or litigation will not arise from the inquiry of the U.S. Attorney’s Office for the Southern District of New York, or that damages and penalties, will not be incurred in connection with that matter.





Lender-Placed Insurance. The Company is currently subject to pending litigation alleging that its servicing practices around lender-placed insurance were not in compliance with applicable laws.  Through its mortgage subsidiary, the Company did have certain outsourcing arrangements for the purchase of lender-placed hazard insurance for borrowers whose coverage had lapsed.  The Company believes that it has meritorious defenses to these allegations; however, in January 2017, the Company entered into an agreement to settle outstanding litigation relating to this matter and the court approved the settlement in July 2017.  The Company paid a majority of the settlement costs during the third quarter of 2017, while the remaining expected losses yet to be paid are included in the recorded liability as of September 30, 2017 .





Repurchase and Foreclosure-Related Reserves





Repurchase and foreclosure-related reserves are maintained for probable losses related to repurchase and indemnification obligations and for on-balance sheet loans in foreclosure and real estate owned.  A summary of the activity in repurchase and foreclosure-related reserves is as follows:


Nine Months EndedSeptember 30,20172016(In millions)Balance, beginning of period$73$89Realized losses(18)(17)Transfer of reserves(1)(7)—Increase in reserves due to:Changes in assumptions710New loan sales25Balance, end of period$57$87


______________


|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During thenine months ended September 30, 2017, certain loans and associated reserves of Mortgage loans in foreclosure have been transferred to Mortgage loans held for sale pursuant to the Company's marketing of and intentions to sell those assets.

Repurchase and foreclosure-related reserves consist of the following:


September 30, 2017December 31, 2016(In millions)Loan repurchase and indemnification liability$38$49Adjustment to value for real estate owned1914Allowance for probable foreclosure losses—10Total$57$73





Loan Repurchases and Indemnifications. The liability for loan repurchases and indemnifications represents management’s estimate of probable losses based on the best information available and requires the application of a significant level of judgment and the use of a number of assumptions including borrower performance, investor demand patterns, expected relief from the expiration of repurchase obligations, the expected success rate in defending against requests and estimated loss severities (adjusted for home price forecasts).








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In December 2016, the Company executed resolution agreements and paid Fannie Mae and Freddie Mac to resolve substantially all representation and warranty exposure related to the sale of mortgage loans that were originated and delivered prior to September 30, 2016 and November 30, 2016, respectively.  The Company's remaining exposure to repurchase and indemnification claims consists primarily of estimates for claims from private investors, losses for specific non-performing loans where the Company believes it will be required to indemnify the investor and losses from government mortgage insurance programs.  Given the inherent uncertainties involved in estimating losses associated with future repurchase and indemnification requests, there is a reasonable possibility that future losses may be in excess of the recorded liability.  As of September 30, 2017 , the estimated amount of reasonably possible losses in excess of the recorded liability was $10 million .





The maximum amount of losses cannot be estimated because the Company does not service all of the loans for which it has provided representations or warranties.  As of September 30, 2017 , $53 million of loans have been identified in which the Company has full risk of loss or has identified a breach of representation and warranty provisions; 23% of which were at least 90 days delinquent (calculated based upon the unpaid principal balance of the loans).





Off-Balance Sheet Arrangements and Guarantees





Lease Arrangements. On February 8, 2017, the Company entered into an assignment with LenderLive Network, LLC ("LenderLive") of its Jacksonville, Florida facility lease.  Under the terms of the original facility lease, PHH remains jointly and severally obligated with LenderLive for performance under the lease agreement.  As of September 30, 2017 , the total amount of potential future lease payments under this guarantee is $14 million ; however, the Company does not believe any amount of loss under this guarantee is probable.





During 2017, the Company entered into assignments with Guaranteed Rate Affinity, LLC ("GRA") for certain of PHH Home Loans' facility leases that were associated with the location transfers under the asset sale agreement.  Refer to Note 13, 'Variable Interest Entities' for further information on the sale transactions.  Under the terms of these original facility leases, PHH remains jointly and severally obligated with GRA for performance under certain lease agreements.  As of September 30, 2017 , the total amount of potential future lease payments under these guarantees was not significant, and the Company does not believe any amount of loss under this guarantee is probable.











12. Fair Value Measurements





The Company updates the valuation of each instrument recorded at fair value on a quarterly basis, evaluating all available observable information, which may include current market prices or bids, recent trade activity, changes in the levels of market activity and benchmarking of industry data.  The assessment also includes consideration of identifying the valuation approach that would be used currently by market participants.  If it is determined that a change in valuation technique or its application is appropriate, or if there are other changes in availability of observable data or market activity, the current methodology will be analyzed to determine if a transfer between levels of the valuation hierarchy is appropriate.  Such reclassifications are reported as transfers into or out of a level as of the beginning of the quarter that the change occurs.  Other than the MSRs secured liability and Liability to deliver MSRs as discussed below, there has been no change in the valuation methodologies and classification pursuant to the valuation hierarchy during the nine months ended September 30, 2017 .





The incorporation of counterparty credit risk did not have a significant impact on the valuation of assets and liabilities recorded at fair value as of September 30, 2017 or December 31, 2016 .








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Recurring Fair Value Measurements





The following summarizes the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:


September 30, 2017LevelOneLevelTwoLevelThreeCashCollateraland NettingTotal(In millions)ASSETSMortgage loans held for sale$—$545$45$—$590Mortgage servicing rights——500—500Other assets—Derivative assets:Interest rate lock commitments——13—13Forward delivery commitments—1—(1)—LIABILITIESMortgage servicing rights secured liability$—$—$440$—$440Other liabilities:Derivative liabilities—Forward delivery commitments—2—(1)1Liability to deliver MSRs——2—2





December 31, 2016LevelOneLevelTwoLevelThreeCashCollateraland NettingTotal(In millions)ASSETSMortgage loans held for sale$—$636$47$—$683Mortgage servicing rights——690—690Other assets—Derivative assets:Interest rate lock commitments——18—18Forward delivery commitments—14—(12)2MSR-related agreements—19—(18)1Option contracts—1—(1)—LIABILITIESOther liabilities—Derivative liabilities:Forward delivery commitments$—$4$—$1$5MSR-related agreements—65—(53)12Option contracts———11








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Significant inputs to the measurement of fair value and further information on the assets and liabilities measured at fair value are as follows:





Mortgage Loans Held for Sale (“MLHS”). The Company has elected to record MLHS at fair value which is intended to better reflect the underlying economics and eliminate the operational complexities of risk management activities and hedge accounting requirements.  The following table reflects the difference between the carrying amounts of MLHS measured at fair value and the aggregate unpaid principal amount that the Company is contractually entitled to receive at maturity:


September 30, 2017December 31, 2016TotalLoans 90 days ormore past due andon non-accrualstatus(1)TotalLoans 90 days ormore past due andon non-accrualstatus(In millions)Carrying amount$590$19$683$7Aggregate unpaid principal balance6063868710Difference$(16)$(19)$(4)$(3)


———————


|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As ofSeptember 30, 2017, the majority of Mortgage loans in foreclosure and associated reserves have been transferred to Mortgage loans held for sale pursuant to the Company's marketing of and intentions to sell those assets.




The following table summarizes the components of MLHS: September 30, 2017December 31, 2016(In millions)First mortgages:Conforming$473$531Non-conforming72105Total first mortgages545636Second lien13Scratch and Dent4444Total$590$683





Mortgage Servicing Rights. MSRs are classified within Level Three of the valuation hierarchy due to the use of significant unobservable inputs and the inactive market for such assets. The fair value of MSRs is estimated based upon projections of expected future cash flows considering prepayment estimates, the Company’s historical prepayment rates, portfolio characteristics, interest rates based on interest rate yield curves, implied volatility and other economic factors.  On a quarterly basis, assumptions used in estimating fair value are validated against a number of third-party sources, which may include peer surveys, MSR broker surveys, third-party valuations and other market-based sources.  The September 30, 2017 determination of fair value includes calibration of our valuation model considering the pricing associated with the MSR agreements executed in the fourth quarter of 2016.  See Note 4, 'Servicing Activities' for further discussion of the MSR sale commitments.








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The following tables summarize certain information regarding the initial and ending capitalization rate of MSRs:


Nine Months EndedSeptember 30,20172016Initial capitalization rate of additions to MSRs owned1.10%1.00%





September 30, 2017December 31, 2016MSRs OwnedCapitalization servicing rate0.67%0.82%Capitalization servicing multiple2.32.9Weighted-average servicing fee (in basis points)2928Weighted-average life (years)6.06.3





September 30, 2017MSRs Under Secured Borrowing ArrangementCapitalization servicing rate0.85%Capitalization servicing multiple3.2Weighted-average servicing fee (in basis points)27Weighted-average life (years)5.8





The significant assumptions used in estimating the fair value of MSRs were as follows (in annual rates):


September 30, 2017December 31, 2016MSRs OwnedWeighted-average prepayment speed (CPR)8.4%9.2%Option adjusted spread, in basis points (OAS)4901,430Weighted-average delinquency rate12.0%5.1%





September 30, 2017MSRs Under Secured Borrowing ArrangementWeighted-average prepayment speed (CPR)10.5%Option adjusted spread, in basis points (OAS)988Weighted-average delinquency rate3.8%











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The following table summarizes the estimated change in the fair value of MSRs from adverse changes in the significant assumptions:


September 30, 2017Weighted-AveragePrepaymentSpeedOptionAdjustedSpreadWeighted-AverageDelinquencyRate(In millions)MSRs OwnedImpact on fair value of 10% adverse change$(3)$(2)$(4)Impact on fair value of 20% adverse change(5)(4)(9)MSRs Under Secured Borrowing Arrangement(1)Impact on fair value of 10% adverse change$(16)$(20)$(6)Impact on fair value of 20% adverse change(30)(38)(12)


———————


|    |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During 2017, the Company sold MSRs to New Residential, which have been accounted for as a secured borrowing and have a fair value of$440 millionas ofSeptember 30, 2017.  Accordingly, the MSRs remained on the balance sheet with the proceeds from sale recognized asMSRs secured liability.  Any changes in fair value of this secured borrowing are expected to fully offset within MSRs secured asset andMSRs secured liability.




These sensitivities are hypothetical and presented for illustrative purposes only.  Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear.  Also, this analysis does not assume any impact resulting from management’s intervention to mitigate these variations.





The effect of a variation in a particular assumption is calculated without changing any other assumption, and the assumptions used in valuing the MSRs are independently aggregated.  Although there are certain inter-relationships among the various key assumptions noted above, changes in one of the significant assumptions would not independently drive changes in the others.  The modeled prepayment speed assumptions are highly dependent upon interest rates, which drive borrowers’ propensity to refinance; however, there are other factors that can influence borrower refinance activity.  These factors include housing prices, the levels of home equity, underwriting standards and loan product characteristics.  The OAS is a component of the discount rate used to present value the cash flows of the MSR asset and represents the spread over a base interest rate that equates the present value of cash flows of an asset to the market price of that asset.  The weighted average delinquency rate is based on the current and projected credit characteristics of the capitalized servicing portfolio and is dependent on economic conditions, home equity and delinquency and default patterns.





Mortgage Servicing Rights Secured Liability . The Company elected to record the MSRs secured liability at fair value consistent with the related MSR asset.  The Company initially established the value of the MSRs secured liability based on the price at which the MSRs were sold.  Thereafter, the carrying value is adjusted to fair value at each reporting date, and the changes in value of the MSR secured asset and liability are expected to offset in the Condensed Consolidated Statements of Operations .  The Company records interest expense using the effective interest method based on the expected cash flows from the MSRs through the expected life of the underlying loans, which offsets the estimated yield on the MSR asset.





The fair value of MSRs secured liability is classified within Level Three of the valuation hierarchy due to the use of significant unobservable inputs, which is consistent with the fair value methodology of the related MSR asset.  The fair value of MSRs secured liability is estimated based upon projections of expected future cash flows of the underlying MSR asset.  The cash flow assumptions and prepayment assumptions used in the model are based on various factors, including portfolio characteristics, interest rates based on interest rate yield curves, implied volatility and other economic factors.





The significant assumptions used in estimating the fair value of MSRs secured liability were as follows (in annual rates):


September 30, 2017Weighted-average prepayment speed (CPR)10.5%Option adjusted spread, in basis points (OAS)988Weighted-average delinquency rate3.8%








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Derivative Instruments . Derivative instruments are classified within Level Two and Level Three of the valuation hierarchy.  The average pull through percentage used in measuring the fair value of interest rate lock commitments ("IRLCs") as of September 30, 2017 and December 31, 2016 was 73% and 77% , respectively.  The pull through percentage is considered a significant unobservable input and is estimated based on changes in pricing and actual borrower behavior using a historical analysis of loan closing and fallout data.  Actual loan pull through is compared to the modeled estimates in order to evaluate this assumption each period based on current trends.  Generally, a change in interest rates is accompanied by a directionally opposite change in the assumption used for the pull through percentage, and the impact to fair value of a change in pull through would be partially offset by the related change in price.





Liability to Deliver MSRs. Under our portfolio defense agreements, upon the refinance by the Company of any mortgage loan subserviced by the Company for the contractual counterparty as servicing rights owner, the Company agreed to transfer the MSR with respect to such new mortgage loan to the counterparty on the terms set forth in that agreement.  The Company elected to record the Liability to deliver MSRs at a fair value consistent with the related servicing value included within the related IRLC or MLHS.





The fair value of Liability to deliver MSRs is classified within Level Three of the valuation hierarchy due to the use of significant unobservable inputs, which is consistent with the fair value methodology of the servicing rights within IRLCs.  The Company initially established the value of the Liability to deliver MSRs based on the servicing value within the IRLC at inception.  Thereafter, the carrying value of this liability is adjusted to fair value at each reporting date, and the changes in value are expected to offset changes in the associated servicing value within the IRLC or MLHS in the Condensed Consolidated Statements of Operations until the MSR is delivered to New Residential.





Level Three Measurements





Activity of assets and liabilities classified within Level Three of the valuation hierarchy consisted of:


Three Months EndedSeptember 30, 2017Three Months EndedSeptember 30, 2016MLHSMSRsIRLCs,netMSRs Secured LiabilityLiability to Deliver MSRsMLHSMSRsIRLCs,net(In millions)Balance, beginning of period$32$555$16$(114)$—$42$679$39Purchases, Issuances, Sales and Settlements:Purchases2————3——Issuances210—(354)—215—Sales(3)(30)———(6)(3)—Settlements(2)—(65)141(4)—(92)(1)(20)(65)(340)1(5)12(92)Realized and unrealized gains (losses) included in:Gain on loans held for sale, net(6)—62—(3)——100Loan servicing income, net—(35)—28——(46)—Net interest expense1——(14)————(5)(35)6214(3)—(46)100Transfers into Level Three23————13——Transfers out of Level Three(4)————(5)——Balance, end of period$45$500$13$(440)$(2)$45$645$47








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Nine Months EndedSeptember 30, 2017Nine Months EndedSeptember 30, 2016MLHSMSRsIRLCs,netMSRs Secured LiabilityLiability to Deliver MSRsMLHSMSRsIRLCs,net(In millions)Balance, beginning of period$47$690$18$—$—$39$880$21Purchases, Issuances, Sales and Settlements:Purchases7————11——Issuances528—(467)—545—Sales(20)(125)———(20)(8)—Settlements(11)—(180)151(9)—(252)(19)(97)(180)(452)1(13)37(252)Realized and unrealized gains (losses) included in:Gain on loans held for sale, net(6)—175—(3)——278Loan servicing income, net—(93)—27——(272)—Net interest expense2——(15)—2——(4)(93)17512(3)2(272)278Transfers into Level Three34————33——Transfers out of Level Three(13)————(16)——Balance, end of period$45$500$13$(440)$(2)$45$645$47





Transfers into Level Three generally represent mortgage loans held for sale with performance issues, origination flaws, or other characteristics that impact their salability in active secondary market transactions.  During the three and nine months ended September 30, 2017 , transfers into Level Three also include certain of our foreclosure loan population and associated reserves pursuant to the Company's marketing of and intentions to sell those assets. Transfers out of Level Three represent Scratch and Dent loans that were foreclosed upon and loans that have been cured.





Unrealized gains (losses) included in the Condensed Consolidated Statements of Operations related to assets and liabilities classified within Level Three of the valuation hierarchy that are included in the Condensed Consolidated Balance Sheets were as follows:


Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Gain on loans held for sale, net$8$42$7$43Loan servicing income, net(3)(9)(9)(174)





Fair Value of Other Financial Instruments





As of September 30, 2017 and December 31, 2016 , all financial instruments were either recorded at fair value or the carrying value approximated fair value, with the exception of Debt.  For financial instruments that were not recorded at fair value, such as Cash and cash equivalents, Restricted cash, Accounts receivable and Servicing advance receivables, the carrying value approximates fair value due to the short-term nature of such instruments.





Debt. The total fair value of Debt as of September 30, 2017 and December 31, 2016 was $662 million and $1.3 billion , respectively, and is measured using Level Two inputs.  As of September 30, 2017 , the fair value was estimated using the following valuation techniques: (i) $127 million was measured using a market based approach, considering the current market pricing of recent trades for the Company’s debt instruments; and (ii) $535 million was measured using observable spreads and terms for recent pricing of similar instruments.











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13. Variable Interest Entities





Assets and liabilities of significant variable interest entities are included in the Condensed Consolidated Balance Sheets as follows:





September 30, 2017December 31, 2016PHH HomeLoansServicingAdvanceReceivablesTrustPHH HomeLoansServicingAdvanceReceivablesTrust(In millions)ASSETSCash and cash equivalents$60$—$67$—Restricted cash414519Mortgage loans held for sale239—350—Accounts receivable, net17—9—Servicing advances, net—80—150Property and equipment, net——1—Other assets7—111Total assets$327$94$443$170Assets held as collateral$218$94$320$169LIABILITIESAccounts payable and accrued expenses$14$—$11$—Debt2065230099Other liabilities6—5—Total liabilities(1)$226$52$316$99


———————


|    |                                
|--- | -------------------------------
|(1) | Excludes intercompany payables.




PHH Home Loans





PHH Home Loans is a joint venture between the Company and Realogy Holdings Corp. ("Realogy"), which provides mortgage origination services for brokers associated with brokerages owned or franchised by Realogy, and represented substantially all of the Real Estate channel, and 29% of the Company’s total mortgage production volume (based on dollars) for the nine months ended September 30, 2017 .





In February 2017, the Company announced it had entered into agreements to sell certain assets of PHH Home Loans and its subsidiaries, including its mortgage origination and processing centers and the majority of its employees.  Agreements related to these intended transactions include:





Asset sale transactions. On February 15, 2017, the Company entered into an agreement to sell certain assets of the PHH Home Loans joint venture to Guaranteed Rate Affinity, LLC ("GRA"), which is a newly formed joint venture formed by subsidiaries of Realogy and Guaranteed Rate, Inc.





During the third quarter of 2017, the Company completed the delivery of two of the five location transfers under the PHH Home Loans asset sale agreement, with a third transfer completed in October 2017.  In connection with these asset sales, the Company received $28 million of proceeds and recognized $28 million of gain in Other income within the Condensed Consolidated Statements of Operations during the third quarter of 2017.  Subsequent proceeds and gain related to the third transfer in October 2017 were $14 million .  The Company's realized cash proceeds and income from these transactions are reduced by the noncontrolling interest holder's pro-rata share.  The Company expects the remaining asset sales under this agreement to occur during the fourth quarter of 2017.





JV Interests Purchase. In connection with the asset sale agreements, PHH entered into an agreement to purchase Realogy's 49.9% ownership interests in the PHH Home Loans joint venture, for an amount equal to their interest in the residual equity of PHH Home Loans after the final closing of the Asset sale transactions.








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At the completion of the above described transactions, the Company expects to receive or pay amounts to resolve the remaining assets and liabilities of the PHH Home Loans legal entity, and would no longer operate through its Real Estate channel.  The Company estimates that it will receive total proceeds of $96 million in connection with these transactions, inclusive of the amounts received from asset sales through October 2017.





In connection with these transactions, the Company recognized $4 million and $9 million of Exit and disposal costs for PHH Home Loans within the Reorganization exit program for the three and nine months ended  September 30, 2017 , respectively.  Refer to Note 2, 'Exit Costs' for additional information regarding the Reorganization exit program.





Redeemable Noncontrolling Interest. As of December 31, 2016, Realogy's ownership interest in PHH Home Loans is presented as a Redeemable noncontrolling interest which reflects Realogy’s right, beginning on February 1, 2015, to require that the Company purchase all of their interest in PHH Home Loans, LLC upon two years notice at fair value, as outlined in the PHH Home Loans Operating Agreement (“2015 Put Option”).  For all periods presented, the fair value of the 2015 Put Option was determined based upon an orderly liquidation of the entity due to the uncertainty of the cash flows associated with an income approach, specifically the impact from exercising the 2015 Put Option on the related operating and strategic relationship agreements.  The resulting changes to the redemption value are recognized as an equity adjustment to Additional paid-in capital.  Refer to Note 1, 'Summary of Significant Accounting Policies' for information regarding the correction of an immaterial error related to the prior classification and measurement of Realogy's ownership interests.





As described above, during 2017, the Company entered into the JV Interests Purchase agreement with Realogy to acquire their membership interest based on the book value of the net equity of the JV, which is contingent upon the closing of all five asset sale transactions.  During the third quarter of 2017, upon the delivery of the FNMA MSRs to New Residential and the satisfaction of other conditions to closing the initial delivery under the asset sale agreement with GRA, the contingent forward purchase agreement represented a redemption feature of the minority partner that became outside of the Company's sole control.   The Company believes it is probable that the contingent forward purchase agreement will become redeemable upon completion of the final location transfer, which is expected to occur in the fourth quarter of 2017.  As a result, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount to equal the redemption value at the end of each reporting period.   The fair value of the JV Interest Purchase agreement was based upon Realogy's portion of the net assets of PHH Home Loans as of September 30, 2017 , which are primarily recorded at fair value (or approximated fair value).





Since the redemption value of the forward purchase agreement is greater than the redemption value of the 2015 Put Option, the Company considered the JV Interests Purchase agreement in the measurement of the balance as of September 30, 2017 .  During the nine months ended September 30, 2017 , the Company recognized an increase to the redemption value of the Redeemable noncontrolling interest of $28 million , with a corresponding decrease to Additional paid-in capital.











14.  Segment Information





Operations are conducted through the following two reportable segments:





|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|▪ | Mortgage Production— provides mortgage loan origination services and sells mortgage loans.




|  |                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|▪ | Mortgage Servicing— performs servicing activities for loans originated by the Company and mortgage servicing rights purchased from others, and acts as a subservicer for certain clients that own the underlying mortgage servicing rights.




The Company's operations are located in the U.S.  The heading Other includes expenses that are not allocated back to the two reportable segments, which may include Loss on early debt retirement, certain Exit and disposal costs and Professional and third-party service fees incurred related to the strategic review.  Management evaluates the operating results of each of the reportable segments based upon Net revenues and Segment profit or loss, which is presented as the Income or loss before income tax expense or benefit and after Net income or loss attributable to noncontrolling interest.  The Mortgage Production segment profit or loss excludes Realogy’s noncontrolling interest in the profit or loss of PHH Home Loans.








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Segment results were as follows:


Total AssetsSeptember 30, 2017December 31, 2016(In millions)Mortgage Production segment$803$913Mortgage Servicing segment1,0101,428Other488834Total$2,301$3,175





Net RevenuesThree Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Mortgage Production segment$98$168$276$443Mortgage Servicing segment232971107Total$121$197$347$550





Segment (Loss) Profit(1)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Mortgage Production segment$(18)$22$(84)$9Mortgage Servicing segment(37)(52)(114)(106)Other(36)(5)(73)(10)Total$(91)$(35)$(271)$(107)


———————


|    |                                                                               
|--- | ------------------------------------------------------------------------------
|(1) | The following is a reconciliation of Loss before income taxes to Segment loss:

Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Loss before income taxes$(78)$(29)$(266)$(98)Less: net income attributable to noncontrolling interest13659Segment loss$(91)$(35)$(271)$(107)











15. Subsequent Events





See Note 13, 'Variable Interest Entities' for discussion of an additional PHH Home Loans location transfer on October 23, 2017.





On November 5, 2017 , the Company's Board of Directors provided a new authorization for up to $100 million of share repurchases.


























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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations





The following discussion should be read in conjunction with the Cautionary Note Regarding Forward-Looking Statements and our Condensed Consolidated Financial Statements and Part II—Item 1A. Risk Factors in this Form 10-Q and Part I—Item 1. Business, Part I—Item 1A. Risk Factors, Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements included in our 2016 Form 10-K.





We are a leading provider of end to end mortgage solutions. We conduct our business through two reportable segments: Mortgage Production, which provides mortgage loan origination services and sells mortgage loans, and Mortgage Servicing, which performs servicing activities for originated and purchased loans, and acts as a subservicer.





Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in sections as follows:


|  |                  
|- | -----------------
|▪ | Executive Summary

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|- | -----------------------------
|▪ | Asset Sales and Exit Programs

|  |                      
|- | ---------------------
|▪ | Results of Operations

|  |                
|- | ---------------
|▪ | Risk Management

|  |                                
|- | -------------------------------
|▪ | Liquidity and Capital Resources

|  |                                           
|- | ------------------------------------------
|▪ | Critical Accounting Policies and Estimates

|  |                                          
|- | -----------------------------------------
|▪ | Recently Issued Accounting Pronouncements







EXECUTIVE SUMMARY


Business Update


Throughout 2017, we have focused on executing the necessary actions to achieve our strategic objectives as we transition and restructure the business.  These actions include closing our asset sale transactions, re-engineering the cost structure of the business and transitioning to the new business model while maintaining strategic flexibility.  In the third quarter, we made significant progress on executing our strategic transactions and returning capital to our shareholders.


MSR Sales . During the quarter, we completed the delivery of $429 million of MSRs and advances under our sale agreements with New Residential Investment Corp. ("New Residential"), Lakeview Loan Servicing LLC ("Lakeview"), and other third parties.  The cash received from MSR sales and advances during the quarter was $425 million, which is adjusted for applicable holdback.  As a result of all of our MSR sales to-date, we have recognized a net receivable for holdbacks from the MSR transfers of $42 million as of September 30, 2017 .  The MSR sale holdback will be released either upon the complete delivery of the underlying mortgage loan documents, or to the extent not used to satisfy any indemnification claims of New Residential.





The remaining $183 million of MSRs and advances committed under the New Residential agreement consist of private investor MSRs.  The extended time frame for executing the remaining transactions is due to the complexity of the consent process, the number of parties involved, and the depth of investor and trustee due diligence.  Although all parties continue to work diligently to close on the sale of these private MSRs and related advances, we now believe there is an increasing risk that the necessary consents may not be obtained for portions of the private MSR population.  If necessary, we believe there would be alternative means to monetize a substantial portion of these assets.





Home Loans Asset Sales.  In the third quarter, we completed two of five transactions under our PHH Home Loans ("HL") asset sale agreement.  We received $28 million of the $70 million total purchase price from these transfers.  Amounts received for the HL asset sales are divided with our minority interest partner, and we realized $14 million as net proceeds from the initial transfers.  We expect the remaining asset sales under this agreement to occur within the fourth quarter of 2017.  At the completion of the HL asset sales, we expect to liquidate the residual assets of the entity, and we have agreed to purchase Realogy's membership interests at book value.





PLS & Exit Activities.  We continue to make progress in executing the exit of our PLS business and re-engineering our shared services platform.  We currently expect $209 million in total PLS exit-related costs comprised of $130 million of operating losses and $79 million of cash exit expenses.  Further, we expect $34 million in total Reorganization program cash costs.  Through September 30, 2017 , we have incurred $77 million of cash exit costs associated with our exit programs, including $8 million in cash exit costs in the third quarter of 2017.  We continue to expect to have substantially exited the PLS channel





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by the first quarter of 2018, subject to transition support requirements, and we expect to have substantially completed our reorganization actions by the second quarter of 2018.





See details of executed and pending transactions below under "—Asset Sales and Exit Programs".


We continue to believe there will be growing demand for subservicing and that we are well positioned in this market based upon the quality of our subservicing platform, established compliance management system, portfolio retention services offering and immediately available capacity.  In portfolio retention, while we have seen growth from the prior quarters based on closing units, we are addressing volume challenges through sales training, management techniques and data analytics.  However, our long-term plans are dependent on growth, and adding new subservicing units is critical for us to achieve the desired scale and a profitable business model.  Establishing subservicing relationships requires a long sell cycle, and we are in the relatively early stages of our marketing initiatives.  As a result, we have yet to close our first mandate from these efforts, and there can be no assurance that we will be successful in growing our subservicing portfolio.


Update on Capital Returns





In the third quarter, we utilized cash received from our asset sales to extinguish $496 million of principal of our senior notes, and completed $301 million of repurchases of our common shares.  In November, we announced additional plans to use our current excess cash, as detailed below.





Reduction in Debt.  In June, we launched a tender program for any and all of our senior notes.  Through the completion of the tender, in July, we extinguished $496 million of note principal for consideration of $509 million plus $15 million for early tender payments and $12 million of accrued and unpaid interest.  We recognized a pre-tax loss in the third quarter of 2017 of $34 million in connection with the debt repayment.  After the tender, $119 million of note principal remains outstanding.  We continue to assess what amount, if any, of the remaining unsecured debt would be appropriate as part of our permanent capital structure.





Share Repurchases.  In the third quarter, we executed $10 million in open market repurchases, retiring 689,502 shares, and we completed $267 million in repurchases from our modified “Dutch auction” self-tender offer on September 15, 2017, retiring 18,762,962 shares.





In November, our Board of Directors has provided a new authorization for up to $100 million of share repurchases.  The amount of the authorization represents excess cash we believe is currently available with a high degree of certainty, exclusive of any additional MSR sales.  We have no obligation to repurchase shares under this authorization, and any share repurchase program may be extended, modified, suspended or discontinued at any time.  The number, timing, and purchase price of any shares will be at management’s discretion and based on an evaluation of a number of factors, including but not limited to general market and economic conditions, the trading price of the common stock, and regulatory requirements.  See further discussion of risks specific to the repurchase program at “Part II—Item 1A. Risk Factors—Risk Related to our Common Stock— Our decision to return cash to shareholders through stock repurchases may not prove to be the best use of our capital or result in the effects we anticipated, including a positive return of capital to stockholders. " in this Form 10-Q.











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ASSET SALES AND EXIT PROGRAMS





Sale of MSRs





The following table summarizes our MSRs committed under sale agreements and estimated committed Servicing advance receivables:


September 30, 2017December 31, 2016MSR Fair ValueUPBServicing AdvancesMSR Fair ValueUPBServicing Advances(In millions)MSR CommitmentsNew Residential$38$6,430$145$579$69,937$286Lakeview———9713,36914Other counterparties5548—2158—Total$43$6,978$145$678$83,464$300





We received $686 million of cash during the nine months ended September 30, 2017 from executed sales or transfers of MSRs and related advances, and we have recorded a net $42 million in Accounts receivable as of September 30, 2017 related to executed sales, representing document and indemnification holdbacks pursuant to the applicable contracts.





See Note 4, 'Servicing Activities' in the accompanying Notes to Condensed Consolidated Financial Statements for further information about our MSR sales executed in 2017 and "Executive Summary" above for discussion of the remaining MSR sale commitments with New Residential and related risks.  In addition, see “Part I—Item 1A. Risk Factors—Risks Related to Our Strategies— Our agreements to sell substantially all of our capitalized MSRs are subject to various approvals, including regulatory approvals, shareholder approval (for the New Residential transaction), approvals from certain origination sources and investors, as well as other closing requirements, and may not be completed as anticipated, or at all. ” in our 2016 Form 10-K.





Further information about our agreements with New Residential, and our continuing involvement with the portfolio transferred to New Residential, follows:


|  |                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Subservicing Agreement.We entered into a subservicing agreement with New Residential in connection with our MSR Sale Agreement, which covers all units sold to New Residential for an initial period of three years, subject to certain early transfer and termination provisions.  This subservicing relationship became effective upon the initial delivery of MSRs to New Residential on June 16, 2017.

As of September 30, 2017 , our total units subserviced is approximately 648,000 , and New Residential represents 377,000 units, or a 58% client concentration in our subservicing portfolio.  For further information, see “Part II—Item 1A. Risk Factors—Risks Related to Our Strategies— Our remaining business will be focused on subservicing activities, and we have significant client concentration risk related to the percentage of subservicing from agreements with New Residential Investment Corp. and Pingora Loan Servicing, LLC.  Further, the terms of a substantial portion of our subservicing agreements allow the owners of the servicing to terminate the subservicing agreement without cause, or to otherwise significantly decrease the number of loans we subservice on their behalf at any time, or upon the occurrence of certain time-based events. " in this Form 10-Q.


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|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Portfolio Defense Agreement.In connection with the initial delivery of MSRs to New Residential on June 16, 2017, we entered into the MSR Portfolio Defense Agreement with New Residential, pursuant to which we will be entitled, subject to compliance with the terms of the agreement, to seek to refinance loans subserviced on behalf of New Residential as part of our Portfolio Retention services.  Under this agreement, we have agreed to sell the MSR with respect to loans originated under this program to New Residential.

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|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Secured Borrowing Accounting.Our accounting evaluation of the New Residential MSR Sale agreement and related agreements concluded that New Residential has not acquired all ownership rewards since the terms of the subservicing contract limit New Residential's ability to terminate the contract within the first three years.  Therefore, our transfer of MSRs to New Residential did not qualify for sale accounting under GAAP, and we will record the transactions as a secured borrowing.  Upon the receipt of cash for MSRs transferred to New Residential, we recognized aMortgage servicing rights secured liabilityon our balance sheet, and we continued to recognize the MSR asset.  Future changes in theMortgage servicing rights secured liabilityare expected to fully offset future changes in the related MSR asset, including changes in fair value.  See further information about the presentation in the 'Selected Income Statement Data' tables within "Results of Operations—Mortgage Servicing Segment".




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Home Loans Asset Sales





The HL asset sales are expected to occur in a series of five transfers, based on geographic location of the mortgage origination and processing centers. In the third quarter, two of the HL location transfers occurred, and we received $28 million of proceeds in connection with the sale.  We recognized $14 million of pre-tax gain from the sale, which is reduced for the portion of the proceeds attributable to non-controlling interest.  In October 2017, a third location transfer occurred, and we received an additional $14 million of proceeds, and will recognize $7 million of pre-tax gain after consideration of the non-controlling interest holders' share.





We expect the remaining asset sales under this agreement to occur within 2017, and once the asset sales are completed, we expect to purchase Realogy's membership interest in the HL venture based on the book value of the net equity of the joint venture, and receive or pay amounts to resolve the remaining assets and liabilities of the HL legal entity.  If the remaining asset sales, our purchase of Realogy's membership interest in the HL venture and the resolution of the HL legal entity are completed, we estimate that we will receive additional proceeds of $66 million.  After the completion of these transactions, we will no longer have operations in our Real Estate channel.





See Note 13, 'Variable Interest Entities' in the accompanying Notes to Condensed Consolidated Financial Statements for more information about the agreements related to the HL Asset Sales.








Exit Programs





We are currently executing our announced programs to exit our PLS business and to reorganize our business to "PHH 2.0".  As a result of these exit programs and the transfer of employees as part of our transactions with LenderLive Network, LLC and Guaranteed Rate Affinity LLC ("GRA"), we expect to reduce our employee headcount from 3,500 at the end of 2016, to our future staffing levels of approximately 1,250 employees in the second half of 2018.  The table below summarizes the total costs of these exit programs, the amount recognized to date and the expected cash flows related to the programs (all amounts are pre-tax):


Exit Program CostsCash OutflowsPLS ExitReorganizationTotalPayments To Date(1)Future Outflows(In millions)Cash Exit Costs by Segment - Q3 2017:Mortgage Production segment$1$5$6Mortgage Servicing segment———Other2—2Recognized in Q3 2017$3$5$8Recognized in prior periods462369Estimate of remaining costs30636Cash exit program expenditures$79$34$113$(18)$95Non-cash charges and impairments114Exit costs attributed to Noncontrolling interest—(8)Total$90$30


______________


|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Cash outflows as presented above exclude the transfer of$5 millionto Restricted cash related to a letter of credit posted in connection with the March 31, 2017 transaction with LenderLive.

We expect to incur the remaining exit costs for PLS over the next 6 months through the first quarter of 2018, and substantially all of the exit costs for Reorganization through the end of 2017.  We expect the timing of cash outflows for the exit programs to extend through the end of 2018, as payments related to our severance arrangements are paid in biweekly installments, not lump sum payments.


See further details in Note 2, 'Exit Costs' in the accompanying Notes to Condensed Consolidated Financial Statements , including the total program cost estimate by segment.





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Exit from Private Label Channel. For the third quarter of 2017 , PLS Exit costs incurred in the Mortgage Production and Other segments include expenses related to employee retention agreements.


In addition to the exit costs outlined above, in the third quarter of 2017, we incurred $25 million of pre-tax operating losses for PLS.  While we implement the exit from this channel, we expect to incur further pre-tax operating losses of $55 million for PLS, including maintaining the support and compliance infrastructure needed to comply with both regulatory and contractual requirements.  We have committed exit dates of no later than December 31, 2017 with clients representing approximately 70% of our PLS closing volume (based on closing dollars for the year ending December 31, 2016 ).  At this time, we believe we will be in a position to substantially exit the PLS business by the first quarter of 2018, subject to certain transition support requirements.  For discussion of risks related to the PLS exit, see “Part I—Item 1A. Risk Factors—Risks Related to Our Strategies— Our decision to exit our Private Label client agreements will involve a significant amount of restructuring costs, and we have risks specific to our exit plans.  Furthermore, there can be no assurances that such action will be as beneficial to shareholders as if we had not taken such action.” in our 2016 Form 10-K.


Reorganization. To execute our Reorganization to PHH 2.0 and change the focus of our operations to subservicing and portfolio retention services, we are restructuring our remaining business and shared services platform.  We intend to re-engineer and reduce operating and overhead costs, which may take into the third quarter of 2018 to complete.  For the third quarter of 2017 , Reorganization-related exit costs are primarily related to employee retention agreements and employee-related costs as part of the HL asset sales.  We are targeting total annualized shared service expenses of $75 million in PHH 2.0’s first full year as a stand-alone business.


For discussion of risks related to our remaining business, see “Part I—Item 1A. Risk Factors—Risks Related to Our Strategies— Our continuing operations have not been profitable over the past three years, and we intend to implement strategic actions and change the focus of our business to improve our financial results.  We may not be able to fully or successfully execute or implement our business strategies or achieve our objectives, and our actions taken may not have the intended result." in our 2016 Form 10-K.





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RESULTS OF OPERATIONS








The following table presents our consolidated results of operations:


Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions, except per share data)Net revenues$121$197$347$550Total expenses199226613648Loss before income taxes(78)(29)(266)(98)Income tax benefit(36)(8)(103)(38)Net loss(42)(21)(163)(60)Less: net income attributable to noncontrolling interest13659Net loss attributable to PHH Corporation$(55)$(27)$(168)$(69)Basic and Diluted loss per share attributable to PHH Corporation$(1.14)$(0.50)$(3.25)$(1.28)





Our financial results for the third quarter of 2017 reflect our continued progress to move to a smaller business comprised of subservicing and portfolio retention services, including execution of the sale of the majority of our MSRs.  Our third quarter of 2017 results include:





|  |                                                                       
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|• | $25 millionin operating losses related to the exit of our PLS channel;

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|• | $8 millionin Exit and disposal costs related to all of our exit and restructuring activities;

|  |                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------
|• | $16 millionin transaction and related expenses from the MSRs sold primarily to New Residential and Lakeview; and

|  |                                                                                            
|- | -------------------------------------------------------------------------------------------
|• | $34 millionof Loss on early debt retirement to extinguish a majority of our unsecured debt.




Throughout the remainder of 2017 and into the first quarter of 2018, we expect our results to continue to be negatively impacted by our exit of the PLS channel and re-engineering the cost structure of our operations, as discussed further in "Overview—Executive Summary".   Under our Asset sale agreements, we expect to execute the remaining HL sales in the fourth quarter; however, $188 million of MSR and related advances remain committed for sale, as discussed further in "—Asset Sales and Exit Programs".





Income Taxes. We record our interim tax benefit for 2017 by applying a projected full-year effective income tax rate to our quarterly pre-tax loss for results that we deem to be reliably estimable.  For 2016, we recorded our interim tax benefit using the discrete effective tax rate method due to actual results for the third quarter of 2016 as compared to the expected results for the full year and the sensitivity of the effective tax rate to small changes in forecasted results.  Certain items are considered not to be reliably estimable; therefore, we record discrete year-to-date income tax provisions on those items.





Our effective income tax rate for the three months ended September 30, 2017 and 2016 was (45.8)% and (27.5)% , respectively.  Our effective tax rates differ from our federal statutory rate of 35% primarily due to state tax provision, changes in the valuation allowance, and income or loss attributable to noncontrolling interest for which no taxes are provided.





We expect to have taxable income for the full year 2017 driven by the MSR sales.  Our Deferred tax liabilities related to the MSR decreased by $214 million during the nine months ended September 30, 2017 as a result of the executed MSR sales.





See Note 10, 'Income Taxes' in the accompanying Notes to Condensed Consolidated Financial Statements for further details.








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Revenues


Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Origination and other loan fees$33$75$114$215Gain on loans held for sale, net3587129212Loan servicing income4289162271Change in fair value of MSRs asset and secured liability, net of related derivatives(7)(50)(66)(133)Net interest expense(10)(7)(23)(23)Other income283318Net revenues$121$197$347$550





Revenues from our Mortgage Production segment for the third quarter of 2017, including Origination and other loan fees and Gain on loans held for sale, net reflect a 51% decline in total closings.  Origination and other loan fees decreased by $42 million or 56% as compared to the prior year quarter resulting from a 62% decrease in private label closing units as we continue to exit this business.  Gain on loans held for sale, net decreased by $52 million for the third quarter of 2017 resulting primarily from a 41% decrease in saleable applications that was primarily due to our decline in PLS applications and the asset sale of two HL locations in our Real Estate channel during the third quarter of 2017 .





Loan servicing income for the third quarter of 2017 was lower by $47 million or 53% compared to the prior year quarter, primarily due to a 76% decrease in the average owned capitalized portfolio due to our 2017 sales of GNMA servicing to Lakeview and June and July 2017 sales of substantially all of Freddie Mac and Fannie Mae servicing to New Residential.





Change in fair value of MSRs asset and secured liability, net of related derivatives for the third quarter of 2017 was favorable by $43 million compared to the third quarter of 2016, which was a result of an 89% decrease in payoffs and a 76% decrease in the average owned capitalized servicing portfolio compared to the prior year quarter, as a result of the Lakeview and New Residential sales.





Other income increased by $25 million primarily due to a $28 million gain from the asset sales of two HL locations in the third quarter of 2017 .  Our net proceeds from the HL asset sales is reduced by the $14 million noncontrolling interest holder's 49.9% share, which is recorded within Net income attributable to noncontrolling interest.  This was partially offset by declining earnings from our equity investment in Speedy Title and Appraisal Review Services LLC ("STARS") as a result of lower appraisal volume in STARS from our announced exit from the PLS channel.








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Expenses


Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Salaries and related expenses$62$86$223$268Commissions13193849Loan origination expenses9182752Foreclosure and repossession expenses4101626Professional and third-party service fees253592111Technology equipment and software expenses9102730Occupancy and other office expenses8112635Depreciation and amortization441113Exit and disposal costs8—49—Other operating expenses:Legal and regulatory reserves2112416Loss on early debt retirement34—34—Other21224648Total expenses$199$226$613$648





Salaries and related expenses were down $24 million or 28% compared to the prior year quarter, due to a $20 million decline in Salaries, benefits and incentives from declines in our average employee headcount and a $4 million decrease in contract labor and overtime as a result of declining volumes and our continued transition to a smaller business.





Commissions declined by $6 million or 32% compared to the prior year quarter, primarily due to a 23% decrease in closing volume from our real estate channel and lower private label closing units.





Loan origination expenses decreased by $9 million or 50% compared to the third quarter of 2016 , primarily due to a 54% decrease in retail application units.





Foreclosure and repossession expenses were down by $6 million or 60% compared to the prior year quarter primarily due to lower foreclosure activity and improved delinquencies that were partially the result of the Lakeview GNMA MSR sale and other recent MSR sales of delinquent government loans.





Professional and third-party service fees decreased by $10 million primarily due to a decrease in information technology expenses as a result of higher costs in the third quarter of 2016 associated with the modernization and enhanced security of our information technology systems and implementing new compliance requirements in our origination business.





Exit and disposal costs were $8 million in the third quarter of 2017 , which included $7 million of severance and retention expense for impacted employees of the PLS exit and the Reorganization.





We recorded a provision for legal and regulatory matters of $2 million in the third quarter of 2017 , compared to an $11 million provision during the third quarter of 2016 , due to various legal proceedings and regulatory investigations, examinations and inquiries that were still ongoing at that time related to our legacy mortgage servicing practices.





Loss on early debt retirement was $34 million in the third quarter of 2017 as a result of the July 2017 extinguishment of $496 million of Term notes due in 2019 and 2021.














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Mortgage Production Segment


Strategic Update


PLS and Exit Programs. In November 2016, as an outcome of our strategic review process, we announced our intentions to exit our PLS business.  In the Mortgage Production segment for the three and nine months ended September 30, 2017 , we incurred operating losses related to PLS of $25 million and $75 million , respectively, and PLS-related exit costs of $1 million and $15 million , respectively.  In addition, in the Mortgage Production segment for the three and nine months ended September 30, 2017 , we incurred $5 million and $14 million , respectively, of costs related to the reorganization of our shared services function.  See further discussion of the PLS operating losses and exit costs within "—Asset Sales and Exit Programs".


Real Estate Joint Venture. As an outcome of our strategic review process, we announced in February 2017 that we have entered into agreements to sell certain assets of PHH Home Loans ("HL") and its subsidiaries, including its mortgage origination and processing centers and the majority of its employees. In the third quarter, we completed the first two of the total five expected location transfers under the asset sale agreement and received $28 million cash.   During October 2017, we received an additional $14 million from the third location transfer.  The cash received from these transfers is shared prorata with the minority interest holder. We expect to complete the remaining HL Asset sales by the end of 2017, and after the completion of these sales, we will no longer operate through our Real Estate channel.


For discussion of risks related to our HL transactions, see “Part I—Item 1A. Risk Factors—Risks Related to Our Strategies— We have entered into agreements to sell certain assets of PHH Home Loans and to monetize our investment in the joint venture.  The transaction contains a number of pre-closing conditions and is subject to PHH Corporation shareholder approval.  There can be no assurance that the Company will complete the execution of these transactions or that the net proceeds realized upon the sale will equal the current estimate. ” in our 2016 Form 10-K.





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Business Summary


The following tables summarize the closing statistics and the allocation of revenue of our exiting and remaining Mortgage Production businesses:


Nine Months Ended September 30, 2017ExitingRemainingPLS(1)Real EstatePortfolio RetentionTotal(In millions)Origination and other loan fees$88$24$2$114Gain on loans held for sale, net(5)10826129Net interest income1124Other income128—29Net revenues$85$161$30$276Total Closings$10,775$4,708$812$16,295





Nine Months Ended September 30, 2016ExitingRemainingPLS & Wholesale(1)Real EstatePortfolio RetentionTotal(In millions)Origination and other loan fees$186$27$2$215Gain on loans held for sale, net1714748212Net interest income4318Other income6118Net revenues$213$178$52$443Total Closings$22,046$5,598$700$28,344


________________


|    |                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Portfolio Retention has historically been included in our disclosed PLS channel data. These amounts exclude Portfolio Retention, which is displayed separately.  Wholesale was also included in theninemonths endedSeptember 30, 2016; however, we exited the platform during the second quarter of 2016.




Our Mortgage Production segment will consist entirely of portfolio retention services once our exits of PLS and Real Estate are completed.  Portfolio retention involves the refinancing of mortgages held within our current servicing portfolio, and results are currently included within the statistics of our PLS channel in the following Segment Metrics table.  For the nine months ended September 30, 2017 , portfolio retention represented 5% of our total closing volume (based on dollars).





On June 16, 2017, we entered into a portfolio defense agreement with New Residential, which entitles us to seek refinancing of the mortgage loans we subservice under the subservicing agreement with New Residential.  New Residential represents 58% of our total subservicing (by units as of September 30, 2017 ).





Future portfolio retention volumes are dependent on the size and breadth of our servicing portfolio, on the willingness of subservicing clients to permit us to perform such services and on a declining or lower interest rate environment as compared to individual mortgagor's current rates.  In late 2016, rates increased and have remained relatively stable through the third quarter of 2017 .  As a result, refinancing activity declined as the majority of individual mortgages have rates comparable or lower than current mortgage rates; therefore, limited benefit exists to the remaining population of borrowers.  Based on Fannie Mae's October 2017 Economic and Housing Outlook projection of mostly stable rates during the remainder of 2017 into the first half of 2018, refinancing volumes are expected to drop significantly in the full year 2017 as compared to 2016, with additional declines into the first half of 2018 .





For discussion of risks related to our continuing business, see “Part I—Item 1A. Risk Factors—Risks Related to Our Strategies— Our continuing operations have not been profitable over the past three years, and we intend to implement strategic actions and change the focus of our business to improve our financial results.  We may not be able to fully or successfully execute or implement





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our business strategies or achieve our objectives, and our actions taken may not have the intended result." in our 2016 Form 10-K.





Segment Metrics:


Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016($ In millions)Closings:Saleable to investors$1,894$2,759$5,663$7,594Fee-based3,0507,25810,63220,750Total$4,944$10,017$16,295$28,344Purchase$3,059$4,421$9,283$12,748Refinance1,8855,5967,01215,596Total$4,944$10,017$16,295$28,344Retail - PLS$3,298$7,853$11,587$22,161Retail - Real Estate1,6462,1374,7085,598Total retail4,9449,99016,29527,759Wholesale/correspondent—27—585Total$4,944$10,017$16,295$28,344Retail - PLS (units)5,14013,59019,14238,718Retail - Real Estate (units)5,5037,37915,92919,928Total retail (units)10,64320,96935,07158,646Wholesale/correspondent (units)—107—2,298Total (units)10,64321,07635,07160,944Applications:Saleable to investors$2,436$4,136$7,953$11,580Fee-based3,2418,21711,62325,720Total$5,677$12,353$19,576$37,300Other:IRLCs expected to close$784$1,199$2,073$3,685Total loan margin on IRLCs (in basis points)299388307342Loans sold$1,940$2,954$5,782$7,804








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Segment Results:





Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Origination and other loan fees$33$75$114$215Gain on loans held for sale, net3587129212Net interest income2348Other income283298Net revenues98168276443Salaries and related expenses3553131167Commissions13193849Loan origination expenses9182752Professional and third-party service fees862017Technology equipment and software expenses1133Occupancy and other office expenses561620Depreciation and amortization2257Exit and disposal costs6—29—Other operating expenses243586110Total expenses103140355425(Loss) income before income taxes(5)28(79)18Less: net income attributable to noncontrolling interest13659Segment (loss) profit$(18)$22$(84)$9





Quarterly Comparison: Mortgage Production segment loss was $18 million during the third quarter of 2017 compared to a segment profit of $22 million during the third quarter of 2016 .  Our results in the segment reflect the reduced volumes associated with our 2017 exit of the PLS business and reductions in our Real Estate channel from the transfer of two of five HL locations in the third quarter of 2017.  In addition, our third quarter of 2017 segment loss includes $25 million of PLS operating losses and $6 million of Exit and disposal costs, partially offset by $14 million in net proceeds from HL asset sales.





Net revenues. Origination and other loan fees were $33 million , down $42 million or 56% compared with the prior year quarter.  Origination assistance fees decreased by $33 million, which was primarily driven by a 62% decrease in private label closing units compared to the prior year quarter.  This decrease also included a $9 million decrease in appraisal income and application and other closing fees primarily driven by a 49% decrease in total retail closing units.





Gain on loans held for sale, net was $35 million during the third quarter of 2017 , down $52 million or 60% , as compared to $87 million for the prior year quarter.  This decrease related to a 41% decrease in saleable applications that was primarily due to our decline in retail applications as we execute the exit of the PLS channel and as we executed the asset sale of two HL locations in our real estate channel during the third quarter of 2017 .  The decrease was also impacted by $6 million in reductions to the fair value of the illiquid loan population in 2017, primarily driven by updates to fair value based on our current marketing efforts for these loans.





Net interest income was $2 million during the third quarter of 2017 , down $1 million or 33% , as compared to the third quarter of 2016 , primarily due to the decline in average mortgage loans held for sale that was partially offset by the decline in average mortgage warehouse debt, both from the decline in saleable volume.





Other income was $28 million during the third quarter of 2017 as compared to $3 million during the third quarter of 2016 , primarily due to $28 million gain from the asset sales of two HL locations in the third quarter of 2017 .  Our net proceeds from the HL asset sales is reduced by the $14 million noncontrolling interest holder's 49.9% share, which is recorded within Net income attributable to noncontrolling interest.





Other income was also negatively impacted during the third quarter of 2017 from declining earnings in our equity investment in STARS as a result of lower appraisal volume in STARS from our announced exit from the PLS channel.





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Total expenses . Salaries and related expenses were down $18 million or 34% compared to the prior year quarter, primarily due to a $14 million decline in Salaries, benefits and incentives as a result of declines in average employee headcount as we execute on the exit of PLS and the asset sale of HL locations, as well as the transfer of a significant number of employees to LenderLive on March 31, 2017 as part of our transaction to outsource certain PLS mortgage origination fulfillment functions.  Salaries and related expenses also included a $4 million decrease in Contract labor and overtime as a result of declining application volumes.





Loan origination expenses were down $9 million or 50% compared to the prior year quarter, primarily due to a 54% decrease in retail application units.  Commissions were down $6 million or 32% compared to the prior year quarter, primarily due to a 23% decrease in closing volume from our real estate channel and lower private label closing units.





Professional and third-party service fees increased by $2 million or 33% compared to the prior year quarter, primarily due to $3 million of fees paid in the third quarter of 2017 to LenderLive for outsourced PLS mortgage origination services that were partially offset by lower expenses for compliance activities as compared to the prior year quarter.





Exit and disposal costs were $6 million for the third quarter of 2017 , which primarily related to $3 million of retention expenses for impacted employees of the PLS exit and the Reorganization and $2 million accrual for employee-related costs as part of the HL asset sale to GRA.





Corporate overhead allocation decreased by $7 million compared to the prior year quarter primarily due to reduced professional fees for information technology shared services.  See “—Other” for a discussion of the costs that are allocated through the Corporate overhead allocation.





Other expenses decreased by $4 million compared to the prior year quarter due primarily to lower service level agreement penalties related to our PLS clients and lower lender-paid fees from a decrease in portfolio retention volume.  In the third quarter of 2016, interest rates were declining and historically low, driving more borrowers in our servicing portfolio to refinance their loans.





Year-to-Date Comparison: Mortgage Production segment loss was $84 million during the nine months ended September 30, 2017 compared to a segment profit of $9 million during the prior year.  Our results in the segment reflect the reduced volumes associated with our 2017 exit of the PLS business and reductions in our Real Estate channel from the transfer of two of five HL locations in the third quarter of 2017. Our nine months ended September 30, 2017 segment loss includes $75 million of PLS operating losses and $29 million of Exit and disposal costs, partially offset by $14 million in net proceeds from HL asset sales.





Net revenues. Origination and other loan fees were $114 million , down $101 million or 47% compared with the prior year.  Origination assistance fees decreased by $77 million, which was primarily driven by a 51% decrease in private label closing units compared to the prior year.  This decrease also included a $22 million decrease in appraisal income and application and other closing fees primarily driven by a 40% decrease in total retail closing units.





Gain on loans held for sale, net was $129 million during the nine months ended September 30, 2017 , down $83 million or 39% as compared to $212 million for the prior year.  This decrease related to a 31% decrease in saleable applications that was primarily due to the decline in retail applications as we execute the exit of the PLS channel and as we executed the sale of two HL locations in our real estate channel.





Net interest income was $4 million during the nine months ended September 30, 2017 , down $4 million or 50% , as compared to the prior year, primarily due to the decline in average mortgage loans held for sale partially offset by the decline in average mortgage warehouse debt, both from the decline in saleable volume.





Other income was $29 million during the nine months ended September 30, 2017 as compared to $8 million in the prior year, primarily due to $28 million gain from the asset sales of two HL locations in the third quarter of 2017 . Our net proceeds from the HL asset sales is reduced by the $14 million noncontrolling interest holder's 49.9% share, which is recorded within Net income attributable to noncontrolling interest.





Other income was also negatively impacted during the nine months ended September 30, 2017 from declining earnings in our equity investment in STARS as a result of lower appraisal volume in STARS from our announced exit from the PLS channel.








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Total expenses . Salaries and related expenses were down $36 million or 22% compared to the prior year, due to a $26 million decline in Salaries, benefits and incentives as a result of declines in average employee headcount as we execute on our planned exit activities and the transfer of a significant number of employees to LenderLive on March 31, 2017 as part of our transaction to outsource certain PLS mortgage origination fulfillment functions.  Salaries and related expenses also included a $10 million decrease in Contract labor and overtime as a result of declining application volumes.





Loan origination expenses were down $25 million or 48% compared to the prior year, primarily due to a 45% decrease in retail application units.  Commissions were down $11 million or 22% compared to the prior year, primarily due to a 16% decrease in closing volume from our real estate channel and lower private label closing units.





Professional and third-party service fees increased by $3 million or 18% compared to the prior year, primarily due to $7 million of fees paid in 2017 to LenderLive for outsourced PLS mortgage origination services that were partially offset by lower expenses for compliance activities as compared to the prior year.





Occupancy and other office expenses decreased by $4 million or 20% compared to the prior year, primarily due to lower rent and related occupancy expenses as a result of vacating Jacksonville and other smaller facilities during 2017.





Exit and disposal costs were $29 million for the nine months ended September 30, 2017 and primarily included $14 million of severance and retention expenses for impacted employees of the PLS exit and the Reorganization, $2 million accrual for employee-related costs as part of the HL asset sale to GRA, $8 million of PLS contract-related termination costs, and $4 million of facility-related costs in connection with our transfer of the Jacksonville facility to LenderLive and other smaller facility closures.





Corporate overhead allocation decreased by $20 million compared to the prior year primarily due to reduced professional fees for information technology shared services.  See “—Other” for a discussion of the costs that are allocated through the Corporate overhead allocation.





Other expenses decreased by $4 million compared to the prior year due primarily to lower service level agreement penalties related to our PLS clients.








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Selected Income Statement Data:





Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Gain on loans held for sale, net:Gain on loans$33$75$118$181Change in fair value of Scratch and Dent and certain non-conforming mortgage loans(6)—(6)(3)Economic hedge results8121734Total change in fair value of mortgage loans and related derivatives2121131Total$35$87$129$212Net interest income:Interest income$6$8$17$24Secured interest expense(4)(5)(13)(16)Total$2$3$4$8Salaries and related expenses:Salaries, benefits and incentives$34$48$127$153Contract labor and overtime15414Total$35$53$131$167Other operating expenses:Corporate overhead allocation$21$28$72$92Other expenses371418Total$24$35$86$110





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Mortgage Servicing Segment


Agreements to Sell MSRs





As an outcome of our strategic review process, during the fourth quarter of 2016, we entered into two separate agreements to sell substantially all of our MSRs, as discussed in “—Executive Summary”.  To date, we have completed the sales of $54 billion in unpaid principal balance of MSRs to New Residential and we completed the sales to Lakeview, representing $13.2 billion in unpaid principal balance of GNMA MSRs.  Substantially all of the remaining sale commitments of the MSRs and servicing advances currently require consents from third parties other than GSEs.  See Note 4, 'Servicing Activities' in the accompanying Notes to Condensed Consolidated Financial Statements for detailed information about the executed MSR sales.





Our sales of MSRs to New Residential were accounted for as a secured borrowing, and accordingly, the MSRs remained on the balance sheet with the proceeds from sale recognized as MSRs secured liability .  We elected to record the MSRs secured liability at fair value consistent with the related MSR asset.  Future changes in the MSRs secured liability will fully offset future changes in the related MSR asset.





As of September 30, 2017 , 72% of our owned MSRs, excluding the capitalized MSRs sold to New Residential, are committed under a sale agreement.  If the sales of substantially all of our MSRs are completed, we do not anticipate retaining a significant amount of capitalized MSRs in the future.  In December 2016, we terminated substantially all of our MSR-related derivatives in connection with the MSR sale agreements, as our agreement with New Residential fixes the value we expect to realize on our MSRs as of the transaction date.  The remaining MSR-related derivatives were settled in the first quarter of 2017 with no significant impact to our results of operations.





Subservicing





If all transactions under the MSR sale agreements are completed, our remaining servicing platform will consist primarily of subserviced loans.  The market for subservicing clients is comprised of independent mortgage bankers, community banks, credit unions and other mortgage investors.  The size of the subservicing market is dependent on the following: (i) the rate of prepayment speeds and the size of the home purchase market; (ii) lack of operational scale for smaller MSR owners who may need a subservicing partner to keep pace with consumer, regulatory and investor requirements; and (iii) MSR ownership by financial investors who do not have in-house servicing capability.





We anticipate growth in the subservicing market as mid-size and smaller servicers may sell MSRs for cash to financial investors who would contract with subservicers for assistance.  We also are monitoring the political environment for possible regulatory reform and changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which could potentially lower costs to subservicers.  However, market factors such as higher interest rates, evolving regulations, and potentially volatile capital market conditions may adversely impact demand for MSRs by non-bank investors and create a more challenging environment for subservicing.





We are in the early stages of our business development efforts, in order to grow our subservicing units to achieve an adequate level of scale and a profitable business model.  Our subservicing portfolio is subject to runoff and will continue to shrink as our current additions through flow sales and portfolio retention are insufficient to offset runoff.  Establishing subservicing relationships has a long sale cycle, and we are in the relatively early stages of our marketing initiatives.  There can be no assurances that we will be successful in growing our subservicing portfolio.





Our subservicing agreements also have significant client retention risk.  The terms of a substantial portion of these agreements allow the owners of the servicing to terminate the subservicing agreement without cause with respect to some or all of the subserviced loans and, in some cases, without payment of any termination fee.  This risk is further magnified by our client concentration exposure, as further discussed in "—Risk Management".  New Residential represents 58% of our subserviced units as of September 30, 2017 .  However, our subservicing agreement with New Residential engages us to subservice the loans sold to New Residential for an initial period of three years, subject to certain transfer and termination provisions (including New Residential's right to transfer, without cause, 25% of the subservicing units in the second year, and an additional 25% of the subservicing units in the third year of the contract).








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For more information, see “Part II—Item 1A. Risk Factors—Risks Related to Our Strategies— Our remaining business will be focused on subservicing activities, and we have significant client concentration risk related to the percentage of subservicing from agreements with New Residential Investment Corp. and Pingora Loan Servicing, LLC.  Further, the terms of a substantial portion of our subservicing agreements allow the owners of the servicing to terminate the subservicing agreement without cause, or to otherwise significantly decrease the number of loans we subservice on their behalf at any time, or upon the occurrence of certain time-based events. " in this Form 10-Q.





Business Summary


The following tables summarize our revenues between our owned and subservicing portfolios, and the portfolio statistics:


Three Months Ended September 30, 2017Owned ServicingSubservicingTotal(In millions)Servicing fees$8$17$25MSR prepayments and receipts of recurring cash flows(4)—(4)MSR market-related adjustments, net(3)—(3)Other(4)95Net revenues$(3)$26$23Average number of loans serviced (units)59,341650,275709,616


Three Months Ended September 30, 2016Owned ServicingSubservicingTotal(In millions)Servicing fees$67$17$84MSR prepayments and receipts of recurring cash flows(37)—(37)MSR market-related adjustments, net(13)—(13)Other(8)3(5)Net revenues$9$20$29Average number of loans serviced (units)480,111596,0081,076,119





The tables above are presented to illustrate the significant shift in our Mortgage Servicing segment revenues that are occurring, beginning with the third quarter of 2017, as we sell our capitalized MSRs and shift our business focus to subservicing.  Since our servicing platform now consists primarily of subserviced loans, we expect our contractual servicing fees in future periods to decline since we receive a smaller fee per loan from our subservicing clients as compared to the servicing fee received for our capitalized servicing rights.  However, subservicing loans reduces the interest rate exposure and related revenue volatility from MSR fair value changes and eliminates curtailment interest expense and payoff-related costs as well as eliminates the need for capital to fund servicing advance obligations.  Additionally, our exposure to foreclosure-related costs and losses is generally limited in our subservicing relationships as those risks are retained by the owner of the MSR.  Our servicing operations and expense base remain relatively consistent despite this shift in our business, other than as previously described.  We are continuing to restructure our shared services and overhead cost scale for our future business, as discussed further in "—Asset Sales and Exit Programs—Exit Programs".





Between September 30, 2016 and 2017, we have experienced significant changes in the mix of loans within our total loan servicing portfolio from the execution of our MSR sale agreements and client-driven actions.  Specifically, in June and July 2017, we sold a significant portion of our owned MSRs to New Residential, and began functioning as subservicer for those approximately 391,000 units transferred.  In addition, between February and August 2017, we sold approximately 87,000 units, representing our owned GNMA MSR portfolio, to Lakeview, and we did not retain any continuing involvement as servicer for that population.  Finally, in the fourth quarter of 2016, our subservicing portfolio declined by approximately 211,000 units driven by Merrill Lynch's insourcing of their subservicing activities, and HSBC's sale of a population of MSRs related to loans that we subserviced.





As of September 30, 2017, we have commitments to sell an additional 30,000 units (approximately) of our owned MSRs to New Residential, where we would continue functioning as subservicer.  Refer to "—Executive Summary" for a discussion of the time frame for executing any remaining transactions with New Residential.





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Segment Metrics:





September 30,20172016($ In millions)Total Loan Servicing Portfolio:Conventional loans$140,515$200,592Government loans9,34423,415Home equity lines of credit1,6233,876Total Unpaid Principal Balance$151,482$227,883Number of loans in owned portfolio (units)45,677588,700Number of subserviced loans (units)(1)648,108475,877Total number of loans serviced (units)693,7851,064,577Weighted-average interest rate3.9%3.8%Portfolio delinquency% of UPB - 30 days or more past due2.34%2.24%% of UPB - Foreclosure, REO and Bankruptcy1.55%1.75%Units - 30 days or more past due3.30%3.22%Units - Foreclosure, REO and Bankruptcy2.08%2.19%Total Capitalized Servicing Portfolio:Unpaid Principal Balance of capitalized MSRs owned$8,906$88,622Unpaid Principal Balance of capitalized MSRs in secured borrowing arrangement(2)51,465—Total Unpaid Principal Balance of capitalized servicing portfolio$60,371$88,622Capitalized servicing rate0.83%0.73%Capitalized servicing multiple3.02.6Weighted-average servicing fee (in basis points)2728





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|    |                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For September 30, 2017, includes376,551units of New Residential subserviced loans that are accounted for as a secured borrowing arrangement based on our evaluation of the New Residential MSR sale agreement.  Refer to "Asset Sales and Exit Programs" for additional information.

|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Represents MSRs sold to New Residential during 2017 that are accounted for as a secured borrowing arrangement.  Refer to "—Asset Sales and Exit Programs" for additional information.

Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Total Loan Servicing Portfolio:Average Portfolio UPB$156,887$229,969$162,735$230,479Owned Capitalized Servicing Portfolio:(1)Average Portfolio UPB$21,842$90,655$53,964$94,213Payoffs and principal curtailments6145,3357,24914,102Sales4,57024617,086742


_____________


|    |                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For 2017, balances exclude MSRs sold to New Residential that are accounted for as a secured borrowing arrangement.  Refer to "—Asset Sales and Exit Programs" for additional information.










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Segment Results:


Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Loan servicing income, net$35$39$96$138Net interest expense(12)(10)(27)(31)Other income——2—Net revenues232971107Salaries and related expenses14174654Foreclosure and repossession expenses4101626Professional and third-party service fees1092527Technology equipment and software expenses441112Occupancy and other office expenses24813Depreciation and amortization1—22Exit and disposal costs——2—Other operating expenses25377579Total expenses6081185213Segment loss$(37)$(52)$(114)$(106)





Quarterly Comparison: Mortgage Servicing segment loss was $37 million during the third quarter of 2017 compared to a loss of $52 million during the prior year quarter.  Net revenues decreased to $23 million , down $6 million or 21% , compared to the prior year quarter primarily driven by declines in our Loan servicing income, net from declines in our total loan servicing portfolio.  Total expenses decreased to $60 million , down $21 million or 26% , compared with the third quarter of 2016 primarily driven by declines in Salaries and related expenses and Foreclosure and repossession expenses, a lower Corporate overhead allocation and a lower provision for legal and regulatory matters in the third quarter of 2017 .





Net revenues. Servicing fees from our capitalized portfolio decreased to $8 million , down $59 million or 88% , compared to the prior year quarter driven by a 76% decrease in our average owned capitalized loan servicing portfolio.  This decline in our owned capitalized loan servicing portfolio was primarily due to our June and July 2017 sales of substantially all of Freddie Mac and Fannie Mae servicing to New Residential.





Subservicing fees were $17 million in both the third quarter of 2017 and 2016, as the average number of loans in our subserviced portfolio were relatively consistent.  The insourcing and MSR sale actions of certain clients during the fourth quarter of 2016 were almost entirely offset from the average increase of subservicing units from the sale of Freddie Mac and Fannie Mae servicing to New Residential in June and July 2017, respectively.





During the third quarter of 2017 , MSR yield on secured borrowing asset contributed $14 million to Loan servicing income, net, as a result of the sale of Freddie Mac and Fannie Mae servicing to New Residential in June and July 2017.  This was entirely offset by $14 million of MSRs secured interest expense included within Net interest expense.





Late fees and other ancillary servicing revenue decreased by $3 million or 33% due to declining late fees and other servicing fees from a smaller overall portfolio.  Loss on sale of MSRs was $3 million in the third quarter of 2017 as compared to zero in the prior year quarter, primarily due to transaction-related expenses from GNMA MSRs sold to Lakeview in 2017.  Curtailment interest paid to investors decreased by $4 million due to the significant reduction of the owned capitalized portfolio from the New Residential sale, resulting in reduced payments to investors.





MSR valuation changes from actual prepayments of the underlying mortgage loans decreased by $28 million or 90% , primarily due to an 89% decrease in payoffs in our owned capitalized servicing portfolio compared to the prior year quarter.  MSR valuation changes from actual receipts of recurring cash flows decreased by $5 million or 83% , primarily due to a 76% decrease in our average owned capitalized portfolio.





During the third quarter of 2017 , Market-related fair value adjustments decreased the value of our MSRs by $3 million , which was primarily due to changes in interest rates.  We also had no gain on MSR derivatives as we terminated all of our remaining MSR-related derivatives in connection with the MSR sale agreements in December 2016.   During the third quarter of 2016 , Market-related fair value adjustments decreased the value of our MSRs by $9 million , which was primarily due to a flattening





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of the yield curve.  We also had $4 million of net losses on MSR derivatives, which was primarily attributable to changes in interest rates.





Net interest expense was $12 million during the third quarter of 2017 , up $2 million , as compared to the third quarter of 2016 .  This was a result of the $14 million of MSRs secured interest expense in third quarter of 2017 discussed above, that was mostly offset by a $10 million decrease in Unsecured interest expense as a result of the July 2017 retirement of $496 million of Term notes.





Total expenses. Salaries and related expenses decreased by $3 million or 18% compared to the prior year quarter primarily due to declines in average employee headcount.





Foreclosure and repossession expenses decreased by $6 million or 60% compared to the prior year quarter primarily due to lower foreclosure activity and improved delinquencies that were partially the result of the Lakeview GNMA MSR sale and other recent MSR sales of delinquent government loans.





Repurchase and foreclosure charges decreased by $2 million primarily due to higher expenses in the third quarter of 2016 that will not be reimbursed pursuant to mortgage insurance programs as well as higher exposure for legacy repurchase claims from certain private investors in the prior year quarter.





During the third quarter of 2017 , we recorded a $2 million provision for legal and regulatory matters, as compared to an $11 million provision during the third quarter of 2016 , driven by adjustments for negotiated settlements related to our legacy mortgage servicing practices and provisions for other matters.





Corporate overhead allocation decreased by $5 million compared to the prior year quarter primarily due to reduced professional fees for information technology shared services.  See “—Other” for a more detailed discussion of expenses included in the Corporate overhead allocation.





Other expenses increased by $4 million compared to the prior year quarter primarily due to transaction-related expenses recorded in connection with the sale of servicing to New Residential.





Year-to-Date Comparison: Mortgage Servicing segment loss was $114 million during the nine months ended September 30, 2017 compared to a loss of $106 million during the prior year.  Net revenues decreased to $71 million , down $36 million or 34% , compared to the prior year primarily driven by declines in our Loan servicing income, net from declines in our total loan servicing portfolio.  Total expenses decreased to $185 million , down $28 million or 13% , compared with the prior year primarily driven by declines in Salaries and related expenses, Foreclosure and repossession expenses, and Occupancy and other office expenses and a lower Corporate overhead allocation, that was partially offset by a higher provision for legal and regulatory matters incurred in 2017.





Net revenues. Servicing fees from our capitalized portfolio decreased to $110 million , down $94 million or 46% , compared to the prior year driven by a 43% decrease in our average owned capitalized loan servicing portfolio.  This decline in our owned capitalized loan servicing portfolio was primarily due to our June and July 2017 sales of substantially all of Freddie Mac and Fannie Mae servicing to New Residential and our 2017 sales of GNMA servicing to Lakeview.





Subservicing fees decreased to $38 million , down $15 million or 28% , primarily driven by declines in the average subservicing units from the insourcing and MSR sale actions of certain clients during the fourth quarter of 2016 that was partially offset by the average increase of subservicing units from the sale of Freddie Mac and Fannie Mae servicing to New Residential in June and July 2017.  While our total subservicing units increased as of September 30, 2017 versus the prior year, we did not realize a significant benefit during the nine months ended September 30, 2017 from the 391,000 subservicing unit additions from the MSRs sale to New Residential.





During the nine months ended September 30, 2017 , MSR yield on secured borrowing asset contributed $15 million to Loan servicing income, net, as a result of the sale of Freddie Mac and Fannie Mae servicing to New Residential in June and July 2017.  This was entirely offset by $15 million of MSRs secured interest expense included within Net interest expense.





Late fees and other ancillary servicing revenue decreased by $6 million or 22% due to declining late fees and other servicing fees from a declining overall portfolio.  Loss on sale of MSRs was $16 million in the nine months ended September 30, 2017 as compared to $2 million in the prior year, primarily due to transaction-related expenses from the GNMA MSRs sold to Lakeview in 2017.  Curtailment interest paid to investors decreased by $5 million due to the significant reduction of the owned capitalized portfolio from the New Residential sale, resulting in reduced payments to investors.





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MSR valuation changes from actual prepayments of the underlying mortgage loans decreased by $39 million or 49% primarily due to a 50% decrease in payoffs in our owned capitalized servicing portfolio compared to the prior year.  MSR valuation changes from actual receipts of recurring cash flows decreased by $2 million or 11% primarily due to a smaller average owned capitalized portfolio size compared to the prior year that was partially offset by higher average capitalized servicing rate.





During the nine months ended September 30, 2017 , Market-related fair value adjustments decreased the value of our MSRs by $9 million , which was primarily due to a flattening of the yield curve.  Negative market adjustments from interest rates were offset by the calibration of our modeled value using the pricing associated with the MSR sale commitments.  We also had an insignificant net gain on MSR derivatives as we terminated all of our remaining MSR-related derivatives in connection with the MSR sale agreements in December 2016.  During the nine months ended September 30, 2016 , Market-related fair value adjustments decreased the value of our MSRs by $174 million , which was partially offset by $139 million of net gains on MSR derivatives from changes in interest rates.  This activity was primarily attributable to a 57 basis point decline in the modeled primary mortgage rate and a flattening of the yield curve.





Net interest expense was $27 million during the nine months ended September 30, 2017 , down $4 million , as compared to the prior year.  This was primarily due to a $12 million decrease in Unsecured interest expense that was a result of the July 2017 retirement of $496 million of Term notes and a $5 million increase in Interest income that was a result of higher interest income from cash management activities related to our escrow accounts for our total servicing portfolio, as well as an increase in interest rates.  This was partially offset by $15 million of MSRs secured interest expense in 2017 discussed above.





Other income was $2 million during the nine months ended September 30, 2017 , as compared to zero in the prior year, as 2017 included fees earned from a client for assistance in complying with regulatory changes.





Total expenses. Salaries and related expenses decreased by $8 million or 15% compared to the prior year primarily due to declines in average employee headcount and $2 million in severance incurred in 2016.





Foreclosure and repossession expenses decreased by $10 million or 38% compared to the prior year primarily due to lower foreclosure activity and improved delinquencies that were partially the result of the Lakeview GNMA MSR sale and other recent MSR sales of delinquent government loans.





Professional and third-party service fees decreased by $2 million or 7% compared to the prior year primarily driven by higher expenses incurred during 2016 related to compliance activities.





Occupancy and other office expenses decreased by $5 million from the prior year primarily due to reductions in printing and mailing expenses from declines in our total loan servicing portfolio, as well as reductions in our rent and related occupancy expenses as we vacated certain facilities in 2016.





Exit and disposal costs were $2 million for the nine months ended September 30, 2017 for severance and retention expenses related to Mortgage shared service employees as a result of the reorganization.





Corporate overhead allocation decreased by $13 million compared to the prior year primarily due to reduced professional fees for information technology shared services.  See “—Other” for a more detailed discussion of expenses included in the Corporate overhead allocation.





Repurchase and foreclosure-related expenses decreased by $3 million compared to the prior year primarily due to higher expenses in 2016 that will not be reimbursed pursuant to mortgage insurance programs as well as higher exposure for legacy repurchase claims from certain private investors in the prior year.





During the nine months ended September 30, 2017 , we recorded a $24 million provision for legal and regulatory matters, as compared to a $16 million provision during the nine months ended September 30, 2016 , driven by adjustments for negotiated settlements related to our legacy mortgage servicing practices and provisions for other matters.





Other expenses increased by $4 million compared to the prior year primarily due to transaction-related expenses recorded in connection with the sale of servicing to New Residential.








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Selected Income Statement Data:





Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Loan servicing income, net:Loan servicing income:Servicing fees from capitalized portfolio$8$67$110$204Subservicing fees17173853MSR yield on secured asset(1)14—15—Late fees and other ancillary servicing revenue692127Loss on sale of MSRs(3)—(16)(2)Curtailment interest paid to investors—(4)(6)(11)Loan servicing income$42$89$162$271Changes in fair value of owned mortgage servicing rights:Actual prepayments of the underlying mortgage loans$(3)$(31)$(40)$(79)Actual receipts of recurring cash flows(1)(6)(17)(19)Market-related fair value adjustments(3)(9)(9)(174)Changes in fair value of owned MSR asset(7)(46)(66)(272)Change in fair value of MSRs secured asset(2)(28)—(27)—Change in fair value of MSRs secured liability(2)28—27—Net derivative (loss) gain related to MSRs—(4)—139Total$35$39$96$138Net interest expense:Interest income$4$3$13$8Secured interest expense(2)(3)(6)(8)MSRs secured interest expense(1)(14)—(15)—Unsecured interest expense—(10)(19)(31)Total$(12)$(10)$(27)$(31)Other operating expenses:Corporate overhead allocation$8$13$27$40Repurchase and foreclosure-related charges57710Legal and regulatory reserves2112416Other expenses1061713Total$25$37$75$79


____________________


|    |                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Related to the secured borrowing treatment of the 2017 sales of MSRs to New Residential, income in MSR yield on secured asset fully offsets the expense inMSRs secured interest expense.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Related to the secured borrowing treatment of the 2017 sales of MSRs to New Residential, the decrease to Change in fair value for MSRs secured asset fully offsets the increase toChange in fair value of MSRs secured liability.  For both thethree and nine months endedSeptember 30, 2017, Changes in fair value of the secured asset and liability include offsetting$15 millionin Actual prepayments of the underlying mortgage loans and$6 millionin Actual receipts of recurring cash flows, with the remaining change consisting of Market-related fair value adjustments.







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Other


We leverage a centralized corporate platform to provide shared services for general and administrative functions to our reportable segments.  These shared services include support associated with, among other functions, information technology, enterprise risk management, internal audit, human resources, accounting and finance and communications.  The costs associated with these shared general and administrative functions, in addition to the cost of managing the overall corporate function, are recorded within Other and allocated to our reportable segments through a corporate overhead allocation.  The Corporate overhead allocation to each segment is determined based upon the actual and estimated usage by function or expense category.  Any net loss of the Other segment represents losses that are not allocated back to our reportable segments.


Results:


Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2017201620172016(In millions)Salaries and related expenses$13$16$46$47Professional and third-party service fees7204767Technology equipment and software expenses451315Occupancy and other office expenses1122Depreciation and amortization1244Exit and disposal costs2—18—Other operating expenses:Loss on early debt retirement34—34—Other3287Total expenses before allocation6546172142Corporate overhead allocation:Mortgage Production segment(21)(28)(72)(92)Mortgage Servicing segment(8)(13)(27)(40)Total expenses3657310Net loss before income taxes$(36)$(5)$(73)$(10)


Quarterly Comparison: Net loss before income taxes was $36 million during the third quarter of 2017 , compared to a loss of $5 million during the prior year quarter.  For the third quarter of 2017 , the net loss primarily represents the Loss on early debt retirement associated with the July extinguishment of the majority of our Term notes due in 2019 and 2021.


Total expenses . Total expenses before allocations increased to $ 65 million , as compared to $46 million in the prior year quarter.  Salaries and related expenses decreased by $3 million resulting from the decline in our average employee headcount as a result of the reorganization.


Professional and third-party service fees decreased to $7 million , down $13 million as compared to the prior year quarter.  This decrease was primarily due to a $7 million decrease in information technology expenses as a result of higher costs in the third quarter of 2016 associated with the modernization and enhanced security of our information technology systems and implementing new compliance requirements in our origination business.  There was also a reduction of costs associated with the strategic review of $6 million.


Exit and disposal costs of $2 million in the third quarter of 2017 are a result of existing retention awards for Other shared services employees impacted by our exit activities and professional fees related to system decommissioning projects.


Loss on early debt retirement was $34 million in the third quarter of 2017 as a result of the July 2017 extinguishment of $496 million of Term notes due in 2019 and 2021.


Year-to-Date Comparison: Net loss before income taxes was $73 million for the nine months ended September 30, 2017 , compared to a loss of $10 million during the prior year.  For the nine months ended September 30, 2017 , the net loss primarily represents our Loss on early debt retirement, strategic review costs and Exit and disposal costs resulting from our reorganization of our operations to subservicing and portfolio retention services.





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Total expenses . Total expenses before allocations increased to $172 million , up $30 million , or 21% , compared to the prior year.  Professional and third-party service fees declined to $47 million , down $20 million , or 30% , compared to the prior year. This decrease was primarily due to a $26 million decrease in information technology expenses as a result of higher costs during 2016 associated with the modernization and enhanced security of our information technology systems and implementing new compliance requirements in our origination business.  This was partially offset by an increase of $8 million in strategic review costs.


For the nine months ended September 30, 2017, Exit and disposal costs was $18 million , primarily driven by severance and retention expenses for Other shared services employees impacted by our exit activities.


Loss on early debt retirement was $34 million in 2017 as a result of the July 2017 extinguishment of $496 million of Term notes due in 2019 and 2021.











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RISK MANAGEMENT





We are exposed to various business risks which may significantly impact our financial results including, but not limited to: (i) interest rate risk; (ii) consumer credit risk; (iii) counterparty and concentration risk; (iv) liquidity risk; and (v) operational risk.





During the nine months ended September 30, 2017 , there have been no significant changes to our liquidity risk or operational risk.    Refer to "—Liquidity and Capital Resources" for discussion of changes to our liquidity position.   In addition, as of September 30, 2017 , there were no significant concentrations of credit risk with any individual counterparty or group of counterparties with respect to our derivative transactions.





Interest Rate Risk





Our principal market exposure is to interest rate risk, specifically long-term Treasury and mortgage interest rates due to their impact on mortgage-related assets and commitments.  We are also exposed to changes in short-term interest rates on certain variable rate borrowings related to mortgage warehouse debt.  We anticipate that such interest rates will remain our primary benchmark for market risk for the foreseeable future.





Refer to “—Item 3. Quantitative and Qualitative Disclosures About Market Risk” for an analysis of the impact of changes in interest rates on the valuation of assets and liabilities that are sensitive to interest rates.





Consumer Credit Risk





We are not subject to the majority of the credit-related risks inherent in maintaining a mortgage loan portfolio because we do not hold loans for investment purposes.  Our exposure to consumer credit risk primarily relates to loan repurchase and indemnification obligations from breaches of representation and warranty provisions of our loan sale or servicing agreements, which result in indemnification payments or exposure to loan defaults and foreclosures.  We subject the population of repurchase and indemnification requests received to a review and appeal process to establish the validity of the claim and corresponding obligation.





We have established a loan repurchase and indemnification liability for our estimate of exposure to losses related to our obligation to repurchase or indemnify investors for loans sold, which as of September 30, 2017 was $38 million .  Given the inherent uncertainties involved in estimating losses associated with future repurchase and indemnification requests, there is a reasonable possibility that future losses may be in excess of the recorded liability.  As of September 30, 2017 , the estimated amount of reasonably possible losses in excess of the recorded liability was approximately $10 million , which relates to our estimate of repurchase and foreclosure-related charges that may not be reimbursed pursuant to government mortgage insurance programs or in the event we do not file insurance claims.





See Note 11, 'Commitments and Contingencies' in the accompanying Notes to Condensed Consolidated Financial Statements for additional information regarding loan repurchase and indemnification requests and our repurchase and foreclosure-related reserves.





Counterparty and Concentration Risk


Production. For the nine months ended September 30, 2017 , our mortgage loan originations were derived from our relationships with significant counterparties as follows:


|  |                                                                                            
|- | -------------------------------------------------------------------------------------------
|• | 29%through the Real Estate channel, from our relationships with Realogy and its affiliates;

|  |                                                                                               
|- | ----------------------------------------------------------------------------------------------
|• | 28%through our PLS relationship with Morgan Stanley Private Bank, N.A. ("Morgan Stanley"); and

|  |                                                             
|- | ------------------------------------------------------------
|• | 13%through our PLS relationship with HSBC Bank USA ("HSBC").

In November 2016, as an outcome of our strategic review process, we announced our intentions to exit our PLS business, which represented 71% of our total closing volume (based on dollars) for the nine months ended September 30, 2017 .  In February 2017, we entered into an agreement to sell certain assets of HL, which constitutes substantially all of our Real Estate channel, and during the third quarter of 2017, we completed the first two deliveries of the total five expected location transfers under this agreement.  In October 2017, we completed the third location transfer under the agreement. The Real Estate channel represented 29% of our total closing volume (based on dollars) for the nine months ended September 30, 2017 .  If the asset sales of HL are successfully





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completed, our remaining mortgage loan origination business will consist of portfolio retention.  There can be no assurances that our closing volumes, agreements or relationships will not be subject to further change.


See “Part I—Item 1A. Risk Factors—Risks Related to Our Strategies— "Our decision to exit our Private Label client agreements will involve a significant amount of restructuring costs, and we have risks specific to our exit plans.  Furthermore, there can be no assurances that such action will be as beneficial to shareholders as if we had not taken such action. " and “We have entered into agreements to sell certain assets of PHH Home Loans and to monetize our investment in the joint venture.  The transaction contains a number of pre-closing conditions and is subject to PHH Corporation shareholder approval.  There can be no assurance that the Company will complete the execution of these transactions or that the net proceeds realized upon the sale will equal the current estimate. " in our 2016 Form 10-K.


Servicing. During the nine months ended September 30, 2017 , there have been no significant changes to our total servicing portfolio's geographic, delinquency, and agency concentration risks, as previously outlined in our 2016 Form 10-K.  Since the majority of the transactions under the MSR sale agreements have been completed, our servicing platform at the end of the third quarter consists primarily of subserviced loans.  Our Mortgage Servicing segment has exposure to concentration risk and client retention risk with respect to our subservicing agreements.  Our subservicing concentration by units as of September 30, 2017 is as follows: 58% from New Residential, 18% from Pingora Loan Servicing, LLC, 8% from HSBC and 6% from Morgan Stanley.


Our agreement to sell the majority of our capitalized MSRs to New Residential contains a three-year subservicing term, subject to certain transfer and termination provisions (including New Residential's right to transfer, without cause, 25% of the subservicing units in the second year, and an additional 25% of the subservicing units in the third year of the contract).  A substantial portion of our other subservicing agreements allow the owners of the servicing to terminate the subservicing agreement without cause with respect to some or all of the subserviced loans and, in some cases, without payment of any termination fee.  Market conditions, including interest rates and future economic projections, could impact investor demand to hold MSRs, which may result in our loss of additional subservicing relationships, or significantly decrease the number of loans under such relationships.  Further, our subservicing relationships may be negatively impacted by our planned exit of the PLS origination channel, and such clients may elect to transfer their subservicing relationships to other counterparties upon sourcing a new origination services provider.  The termination of subservicing agreements, or other significant reductions to our subservicing units, could adversely affect our business, financial condition, and results of operations.


For further discussion of concentration risks related to our subservicing agreements, see “Part II—Item 1A. Risk Factors—Risks Related to Our Strategies— Our remaining business will be focused on subservicing activities, and we have significant client concentration risk related to the percentage of subservicing from agreements with New Residential Investment Corp. and Pingora Loan Servicing, LLC.  Further, the terms of a substantial portion of our subservicing agreements allow the owners of the servicing to terminate the subservicing agreement without cause, or to otherwise significantly decrease the number of loans we subservice on their behalf at any time, or upon the occurrence of certain time-based events.  ” in this Form 10-Q.











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LIQUIDITY AND CAPITAL RESOURCES





Our sources of liquidity include: unrestricted Cash and cash equivalents; proceeds from the sale or securitization of mortgage loans; secured borrowings, including mortgage warehouse and servicing advance facilities; cash flows from operations; the unsecured debt markets; asset sales; and equity markets.  Our primary operating funding needs arise from the origination and financing of mortgage loans and the retention of mortgage servicing rights.  Our liquidity needs can also be significantly influenced by changes in interest rates due to collateral posting requirements from derivative agreements as well as the levels of repurchase and indemnification requests.  Given our expectation for business volumes, we believe that our sources of liquidity are adequate to fund our operations for at least the next 12 months.





Throughout 2017, we are focused on completing asset sales, exiting certain business platforms, and completing returns of capital to our shareholders in order to transition to a capital-light business model.  We have been continually assessing our available excess cash based on the total proceeds realized from our MSR sales, the value realized from our HL joint venture, the progress towards executing of our PLS exit, transaction, restructuring and PLS exit costs, and the working capital and contingency needs for the remaining business.  Based on such assessments, throughout 2017, we have been continually making significant distributions to our shareholders and reducing our unsecured debt profile, to evolve our capital structure towards our targeted levels for our future business.





We started the year with $906 million of cash as of December 31, 2016 , which includes $67 million of cash in variable interest entities.  Through the end of the third quarter, significant cash activities include:





|  |                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | $700 million of cash inflows realized from our asset sales, which includes $686 million from our sales of MSRs plus sale or collection of related advances and $14 million of net inflows from our HL asset sales;




|  |                                                                                                                                                                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | $222 million of cash outflows incurred related to our business exits, transactions and legacy legal matters, including $95 million related to our PLS operating losses, reengineering and exit programs, $47 million of costs for MSR transactions and strategic review professional fees, and we have paid $80 million in legal and regulatory settlements;




|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|• | $301 millionreturned to our shareholders through share repurchases (see detail below); and




|  |                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | $524 millionaggregate paid to complete a debt tender offer for$496 millionprincipal of our term notes.  After the tender, note principal of$119 millionremains outstanding.

Through those actions, and the net changes in funding our operations, our total unrestricted cash position as of September 30, 2017 , is $494 million , which includes $60 million of cash in variable interest entities.


For our remaining asset sales and re-engineering spend, we expect to complete the remaining HL asset sales in the fourth quarter and are beginning to monetize our residual assets; however, the time frame for executing the remaining MSR sale transactions has been extended due to the complexity of the consent process, the number of parties involved, and the depth of investor and trustee due diligence, as discussed further in "—Executive Summary".  We have identified further estimated uses of our cash over the next 12 months which, include $116 million related to the exit of the PLS business, including expected operating losses and costs to complete the exit, $26 million for costs associated with re-engineering and transitioning our business and $11 million for payment of MSR transaction costs and strategic review advisory, legal and professional fees.  Further, we intend to maintain excess cash to cover contingencies, which include $58 million related to our legal and regulatory reserves, and $40 million related to other contingencies for mortgage loan repurchases, MSR sale agreement indemnifications, and other contingencies.  In addition, we expect to pay cash taxes for 2017, and we would utilize any remaining proceeds from the MSR sales to repay borrowings under our servicing advance facility.





Based on our current assessment of our available excess cash, exclusive of any additional MSR sales, our Board of Directors has provided a new authorization for up to $100 million of share repurchases.  We have no obligation to repurchase shares under this authorization, and any share repurchase program may be extended, modified, suspended or discontinued at any time.  The number, timing, and purchase price of any shares will be at management’s discretion and based on an evaluation of a number of factors, including but not limited to general market and economic conditions, the trading price of the common stock, and regulatory requirements.    See further discussion of risks specific to the repurchase program at “Part II—Item 1A. Risk Factors—Risk Related to our Common Stock— Our decision to return cash to shareholders through stock repurchases may not prove to be the best use of our capital or result in the effects we anticipated, including a positive return of capital to stockholders. " in this Form 10-Q.








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The method, timing and amount of additional returns of capital to shareholders, if any, beyond the initiatives announced to date will be largely dependent on completing additional MSR sales and will depend on several factors including market and business conditions and the trading price of our common stock, total proceeds realized from our MSR sales, the value realized from HL joint venture, the successful execution of our PLS exit, the resolution of our outstanding legal and regulatory matters, the successful completion of other restructuring activities, and the working capital requirements and contingency needs for the remaining business.  There can be no assurances we will complete any further return of capital to our shareholders.  For more information, see “Part II—Item 1A. Risk Factors— Risks Related to our Common Stock — Our decision to return cash to shareholders through stock repurchases may not prove to be the best use of our capital or result in the effects we anticipated, including a positive return of capital to stockholders. " in this Form 10-Q and “Part I—Item 1A. Risk Factors—Risks Related to Our Strategies— The amount of capital returned to shareholders, if any, as a result of our strategic actions may be less than our expectations.  Furthermore, there can be no assurances about the method, timing or amounts of any such distributions. " in our 2016 Form 10-K.





Completed Share Repurchases: In May 2017, our Board of Directors authorized up to $100 million in open market share repurchases as an initial action in our plan to return capital to shareholders.  In July 2017, our Board of Directors increased the amount of authorized share repurchases to up to an aggregate $300 million .  From May through early August 2017, we completed the repurchase of 2,450,466 shares for $34 million under an open market program.  In August 2017, the Company announced the commencement of a modified “Dutch auction” self-tender offer to purchase shares of its common stock for an aggregate amount of up to $266 million in cash, with the right to purchase an additional 2% of its outstanding shares for an additional purchase price.  In September 2017, we completed the repurchase of 18,762,962 shares for $267 million under this program.





Unencumbered Assets: As of September 30, 2017 , a significant portion of our assets are under financing arrangements or are subject to sale commitments.  The following table identifies the Total assets on our Condensed Consolidated Balance Sheets that are unencumbered:


Total AssetsCollateral for Asset-backed Borrowing ArrangementsSaleCommitmentsOtherUnencumbered Assets(In millions)Cash and cash equivalents$494$—$—$—$494Restricted cash5220—32—Mortgage loans held for sale590502——88Accounts receivable, net94———94Servicing advances, net413806522840Mortgage servicing rights500—4344017Property and equipment, net24———24Deferred taxes, net80——80—Other assets54——153Total assets$2,301$602$108$781$810





Total Servicing advances committed to be transferred under our MSR sale agreements of $145 million as of September 30, 2017 includes both advances that are presently collateral for asset-backed borrowing arrangements and amounts that are self-funded. Therefore, the Servicing advances committed under MSR sale agreements appears in both columns of the table above.





Other restrictions and encumbrances include the following:


|  |                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------
|• | Restricted cash represents letters of credit, funds received for pending mortgage closings, and other contractual arrangements.

|  |                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Servicing advances represent the balance of Servicing advance liabilities for advances funded by our subservicing clients, as discussed below under "—Debt—Servicing Advance Funding Arrangements".

|  |                                                                                                                                                                                                                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | MSRs represent amounts under secured borrowing arrangements where we have recognized a liability for MSRs transferred to a third party that does not meet the criteria for sale accounting.  See further discussion inNote 1, 'Summary of Significant Accounting Policies' in the accompanying Notes to Condensed Consolidated Financial Statements.

|  |                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Deferred taxes represent the future tax asset generated upon reversal of the differences between the tax basis and book basis of certain of the Company's assets.







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Cash Flows





The following table summarizes the changes in Cash and cash equivalents:


Nine Months EndedSeptember 30,20172016Change(In millions)Cash provided by (used in):Operating activities$(3)$20$(23)Investing activities14011723Financing activities(549)(47)(502)Net (decrease) increase in Cash and cash equivalents$(412)$90$(502)





Operating Activities





Our cash flows from operating activities reflect the net cash generated or used in our business operations and can be significantly impacted by the timing of mortgage loan originations and sales.  The operating results of our businesses are also impacted by significant non-cash activities which include: (i) the capitalization of mortgage servicing rights in our Mortgage Production segment; (ii) the change in fair value of mortgage servicing rights and MSRs secured liability in our Mortgage Servicing segment; and (iii) the recognition of deferred income tax benefits as a result of the timing of income recognition for accounting and tax purposes for certain servicing rights.





During the nine months ended September 30, 2017 , cash used in our operating activities was $3 million , which was primarily driven by operating losses primarily in our PLS business, cash used for strategic review costs and payments associated with settlements of legal and regulatory matters.  This was mostly offset by the impact of net collections of Servicing advances and timing differences between the origination and sale of mortgages as Mortgage loans held for sale decreased between December 31, 2016 and September 30, 2017 .





During the nine months ended September 30, 2016 , cash provided by our operating activities was $20 million which was primarily driven by operating benefits from amendments to our private label and subservicing agreements that were partially offset by cash expenses related to the re-engineering efforts and our strategic review.





Investing Activities





Cash flows from investing activities include cash flows related to collateral postings or settlements of our MSR derivatives, proceeds on the sale of mortgage servicing rights and servicing advances, proceeds on asset sales, purchases of property and equipment and changes in the funding requirements of restricted cash.





During the nine months ended September 30, 2017 , cash provided by our investing activities was $140 million , which was driven by $153 million of cash received from the proceeds on the sale of MSRs and related servicing advances, including the GNMA MSR sales to Lakeview and $28 million of cash received from the HL asset sales, that was partially offset by $45 million of net cash paid for MSR derivatives settled in the first quarter of 2017 as substantially all of our MSR derivatives were terminated in December 2016 in connection with the MSR sale agreements.





During the nine months ended September 30, 2016 , cash provided by our investing activities was $117 million , which was driven by $121 million of net cash received from MSR derivatives for cash collateral amounts and settlement activity due to changes in interest rates.








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Financing Activities





Our cash flows from financing activities include proceeds from and payments on borrowings under our mortgage warehouse facilities, servicing advance facility and MSRs secured borrowing arrangement.  The fluctuations in the amount of borrowings within each period are due to working capital needs and the funding requirements for assets, including Mortgage loans held for sale and Mortgage servicing rights.  The outstanding balances under our warehouse and servicing advance debt facilities vary daily based on our current funding needs for eligible collateral and our decisions regarding the use of excess available cash to fund assets.  As of the end of each quarter, our financing activities and Condensed Consolidated Balance Sheets reflect our efforts to maximize secured borrowings against the available asset base, increasing the ending cash balance.  Within each quarter, excess available cash is utilized to fund assets rather than using the asset-backed borrowing arrangements, given the relative borrowing costs and returns on invested cash.





During the nine months ended September 30, 2017 , cash used in our financing activities was $549 million , which primarily related to $524 million of cash paid to complete the tender offer of our Term Notes due in 2019 and 2021 including the early tender premium, $301 million used to retire shares in our open market share repurchase program, $119 million of net payments on our secured borrowings primarily resulting from the decreased funding requirements for Mortgage loans held for sale and Servicing advances that were partially offset by $420 million of proceeds from the sales of our MSRs to New Residential that were treated as a secured borrowing arrangement.





During the nine months ended September 30, 2016 , cash used in by our financing activities was $47 million which primarily related to $18 million of net payments on secured borrowings resulting from decreased funding requirements for servicing advances and mortgage loans held for sale and $ 23 million used to retire shares in our open market share repurchase program.








Debt


The following table summarizes our Debt as of September 30, 2017 :


Outstanding BalanceCollateral(1)(In millions)Warehouse facilities$483$508Servicing advance facility5294Unsecured debt, net118—Total$653$602


_________________


|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(1) | Assets held as collateral are not available to pay our general obligations.




See Note 9, 'Debt and Borrowing Arrangements' in the accompanying Notes to Condensed Consolidated Financial Statements for additional information regarding our debt covenants and other components of our debt.





Warehouse Facilities





We utilize both committed and uncommitted warehouse facilities, and we evaluate our capacity need under these facilities based on forecasted volume of mortgage loan closings and sales.  During the nine months ended September 30, 2017 , we reduced the aggregate committed capacity of our facilities in response to our expected saleable production volume and to reduce expenses associated with the facilities.








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Mortgage warehouse facilities consisted of the following as of September 30, 2017 :





TotalCapacityOutstanding BalanceAvailableCapacity(1)MaturityDate(In millions)Debt:Committed facilities:Wells Fargo Bank, N.A.$350$223$12712/1/2017Bank of America, N.A.1501203012/29/2017Barclays Bank PLC10062381/31/2018Committed warehouse facilities600405195Uncommitted facilities:Fannie Mae20078122n/aBarclays Bank PLC100—100n/aTotal$900$483$417Off-Balance Sheet Gestation Facilities:Uncommitted facilities:JP Morgan Chase Bank, N.A.$150$—$150n/a


___________________


|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Capacity is dependent upon maintaining compliance with the terms, conditions and covenants of the respective agreements and may be further limited by asset eligibility requirements.




Servicing Advance Funding Arrangements





As of September 30, 2017 , there are $413 million of Servicing advance receivables, net on our Condensed Consolidated Balance Sheets , including $133 million from our own funds, and the remainder funded as outlined below:


TotalCapacityOutstanding BalanceAvailableCapacity(1)MaturityDate(In millions)Debt:Servicing Advance Receivables Trust(2)$65$52$133/15/2018Subservicing advance liabilities:Client-funded amountsn/a228n/an/aTotal$280


__________________


|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Capacity is dependent upon maintaining compliance with the terms, conditions and covenants of the respective agreements and may be further limited by asset eligibility requirements.

|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(2) | On September 8, 2017, the aggregate maximum principal amount of the facility was reduced by$35 millionto$65 millionat our request.







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Unsecured Debt





Unsecured borrowing arrangements consisted of the following as of September 30, 2017 :


Balance at Maturity(1)Outstanding BalanceMaturityDate(In millions)7.375% Term notes due in 2019$97$979/1/20196.375% Term notes due in 202122218/15/2021Total$119$1180


__________________


|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On June 19, 2017, we commenced tender offers to purchase for cash any and all of the Senior Notes due in 2019 and 2021. On July 3, 2017, we repaid$178 millionof the 2019 Notes and$318 millionof the 2021 Notes for an aggregate$524 millionin cash, plus accrued interest.  On July 17, 2017, upon expiration of the tender offer, the amount of notes repaid was not significant. We recognized a loss of$34 millionin Other Operating Expenses in theCondensed Consolidated Statements of Operationsrelated to this debt retirement during the three and nine months ended September 30, 2017.




As of November 1, 2017 , our credit ratings on our senior unsecured debt were as follows:


SeniorDebtShort-TermDebtMoody’s Investors ServiceB1NPStandard & Poor's Rating ServicesB-N/A





A security rating is not a recommendation to buy, sell or hold securities, may not reflect all of the risks associated with an investment in our debt securities and is subject to revision or withdrawal by the assigning rating organization.  Each rating should be evaluated independently of any other rating.  Our senior unsecured long-term debt credit ratings are below investment grade, and as a result, our access to the public debt markets may be severely limited in comparison to the ability of investment grade issuers to access such markets.  See further discussion at “Part I—Item 1A. Risk Factors—Liquidity Risks— We may be limited in our ability to obtain or renew financing in the unsecured credit markets on economically viable terms or at all, due to our senior unsecured long-term debt ratings being below investment grade and due to our history of reported losses from continuing operations since becoming a standalone mortgage company. ” in our 2016 Form 10-K.











CRITICAL ACCOUNTING POLICIES AND ESTIMATES





There have not been any significant changes to the critical accounting policies and estimates described under “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our 2016 Form 10-K.





RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





For information regarding recently issued accounting pronouncements and the expected impact on our financial statements, see Note 1, 'Summary of Significant Accounting Policies' in the accompanying Notes to Condensed Consolidated Financial Statements .














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Item 3.  Quantitative and Qualitative Disclosures About Market Risk





Interest Rate Risk





Our principal market exposure is to interest rate risk, specifically long-term Treasury and mortgage interest rates due to their impact on mortgage-related assets and commitments.  Additionally, our escrow earnings on our mortgage servicing rights are sensitive to changes in short-term interest rates such as LIBOR.  We also are exposed to changes in short-term interest rates on certain variable rate borrowings including our mortgage warehouse debt and our servicing advance facility.  The valuation of our Mortgage servicing rights and Mortgage servicing rights secured liability is based, in part, on the realization of the forward yield curve due to the impact that expected future interest rates have on our expected cash flows.  We anticipate that such interest rates will remain our primary benchmark for market risk for the foreseeable future.





We assess our market risk based on changes in interest rates utilizing a sensitivity analysis.  The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.  These sensitivities are hypothetical and presented for illustrative purposes only.  Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear.





The following table summarizes the estimated change in the fair value of our Mortgage pipeline, Mortgage servicing rights, Mortgage servicing rights secured liability and unsecured debt that are sensitive to interest rates as of September 30, 2017 given hypothetical instantaneous parallel shifts in the yield curve:


Change in Fair ValueDown100 bpsDown50 bpsDown25 bpsUp25 bpsUp50 bpsUp100 bps(In millions)Mortgage pipelineMortgage loans held for sale$11$7$4$(4)$(9)$(20)Interest rate lock commitments(1)974(5)(10)(23)Forward delivery commitments(1)(22)(14)(8)91840Option contracts(1)————24Total Mortgage pipeline(2)———11MSRs and related secured liabilityMortgage servicing rights owned(2)(16)(8)(4)3611Mortgage servicing rights secured asset(3)(132)(63)(30)275293MSRs secured liability(3)1326330(27)(52)(93)Total MSRs and related secured liability(16)(8)(4)3611Unsecured term debt(3)(1)(1)113Total, net$(21)$(9)$(5)$4$8$15


__________________


|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|(1) | Included in Other assets or Other liabilities in theCondensed Consolidated Balance Sheets.




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | During 2017, we ended our MSR-related derivative hedge coverage as a result of our sale agreement with New Residential that fixes the prices we expect to realize at future transfer dates.  We do not expect changes in interest rates to substantially impact the fair value of owned MSRs since our determination of fair value atSeptember 30, 2017considers the committed pricing of MSR sale agreements, which is for the majority of our remaining owned MSRs.  For further discussion of those agreements and other requirements that must be met to complete such sales, seeNote 4, 'Servicing Activities' in the accompanying Notes to Condensed Consolidated Financial Statements.




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | During 2017, we sold a substantial amount of MSRs to New Residential.  These transfers were accounted for as a secured borrowing, and accordingly, the MSRs remained on the balance sheet with the recognition of an offsettingMSRs secured liability, which has a fair value of$440 millionas ofSeptember 30, 2017.  The interest rate sensitivity of this secured borrowing is reflected within Mortgage servicing rights secured asset andMSRs secured liability, and any changes in fair value are expected to fully offset.










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Item 4. Controls and Procedures





DISCLOSURE CONTROLS AND PROCEDURES





As of the end of the period covered by this Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.  Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.  Based on that evaluation, management concluded that our disclosure controls and procedures were effective as of September 30, 2017 .





CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING





There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

















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PART II  — OTHER INFORMATION








Item 1.  Legal Proceedings





For information regarding legal proceedings, see Note 11, 'Commitments and Contingencies' in the accompanying Notes to Condensed Consolidated Financial Statements .











Item 1A.  Risk Factors





This Item 1A. should be read in conjunction with "Part I—Item 1A. Risk Factors" in our 2016 Form 10-K.  Other than with respect to the discussion below, there have been no material changes from the risk factors disclosed in our Form 10-K.





Risks Related to our Strategies





Our remaining business will be focused on subservicing activities, and we have significant client concentration risk related to the percentage of subservicing from agreements with New Residential Investment Corp. and Pingora Loan Servicing, LLC.  Further, the terms of a substantial portion of our subservicing agreements allow the owners of the servicing to terminate the subservicing agreement without cause, or to otherwise significantly decrease the number of loans we subservice on their behalf at any time, or upon the occurrence of certain time-based events.





Our subservicing portfolio is subject to runoff, meaning that the loans serviced by us under subservicing agreements may be repaid in full prior to maturity.  Additionally, the owners of the servicing rights may elect to sell their MSRs related to some or all of the loans we subservice on their behalf, which could lead to a termination of our subservicing agreements with respect to such loans, resulting in a decrease in our revenues from subservicing.  As a result, our subservicing portfolio will continue to shrink as our current additions through flow sales and portfolio retention are insufficient to offset the current level of runoff.  Our ability to maintain the size of our subservicing portfolio depends on our ability to enter into agreements for additional subserviced populations with new or existing clients.  In addition, our ability to generate revenue from our subservicing platform and transition our business to be primarily focused on subservicing and portfolio retention is highly dependent on the success of our business relationships with our significant clients.





Client Concentration Risk. We have significant client concentration risk related to the percentage of our subservicing portfolio that are under agreements with a small group of clients.  As of September 30, 2017, 58% and 18% of our subservicing portfolio (by units) related to significant client relationships with New Residential and Pingora Loan Servicing, LLC, respectively.  Further, we have other client relationships that may be negatively impacted by our exit of the PLS origination channel, including with HSBC and Morgan Stanley who have been PLS clients, and such clients may elect to transfer their subservicing relationships to other counterparties upon sourcing a new origination services provider.





Termination Rights. Our subservicing agreement with New Residential became effective in June 2017 upon the initial transfer of MSRs under the sale agreement, and the subservicing agreement contains a three-year initial subservicing term.  However, in addition to having the right to terminate the subservicing contract with respect to any MSRs sold by New Residential, New Residential has the right to transfer to another servicer, without cause, 25% of the subservicing units in the second year of the subservicing contract, and an additional 25% of the subservicing units in the third year of the contract.  In addition, the terms of a substantial portion of our other subservicing agreements allow the owners of the servicing to terminate the subservicing agreement without cause, or to otherwise significantly decrease the number of loans we subservice on their behalf, at any time, without cause, and with limited notice and negligible compensation.  In recent periods, we have experienced client-driven reductions in our subservicing portfolio.  Further terminations or material reductions in our subservicing portfolio would adversely affect our business, financial condition, results of operations and cash flows.





Our portfolio retention business is exposed to the same client concentration and termination risks as subservicing, as our portfolio retention agreements cease upon the termination of the related client subservicing relationship.





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Risks Related to our Common Stock


Our decision to return cash to shareholders through stock repurchases may not prove to be the best use of our capital or result in the effects we anticipated, including a positive return of capital to stockholders.





During 2017, we repurchased 21,213,428 shares of Common stock for an aggregate $301 million through an open market repurchase program and modified "Dutch" auction tender offer.  These repurchases reduced our public float, which is the number of shares of our Common stock that are owned by non-affiliated stockholders and available for trading in the securities markets, which may reduce the volume of trading in our shares and result in reduced liquidity and, potentially, lower trading prices.  We funded the tender offer with available cash, which burdens our liquidity and prevents us from using the cash for other corporate purposes.





We have an additional authorization to repurchase up to an additional $100 million of our Common stock.  The execution of share repurchases will be at management's discretion and based on an evaluation of a number of factors, including but not limited to general market and business conditions, the trading price of our common stock and regulatory requirements.  We have no obligation to repurchase shares under this authorization, and any share repurchase program may be extended, modified, suspended or discontinued at any time.  Important factors that could cause us to discontinue our share repurchases include, among others, unfavorable market conditions, the market price of our common stock and our overall capital structure and liquidity position, including investments to grow the business and amounts for key cash requirements.





There can be no assurances that our stock repurchases will have the effects we anticipated.  Our stock repurchases may not return value to stockholders because the market price of our stock may decline significantly below the levels at which we repurchased shares of Common stock.  Our stock repurchases are intended to deliver stockholder value over the long-term, but the price we paid for shares in the tender offer may be dilutive and may not be the best use of our capital.  There can be no assurance that any past or future repurchases will have a positive impact on our stock price.











Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds





Purchases of Equity Securities by the Issuer and Affiliated Purchasers





The following table presents our share repurchase activity for the quarter ended September 30, 2017 .


PeriodTotal number of shares purchasedAverage price paid per shareTotal number of shares purchased as part of publicly announced plans or programsApproximate dollar value of shares that may yet be purchased under the plan or programJuly 1, 2017 to July 31, 2017(1)574,129$13.98574,129$268,015,384August 1, 2017 to August 31, 2017(1)115,37313.86115,373266,416,268September 1, 2017 to September 30, 2017(2)18,762,96214.2518,762,962—Total19,452,464$14.2419,452,464$—


______________


|    |                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On May 3, 2017, our Board of Directors authorized up to$100 millionin open market purchases.  On July 27, 2017, our Board of Directors authorized an increase in share repurchases of our common stock from$100 millionto up to$300 millionin the aggregate.  We repurchased689,502shares through open market repurchases during July and early August 2017.

|    |                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | On August 11, 2017, we announced the commencement of a modified "Dutch auction” self-tender offer to purchase up to$266 millionof our common stock.  We elected to exercise our right to purchase up to an additional 2% of its outstanding shares without amending or extending the tender offer.  We repurchased18,762,962shares through this tender offer on September 15, 2017.




On November 5, 2017 , our Board of Directors provided an authorization for up to $100 million of additional share repurchases.





All shares received under the share repurchase programs are retired upon receipt and are reported as a reduction of shares issued and outstanding, and the cash paid is recorded as a reduction of stockholders' equity in the Condensed Consolidated Balance Sheets.  For more information about our repurchase activity and about additional repurchases authorized by our Board of Directors, see “Part I—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Form 10-Q.





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Item 3.  Defaults Upon Senior Securities





None.











Item 4.  Mine Safety Disclosures





Not applicable.











Item 5.  Other Information





None.











Item 6.  Exhibits





Information in response to this Item is incorporated herein by reference to the Exhibit Index to this Form 10-Q.





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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, on this 8 th day of November, 2017.








PHH CORPORATIONBy:/s/ Robert B. CrowlRobert B. CrowlPresident and Chief Executive OfficerBy:/s/ Michael R. BoganskyMichael R. BoganskySenior Vice President and Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer)








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EXHIBIT INDEX





Exhibit No.DescriptionIncorporation by Reference10.1†, **Form of First Amendment to 2017 Cash Performance Incentive Award Pursuant to the PHH Corporation 2014 Equity And Incentive Plan.Filed herewith.10.2†, **Form of First Amendment to the PHH Management Incentive Plan 2017 Award Notice.Filed herewith.31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Filed herewith.31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Filed herewith.32.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Furnished herewith.32.2Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Furnished herewith.101.INSXBRL Instance Document.Filed herewith.101.SCHXBRL Taxonomy Extension Schema Document.Filed herewith.101.CALXBRL Taxonomy Extension Calculation Linkbase Document.Filed herewith.101.LABXBRL Taxonomy Extension Labels Linkbase Document.Filed herewith.101.PREXBRL Taxonomy Extension Presentation Linkbase Document.Filed herewith.101.DEFXBRL Taxonomy Extension Definition Linkbase Document.Filed herewith.


________________


|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
|† | Management or compensatory plan or arrangement required to be filed pursuant to Item 601(b)(10) of Regulation S-K.

|   |                                                                                                                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Confidential treatment has been granted for certain portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended, which portions are omitted and filed separately with the SEC.







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