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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form  10-K
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2016
 
OR
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 No. 1-7797
 
PHH CORPORATION
(Exact name of registrant as specified in its charter)
 
MARYLAND
(State or other jurisdiction of
incorporation or organization)
 
52-0551284
(I.R.S. Employer
Identification Number)
 
 
 
3000 LEADENHALL ROAD
MT. LAUREL, NEW JERSEY
(Address of principal executive offices)
 
08054
(Zip Code)
856-917-1744
(Registrant’s telephone number, including area code)
 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
 
TITLE OF EACH CLASS
 
NAME OF EACH EXCHANGE
 ON WHICH REGISTERED
 
 
Common Stock, par value $0.01 per share
 
The New York Stock Exchange
 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ   No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.  Yes o No þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer þ    Accelerated filer o   Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company 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
 
The aggregate market value of our Common stock held by non-affiliates of the registrant as of June 30, 2016 was $709 million .
 
As of February 21, 2017 , 53,599,433 shares of PHH Common stock were outstanding.
 
Documents Incorporated by Reference: Portions of the registrant’s definitive Proxy Statement for the 2017 Annual Meeting of Stockholders, which will be filed by the registrant on or prior to 120 days following the end of the registrant’s fiscal year ended December 31, 2016 are incorporated by reference in Part III of this Report.
 

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TABLE OF CONTENTS
 
 
 
 
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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 Annual Report on Form 10-K 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-K include, but are not limited to, statements concerning the following:
•
our expectations related to our strategic review and related actions, including the estimated impacts on our results, the timing of any such actions, our estimates of transaction, operating losses and exit costs, 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;
•
our expectations and projected financial results of the remaining business after executing the actions resulting from our strategic review, the market for subservicing and portfolio retention services, our competitive position, and the expected profitability and capital structure of our remaining business;
•
the method, amounts and timing of any capital returns to shareholders;
•
anticipated future origination volumes and loan margins in the mortgage industry;
•
our expectations of the impacts of regulatory changes on our business;
•
our assessment of legal and regulatory proceedings and the associated impact on our financial statements;
•
our expectations around future losses from representation and warranty claims, and associated reserves and provisions; and
•
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 I—Item 1A. Risk Factors” in this Form 10-K and those factors described below:
•
the effects of our comprehensive review of all strategic options, and any transactions that may result, on our business, management resources, customer, counterparty and employee relationships, capital structure and financial position;
•
our ability to execute and complete the actions contemplated from our strategic review and implement changes to meet our operational and financial objectives, including restructuring our remaining business and shared services platform, achieving our growth objectives and assumptions and resolving our legacy legal and regulatory matters;
•
any failure to execute all or any portion of the 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 shareholder, 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;
•
any failure to execute the sale of certain 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 shareholder, regulatory and agency approvals; (ii) the failure to execute a certain portion of the New Residential MSR sales; (iii) the lack of acceptance by a specified percentage of PHH Home Loans employees (including loan originators) of employment offers from the buyer; and (iv) not meeting any other conditions precedent to closing, as defined in the respective agreements;
•
available excess cash from our strategic actions is dependent upon a variety of factors, including the execution of the sale of all of our MSRs, the monetization of our investment in PHH Home Loans, the successful completion of our PLS exit activities, 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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•
our decisions regarding whether to use, and the use of, derivatives and hedge strategies related to our mortgage servicing rights;
•
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;
•
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;
•
the effects of changes in current interest rates on our business, the value of our mortgage servicing rights and our financing costs;
•
the impact of changes in the U.S. financial condition 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;
•
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;
•
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, and our ability to operationalize changes necessary to comply with updates to such guides and programs;
•
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;
•
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;
•
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;
•
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;
•
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;
•
the ability to obtain or renew financing on acceptable terms, if at all, to finance our mortgage loans held for sale and servicing advances;
•
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;
•
any failure to comply with covenants or asset eligibility requirements under our financing arrangements; and
•
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

Item 1. Business
 
Overview
 
Background
We were incorporated in 1953 as a Maryland corporation. For periods between April 30, 1997 and February 1, 2005, we were a wholly owned subsidiary of Cendant Corporation (now known as Avis Budget Group, Inc.) and its predecessors and provided mortgage banking services, facilitated employee relocations and provided vehicle fleet management and fuel card services. On February 1, 2005, we began operating as an independent, publicly traded company pursuant to our spin-off from Cendant. On July 1, 2014, we sold our Fleet Management Services business (the "Fleet Business") and began operating as a stand-alone mortgage business. 
As a stand-alone mortgage company, we provide outsourced mortgage banking services to a variety of clients, including financial institutions and real estate brokers throughout the U.S. and are focused on originating, selling, servicing and subservicing residential mortgage loans through our wholly-owned subsidiary, PHH Mortgage Corporation and its subsidiaries (collectively, “PHH Mortgage”).
Strategic Developments

In March 2016, in response to changing industry and regulatory dynamics impacting our business, we announced that Management and our Board of Directors were undertaking a comprehensive review of all strategic options, including capital deployment alternatives. The goal of our strategic review has been to identify the best opportunities to maximize the value of our assets and business platforms and evaluate the strategic potential of our business model. As a result of the strategic review process, we announced specific outcomes, conclusions and intentions as follows:
•
In the second quarter of 2016, we exited our wholesale/correspondent lending channel. Through this channel, we purchased closed mortgage loans from community banks, credit unions, mortgage brokers and mortgage bankers. For the year ended December 31, 2016 , the wholesale/correspondent lending channel represented 1% of our total closing volume (based on dollars).
•
In November 2016, we announced our intentions to exit the Private Label solutions ("PLS") channel. The PLS channel includes providing outsourced mortgage origination services for wealth management firms, regional banks and community banks throughout the U.S.  For the year ended December 31, 2016 , the PLS channel represented 79% of our total closing volume (based on dollars).
•
In November 2016, we announced the sale of our capitalized GNMA mortgage servicing rights to Lakeview Loan Servicing, LLC ("Lakeview"), which included the transfer of all servicing to another subservicer. In addition, in December 2016, we announced the sale of substantially all of our remaining capitalized servicing rights to New Residential Mortgage LLC ("New Residential"), a wholly-owned subsidiary of New Residential Investment Corporation. The New Residential sale provides that we will perform the subservicing for these loans for an initial period of three years subject to certain transfer and termination provisions. The execution of sales under these agreements is subject to a number of approvals and other closing requirements.
•
In February 2017, we entered into an agreement to sell certain assets of our PHH Home Loans joint venture, which constitutes substantially all of our Real Estate channel. The execution of the sale under this agreement is subject to a number of approvals and other closing requirements. See Note 23, 'Subsequent Events' in the accompanying Notes to Consolidated Financial Statements for further information.
•
In February 2017, we entered into an asset purchase agreement with LenderLive Network, LLC ("LenderLive") to assign our lease interests in Jacksonville, Florida along with the sale of information technology and other equipment and fixtures. We also agreed to enter into a master services agreement to outsource certain processing, underwriting and closing services that we are contractually obligated to provide to certain of our PLS clients to LenderLive.

As a result of the conclusions reached from strategic review, we intend to transition to a capital-light business comprised of our subservicing and portfolio retention businesses. Successful completion of this transition is contingent upon successfully executing the asset sales and business exits outlined above, as well as restructuring our remaining business and shared services platform and

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achieving certain asset growth objectives and assumptions. Our transition to our new business model would be completed in a series of actions throughout 2017 and into the first half of 2018, which actions would include the closing of our sale of mortgage servicing rights to New Residential and the sale of certain assets of our PHH Home Loans joint venture, if approved and executed.

Additional information regarding these intended actions, risks specific to our ability to achieve these actions and risks related to the potential outcomes of these actions is provided in “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary”, and “Part I—Item 1A. Risk Factors— Risks Related to Our Strategies ".

Segments
 
Our business activities are organized and presented in two operating segments: Mortgage Production and Mortgage Servicing. A description of each operating segment is presented below with further details and discussions of each segment’s results of operations presented in “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations”. Also refer to Note 21, 'Segment Information' in the accompanying Notes to Consolidated Financial Statements for a discussion of our Net revenues, Segment profit or loss and Total assets attributable to each segment.

Mortgage Production
Our Mortgage Production segment provides private label mortgage services to financial institutions and real estate brokers, and sources mortgage loans through our retail platform. According to Inside Mortgage Finance , PHH Mortgage was the 10th largest overall mortgage loan originator with a 1.8% market share for the year ended December 31, 2016 and the 5th largest retail mortgage originator for the nine months ended September 30, 2016 .
We generate revenue through fee-based mortgage loan origination services and the origination and sale of mortgage loans into the secondary market, referred to as saleable loans. PHH Mortgage generally sells all saleable mortgage loans that it originates to secondary market investors within 30 days of origination. During 2016 , 52% of our mortgage loans were sold to, or were sold pursuant to, programs sponsored by Fannie Mae, Freddie Mac or Ginnie Mae and the remaining 48% were sold to private investors.
A summary of our platforms and channels follows, with the percentage of our loan closing dollars that each represents:
•
Retail - Private Label ( 79% in 2016 compared to 75% in 2015 )

Our PLS business includes offering mortgage outsource solutions to wealth management firms, regional banks and community banks. All loans originated in this channel are originated and funded in the private label clients' names. We principally generate revenue from the PLS business through the receipt of origination assistance fees from our private label clients, earned as a stated amount per loan for all fee-based and saleable loans, as well as the gain on loans sold into the secondary market for saleable loans, earned as a percentage of the unpaid principal balance sold.

Our largest clients for the year ended December 31, 2016 include Merrill Lynch Home Loans, a division of Bank of America, National Association ("Merrill Lynch"), Morgan Stanley Private Bank, N.A. ("Morgan Stanley") and HSBC Bank USA ("HSBC") which represented 25% , 21% , and 10% respectively, of our total mortgage loan originations.

Plans to Exit Private Label Channel. Our PLS business model has faced inherent difficulties in the current mortgage environment, including escalating costs associated with regulatory oversight and compliance efforts and requirements to customize our products and service levels. In our strategic review of PLS, we considered industry, customer and regulatory trends, cost re-engineering opportunities and the potential for alternative business models. We determined that resolving the complex business challenges of our PLS model is too uncertain, would require an extended period of time and would result in elevated level of operating losses over a prolonged period. As a result, in November 2016, we announced our plan to exit the PLS business.

We currently have exit plans in place with clients representing 55% of our PLS closing volume, including Merrill Lynch, and believe we will substantially exit the PLS business by the first quarter of 2018, subject to certain transition support requirements . For more information about our costs related to the PLS exit program, see Note 2, 'Exit Costs' in the accompanying Notes to Consolidated Financial Statements .

Our agreements with LenderLive discussed above under “—Overview—Strategic Developments” are intended to mitigate the operating risk related to the exit of the PLS business, including by alleviating the risk of employee attrition that could adversely impact our ability to satisfy the service level agreements and other PLS contractual requirements. Upon closing

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of the sale, LenderLive is contractually obligated to hire approximately 250 PHH Mortgage employees located in the Jacksonville office and is contractually required to allocate certain of those employees to providing services to support our obligations to our PLS clients. Subject to our right to terminate the services agreement at any time upon 90 days prior notice, the services agreement will terminate on the earlier of June 30, 2019 or the date of expiration or termination of our final PLS contract. The consummation of the transactions with LenderLive is subject to various conditions precedent to closing, including that the closing occur no later than May 16, 2017, LenderLive’s satisfaction of certain licensing requirements and the development and implementation of certain requisite technology enhancements.

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. ”
Portfolio Retention. Within our current PLS channel, we execute saleable closings that involve the refinance of mortgages held within our total servicing portfolio, which we refer to as portfolio retention. Portfolio retention services are also a product offered to both PLS and non-PLS clients under our Subservicing relationships. For the year ended December 31, 2016 , portfolio retention represented 3% of our total closing volume (based on dollars). While we plan to exit the PLS channel, we intend to continue to engage in these activities as a component of our offerings to our subservicing clients.
 
•
Retail - Real Estate ( 20% in 2016 compared to 22% in 2015 )

Within our Real Estate channel, we provide mortgage origination services for brokers associated with brokerages owned or franchised by Realogy Corporation ("Realogy") and other third-party brokers, through our joint venture with Realogy Corporation, PHH Home Loans. Through our affiliations with real estate brokers, we have access to home buyers at the time of purchase.  Substantially all of the originations through the real estate channel are originated from Realogy and brokers associated with Realogy's franchised brokerages, which represented 20% of our mortgage originations for the year ended December 31, 2016 . For the year ended December 31, 2016, we originated mortgage loans for 12% of the transactions in which real estate brokerages owned by Realogy represented the home buyer. For further information about our agreements and relationship with Realogy, see Note 19, 'Variable Interest Entities' in the accompanying Notes to Consolidated Financial Statements .

Saleable loans are originated in this channel through PHH Home Loans, PHH Mortgage or their affiliates. PHH Home Loans sells its loan originations to third parties on a servicing-released basis or to PHH Mortgage. PHH Mortgage sells loans to, or pursuant to programs sponsored by, Fannie Mae, Freddie Mac and Ginnie Mae, or sells loans to private investors. The Real Estate channel principally generates revenue from the receipt of origination and application fees, earned on a per loan basis, as well as the gain on sale of loans sold into the secondary market, earned as a percentage of the unpaid principal balance of loans sold.

Agreements for the Sale of PHH Home Loans joint venture. On February 15, 2017, we 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. The execution of these transactions is subject to closing conditions, including PHH shareholder approval, the execution of a portion of the New Residential MSR sales, and the receipt of agency approvals, among other conditions. After completion of the sale, we intend to exit the existing joint venture relationship with Realogy Corporation and cease closings in the Real Estate channel.

For discussion of risks related to the sale of PHH Home Loans joint venture, 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. "
 
•
Wholesale/Correspondent ( 1% in 2016 compared to 3% in 2015 )  

We exited the Wholesale/Correspondent channel in the second quarter of 2016 due to its subpar profitability and our intentions to reduce our investment in MSRs. In this channel, we purchased closed mortgage loans from community banks, credit unions, mortgage brokers and mortgage bankers and also acquired mortgage loans from mortgage brokers that receive applications from and qualify the borrowers.
 

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Mortgage Servicing
Our Mortgage Servicing segment services mortgage loans originated by PHH Mortgage where we retained the mortgage servicing rights ("MSRs") and acts as a subservicer for certain clients that own the underlying servicing rights. According to Inside Mortgage Finance, PHH Mortgage was the 9th largest mortgage loan servicer with a market share of 2.1% at December 31, 2016 and the 3rd largest mortgage loan subservicer at September 30, 2016.

We service loans on behalf of the investors or owners of the underlying mortgage, and because we do not hold loans for investment purposes, we only have exposure to credit risk to the extent we are required to make servicing advances. Servicing consists of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses such as taxes and insurance, performing loss mitigation activities on behalf of investors and otherwise administering our mortgage loan servicing portfolio.

As a result of the conclusions reached from our strategic review, we intend to transition to a capital-light business comprised of our subservicing and portfolio retention businesses. The following description provides a summary of our servicing activities for our capitalized servicing portfolio and our subserviced portfolio, as well as information on the portfolio changes from December 31, 2015 to 2016. The Servicing portfolio statistics below are shown as either portfolio unpaid principal balance (UPB) or based on units, depending on the revenue driver of each respective activity:

•
Capitalized Servicing ( $84.7 billion of UPB for 2016, a 14% decline from 2015)

We own the right to service loans owned by investors, which typically result from the sale and securitization of loans we originate. We recognize an MSR asset in our Consolidated Financial Statements and have elected to mark this portfolio to fair value each quarter. We principally generate revenue through contractual fees earned from our MSRs, which are a stated percentage of the unpaid principal balance of current performing loans. As the MSR owner, we are in several instances obligated to make servicing advances to fund scheduled principal, interest, tax and insurance payments when the mortgage loan borrower has failed to make the scheduled payments and to cover foreclosure costs and various other items that are required to preserve the assets being serviced.  These servicer advance obligations require significant capital and liquidity in order to fund the advances until we are contractually authorized to reimburse ourselves for the advances from the loan investor.

Lakeview Sale. 16% of our portfolio UPB as of December 31, 2016 consisted of GNMA MSRs that are subject to our November 2016 sale agreement with Lakeview. This sale consists of $13.4 billion of UPB and $97 million in fair value as of December 31, 2016 , and the subservicing will transfer to another servicer appointed by the purchaser upon completion of the sale.

On February 2, 2017, the initial sale of GNMA MSRs under the Lakeview agreement was completed, representing $10.3 billion of unpaid principal balance, $77 million in fair value, and $11 million of Servicing advances.

New Residential Sale . 83% of our portfolio UPB as of December 31, 2016 is subject to our December 2016 sale agreement with New Residential. This sale consists of $69.9 billion of UPB and $579 million in fair value as of December 31, 2016 . This sale provides that we will perform the subservicing for these loans for an initial period of three years, subject to certain transfer and termination provisions. The consummation of the transactions contemplated under the MSR sale agreement is subject to the approvals of PHH Corporation shareholders, the GSEs, origination sources and private loan investors, as well as other customary closing requirements.

The final net proceeds we may receive from each MSR sale is dependent on the portfolio composition and servicing advances outstanding at each transfer date, the amount of investor and origination source consents received, and transaction costs. The sale of $440 million of the MSRs and Servicing advances underlying these agreements currently requires consents other than GSEs, including the approvals of certain clients and private investors.

Remaining Portfolio. 1% of our portfolio UPB as of December 31, 2016 is not included committed to any sale agreement. This consists of MSRs recognized after the populations were defined for the above sales agreements. 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.


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For discussion of risks related to the MSR sales, 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. ”

Additional information regarding our sale of MSRs is provided in "Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary".

•
Subservicing (approximately 265,000 units for 2016, a 41% decrease from 2015)

We service loans on behalf of our clients who own the underlying servicing rights. Since we do not own the right to service the loan, we do not recognize an asset in our Consolidated Financial Statements. We principally generate revenue based upon a stated fee per loan that varies based on the delinquency status. Subservicing fee revenue is generally less than the servicing fee received by the owner of the MSR; 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. 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.

We have significant client concentration risk related to the percentage of our subservicing portfolio that is under agreements with a small group of clients. As of December 31, 2016 , we had significant subservicing concentrations with Pingora Loan Servicing, LLC, HSBC and Morgan Stanley which represent 42% , 22% and 14% , respectively, of our subservicing portfolio units. We have significant client concentration risk due to the small number of key clients and the standard contractual termination rights. If the pending sale of our owned MSR to New Residential is consummated, New Residential will become our largest subservicing client in 2017, as this population includes 467,000 units (based on the December 31, 2016 portfolio); however, the New Residential subservicing agreement extends for at least three years, subject to certain transfer and termination provisions.

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, without cause, and with limited notice and negligible compensation. In 2016, we have experienced such client-driven terminations or reductions. During the fourth quarter of 2016, we realized reductions in our subservicing portfolio driven by: (i) Merrill Lynch’s insourcing of their servicing activities and (ii) HSBC’s sale of a population of MSRs relating to loans that we subserviced. In the three months ended December 31, 2016, our subservicing portfolio declined by approximately 211,000 units, or 44% , primarily driven by those actions.

For discussion of risks related to subservicing, see “Part I—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 Pingora Loan Servicing, LLC, HSBC, and Morgan Stanley. 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. "

For a discussion of the geographic concentrations of properties in our total servicing portfolio, see “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Counterparty and Concentration Risk—Servicing.”

Business Development. The subservicing target market is comprised of independent mortgage bankers, community banks, credit unions and other mortgage investors. We believe that the size of the subservicing market will continue to grow due to the following projected market conditions: (i) slower prepayment speeds as a result of higher interest rates and projected growth in the home purchase market; (ii) lack of operational scale for smaller MSR owners who will need to continually invest in their technology and infrastructure to keep pace with consumer, regulatory and investor requirements; and (iii) projected growth of MSR ownership by financial investors who do not have in-house servicing capability. With our servicing expertise, we believe that we are well positioned to grow commensurate with the overall market.

However, the subservicing market in which we operate is highly competitive. We compete with non-bank servicers, such as Cenlar FSB, Dovenmuehle Mortgage, Inc., Nationstar Mortgage Holdings, Inc., and LoanCare, and we face competition related to subservicing pricing and service delivery. Our competitive position is also dependent on our continued ability to demonstrate compliance with local, state, federal and investor regulations or requirements and to improve technology

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and processes while controlling our costs to maintain competitive pricing. Finally, we also must manage the risk of declining subservicing units due to payoffs as we must continually enter into new arrangements and execute our portfolio retention initiatives to grow our subservicing portfolio.

Legal and Regulatory Environment
 
Our business is subject to extensive federal, state and local regulation. Our loan origination and servicing activities are primarily regulated at the state level by state licensing authorities and administrative agencies, with additional oversight from the Bureau of Consumer Financial Protection (the “CFPB”). The CFPB has rule-making, supervision and examination authority and is responsible for enforcing federal consumer protection laws. In addition to state licensing requirements, we are required to comply with various federal consumer protection and other laws, including but not limited to:
•
the Gramm-Leach-Bliley Act, which requires us to maintain privacy regarding certain consumer data in our possession and to periodically communicate with consumers on privacy matters;
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the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection communications;
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the Truth in Lending Act, or TILA, and Regulation Z, which requires certain disclosures be made to mortgagors regarding the terms of their mortgage loans;
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the Real Estate Settlement Procedures Act, or RESPA, and Regulation X, which require, among other things, certain disclosures to mortgagors regarding the costs of mortgage loans, the administration of escrow accounts, the transferring of mortgage loans, lender-placed insurance and other customer communications;
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the TILA-RESPA Integrated Mortgage Disclosure Rule, or TRID, which mandates specific origination and settlement documents and processes;
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the Fair Credit Reporting Act, which regulates the use and reporting of information related to the credit history of consumers;
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the Equal Credit Opportunity Act and Regulation B, which prohibit discrimination on the basis of age, race and certain other characteristics in the extension of credit;
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the Homeowners Protection Act, which requires, among other things, the cancellation of private mortgage insurance once certain equity levels are reached;
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the Home Mortgage Disclosure Act and Regulation C, which require reporting of certain public loan data; and
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the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics.

In addition, by agreement with our private label clients, we are required to comply with additional laws and regulations to which our clients are subject. While we are not a bank, our private label business subjects us to both direct and indirect banking supervision and each private label client requires a unique compliance model, which creates complexities and potential inefficiencies in our operations. Laws and regulations we are exposed to through our private label relationships include, but are not limited to, the Bank Service Company Act, which permits the regulators of federal financial institutions to examine vendors that provide outsourced services to such regulated financial institutions.

We are also subject to periodic reviews and audits from the Federal Housing Finance Authority (FHFA), Fannie Mae, Freddie Mac, Ginnie Mae, the U.S. Department of Housing and Urban Development, other federal, state and local agencies, various investors and regulators of our clients. We are currently managing through various regulatory investigations, examinations and inquiries related to our legacy mortgage origination and servicing practices. Our experience is consistent with other companies in the mortgage industry, and several large mortgage originators have been subject to similar actions, which have resulted in the payment of substantial fines and penalties. We are continuing to address each matter, and we will defend our positions and/or appeal matters as appropriate when we believe we have meritorious defenses. Alternately, we may engage in settlement discussions on certain matters in order to avoid the additional monetary costs and other business impact of engaging in litigation. For more information, including our fourth quarter of 2016 consent order with the New York Department of Financial Services, see Note 15, 'Commitments and Contingencies' in the accompanying Notes to Consolidated Financial Statements and “Part I—Item 1A.— Legal and Regulatory Risks — We are subject to litigation and regulatory investigations, inquiries and proceedings, and we may incur fines, penalties, increased costs, and other consequences that could negatively impact our business, results of operations, liquidity and cash flows or damage our reputation. ” in this Form 10-K.

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In recent years, there has been heightened regulatory and public scrutiny with regard to origination and servicing practices and there has been a number of developments in laws and regulations and other financial reform legislation that have impacted, or are expected to impact, our business. We continue to work diligently to assess and understand the implications of the recent developments in the regulatory environment. We have devoted substantial resources towards implementing all of the new rules to ensure we continue to maintain regulatory compliance, while, at the same time, working towards meeting the needs and expectations of our clients and the borrowers whose loans we service.
We expect that the higher level of legislative and regulatory focus on mortgage origination and servicing practices will result in higher legal, compliance and servicing related costs as well as heightened potential regulatory fines and penalties. For more information, see “Part I—Item 1A. Risk Factors— Legal and Regulatory Risks — Our business is complex and heavily regulated, and the full impact of regulatory developments to our business remains uncertain. Any failure of ours to comply with applicable laws, rules, regulations or the terms of agreements with regulators could have a material adverse effect on our business, financial position, results of operations or cash flows. ” in this Form 10-K.
 
Employees
 
As of December 31, 2016 , we employed 3,500 persons in total. In connection with our plans to exit the PLS business, we expect to reduce our employees of the Production and shared-services functions by 900 employees, with such reductions expected to be completed in the second quarter of 2018. Employee counts are approximate.
We also expect to reduce our headcount in the next year as a result of our intentions to reorganize our business and our agreements to sell certain assets of our PHH Home Loans joint venture (if executed).  We currently do not have an estimate of the impact to our headcount from those actions.
Management considers our employee relations to be satisfactory. None of our employees were covered under collective bargaining agreements during the year ended December 31, 2016 .
Available Information
Our corporate website is www.phh.com . We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 available free of charge on our website under the tabs “Investors-SEC Reports” as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. The public may read and copy our filings with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains our reports, proxy and information statements, and other information that we electronically file with the SEC.
Our Corporate Governance Guidelines, Code of Business Ethics & Conduct, Code of Ethics for Chief Executive Officer and Senior Financial Officers, and the charters of the committees of our Board of Directors are also available on our corporate website and printed copies are available upon request. We intend to disclose any amendments or waivers to our Code of Business Ethics and Conduct and our Code of Ethics for Chief Executive Officer and Senior Financial Officers on our website at www.phh.com within four business days of the date of such amendment or waiver in lieu of filing a Form 8-K pursuant to Item 5.05 thereof. The information contained on our corporate website is not part of this Form 10-K.


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Item 1A. Risk Factors
Risks Related to Our Strategies
Any actions resulting from the strategic review process, and our efforts towards executing these actions, could materially and adversely affect our business, results of operations and cash flows, and there can be no assurance that such actions will be beneficial to our shareholders.
We intend to take the following actions resulting from the conclusion of our strategic review: (i) executing the sales of our MSR assets, (ii) exiting the PLS business, including consummating transactions with LenderLive; and (iii) executing the transaction to sell certain assets in our Home Loans joint venture, which would include exiting our future interest and involvement in the operations and results of that business. If we complete these actions, we intend to operate as a smaller, less capital intensive business that is focused on subservicing and portfolio retention services. See further discussion of these actions in "Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary" of this Form 10-K.
We may be unable to fully or successfully execute or implement our intended strategic actions, in whole or in part, or within the projected time frame. Additionally, there can be no assurances that these actions will have the impact that we intend on our financial position, cash flows, and results of operations. While we have assessed the potential value that could be realized, as well as the potential costs that could be incurred, as a result of these actions, our assessments and estimates may differ materially from actual costs and the value realized, if such actions are pursued. Any such actions could materially and adversely affect our business, results of operations, and cash flows, and may not be beneficial to our shareholders.
Our efforts towards executing our intended strategic actions could cause management distractions and disruptions in our business, and exposes us to risks including, but not limited to the following:

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We have diverted, and will continue to divert, significant management resources and attention in our efforts to execute strategic actions, which could negatively impact our business and results of operations.
  
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While we have assessed and estimated the potential costs associated with each strategic action and the estimated cost of advisors, lawyers and consultants to complete our strategic actions, our assessments and estimates may differ materially from actual costs and the value realized. Factors that drive this uncertainty include, among other factors, employee attrition, the expected timing of related actions, contractual complexities and the effects of income taxes.

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We may encounter difficulty in retaining key employees who may be concerned about their future roles with the Company. If such key employees leave the Company, we may encounter difficulty recruiting qualified replacements.  Our unique business model and the specialized knowledge required to fulfill our operations exposes us to significant retention risk. If we are unsuccessful in retaining key employees, or attracting talent during our transition period, we may suffer increased costs to staff our business, difficulties in executing upon our strategic actions and potential contractual penalties or fees if we are unable to meet our obligations.

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We need to re-engineer our overhead costs to an appropriate level to allow our continuing business to be properly supported, while maintaining the appropriate level of overhead to support execution of transactions and business transitions, sustain our ongoing client relationships and to maintain compliance with all applicable legal, regulatory, and contractual requirements of our business. There can be no assurances that we will be able to reduce our overhead structure to a profitable scale, or that we will be successful in managing the risks of this effort.

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Any disruptions in or uncertainty around our business could affect our relationships with customers and/or other counterparties, may have negative impacts on our ability to obtain or renew financing, among other impacts.

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We face risks related to our ability to successfully transition our assets and businesses through these transactions, including steps required to transition the performance of certain processes to LenderLive and to maintain compliance and internal and operational controls during the transition period.
All of the foregoing could materially and adversely affect our business and financial results.

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As a result of our strategic review, we intend to transition to a less capital intensive business focused on subservicing and portfolio retention services. While we intend to return excess capital to our shareholders after, and assuming, the execution of our asset sale transactions, we believe the market capitalization of the Company will be reduced after we complete all of the actions resulting from the strategic review. Furthermore, there may be a limited market for our common stock, with less market liquidity, after the execution of these actions.
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.
We intend to take the following actions resulting from the conclusion of our strategic review: (i) executing the sales of our MSR assets; (ii) exiting the PLS business; and (iii) executing the transaction to sell certain assets in our Home Loans joint venture, which would include exiting our future interest and involvement in the operations and results of that business. If we complete these actions, we intend to operate as a smaller, less capital intensive business that is focused on subservicing and portfolio retention services. See further discussion of these actions in "Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary" of this Form 10-K.
We expect to take further actions to achieve sustained profitability, and increase the strategic flexibility, for our remaining subservicing and portfolio retention business, including re-engineering our overhead and cost structure to allow our business to be properly supported, and to seek growth in our subservicing and portfolio retention businesses. However, the competitive nature of the subservicing business and related risks creates certain challenges that we will need to manage, including natural runoff of servicing units, our existing significant client concentrations, and short-term contractual arrangements with certain clients which provide them with termination rights at any time without cause. Also, 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.
To achieve our financial objectives for this new business, we need to realize our cost re-engineering, subservicing growth, and portfolio retention improvement assumptions. There can be no assurances that we will execute these actions, or that the execution of these actions will achieve the intended results. The achievement of our goals is subject to both the risks affecting our business generally (including market, credit, operational, and legal and compliance risks) and the inherent difficulty associated with implementing these strategic objectives. Furthermore, our success is dependent on the skills, experience and efforts of our management team and our ability to negotiate with third parties.
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.
There can be no assurances that we will return capital to shareholders, or that any amounts returned will be distributed in any prescribed time frame. The amount of capital available for distribution and the method and timing of such distributions, if any, will depend on several factors, including but not limited to:

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the execution of the sales of our MSRs, including the receipt of required approvals, the time required to obtain approvals, and the total proceeds realized based on the portfolio composition as of each future transfer date;

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value realized from monetizing our investment in the PHH Home Loans joint venture, including the successful execution of related agreements and underlying transactions, and the timing of the related transactions;

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the successful execution of our PLS exit, including the amounts of realized exit costs and operating losses, and our progress towards completing the exit of that business;

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actual amounts of future cash outflows, including costs incurred for transactions and restructuring, required payments for our unsecured term debt and realized tax amounts;

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the outcomes of contingencies, including our legal and regulatory matters, loan repurchases, MSR sale indemnifications, and other contingencies; and

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working capital and contingent cash requirements of the remaining business.

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In addition, the method, timing and amount of any returns of capital will be at the discretion of our Board of Directors and will depend on market and business conditions, the market price of our Common stock and our overall capital structure and liquidity position.
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.
Our Company has historically differentiated itself in the market as an outsourced mortgage banking services provider to such financial institutions through our PLS channel. This business represented 79% of our total loan closings for the year ended December 31, 2016 (based on dollars). Despite having completed amendments to improve the economics of our PLS agreements, we have not been able to achieve profitable scale within this business for reasons including, but not limited to, the current regulatory environment for mortgage originations, increased regulatory related costs associated with being a Technology Services Provider under the Bank Services Company Act, increased regulatory scrutiny for our financial institution clients and related persistent high costs of compliance and contractual requirements to customize the business for each client. In addition, we have been faced with recent client contract terminations, which further negatively affects our ability to achieve profitable scale. For these reasons, as an outcome of our strategic review process, we announced in November 2016 that we intend to exit the PLS channel.
Risks specific to our plan to exit PLS include, but are not limited to:

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We may not complete the exit in our anticipated time frame, which may be driven by our need to negotiate the exit of our agreements with PLS clients, as certain existing client agreements currently extend beyond our intended exit date. Any failures to meet our intended exit time frame would result in continued operating losses above our current estimate, and such losses may be material.

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Our estimate of costs to exit the PLS business includes our forecast of the net loss of operating the business through the exit of the business, severance and retention costs, and facility and other costs. However, our actual costs incurred through this process may significantly exceed our current estimates. Factors that drive significant uncertainty around the total amount of costs include our ability to: (i) negotiate terms of certain contracts; (ii) meet the timeline of the exit process; (iii) satisfy the contractual and regulatory requirements of the business during the wind-down period; and (iv) our expectations of origination volumes and costs during the exit period, among other factors.

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Our ability to satisfy the contractual requirements of our PLS agreements and regulatory compliance requirements during the exit period. Factors that drive risk around our ability to fulfill these requirements include, but are not limited to: (i) our ability to maintain adequate staffing levels; (ii) our reliance on outsourcing arrangements with LenderLive to fulfill substantially all of these obligations, including the risk if LenderLive does not meet their obligations to us; and (iii) our change management decisions related to maintaining and updating our systems and compliance infrastructure, in anticipation of our intended exit date.
All of the foregoing could materially and adversely affect our business and financial results.
Our evaluation of strategic alternatives for the PLS business included our assessment of the expected net present value of the estimated future operating losses of the business versus the costs we expect to realize to exit the business. Our decision to exit the business was reliant on the underlying estimates, and there can be no assurances that our exit of the PLS business will be as beneficial to shareholders as if we had not taken such action.
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.
We have entered into agreements to sell certain assets of PHH Home Loans and to monetize our investment in the joint venture may not be executed in full, or at all, or within our anticipated time frame. The agreements related to this transaction contain a number of pre-closing conditions which must be met, including, but not limited to, mortgage licensing requirements (on the part of the buyer), PHH stockholder approval, the execution of a portion of the New Residential MSR sales, the receipt of agency approvals, the acceptance by certain PHH Home Loans employees (including loan originators) who receive employment offers from the buyer, among other conditions. Furthermore, we may not realize the value anticipated from selling our interests.

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Due to the pre-closing conditions and closing dates that are expected to occur over a series of time, we are exposed to a higher risk of employee turnover and other business disruptions as a result of the uncertainty and transitions for this business. We also face liquidity risk during the transition of this entity, as certain counterparties to our PHH Home Loans agreements, including our warehouse and loan sales agreements, may elect to not fulfill existing agreements due to the pending changes in the entity.
Any of the foregoing could impair our ability to complete the joint venture transactions and could materially and adversely affect our business and financial results.
Our contractual arrangements related to the PHH Home Loans joint venture provide Realogy with termination rights upon the occurrence of certain events. Particularly, in the event the PHH Home Loans asset sale is not consummated for certain reasons, Realogy may accelerate its rights to terminate the PHH Home Loans joint venture and related agreements.
PHH Home Loans is a joint venture that was formed for the purpose of originating and selling mortgage loans that are primarily sourced from Realogy's owned real estate brokerage business. In February 2017, we executed agreements to sell certain assets of PHH Home Loans and entered into a JV Interests Purchase Agreement to purchase Realogy's 49.9% ownership interests in the PHH Home Loans joint venture.
Realogy had existing termination rights as specified in the PHH Home Loans Operating Agreement, which have been modified by the JV Interests Purchase Agreement as noted below:
Termination rights with Two-years notice or For cause. The terms of the PHH Home Loans Operating Agreement executed in 2005 provides Realogy with the right at any time to give us two years notice of its intent to terminate its interest in PHH Home Loans. In addition, the Strategic Relationship Agreement and the PHH Home Loans Operating Agreement outline certain terms and events that would give Realogy the right to terminate the PHH Home Loans joint venture for cause.
Upon a termination of the PHH Home Loans joint venture by Realogy or its affiliates (whether for cause or upon two years’ notice without cause), Realogy will have the right either: (i) to require that we or certain of our affiliates purchase all of Realogy’s interest in PHH Home Loans at the applicable purchase price set forth in the PHH Home Loans Operating Agreement or (ii) to cause us to sell our interest in PHH Home Loans at the applicable sale price set forth in the PHH Home Loans Operating Agreement to an unaffiliated third party designated by certain of Realogy’s affiliates. If we were required to purchase Realogy’s interest in PHH Home Loans, such purchase could have a material adverse impact on our liquidity. Additionally, any termination of the PHH Home Loans joint venture will also result in a termination of the Strategic Relationship Agreement and our other agreements and arrangements with Realogy. 
Conditional Waiver of Two-Year Notice. The JV Interests Purchase Agreement executed in February 2017 modifies Realogy's contractual termination rights that were established in the PHH Home Loans Operating Agreement (which are outlined above). The transactions involving PHH Home Loans may be terminated if a specified portion of the MSR sale to New Residential is not consummated by September 1, 2017 under certain specified circumstances and, upon such termination, PHH would be obligated to pay a termination fee and would be deemed to have waived: (i) any restrictions under the PHH Home Loans Operating Agreement that prohibit Realogy from entering into any joint venture with third parties; and (ii) the two-year notice requirement with respect to Realogy’s right to terminate PHH Home Loans joint venture.
In addition to Realogy’s rights under the JV Interests Purchase Agreement as described in the preceding paragraph, if the transactions involving PHH Home Loans are terminated for any reason that does result in a waiver of the two-year notice requirement, Realogy may still exercise its existing right under the PHH Home Loans Operating Agreement to terminate the joint venture on two years notice. Any such termination of the PHH Home Loans joint venture would also result in a termination of the Strategic Relationship Agreement and our other agreements and arrangements with Realogy, which may impact the enterprise value of PHH Home Loans and could materially and adversely impact its operations since the majority of the business of that entity, and our Real Estate channel, are derived from our relationship with Realogy.
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.
As an outcome of our strategic review, we announced a series of transactions to sell substantially all of our capitalized Mortgage servicing rights (collectively, the “MSR transactions”).
Lakeview transaction. In November 2016, we entered into an agreement to sell our GNMA MSRs and related advances to Lakeview. As of December 31, 2016 , the portfolio committed under this sale agreement represented 16% of our total MSR

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asset (based on UPB). We completed the sale of a portion of these MSRs in February 2017; however, the sale of the remaining population of MSRs committed under this agreement continues to be subject to approvals of clients who were the origination source of the MSRs. 
New Residential transaction. On December 28, 2016, we entered into an agreement to sell our entire portfolio of MSRs and related advances in each case as of October 31, 2016, excluding the GNMA MSRs pending sale to Lakeview, to New Residential. As of December 31, 2016 , the portfolio committed under this sale agreement represents 83% of our total MSR asset. The closing of the transactions contemplated by the MSR sale agreement is subject to the approvals of PHH Corporation shareholders, the GSEs and private mortgage loan investors, as well as other customary closing requirements. Further, the sale of 33% of the MSRs underlying this agreement are subject to the approval of clients who were the origination source of the MSRs.
In addition, the New Residential transaction provides certain termination rights to New Residential and to us. If the Sale Agreement is terminated under specified circumstances, including with respect to a competing proposal, we will pay New Residential a termination fee equal to three and a half percent of the purchase price for the MSR portfolio.  Furthermore, the termination of the Sale Agreement could result in the termination of the transactions contemplated by the JV Asset Purchase Agreement and JV Interests Purchase Agreement. If certain material adverse events occur with respect to us prior to the initial sale date, New Residential has the right to terminate the subservicing agreement and, upon any exercise of such termination right, we would have the option to either sell the MSR portfolio on a subservicing-released basis or pay a $10 million termination fee.
The total proceeds realized from the MSR transactions are contingent upon receiving required approvals, and are based on the portfolio as of each future transfer date. Therefore, the portfolio performance between transaction and settlement dates, including realized runoff, will reduce the total proceeds available from this transaction. Furthermore, in addition to the GSEs and PLS clients, there are several hundred other origination sources (such as correspondents and credit unions) and private loan investors from whom consent is needed to sell the MSRs related to their specific relationship. There can be no assurances that we will receive any specific amount of consents required from the GSEs, private loan investors or PLS clients and other origination sources.
We are subject to various risks if the MSR transactions do not close in full, in part, when contemplated, or in accordance with their current terms, including but not limited to:

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Price Risk. If the MSR transactions do not close in accordance with its negotiated terms, we may not be able to negotiate another transaction for this asset at all, or to negotiate a sale for this asset similar to the expected proceeds from the current agreements.

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Hedging & Interest Rate Risks. The fair value of our MSRs is highly sensitive to changes in interest rates, as borrower prepayment patterns are driven by the relative changes in mortgage interest rates. The MSR transaction with New Residential fixes the prices that we expect to realize at future transfer dates.  In contemplation of these transactions, in December 2016, we significantly reduced our MSR-related derivative hedge coverage. As a result, we are subject to substantial risk that we may incur significant losses in the market value of the asset that we may not have incurred, other than for our decisions to cease hedging in anticipation of this transaction.
The results of our Mortgage Servicing segment, our consolidated financial position, results of operations and cash flows may be subject to substantial volatility from changes in interest rates, as a result of our recent decision to reduce hedge coverage.
All of the foregoing could materially and adversely affect our business and financial results.
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 Pingora Loan Servicing, LLC, HSBC, and Morgan Stanley. 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.
As a result of our strategic decisions related to our Mortgage Production origination channels, our remaining business will be focused on subservicing and related portfolio retention activities.
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. As a result, 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.

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Further, our subservicing business has substantial risk with respect to the current client concentrations and the termination rights contained in the underlying agreements, as discussed further below.
Concentration risk. We have significant client concentration risk related to the percentage of our subservicing portfolio that is under agreements with a small group of clients. As of December 31, 2016 , our subservicing portfolio (by units) related to the following client relationships: 42% from Pingora Loan Servicing, LLC, 22% from HSBC and 14% from Morgan Stanley. Further, our agreement to sell the majority of our capitalized MSRs to New Residential contains a three-year subservicing term, subject to certain early transfer and termination rights for New Residential; if the sale is approved and executed, we would also have an additional significant concentration risk with respect to that counterparty.
Termination Rights. 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, without cause, and with limited notice and negligible compensation.
Our subservicing relationships may be negatively impacted by our intended exit of the PLS origination channel; two of our top three subservicing clients are currently PLS clients, and such clients may elect to transfer their subservicing relationships to other counterparties upon sourcing a new origination services provider. Further, 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 and a related decrease in our revenues from subservicing.
As previously disclosed, in the fourth quarter of 2016, we realized client-driven reductions in our subservicing portfolio due to: (i) Merrill Lynch’s announced intent to insource their servicing activities and (ii) HSBC’s sale of a population of MSRs relating to loans that we currently subservice. In the fourth quarter of 2016, our subservicing portfolio declined by approximately 211,000 units, or 44% , primarily driven by those actions.
Further terminations or material reductions in our subservicing portfolio would adversely affect our business, financial condition, results of operations and cash flows. Our intentions to transition our business to be primarily focused on subservicing and portfolio retention further magnifies these risks. For example, our ability to recognize revenues from our portfolio retention business will be dependent upon the size of our subservicing portfolio and the decision by our subservicing clients of whether to engage us to perform such services.

Legal and Regulatory Risks
We are subject to litigation and regulatory investigations, inquiries and proceedings, and we may incur fines, penalties, increased costs, and other consequences that could negatively impact our business, results of operations, liquidity and cash flows or damage our reputation.
There has been a heightened focus of regulators on the practices of the mortgage industry. Consistent with other mortgage originators and servicers, we are subject to litigation and regulatory investigations, examinations, inquiries and proceedings from regulators and attorneys general of certain states as well as various governmental agencies, with respect to our mortgage lending and/or mortgage servicing practices. In addition, we are defendants in various legal proceedings, including private and civil litigation. For more information regarding our existing matters, see Note 15, 'Commitments and Contingencies' in the accompanying Notes to Consolidated Financial Statements .
We are devoting substantial resources towards responding to litigation and regulatory investigations, examinations, inquiries and proceedings and have incurred, and expect to continue to incur, increasing costs with respect to these efforts. Our legal and regulatory matters are at varying procedural stages and the ultimate resolution of any of these matters may result in: (i) adverse judgments, settlements, fines, penalties, injunctions and other relief against us, including, without limitation, payments made in settlement arrangements, monetary payments; (ii) enhanced compliance requirements; (iii) changes in our business processes, procedures or agreements; (iv) limitations on our ability to pursue business strategies; or (iv) other agreements and obligations, any of which could have a material adverse effect on our business, financial position, results of operations, liquidity or cash flows.
Our business is complex and heavily regulated, and the full impact of regulatory developments to our business remains uncertain. Any failure of ours to comply with applicable laws, rules, regulations or the terms of agreements with regulators could have a material adverse effect on our business, financial position, results of operations or cash flows.
Our business is subject to extensive regulation by federal, state and local government authorities and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on how we conduct our business. These laws,

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regulations and judicial and administrative decisions include those pertaining to: real estate settlement procedures; fair lending; fair credit reporting; truth in lending; compliance with federal and state disclosure and licensing requirements; the establishment of maximum interest rates, finance charges and other charges; secured transactions; collection, foreclosure, repossession and claims-handling procedures; other trade practices; and privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers and guidance on non-traditional mortgage loans issued by the federal financial regulatory agencies. In addition, as an outcome of agreements or orders reached with government regulators, we have been, and may be further subject to enhanced compliance monitoring, reporting requirements, changes to our business processes and procedures, and other agreements or obligations related to our origination and servicing activities. Further, by agreement with our private label clients, we are required to comply with additional laws and regulations to which our clients may be subject. While we are not a bank, our private label business subjects us to both direct and indirect banking supervision (including examinations by our private label clients' regulators), and each private label client requires a unique compliance model, which creates complexities and potential inefficiencies in our operations.
In recent years, there have been a number of developments in laws and regulations and other financial reform legislation that have negatively impacted, and we expect will continue to negatively impact, our business and increase our risks of investigations, inquiries and proceedings.  These developments include but are not limited to: (i) regulations from the Dodd-Frank Act; (ii) proposed changes to the infrastructures of Fannie Mae and Freddie Mac; (iii) increased vendor oversight obligations placed upon many of our private label clients by the Office of the Comptroller of the Currency; and (iv) current rules proposed and adopted by the CFPB, including the implementation of changes to mortgage origination and settlement forms under the TILA-RESPA Integrated Mortgage Disclosure Rule, or TRID, which have required significant modifications and enhancements to our mortgage production processes and systems. Certain provisions of the Dodd-Frank Act and of pending legislation in the U.S. Congress may impact the operation and practices of Fannie Mae and Freddie Mac. These changes could reduce or eliminate the government-sponsored entities’ ("GSEs") ability to issue mortgage-backed securities, which would materially and adversely affect our business and could require us to fundamentally change our business model since we sold 52% of our loans in 2016 pursuant to GSE-sponsored programs.
We expect the higher legislative and regulatory focus on mortgage origination and servicing practices to continue to result in higher legal, compliance and servicing-related costs, heightened risk for potential regulatory fines, penalties, and actions required for injunctive relief, and such developments may result in limitations on our ability to pursue business strategies or otherwise adversely affect the manner in which we conduct our business.  Regulatory investigations, inquiries and proceedings all require a significant amount of our time and resources to manage. The magnitude and complexity of our responses required to meet these demands requires the time and attention of our management, which poses a risk to achieving our business goals and priorities. Further, in our mortgage origination and servicing activities, we are exposed to operational risk and events of non-compliance resulting from inadequate or failed internal processes or systems, human factors, or external events. While we maintain and update our systems and procedures to comply with applicable laws and regulations and devote resources towards managing, assessing and reacting to developments, there can be no assurances that these measures will be effective or that changes will be implemented by the required deadlines.
Our failure to comply with applicable laws, rules, regulations or the terms of agreements with regulators could result in:

•
loss of our approvals to engage in our origination and servicing businesses and/or other limitations on our ability to originate or service loans;

•
government investigations and enforcement actions;

•
litigation;

•
an inability to execute on our business strategy;

•
required payments of fines, penalties, settlements or judgments; and/or

•
inability to fund our business, or otherwise operate our business.
Any of these outcomes could have a material adverse effect on our business, financial position, results of operations or cash flows.


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Risks Related to Our Business
We are highly dependent upon programs administered by Fannie Mae, Freddie Mac and Ginnie Mae.
Our ability to generate revenues in our Mortgage Production and Servicing segments is highly dependent on programs administered by Fannie Mae, Freddie Mac and Ginnie Mae that facilitate the issuance of mortgage-backed securities in the secondary market. These entities play a powerful role in the residential mortgage industry, and we have significant business relationships with them, including:
Production.  During 2016 , 52% of our mortgage loan sales were sold to, or were sold pursuant to programs sponsored by, Fannie Mae, Freddie Mac or Ginnie Mae. We also derive other material financial benefits from our relationships with Fannie Mae, Freddie Mac and Ginnie Mae, which include the assumption of credit risk by these entities on loans included in mortgage-backed securities in exchange for our payment of guarantee fees, the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures and the use of mortgage warehouse facilities with Fannie Mae, pursuant to which, as of December 31, 2016 , we had total capacity of $2 billion , with $150 million committed and $1.85 billion uncommitted.
Servicing.  We service loans on behalf of Fannie Mae and Freddie Mac, as well as loans that have been securitized pursuant to securitization programs sponsored by Fannie Mae, Freddie Mac and Ginnie Mae.  As of December 31, 2016 , 59% of our mortgage servicing rights and loans serviced through subservicing agreements pertain to these programs. These entities establish the base service fee to compensate us for servicing loans as well as the assessment of fines and penalties that may be imposed upon us for failing to meet servicing standards.
Our status as a Fannie Mae, Freddie Mac and Ginnie Mae approved seller/servicer is subject to compliance with each entity’s respective selling and servicing guidelines and failure to meet such guidelines could result in the unilateral termination of our status as an approved seller/servicer.  Failure to maintain our relationship with each of Fannie Mae, Freddie Mac and Ginnie Mae would result in the termination of many of our agreements with our private label and subservicing clients and otherwise would materially and adversely affect our business, financial position, results of operations and cash flows.
Further, changes in existing U.S. government-sponsored mortgage programs or servicing eligibility standards could require us to fundamentally change our business model in order to effectively compete in the market.  Congress has held hearings and received reports outlining the long-term strategic plan for, and various options for long-term reform of the U.S. housing finance market, including changes designed to reduce government support for housing finance and the winding down of Freddie Mac and Fannie Mae over a period of years.  If enacted, this legislation or further regulation that curtails Freddie Mac and/or Fannie Mae’s activities and/or results in the wind down of these entities could impact the pricing of mortgage related assets in the secondary market, result in higher mortgage rates to borrowers, and have a resulting negative impact on mortgage origination volumes and margins across the mortgage industry, any one of which could have a negative impact on our business.  There is currently uncertainty with respect to the extent, if any, of such reform, and the long-term or short-term impacts of such changes on the housing market, and the related impacts on our operations. There can be no assurances whether we could timely and effectively change our business model in order to remain a competitive mortgage loan originator or servicer, and any such changes to the programs or GSEs may have a material and adverse effect on our business, financial position, results of operations and cash flows.
Our mortgage asset-backed debt arrangements, a significant portion of which are short-term agreements, are an important source of our liquidity.  If any of our funding arrangements are terminated, not renewed or otherwise become unavailable to us, we may be unable to find replacement financing on economically viable terms, if at all. If a substantial portion of such arrangements are terminated, not renewed, and cannot be replaced, it would adversely affect our ability to fund our operations.
Our mortgage asset-backed debt arrangements are an important source of liquidity for our origination and servicing activities.
Our mortgage warehouse facilities typically have up to a 364-day term and certain facilities require us to maintain a specified amount of available funding from other facilities. As such, our liquidity profile and compliance with debt covenants depends on our ability to renew multiple facilities within a short time frame. As of December 31, 2016, each of our mortgage warehouse facilities mature and are subject to renewal on or around March 31, 2017.
We are currently expecting significant changes to our business profile, liquidity and capital structure and funding requirements driven by our intended strategic actions and transitions of our business model, including expected changes in our mortgage origination volumes driven by the sales or exit of certain businesses. As such, our ability to renew our mortgage warehouse facilities may be more limited than our historical experience as lenders continually assess PHH and its subsidiaries as counterparties, or we may be unable to obtain such financing on terms acceptable to us, if at all.

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Further, our access to and our ability to renew our existing mortgage warehouse facilities is subject to prevailing market conditions, and could suffer in the event of: (i) the deterioration in the performance of the mortgage loans underlying the warehouse facilities; (ii) our failure to maintain sufficient levels of eligible assets or credit enhancements or comply with other terms of the facilities; (iii) our inability to access the secondary market for mortgage loans; and (iv) termination of our role as servicer of the underlying mortgage assets.
Our servicing advance funding facility , PHH Servicer Advance Receivables Trust (“PSART”), is a special purpose bankruptcy remote trust formed for purposes of issuing non-recourse asset-backed notes secured by servicing advance receivables.  Our ability to maintain liquidity through issuing asset-backed notes secured by servicing advance receivables is dependent on many factors, including but not limited to:  (i) market demand for ABS, specifically ABS collateralized by mortgage servicing-related receivables; (ii) our ability to service in accordance with applicable guidelines and the quality of our servicing, both of which will impact noteholders’ willingness to commit to financing for an additional term; and (iii) our ability to negotiate terms acceptable to us.
If a substantial portion of the committed capacity of our facilities are terminated or are not renewed, we may be unable to find replacement financing on commercially favorable terms, if at all, which could adversely impact our operations and prevent us from executing our business plan, originating new mortgage loans or fulfilling commitments made in the ordinary course of business, and realizing the expected proceeds anticipated from the PHH Home Loans transaction. These factors could reduce revenues attributable to our business activities or require us to sell assets at below market prices, either of which would have a material adverse effect on our overall business and consolidated financial position, results of operations and cash flows.
Certain of our debt arrangements require us to comply with specific financial covenants and other affirmative and restrictive covenants, termination events, conditions precedent to borrowing, and other restrictions, including, but not limited to, those relating to material adverse changes, our consolidated net worth, liquidity, and restrictions on our indebtedness. An uncured default of one or more of these covenants could result in a cross-default between and amongst our asset-backed debt arrangements. Consequently, an uncured default that is not waived by our lenders and that results in an acceleration of amounts payable to our lenders or the termination of credit facilities would materially and adversely impact our liquidity, could force us to sell assets at below market prices to repay our indebtedness, and could force us to seek relief under the U.S. Bankruptcy Code. In addition, certain of our mortgage warehouse arrangements contain conditions precedent to borrowing under which our adjusted net income (excluding certain changes in value of mortgage servicing rights and related derivatives and excluding certain expenses) must be $1.00 or more for a rolling 12-month period. Our inability to satisfy this condition would not result in an event of default but would relieve the lender of its funding commitment, which could adversely affect our ability to fund our operations.
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.
Our senior unsecured long-term debt 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. In addition, as a result of the uncertainties around our current strategic actions and future business, our access to the credit markets may be more limited than our historical experience, or we may be unable to obtain such financing on terms acceptable to us, if at all. 
In order to obtain financing in the future, we may be required to rely on alternative financing, such as bank lines and private debt placements, and may also be required to pledge otherwise unencumbered assets. Furthermore, our cost of financing could rise significantly, thereby negatively impacting our financial results. Any of the foregoing could have a material adverse effect on our business, financial position, results of operations, liquidity and cash flows.
We may be subject to further ratings actions: (i) if our business and financial results deteriorate significantly or do not show improvement over an acceptable period of time; (ii) if we are unable to put in place sources of liquidity to fund our business satisfactory to the rating agencies; and/or (iii) based upon regulatory reviews, investigations, proceedings or other claims and enforcement actions that result in material monetary exposures and/or other negative consequences, among other factors.  We cannot predict the impact any further negative debt ratings actions may have on our cost of capital, on our ability to incur new indebtedness or refinance our existing indebtedness or on our ability to retain or secure customers.

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Our hedging strategies related to our mortgage pipeline may not be successful in mitigating our risks associated with changes in interest rates. Further, our hedging counterparties may be unwilling to trade with us on substantially similar terms to our historical trades pending the completion of our strategic actions.
We are exposed to interest rate risk and related price risk for our origination pipeline and related assets, including interest rate lock commitments and mortgage loans held for sale. Interest rate lock commitments generally range between 30 and 90 days, and we typically sell mortgage loans within 30 days of origination. Our pipeline hedging activities include entering into derivative instruments, such as forward delivery commitments on mortgage backed-securities or whole loans, futures, and option contracts, to provide a level of protection against interest rate risks.
However, no hedging strategy can protect us completely. The nature and timing of hedging transactions influence the effectiveness of these strategies. Our hedging strategies also rely on assumptions and projections regarding our assets and general market factors. If these assumptions and projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes including, but not limited to, interest rates, we may incur losses that could have a material adverse effect on our business, financial position, results of operations or cash flows. In addition, changes in interest rates may require us to post additional collateral under certain of our financing arrangements and derivative agreements which could impact our liquidity. Due to the expected significant changes to our business profile, liquidity and capital structure driven by our intended strategic actions and transition of our business model, our liquidity and ability to trade may be more limited than our historical experience, as hedging participants may be unwilling to trade or execute loan sales with us on substantially similar terms to our historical experience.

Risks Related to Our Common Stock
A change in control transaction may result in a number of significant cash outflows that could reduce the value of our business. Further, the provisions of certain of our agreements could discourage third parties from seeking to acquire us, or could prevent or delay a transaction resulting in a change of control.
The net proceeds realized by our shareholders as the result of any change in control transaction or a fundamental change to our businesses, may be negatively impacted as a result of required payments under our unsecured debt, certain tax impacts or the potential termination of certain client relationships (if consents or waivers are not obtained), among other consequences.
The terms of certain of our Senior note agreements and indentures contain provisions that require us to offer to repurchase, for cash, all or a portion of the outstanding notes upon a change of control, as defined in such indentures.  Further, a change of control may constitute an event of default under certain of our debt agreements, including our mortgage warehouse facilities.
We may need to obtain consents or waivers from the GSEs, state licensing agencies and certain clients or counterparties, in connection with certain change in control transactions.  Additionally, the value of our business could be reduced from any lost relationships and/or loss of our approved status as a Fannie Mae, Freddie Mac and Ginnie Mae approved seller/servicer in connection with certain change in control transactions.  Our agreements with Fannie Mae and Freddie Mac require us to provide notice or obtain approvals or consents related to any change in control transaction.  Our agreements with Realogy, including the PHH Home Loans Operating Agreement, state that Realogy may terminate PHH Home Loans if we effect a change in control transaction involving certain competitors or other third parties. In connection with such termination, we may be required to make a cash payment to Realogy in an amount equal to PHH Home Loans’ trailing 12 months net income multiplied by two.
In addition, agreements with some of our financial institution clients governing our private label relationships provide our clients with the right to terminate their relationship with us if we complete certain change in control transactions with certain third parties.  The need to obtain waivers or consents from our clients in connection with a change in control transaction may discourage certain third parties from seeking to acquire us or could reduce or delay our receipt of the amount of consideration they would be willing to pay to our stockholders in an acquisition transaction, or could otherwise reduce the value of the business when separated.
Provisions in our charter documents, the Maryland General Corporation Law, and New York insurance law may delay or prevent our acquisition by a third party.
Our charter and by-laws contain several provisions that may make it more difficult for a third party to acquire control of us without the approval of our Board of Directors. These provisions include, among other things, advance notice for raising business or making nominations at meetings and “blank check” preferred stock. Blank check preferred stock enables our Board of Directors, without stockholder approval, to designate and issue additional series of preferred stock with such dividend, liquidation, conversion, voting or other rights, including the right to issue convertible securities with no limitations on conversion, as our Board of Directors may determine, including rights to dividends and proceeds in a liquidation that are senior to the Common stock.

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We are also subject to certain provisions of the Maryland General Corporation Law which could delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their Common stock or may otherwise be in the best interest of our stockholders. These include, among other provisions:

•
the “business combinations” statute which prohibits transactions between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder becomes an interested stockholder and

•
the “control share” acquisition statute which provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter.
Our by-laws contain a provision exempting any share of our capital stock from the control share acquisition statute to the fullest extent permitted by the Maryland General Corporation Law. However, our Board of Directors has the exclusive right to amend our by-laws and, subject to their fiduciary duties, could at any time in the future amend the by-laws to remove this exemption provision.
In addition, we are registered as an insurance holding company in the state of New York as a result of our wholly owned subsidiary, Atrium Insurance Corporation. New York insurance law requires regulatory approval of a change in control of an insurer or an insurer’s holding company. Accordingly, there can be no effective change in control of us unless the person seeking to acquire control has filed a statement containing specified information with the New York state insurance regulators and has obtained prior approval. The measure for a presumptive change of control pursuant to New York law is the acquisition of 10% or more of the voting stock or other ownership interest of an insurance company or its parent. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change in control of us, including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.

Other Risks
Our financial statements are based in part on assumptions and estimates made by our management, including those used in determining the fair values of a substantial portion of our assets.  If the assumptions or estimates are subsequently proven incorrect or inaccurate, there could be a material adverse effect on our business, financial position, results of operations or cash flows.
Pursuant to accounting principles generally accepted in the United States, we utilize certain assumptions and estimates in preparing our financial statements, including but not limited to, when determining the fair values of certain assets and liabilities, accruals related to litigation, regulatory investigations and proceedings, and reserves related to mortgage representations and warranty claims.  If the assumptions or estimates underlying our financial statements are incorrect, we may experience significant losses as the ultimate realization of value may be materially different than the amounts reflected in our consolidated statement of financial position as of any particular date.
For additional information on the key areas for which assumptions and estimates are used in preparing our financial statements, see “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in this Form 10-K.
Fair Value.  A substantial portion of our assets are recorded at fair value based upon significant estimates and assumptions with changes in fair value included in our consolidated results of operations. As of December 31, 2016 , 44% of our total assets were measured at fair value on a recurring basis, including $690 million of assets representing our Mortgage servicing rights, which are valued using significant unobservable inputs and management’s judgment of the assumptions market participants would use in pricing the asset.  Further, we utilize fair value measurements in our review of the carrying value of long-lived assets and investments for impairment. The determination of the fair value of our assets involves numerous estimates and assumptions made by our management. Such estimates and assumptions include, without limitation, estimates of future cash flows associated with our Mortgage servicing rights based upon model inputs involving interest rates as well as the prepayment rates and delinquencies and foreclosure rates of the underlying serviced mortgage loans. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values, or our fair value estimates may not be realized in an actual sale or settlement, either of which could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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Legal and Regulatory Contingencies.  Accruals are established for pending or threatened litigation, claims or assessments 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 and other legal proceedings, it is not always possible to determine a reasonable estimate of the amount of a probable loss, and we may estimate a range of possible loss for consideration in these 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, our estimates may change from time to time and such changes may be material to our consolidated results of operations. There can be no assurance that the ultimate resolution of such matters will not result in losses in excess of our recorded accruals, or in excess of our estimate of reasonably possible losses, and the ultimate settlement of such matters may have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Representations and Warranties.  In connection with the sale of mortgage loans, we make various representations and warranties that, if breached, require us to repurchase the loans or indemnify the purchaser for actual losses incurred in respect of such loans.  The estimation of our loan repurchase and indemnification liability requires subjective and complex judgments, and incorporates key assumptions that are impacted by both internal and external factors.  Internal factors include, but are not limited to, the level of loan sales and origination volumes, and the quality of our underwriting procedures.  External factors include, but are not limited to: (i) the political environment and oversight of the Agencies, and related changes in Agency programs and guidelines; (ii) borrower delinquency levels and default patterns; (iii) home price values and (iv) the overall economic condition of borrowers and the U.S. economy. There can be no assurance that we will not realize losses in excess of our recorded reserves, or in excess of our estimate of reasonably possible losses, and that such losses may have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Our reliance on outsourcing arrangements for information technology services subjects us to significant business process and control risks due to the complexity of our information systems or if our outsourcing counterparties do not meet their obligations to us.
We outsource certain information technology (“IT”) services to a third party which subjects us to significant business process and control risks.  If our outsource partner fails to perform their obligations under the terms of the agreement, or if our management of this vendor is not successful, we are subject to operational risk from our IT environment. We are heavily dependent on the strength and capability of our technology systems which we use to interface with our customers, to maintain compliance with applicable regulations and to manage our internal financial and other systems. Our business model and our reputation as a service provider to our clients, as well as our internal controls over financial reporting, are highly dependent upon these systems and processes.  In addition, our ability to run our business in compliance with applicable laws and regulations is dependent on our technology infrastructure.
Although we have service-level arrangements with our counterparties, we do not ultimately control their performance, which may make our operations vulnerable to their performance failures.  Any failures in our technology systems, processes or the related internal and operational controls, or the failure of our outsourcing providers to perform as expected or as contractually required could result in the loss of client relationships, damage to our reputation, failures to comply with regulations, failure to prepare our financial statements in a timely and accurate manner, and increased costs, the result of any of which could have a material and adverse effect on our business, reputation, results of operations, financial position or cash flows.
During 2016, we elected to terminate certain IT outsourcing agreements, and we intend to transition such services from the third party to our own systems and processes by the first quarter of 2018. We face risks related to our ability to successfully transition the performance of these processes and the related internal and operational controls, and in enhancing our internal processes to support the functions previously outsourced. We may incur costs in connection with this transition that we may not have incurred, other than for our decision to end this outsourcing relationship.
A failure in or breach of our technology infrastructure or information protection programs, or those of our outsource providers, could result in the inadvertent disclosure of the confidential personal information of our customers, as well as the confidential personal information of the customers of our clients.  Any such failure or breach, including as a result of cyber-attacks against us or our outsource partners, could have a material and adverse effect on our business, reputation, results of operations, financial position or cash flows.
Our business model and our reputation as a service provider to our clients are dependent upon our ability to safeguard the confidential personal information of our customers, as well as the confidential personal information of the customers of our clients.  Although we have put in place, and require our outsource providers to follow, a comprehensive information security program that we monitor and update as needed, security breaches could occur through intentional or unintentional acts by individuals having authorized or unauthorized access to confidential information of our customers or the employees or customers of our clients which could

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potentially compromise confidential information processed and stored in or transmitted through our technology infrastructure.  In addition, we have highly complex information systems, certain portions of which we are dependent upon third party outsource providers and other portions of which are self-developed and for which third party support is not generally available.
A failure in or breach of the security of our information systems, or those of our outsource providers, or a cyber-attack against us or our outsource partners, could result in significant damage to our reputation or the reputation of our clients, could negatively impact our ability to attract or retain clients and could result in increased costs attributable to related litigation or regulatory actions, claims for indemnification, higher insurance premiums and remediation activities, the result of any of which could have a material and adverse effect on our business, reputation, results of operations, financial position or cash flows.


Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

Our principal executive offices are located at 3000 Leadenhall Road, Mt. Laurel, New Jersey 08054.
 
Our business has centralized operations in 450,000 square feet of office space in the Mt. Laurel, New Jersey area.  We occupy 100,000 square feet in Jacksonville, Florida and 40,000 square feet in Bannockburn, Illinois, both of which are primarily used to support our Mortgage Production activities.  We also have a location in Williamsville, New York with 75,000 square feet of total office space that is primarily used to support our servicing operations.  We occupy approximately 30 smaller offices located throughout the U.S. to support our Mortgage Production activities.

In January 2017, we signed an agreement to terminate our lease in Williamsville effective on August 31, 2017. In February 2017, we signed an agreement to assign our interests under the lease of our Jacksonville, Florida office and to sell information technology and other equipment and fixtures located in such office to LenderLive. However, we remain jointly and severally liable with LenderLive to the landlord for the lease obligations over the 7 year remaining term of the Jacksonville lease.

All of our locations are leased, and square footage numbers disclosed above are approximate.

Item 3.  Legal Proceedings

We are party to various claims and legal proceedings from time to time related to contract disputes and other commercial, employment and tax matters.  For more information regarding legal proceedings, see Note 15, 'Commitments and Contingencies' in the accompanying Notes to Consolidated Financial Statements.

Item 4.  Mine Safety Disclosures

Not applicable.


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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Price of Common Stock

Shares of our Common stock are listed on the NYSE under the symbol “PHH”.  The following table sets forth the high and low sales prices for our Common stock for the periods indicated as reported by the NYSE:
 
Stock Price
For the 2016 Quarters Ended:
High
 
Low
March 31, 2016
$
16.50

 
$
8.26

June 30, 2016
14.87

 
9.73

September 30, 2016
16.80

 
12.61

December 31, 2016
15.70

 
13.25

 
 
 
 
For the 2015 Quarters Ended:
 
 
 
March 31, 2015
$
25.61

 
$
22.42

June 30, 2015
27.83

 
24.09

September 30, 2015
26.38

 
13.78

December 31, 2015
18.68

 
13.25

 
As of February 21, 2017 , there were 5,479 holders of record of our Common stock.
 
Restrictions on Share-Related Payments

As of December 31, 2016 , we are not prohibited in our ability to make share-related payments including the declaration and payment of dividends, the repurchase of Common stock, or making any distribution on account of our Common stock. We have not declared or paid cash dividends on our Common stock since we began operating as an independent, publicly traded company in 2005. 

The provisions of our debt arrangements, capital requirements of our operating subsidiaries and other legal requirements and regulatory constraints may restrict us from making such share-related payments in the future.  Limitations and restrictions on our ability to make share-related payments include but are not limited to:
 
a)              Restrictions under our senior note indentures from making a share-related payment if, after giving effect to the payment, the debt to tangible equity ratio calculated as of the most recently completed month end exceeds 6 to 1; however, even if such ratio is exceeded, we may declare or pay any dividend or make a share-related payment so long as our corporate ratings are equal to or better than: Baa3 from Moody’s Investors Service and BBB- from Standard & Poor’s (in each case on stable outlook or better); and
 
b)              Limitations in the amount of share-related payments that can be distributed by us due to maintaining compliance with the financial covenants contained in certain subsidiaries’ mortgage warehouse funding agreements, including but not limited to: (i) the maintenance of net worth of at least $750 million on the last day of each fiscal quarter; and (ii) a ratio of unsecured indebtedness to tangible net worth of no greater than 1.25 to 1.
 
In addition, we are limited in the amount of share-related payments that can be distributed due to capital that is required to be maintained at our subsidiaries.  The amount of intercompany dividends, share-related payments and other fund transfers that certain of our subsidiaries can declare or distribute to us or to other consolidated subsidiaries (and ultimately to us) is limited due to provisions of our subsidiaries’ debt arrangements, capital requirements, and other legal requirements and regulatory constraints.  The aggregate restricted net assets that are required to be maintained at our subsidiaries totaled $772 million as of December 31, 2016 .


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In February 2017, we announced that once we have the appropriate level of certainty with respect to the amount and timing of sources and uses of cash from our strategic actions (including any cash generated from the MSR and PHH Home Loans joint venture asset sales, if executed), we intend to take the necessary actions to commence any returns of capital to shareholders. However, the method, timing and amount of the return of capital to our shareholders, if any, will depend on several factors including the execution of, and proceeds realized from our MSR sales, the value realized from monetizing our investment in the PHH Home Loans joint venture, the successful execution of our PLS exit, the resolution of our outstanding legal and regulatory matters, the successful completion of other restructuring and capital management activities, including debt repayment, and the working capital requirements and contingency needs for the remaining business. Other factors that may impact our decisions regarding the method, timing and amount of any return of capital include economic and market conditions, our financial condition and operating results, cash requirements, capital requirements of our operating subsidiaries, legal requirements, regulatory constraints, investment opportunities at the time any such payment is considered, and other factors deemed relevant. There can be no assurances we will complete any return of capital to our shareholders. For more information, see “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. "
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
There was no share repurchase activity for the quarter ended December 31, 2016 . The Board of Directors' authorization for open market share repurchases expired on December 31, 2016 , and there are no remaining authorizations.

See Note 16, 'Stock-Related Matters' in the accompanying Notes to Consolidated Financial Statements for more information on our share repurchase programs and share repurchase activity for the years ended December 31, 2016, 2015 and 2014.
 


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Item 6.  Selected Financial Data
 
The selected financial data set forth below is derived from our audited Consolidated Financial Statements for the periods indicated.  Because of the inherent uncertainties of our business and our previously announced intent to exit the PLS channel, sell substantially all of our MSR portfolio, monetize our investment in our PHH Home Loans joint venture and transition to a capital-light business consisting of subservicing and portfolio retention services, the historical financial information for such periods may not be indicative of our future results of operations or financial position. 

In 2014, we sold our Fleet business. All Fleet operations have been recorded in held for sale or discontinued operations during 2014 and presented comparatively for all historical periods below:

 
Year Ended and As of December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(In millions, except per share data)
Consolidated Statements of Operations
 

 
 

 
 

 
 

 
 

REVENUES
 

 
 

 
 

 
 

 
 

Origination and other loan fees
$
280

 
$
284

 
$
231

 
$
307

 
$
346

Gain on loans held for sale, net
262

 
298

 
264

 
575

 
942

Loan servicing income
353

 
394

 
448

 
436

 
449

Change in value of mortgage servicing rights, net of related derivatives
(228
)
 
(158
)
 
(238
)
 
(6
)
 
(502
)
Net interest expense
(32
)
 
(46
)
 
(88
)
 
(115
)
 
(121
)
Other (loss) income
(13
)
 
18

 
22

 
3

 
12

Net revenues
622

 
790

 
639

 
1,200

 
1,126

 
 
 
 
 
 
 
 
 
 
Total expenses
926

 
1,003

 
923

 
1,060

 
1,140

 
 
 
 
 
 
 
 
 
 
Net (loss) income attributable to PHH Corporation
(202
)
 
(145
)
 
81

 
135

 
34

 
 
 
 
 
 
 
 
 
 
Basic (loss) earnings per share attributable to PHH Corporation
$
(3.77
)
 
$
(2.62
)
 
$
1.47

 
$
2.36

 
$
0.60

Diluted (loss) earnings per share attributable to PHH Corporation
(3.77
)
 
(2.62
)
 
1.47

 
2.06

 
0.60

 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets
 
 
 

 
 

 
 

 
 

ASSETS
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
$
906

 
$
906

 
$
1,259

 
$
1,126

 
$
758

Mortgage loans held for sale
683

 
743

 
915

 
834

 
2,174

Mortgage servicing rights
690

 
880

 
1,005

 
1,279

 
1,022

Total assets (1)
3,175

 
3,642

 
4,284

 
8,836

 
9,591

LIABILITIES
 
 
 

 
 

 
 

 
 

Unsecured debt (1)
$
607

 
$
605

 
$
819

 
$
1,232

 
$
1,142

Asset-backed debt
655

 
743

 
908

 
775

 
1,941

Total liabilities (1)
2,052

 
2,294

 
2,713

 
7,146

 
8,029

PHH Corporation stockholders’ equity
1,092

 
1,318

 
1,545

 
1,666

 
1,526

________________
(1)  
Prior period amounts have been reclassified to conform to the current year presentation following the adoption of ASU 2015-03.  As a result, debt issuance costs associated with our unsecured term and convertible debt are now presented as a reduction to the carrying amount, which reduced our previously reported Total assets, Unsecured debt and Total liabilities as of each period end date. Refer to Note 1, 'Summary of Significant Accounting Policies' in the accompanying Notes to Consolidated Financial Statements for further information.


25
Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with “Part I—Item 1. Business” and our Consolidated Financial Statements and the notes thereto included in this Form 10-K. The following discussion should also be read in conjunction with the “Cautionary Note Regarding Forward-Looking Statements” and the risks and uncertainties described in “Part I—Item 1A. Risk Factors”.
We are a leading provider of end to end mortgage services. 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 activities for originated and purchased loans, and acts as a subservicer.
As a result of our sale of our Fleet business, which closed effective on July 1, 2014, Fleet Management Services is no longer a reportable segment, and the results and operations of the Fleet business and transaction-related amounts are included within Income from discontinued operations, net of tax for the year ended December 31, 2014.  See further discussion in “—Results of Operations—Discontinued Operations”.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in sections as follows: 
▪
Executive Summary
▪
Results of Operations
▪
Risk Management
▪
Liquidity and Capital Resources
▪
Contractual Obligations
▪
Off-Balance Sheet Arrangements and Guarantees
▪
Critical Accounting Policies and Estimates
▪
Recently Issued Accounting Pronouncements 


26

EXECUTIVE SUMMARY
Strategic Review
In February 2017, we announced the conclusions and outcomes from our strategic review initiated in 2016. Our conclusions from the strategic review include exiting business platforms that were deemed unattractive, which consist of our Private Label solutions business and our correspondent lending business. Further, we intend to sell all assets and platforms for which we received actionable and competitive offers, which include selling our capitalized MSR portfolio and monetizing our interests in our PHH Home Loans joint venture, subject to shareholder and other approvals, as discussed further below. We intend to transition to a capital-light business model comprised of subservicing and portfolio retention services. Successful completion of this transition is contingent upon successfully executing the asset sales and business exits outlined above, as well as restructuring our remaining business and shared services platform and achieving certain asset growth objectives and assumptions.
Once we have the appropriate level of certainty with respect to the amount and timing of sources and uses of cash from our strategic actions (including any cash generated from the MSR and PHH Home Loans joint venture asset sales, if executed), we intend to take necessary actions to commence any returns of capital to shareholders. The method, timing and amount of the return of capital to our shareholders, if any, will depend on several factors including the execution of, and proceeds realized from, our MSR sales, the value realized from PHH Home Loans joint venture, the successful execution of our PLS exit, the resolution of our outstanding legal and regulatory matters, the successful completion of other restructuring and capital management activities, including debt repayment, and the working capital requirements and contingency needs for the remaining business.

Additional information regarding risks specific to our strategic conclusions and outcomes is provided in “Part I—Item 1A. Risk Factors— Risks Related to Our Strategies ".

Details on our strategic plans specific to each action and our intended future business model follows.

Sale of MSRs

We have existing agreements to sell substantially all our existing MSR assets in a series of transactions. The following table summarizes our MSRs committed under sale agreements, based on the portfolio as of December 31, 2016 :
 
As of December 31, 2016
 
MSR Fair Value
 
UPB
 
Loan Count
 
($ in millions)
 
(In units)
MSR Commitments:
 
 
 
 
 
New Residential Investment Corp.
$
579

 
$
69,937

 
466,962

Lakeview Loan Servicing, LLC
97

 
13,369

 
88,117

Other counterparties
2

 
158

 
699

Non-committed
12

 
1,193

 
11,869

Total
$
690

 
$
84,657

 
567,647

 
In addition, the sale agreements include the transfer of approximately $300 million of Servicing advance receivables to the counterparties as of December 31, 2016.

Lakeview/GNMA MSRs Sale Agreement . In November 2016, we entered into an agreement to sell substantially all of our GNMA MSR portfolio and related advances to Lakeview.  Upon sale, the subservicing responsibilities with respect to the related mortgage loans will transfer to a successor subservicer appointed by Lakeview. On February 2, 2017, the initial sale of GNMA MSRs under this agreement was completed, representing $10.3 billion unpaid principal balance, $77 million fair value, and $11 million of Servicing advances. We estimate we will receive total proceeds of $88 million from the initial transfer.
New Residential MSRs Sale Agreement. On December 28, 2016, we entered into an agreement to sell substantially all of our remaining MSR portfolio and related advances to New Residential. In addition, we entered into a subservicing agreement with New Residential for the units sold for an initial period of three years, subject to certain early transfer and termination provisions.


27

The final net proceeds received from each MSR sale is dependent on the portfolio composition and servicing advances outstanding at each transfer date, the amount of investor and origination source consents received and transaction costs. The sale of $440 million of the MSRs and servicing advances underlying these agreements currently requires consents other than GSEs. For further information, 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. ”

After the completion of these MSR sales, assuming all approvals and related consents are received, we do not anticipate retaining a significant amount of capitalized MSRs in the future.

Sale of Joint Venture Assets

We announced in February 2017 that we have 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. The execution of these transactions is subject to closing conditions as set forth in the agreements, including PHH shareholder approval, the execution of a portion of the New Residential MSR sales, the receipt of agency approvals and the acceptance by a certain specified percentage of PHH Home Loans employees (including loan originators) of employment offers from the buyer, among other conditions. If consummated, we would expect to complete the series of asset sales by the end of 2017. In connection with the asset sale agreements, we 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.

After the completion of these sales, we will no longer operate through our Real Estate channel, and we intend to monetize the remaining assets and liabilities of that entity. Assuming the completion of the transaction and subsequent monetization of the net investment in PHH Home Loans, we expect to realize $92 million of cash proceeds from these actions, before transaction and other costs.

See Note 23, 'Subsequent Events' in the accompanying Notes to Consolidated Financial Statements for further information. For discussion of risks related to our PHH Home Loans 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 this Form 10-K.

Exit from Private Label Channel
We are working with our PLS clients to help facilitate our exit from the business in the most cost effective manner possible, while continuing to satisfy our regulatory and contractual compliance requirements. We currently have exit plans in place with clients representing 55% of our PLS 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 the year ended December 31, 2016 , we have incurred $41 million of exit costs (pre-tax) related to the exit of PLS, which includes severance and retention programs, contract termination costs and a $15 million non-cash charge for asset impairment. We estimate we may incur up to $75 million of additional exit costs (pre-tax) over the next 15 months. See further details in Note 2, 'Exit Costs' in the accompanying Notes to Consolidated Financial Statements . Additionally, while we implement the exit from this channel, we expect to incur pre-tax operating losses of $120 million for PLS, including maintaining the support and compliance infrastructure needed to comply with both regulatory and contractual requirements.
In February 2017, we entered into an agreement with LenderLive to transfer to them certain operating assets, personnel, and responsibilities and outsource certain PLS mortgage origination fulfillment functions. We believe this will help mitigate certain operating risks associated with the wind down of the PLS originations business.
For more information about our costs related to the PLS exit program, see Note 2, 'Exit Costs' in the accompanying Notes to Consolidated Financial Statements . 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 this Form 10-K.

28


PHH 2.0

As a result of conclusions reached from strategic review, we intend to transition to a capital-light business comprised of subservicing and portfolio retention, which we refer to as PHH 2.0. We believe we have core strengths and favorable attributes in several key requirements to achieve success in the subservicing business such as reputation, compliance infrastructure, investor performance, and direct cost per loan. However, we will need to manage for certain risks in our subservicing business, including natural runoff of servicing units, significant client concentrations, and short-term contractual arrangements with certain clients which provide them with termination rights at any time without cause. Also, 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.
Successful completion of this transition is contingent upon successfully executing the transactions and business exits outlined above, as well as restructuring our remaining business and shared services platform and achieving our growth objectives and assumptions. We intend to re-engineer and reduce operating and overhead costs, which may take up to 12 to 18 months to complete. We are targeting total annual shared service expenses of $75 million in PHH 2.0’s first full year as a stand-alone business.
To achieve our financial objectives for this new business, we need to realize our cost re-engineering, outstanding legal and regulatory matter resolution, subservicing growth and portfolio retention improvement assumptions.
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. " and “Part I—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 Pingora Loan Servicing, LLC, HSBC, and Morgan Stanley. 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. ” in this Form 10-K.


Legal and Regulatory Matters
We are currently managing through various regulatory investigations, examinations and inquiries related to our mortgage origination and servicing practices. Our experience is consistent with other companies in the mortgage industry, and several large mortgage originators have been subject to similar matters, which have resulted in the payment of substantial fines and penalties. Our significant outstanding legal and regulatory matters include matters with the CFPB, a multistate coalition of certain mortgage banking regulators, and the Office of the Inspector General of the U.S. Department of Housing and Urban Development. Although these matters present a significant amount of uncertainty and we cannot estimate a final resolution date, we are working towards resolving these legal and regulatory matters as soon as practicable. We recorded provisions for our legal and regulatory matters of $38 million for the year ended December 31, 2016.
See Note 15, 'Commitments and Contingencies' in the accompanying Notes to Consolidated Financial Statements for further information about these matters. We expect the higher level of legislative and regulatory focus on mortgage origination and servicing practices will continue to result in higher legal, compliance and servicing related costs and heightened risk of potential regulatory fines and penalties, as well as other consumer relief or injunctive relief. We could also experience an increase in mortgage origination or servicing related litigation, investigations, inquiries or proceedings in the future. 
For more information, see “Part I—Item 1A. Risk Factors— Legal and Regulatory Risks — We are subject to litigation and regulatory investigations, inquiries and proceedings, and we may incur fines, penalties, increased costs, and other consequences that could negatively impact our business, results of operations, liquidity and cash flows or damage our reputation. "


29

RESULTS OF OPERATIONS

Continuing Operations
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions, except per share data)
Net revenues
$
622

 
$
790

 
$
639

Total expenses
926

 
1,003

 
923

Loss from continuing operations before income taxes
(304
)
 
(213
)
 
(284
)
Income tax benefit
(111
)
 
(82
)
 
(99
)
Loss from continuing operations, net of tax
(193
)
 
(131
)
 
(185
)
Less: net income attributable to noncontrolling interest
9

 
14

 
6

Net loss from continuing operations attributable to PHH Corporation
$
(202
)
 
$
(145
)
 
$
(191
)
 
 
 
 
 
 
Basic and Diluted loss per share from continuing operations
$
(3.77
)
 
$
(2.62
)
 
$
(3.47
)

 
Our financial results from continuing operations for 2016 reflect the challenges of our business, including declines in our purchase volume and servicing portfolio and our planned exit of the PLS channel. In the fourth quarter of 2016, we recorded Exit and disposal costs of $41 million related to the PLS exit, including severance, contract termination costs and asset impairments. During 2016 , we also incurred $32 million of costs related to the strategic review. These were partially offset by an increase in refinancing volume and higher loan margins as a result of the lower interest rates, as well as operating benefits in our PLS channel from our completed cost and contract re-engineering. We expect to incur operating losses in 2017 as we exit the PLS business and recognize costs associated with the asset sale transactions and exit plans, as discussed further in “—Executive Summary”.

We continued to maintain a high hedge coverage ratio on our capitalized MSRs until the announcement of our agreement to sell substantially all of our MSR portfolio and related advances in December 2016. Market-related fair value adjustments, net of related derivatives reduced our Net revenues by $90 million during 2016 . As a result of our agreements to sell substantially all of our MSRs in the fourth quarter of 2016, we expect limited MSR hedging activities in 2017. For more information, see “Part I—Item 1A. Risk Factors— Risks Related to Our Business — Our hedging strategies related to our mortgage pipeline may not be successful in mitigating our risks associated with changes in interest rates. Further, our hedging counterparties may be unwilling to trade with us on substantially similar terms to our historical trades pending the completion of our strategic actions. ”
 
Our subservicing revenue declined from Merrill Lynch's decision to insource and HSBC's decision to sell MSRs included in our subservicing portfolio, and our servicing revenue from our capitalized portfolio decreased from declines in our owned MSR asset.

Income Taxes

Our effective income tax rate for the years ended December 31, 2016 , 2015 and 2014 was (36.7)% , (38.4)% and (35.1)% , respectively.  Our effective tax rates differ from our federal statutory rate of 35% , primarily due to:  (i) different state income tax rates from various jurisdictions and changes in state apportionment factors due to changes in state sourcing rules; (ii) nondeductible expenses; (iii) changes in valuation allowances; and (iv) amounts of net income attributable to noncontrolling interest (for which no taxes are recorded at PHH Corporation). 

We generated a net operating loss in both 2016 and 2015. We elected to carry back our 2015 taxable loss to offset our 2014 taxable income, and our expected taxable loss in 2016 is available to either carry back to the 2014 taxable gain or carry forward to future years and offset future taxable income. For 2016 and 2015, our effective tax rate and resulting income tax benefit were impacted by adjustments to deferred tax items resulting from the reconciliation of prior tax provisions to the final income tax returns. Additionally, for 2016, the rate was impacted by the nondeductible expenses for legal and regulatory matters, whereas in 2015, the rate was impacted by the nondeductible expenses for legal and regulatory matters and premiums paid to exchange the 2017 Convertible Notes, which was partially offset by adjustments to deferred tax items resulting from the reconciliation of prior tax provisions to the final income tax returns.

See Note 13, 'Income Taxes' in the accompanying Notes to Consolidated Financial Statements for further information.


30

Revenues
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Origination and other loan fees
$
280

 
$
284

 
$
231

Gain on loans held for sale, net
262

 
298

 
264

Loan servicing income
353

 
394

 
448

Change in fair value of mortgage servicing rights, net of related derivatives
(228
)
 
(158
)
 
(238
)
Net interest expense
(32
)
 
(46
)
 
(88
)
Other (loss) income
(13
)
 
18

 
22

Net revenues
$
622

 
$
790

 
$
639


Revenues from our Mortgage Production segment for 2016, including Origination and other loan fees and Gain on Loans held for sale, net, reflect an 8% decline in total closings. Origination and other loan fees decreased by $4 million , or 1% , as compared to the prior year resulting from a 15% decrease in total retail closing units partially offset by operating benefits from amendments to our private label agreements. Gain on loans held for sale, net decreased by $36 million , or 12% as compared to the prior year primarily related to a 39% decrease in IRLCs expected to close, reflecting the increased mix of fee-based closings (where we do not enter into an IRLC), that was partially offset by a 42 basis point, or 14% , increase in average total loan margins.

Loan servicing income for 2016 was lower by $41 million compared to 2015, reflecting a 12% decrease in the average capitalized portfolio and declines in the average number of loans in our subserviced portfolio from the previously discussed insourcing and MSR sale actions of Merrill Lynch and HSBC, respectively.

Our Net revenue for 2016 compared to the prior year was also impacted by $70 million of unfavorable changes in the fair value of MSRs, net of related derivatives compared to 2015. The unfavorable change reflects $101 million of unfavorable market-related fair value adjustments, net of related derivatives including negative market adjustments from changes in interest rates, a flattening of the yield curve and increased servicing costs and foreclosure losses. The unfavorable change was partially offset by $31 million of lower realized cash flows from prepayments and actual receipts primarily due to a lower average capitalized servicing rate in 2016. Our MSR value as of December 31, 2016 reflects the calibration of our valuation model considering the pricing associated with the MSR agreements executed in the fourth quarter of 2016. During the fourth quarter of 2016, we did not observe market participant pricing of MSRs that was commensurate with the expectations typically associated with a sharp increase in interest rates such as the increase in rates that occurred after the U.S. presidential election.

Net interest expense for 2016 declined by $14 million compared to 2015 primarily due to the June 2015 early retirement of $245 million in Convertible notes due in 2017.

The unfavorable change in Other (loss) income was primarily due to the $23 million impairment on our equity investment in Speedy Title and Appraisal Review Services LLC ("STARS"), as the exit of our PLS channel will significantly reduce STARS appraisal volume and its projected cash flows.


31

Expenses
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Salaries and related expenses
$
345

 
$
323

 
$
358

Commissions
64

 
79

 
78

Loan origination expenses
64

 
91

 
85

Foreclosure and repossession expenses
35

 
51

 
56

Professional and third-party service fees
156

 
171

 
127

Technology equipment and software expenses
42

 
37

 
37

Occupancy and other office expenses
47

 
50

 
51

Depreciation and amortization
16

 
18

 
23

Exit and disposal costs
41

 
—

 
—

Other operating expenses:
 
 
 
 
 
Loss on early debt retirement
—

 
30

 
24

Legal and regulatory reserves
38

 
78

 
28

Other
78

 
75

 
56

Total expenses
$
926

 
$
1,003

 
$
923


Salaries and related expenses for 2016 increased by $22 million compared to 2015, primarily due to higher incentive compensation, higher severance costs and higher contract labor to assist with information technology needs and short-term customer service projects.

Commissions decreased by $15 million , or 19% , compared with 2015 primarily driven by a 16% decrease in closing volume from our real estate channel.

Loan origination expenses for 2016 declined by $27 million compared with 2015 due to a 17% decrease in the total number of retail application units, as well as the termination of our trademark and licensing agreements with Realogy in 2015. 

Foreclosure and repossession expenses decreased by $16 million or 31% from the prior year primarily driven by lower foreclosure activity and improved delinquencies that were partially the result of sales of MSRs with respect to delinquent government loans.

Professional and third-party service fees decreased by $15 million, or 9%, compared to the prior year primarily from the increased costs in 2015 to re-engineer the business and actions to modernize and improve security of our information technology systems that was partially offset by increased costs in 2016 associated with our strategic review.

Exit and disposal costs were $41 million in 2016, related to the announced exit of the PLS business. These costs consist of $22 million in severance and retention expenses, $15 million in asset impairment charges, and $4 million in contract termination costs.

Other operating expenses included losses for early repayment of unsecured debt of $30 million in 2015 related to the exchange of our Convertible notes due in 2017. We also recorded provisions for legal and regulatory contingencies of $38 million in 2016 and $78 million in 2015, primarily in our Mortgage Servicing segment. As discussed in “—Executive Summary”, we are currently managing through several regulatory investigations, examinations and inquiries related to our historical mortgage servicing practices and our reserves are based on currently available information. For more information regarding legal proceedings, see Note 15, 'Commitments and Contingencies' in the accompanying Notes to Consolidated Financial Statements .


32

Mortgage Production Segment
 
Segment Overview
 
Our Mortgage Production segment generates revenue through fee-based mortgage loan origination services and the origination and sale of mortgage loans into the secondary market.  We generally sell all saleable mortgage loans that we originate to secondary market investors, which include a variety of institutional investors, and initially retain the servicing rights on mortgage loans sold.  As previously discussed, we expect the Mortgage Production segment to change significantly as we execute the actions arising from our strategic review, and we position our mortgage production activities to support only the portfolio retention business.

Private Label Services — Exit Activities
The PLS channel includes providing outsourced mortgage origination services for wealth management firms, regional banks and community banks throughout the U.S.  For the year ended December 31, 2016 , the PLS channel represented 79% of our total closing volume (based on dollars).
As an outcome of our strategic review process, we announced in November 2016 that we plan to exit the PLS channel. As a result, our volumes are expected to decline in 2017 as our clients exit our platform. While we exit from this business channel, we estimate that we will incur operating losses in the Mortgage Production segment related to PLS of $120 million for 2017 through the first quarter of 2018, including maintaining the support and compliance infrastructure needed to comply with both regulatory and contractual requirements.

Our costs to exit PLS include severance and retention programs, facility-related exit costs, contract termination and other expected payments and non-cash asset impairment. For the year ended December 31, 2016 , we have incurred $41 million of exit costs (pre-tax), including $33 million in the Production segment and $8 million in "—Other" related to shared services supporting PLS. We estimate we will incur $75 million of additional exit costs (pre-tax) over the next 15 months, of which an estimated $65 million will be incurred in the Production segment.
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 . We currently have exit plans in place with clients representing approximately 55% of our PLS closing volume including Merrill Lynch (based on closing dollars for the year ended December 31, 2016 ).
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. ”
Real Estate — Joint Venture Exit Plan
The Real Estate channel includes providing mortgage origination services for brokers associated with brokerages owned or franchised by Realogy Corporation and other third-party brokers, through PHH Home Loans ("HL"), our joint venture with Realogy. For the year ended December 31, 2016 , Real Estate represented 20% of our total closing volume (based on dollars).

As an outcome of our strategic review process, we announced in February 2017 that we have entered into agreements to sell certain assets of HL and its subsidiaries, including its mortgage origination and processing centers and the majority of its employees. The execution of these transactions is subject to closing conditions as outlined in the agreements, including PHH shareholder approval, the execution of a portion of the New Residential MSR sales, the receipt of agency approvals, and the acceptance by a specified percentage of HL employees (including loan originators) of employment offers from the buyer, among other conditions. If consummated, we would expect to complete the series of HL Asset sales by the end of 2017, and after the completion of these sales, we would no longer operate through our Real Estate channel.

See Note 23, 'Subsequent Events' in the accompanying Notes to Consolidated Financial Statements for further information. 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. "

33


Wholesale/Correspondent—Exit Complete

Through the wholesale/correspondent platform, we purchased closed mortgage loans from community banks, credit unions, mortgage brokers and mortgage bankers.  We also acquired mortgage loans from mortgage brokers that receive applications from and qualify the borrowers.  For the year ended December 31, 2016 , the wholesale/correspondent channel represented 1% of our total closing volume (based on dollars). We exited the wholesale/correspondent platform during the second quarter of 2016 as a result of the strategic review, and there were no significant costs related to the exit.

Production Business Summary

The following table summarizes the closing statistics and the allocation of revenue of our exiting and remaining Mortgage Production businesses:
 
Year ended December 31, 2016
 
PLS & Wholesale (1)
 
Real Estate
 
Portfolio Retention
 
Total
 
(In millions)
Origination and other loan fees
$
242

 
$
35

 
$
3

 
$
280

Gain on loans held for sale, net
11

 
187

 
64

 
262

Net interest income:


 
 
 
 
 
 
Interest income
9

 
18

 
5

 
32

Secured interest expense
(5
)
 
(14
)
 
(3
)
 
(22
)
Net interest income
4

 
4

 
2

 
10

Other (loss) income
(13
)
 
(1
)
 
1

 
(13
)
Net revenues
$
244

 
$
225

 
$
70

 
$
539

 
 
 
 
 
 
 
 
Total Closings
$
28,644

 
$
7,383

 
$
1,202

 
$
37,229

________________
(1)  
These amounts exclude Portfolio Retention which has historically been included in our disclosed PLS channel data.

Our Mortgage Production segment will consist entirely of portfolio retention services, if our exits of PLS and Real Estate are completed, although the completion of such exit from our Real Estate channel continues to be subject to shareholder and other approvals and other closing conditions. Portfolio retention involves the refinancing of mortgages held within our current servicing portfolio. These are saleable closings, and results are currently included within the statistics of our PLS channel in the Segment Metrics table above. For the year ended December 31, 2016 , portfolio retention represented 3% of our total closing volume (based on dollars).

Future portfolio retention volumes are dependent on the size and breadth of our servicing portfolio, on the willingness of our 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 2016, we had a surge of refinancing activity from the decline in interest rates in June. However, since November 2016, rates have been increasing and refinancing activity has declined. Based on Fannie Mae's December 2016 Economic and Housing Outlook projection of modestly increasing rates in 2017, refinancing volumes are expected to drop significantly in 2017 .

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


34

Segment Metrics:  
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
($ In millions)
Closings:
 

 
 

 
 

Saleable to investors
$
10,146

 
$
13,218

 
$
12,389

Fee-based
27,083

 
27,386

 
23,572

Total
$
37,229

 
$
40,604

 
$
35,961

 
 
 
 
 
 
Purchase
$
16,140

 
$
20,169

 
$
20,105

Refinance
21,089

 
20,435

 
15,856

Total
$
37,229

 
$
40,604

 
$
35,961

 
 
 
 
 
 
Retail - PLS
$
29,261

 
$
30,436

 
$
26,015

Retail - Real Estate
7,383

 
8,752

 
8,593

Total retail
36,644

 
39,188

 
34,608

Wholesale/correspondent
585

 
1,416

 
1,353

Total
$
37,229

 
$
40,604

 
$
35,961

 
 
 
 
 
 
Retail - PLS (units)
51,089

 
58,587

 
54,105

Retail - Real Estate (units)
26,075

 
32,428

 
34,131

Total retail (units)
77,164

 
91,015

 
88,236

Wholesale/correspondent (units)
2,298

 
6,199

 
5,940

Total (units)
79,462

 
97,214

 
94,176

 
 
 
 
 
 
Applications:
 

 
 

 
 

Saleable to investors
$
14,275

 
$
18,047

 
$
16,895

Fee-based
31,134

 
33,593

 
28,696

Total
$
45,409

 
$
51,640

 
$
45,591

 
 
 
 
 
 
Other:
 

 
 

 
 

IRLCs expected to close
$
4,373

 
$
7,199

 
$
7,262

Total loan margin on IRLCs (in basis points)
352

 
310

 
282

Loans sold
$
10,548

 
$
13,630

 
$
12,555


The following are descriptions of the business and certain metrics of the Mortgage Production segment:
Saleable closings. Our saleable closings represent loans that are originated or purchased primarily through the real estate and PLS channels of our retail platform. Saleable closings are originated or acquired with the intent that we will sell the loan after closing to secondary market investors, and we may retain the servicing rights upon sale of the loan. For all saleable closings, we recognize gain on sale revenue from investors and related origination fees from borrowers.
Fee-based closings. Our fee-based closings represent loans that are originated through outsourcing relationships with our PLS clients, where we receive a stated fee per loan in exchange for performing loan origination services. These origination services are performed in the name of the PLS client and the ownership rights to the loans are retained by each respective client upon closing. While saleable closings are originated in all platforms, fee-based closings are only originated in our PLS channel. In our PLS channel, fee-based closings are retained by the client subsequent to closing; whereas, saleable closings are purchased by us for sale to secondary market investors subsequent to closing.

Upon completion of the PLS exit and if we complete the sale of certain HL assets, our remaining saleable closings will be portfolio retention. Our portfolio retention activities, where we originate saleable closings through refinancing mortgages held within our current servicing portfolio, are included in our PLS channel, and we will continue to perform these activities after our PLS exit and our sale of certain HL assets.


35

Segment Results:
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Origination and other loan fees
$
280

 
$
284

 
$
231

Gain on loans held for sale, net
262

 
298

 
264

Net interest income (expense):


 
 

 
 
Interest income
32

 
40

 
38

Secured interest expense
(22
)
 
(24
)
 
(26
)
Unsecured interest expense
—

 
(21
)
 
(51
)
Net interest income (expense)
10

 
(5
)
 
(39
)
Other (loss) income
(13
)
 
9

 
9

Net revenues
539

 
586

 
465

 
 
 
 
 
 
Salaries and related expenses
216

 
213

 
231

Commissions
64

 
79

 
78

Loan origination expenses
64

 
91

 
85

Professional and third-party service fees
22

 
34

 
34

Technology equipment and software expenses
4

 
3

 
3

Occupancy and other office expenses
27

 
31

 
31

Depreciation and amortization
8

 
11

 
12

Exit and disposal costs
33

 
—

 
—

Other operating expenses
145

 
157

 
126

Total expenses
583

 
619

 
600

Loss before income taxes
(44
)
 
(33
)
 
(135
)
Less: net income attributable to noncontrolling interest
9

 
14

 
6

Segment loss
$
(53
)
 
$
(47
)
 
$
(141
)
 
2016 Compared With 2015 :  Mortgage Production segment loss was $53 million during 2016 , compared to a loss of $47 million during 2015 .  Net revenues decreased to $ 539 million , down $47 million , or 8% , compared with the prior year driven by lower purchase closing volume and impairment on our equity investment in STARS, partially offset by the lack of allocated unsecured interest expense as compared with 2015.  Total expenses decreased to $ 583 million , down $36 million , or 6% , compared with the prior year primarily driven by decreases in Commissions and Loan origination expenses from lower purchase closing volume and decreases in Professional and third-party service fees and Corporate overhead allocation, that were partially offset by Exit and disposal costs incurred in the fourth quarter of 2016 related to our exit from the PLS channel.
 
Net revenues.   Origination and other loan fees decreased to $280 million , down $4 million or 1% , as compared to the prior year.  Appraisal income, application and other loan fees decreased by $17 million, primarily driven by a 15% decrease in total retail closing units. This was partially offset by a $13 million increase in Origination assistance fees, which was driven by operating benefits from amendments to our private label agreements, partially offset by a 13% decrease in total PLS closing units compared to the prior year.

Gain on loans held for sale, net decreased to $262 million , down $36 million or 12% as compared to the prior year. The $28 million decrease in gain on loans compared to the prior year was primarily related to a 39% decrease in IRLCs expected to close, reflecting the increased mix of fee-based closings (where we do not enter into an IRLC), that was partially offset by a 42 basis point increase in average total loan margins. Additionally, there was a $5 million unfavorable change in fair value of Scratch and Dent and certain non-conforming loans compared with the prior year, which was primarily driven by price adjustments.

Interest income decreased to $32 million , down $8 million or 20% as compared to the prior year, primarily due to the decline in average mortgage loans held for sale from the decline in saleable volume. Secured interest expense decreased to $22 million , down $2 million or 8% , as compared to the prior year, primarily due to the decline in average mortgage warehouse debt from reduced borrowing needs as well as our funding strategy for mortgage loans held for sale.

Allocated unsecured interest expenses was zero for the year ended December 31, 2016 , as compared to $21 million for 2015, driven by updates to our interest allocation methodology in 2016 compared to 2015. We evaluate the capital structure of each

36

segment on an annual basis and have not allocated unsecured interest expense to Mortgage Production during 2016 as the segment's capital structure has been fully supported by existing cash and the secured warehouse debt facilities for 2016.

The unfavorable change in Other (loss) income was primarily due to a $23 million impairment on our equity investment in STARS, as the exit of our PLS channel will significantly reduce STARS appraisal volume and its projected cash flows.
 
Total expenses .  Commissions decreased by $15 million , or 19% , compared with 2015 primarily driven by a 16% decrease in closing volume from our real estate channel.

Loan origination expenses decreased by $27 million , or 30% , compared with 2015 due to a 17% decrease in the total number of retail application units, as well as the termination of our trademark and licensing agreements with Realogy in 2015. 

Professional and third-party service fees decreased to $22 million , down $12 million or 35% , primarily due to reduced consulting expenses on compliance activities and our efforts to re-engineer the business in 2016 as compared to 2015.

Occupancy and other office expenses decreased to $27 million , down $4 million or 13% , compared to 2015 due to one-time expenses and lower rent from consolidating Mt. Laurel facilities in 2015.

Exit and disposal costs were $33 million for the year ended December 31, 2016 , as a result of our announced exit of the PLS channel. These costs included $18 million of severance and retention expenses for impacted employees, $14 million of impairment of technology-related and other long-lived assets used in the PLS channel and $1 million in contract-related costs.

Corporate overhead allocation decreased to $118 million , down $13 million or 10% , compared to the prior year primarily due to a reduced allocation of expenses to the Mortgage Production segment in 2016. See “—Other” for a more detailed discussion of the expenses included in the Corporate overhead allocation.
 
2015 Compared With 2014 :  Mortgage Production segment loss was $47 million during 2015, compared to a loss of $141 million during 2014.  Net revenues increased to $586 million, up $121 million, or 26%, compared with the prior year driven by higher volumes of refinance activity, higher loan margins, operating benefits from amendments to our private label agreements and lower allocated unsecured interest expense.  Total expenses increased to $619 million, up $19 million, or 3%, compared with the prior year primarily driven by an increase in Other operating expenses from technology and compliance enhancements incurred by our shared services platform and an increase in Loan origination expenses from higher closing volumes, that were partially offset by lower Salaries and related expenses.
 
Net revenues.   Origination and other loan fees increased to $284 million, up $53 million, or 23%, compared to the prior year.  Origination assistance fees increased by $46 million, which was driven by $27 million of operating benefits from amendments to our private label agreements and an 8% increase in total PLS closing units compared to the prior year. The remaining $7 million increase in Origination and other loan fees was primarily driven by higher appraisal income and application fees from a 3% increase in total retail closing units.

Gain on loans held for sale, net increased $34 million, or 13% compared to the prior year. The $29 million increase in gain on loans compared to the prior year was primarily driven by a 28 basis points increase in average total loan margins. IRLCs expected to close were mostly flat as higher consumer demand for refinancing activity was offset by an increased mix of fee-based production (where we do not enter into an IRLC).  Additionally, there was an $11 million favorable change in fair value of Scratch and Dent and certain non-conforming loans compared with the prior year which was primarily driven by lower repurchase activity. This was offset by a $6 million decline in economic hedge results compared with 2014 primarily attributable to a lower impact from pullthrough assumptions, partially offset by higher execution gains on mortgage loans sold. 

Allocated unsecured interest expense decreased to $21 million, down $30 million, or 59%, compared to the prior year driven by the completion of our capital strategy to reduce our corporate unsecured debt levels and reduce our cost of debt.
 
Total expenses .  Salaries, benefits and incentives decreased to $196 million, down $25 million, or 11%, compared to the prior year. There was a $17 million decrease which was primarily associated with the impact from a decline in headcount and the related operating benefits of the actions we took during the first half of 2014 to align our cost structure with expected mortgage industry demand. In addition, the transfer of certain employees from our production segment into our corporate shared service platform during January 2015 resulted in an $8 million decrease in Salaries, benefits and incentives compared to the prior year. Contract labor and overtime increased by $7 million compared with 2014 primarily due to higher overall closing volume. 
 

37

Loan origination expenses increased by $6 million, or 7%, compared with 2014 due to a 5% increase in the total number of retail application units. 

Other operating expenses increased to $157 million, up $31 million, or 25%, compared to the prior year which primarily related to increases in the Corporate overhead allocation. See “—Other” for a discussion of the Corporate overhead allocation. During 2015, Corporate overhead allocation increased due to costs associated with the modernization and security of our information technology systems and implementing new compliance requirements in our origination business.
 
Selected Income Statement Data:  
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Gain on loans held for sale, net:
 

 
 

 
 

Gain on loans
$
228

 
$
256

 
$
227

Change in fair value of Scratch and Dent and certain non-conforming mortgage loans
(6
)
 
(1
)
 
(12
)
Economic hedge results
40

 
43

 
49

Total change in fair value of mortgage loans and related derivatives
34

 
42

 
37

Total
$
262

 
$
298

 
$
264

 
 
 
 
 
 
Salaries and related expenses:
 

 
 

 
 

Salaries, benefits and incentives
$
196

 
$
196

 
$
221

Contract labor and overtime
20

 
17

 
10

Total
$
216

 
$
213

 
$
231

 
 
 
 
 
 
Other operating expenses:
 

 
 

 
 

Corporate overhead allocation
$
118

 
$
131

 
$
98

Other expenses
27

 
26

 
28

Total
$
145

 
$
157

 
$
126


The following are descriptions of the contents and drivers of the financial results of the Mortgage Production segment:
 
Origination and other loan fees consist of fee income earned on all loan originations, including loans that are saleable to investors and fee-based closings in our PLS channel.  Retail closings and fee-based closings are key drivers of Origination and other loan fees, and the fee income earned on those loans consists of application and underwriting fees, fees on canceled loans and amounts earned from financial institutions related to brokered loan fees and origination assistance fees resulting from our private label mortgage outsourcing activities.
 
Gain on loans held for sale, net includes realized and unrealized gains and losses on our mortgage loans, as well as the changes in fair value of our interest rate lock commitments ("IRLCs") and loan-related derivatives.  The fair value of our IRLCs is based upon the estimated fair value of the underlying mortgage loan, adjusted for: (i) the estimated costs to complete and originate the loan and (ii) the estimated percentage of IRLCs that will result in a closed mortgage loan.
 
Gain on loans is primarily driven by the volume of IRLCs expected to close, total loan margins and the mix of wholesale/correspondent closing volume.  For certain retail closings from our private label clients and wholesale/correspondent closings, the cost to acquire the loan reduces the gain from selling the loan into the secondary market.  Change in fair value of Scratch and Dent and certain non-conforming mortgage loans is primarily driven by additions, sales and changes in value of Scratch and Dent loans, which represent loans with origination flaws or performance issues.  Economic hedge results represent the change in value of mortgage loans, IRLCs and related derivatives, including the impact of changes in actual pullthrough as compared to our initial assumptions.
 
Salaries and related expenses consist of salaries, payroll taxes, benefits and incentives paid to employees in our mortgage production operations.  These expenses are primarily driven by the average number of permanent employees.
 
Commissions for employees involved in the loan origination process are primarily driven by the volume of retail closings.  Closings from our real estate channel have higher commission rates than private label closings.

38

 
Loan origination expenses represent variable costs directly related to the volume of loan originations and consist of appraisal, underwriting and other direct loan origination expenses.  These expenses are primarily driven by the volume of applications.
 
Exit and disposal costs consist of costs related to our announced exit of the PLS channel. These costs include employee severance and retention costs, facility-related exit costs, contract termination fees and asset impairment of technology-related and other long-lived assets.

Other operating expenses consist of corporate overhead allocation and other production related expenses.


39

Mortgage Servicing Segment
 
 
Segment Overview
 
Our Mortgage Servicing segment services mortgage loans originated by us where we retain the Mortgage servicing rights ("MSRs"), or act as subservicer for certain clients that own the underlying servicing rights.  The segment principally generates revenue through fees earned from our MSRs or from our subservicing agreements as described below.  As previously discussed, we expect the Mortgage Servicing segment to change significantly as we execute the actions arising from our strategic review, and we position our mortgage servicing activities to support only the subservicing business.
 
Owned Servicing

Our owned servicing consists of revenues earned from our MSRs, which are capitalized on our Balance sheet. MSRs are the rights to receive a portion of the interest coupon and fees collected from the mortgagors for performing specified mortgage servicing activities, which consist of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses such as taxes and insurance, performing loss mitigation activities on behalf of investors and otherwise administering our mortgage loan servicing portfolio. 

Owned servicing experiences high degrees of earnings volatility due to significant exposure to changes in interest rates, and the related impact on our modeled MSR cash flows, high delinquent GNMA servicing costs and other market risks. These factors can be impacted by, among other factors, conditions in the housing market, general economic factors, including higher unemployment rates, and policies of the Federal Reserve.  The results of servicing our owned portfolio have been negatively impacted by the persistent low interest rate environment and increasing costs to comply with regulations, while the compensation for servicers has remained constant. Our owned portfolio also requires significant capital and liquidity to fund servicing advance obligations, as we are required to fund scheduled principal, interest, tax and insurance payments when the mortgage loan borrower has failed to make the scheduled payments and to cover foreclosure costs and various other items that are required to preserve the assets being serviced. 

We have used a combination of derivative instruments to protect against potential adverse changes in the fair value of our MSRs resulting from a decline in interest rates. The size and composition of derivative instruments used depends on our evaluation of the current market environment and the interest rate risk inherent in our capitalized servicing portfolio and requires assumptions with regards to future replenishment rates, loan margins, the value of additions to MSRs and loan origination costs. 

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”. As of December 31, 2016, 98% of our MSRs 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, if such transactions are approved and executed.

Subservicing

Subservicing consists of revenues earned from performing servicing functions under subservicing agreements, whereby we service loans on behalf of the owner of the MSRs. Although the underlying business activities are substantially similar, the key economic distinctions between owned MSRs and subservicing are outlined below as well as some of the risks specific to our subservicing business:

•
Revenue/Expense Recognition. Contractual subservicing fees are generally based on a stated amount per loan and vary depending on the delinquency status of each loan and the terms of each subservicing agreement. We receive a smaller fee per loan from our subservicing clients as compared to the servicing fee received for our capitalized servicing rights. However, we have less risks of elevated costs as a subservicer, as 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 servicing rights.

•
Interest Rate Risk Management. Our subservicing business has less exposure to interest rate volatility because we do not capitalize an MSR on our balance sheet, which eliminates earnings volatility from market-related changes in fair value, costs from executing MSR derivatives, as well as MSR amortization, curtailment interest expense and payoff-related costs. However, as a subservicer, we continue to be exposed to the risk of portfolio runoff driven by a low interest rate environment. We need to continually source new subservicing relationships or portfolio additions in order to maintain our portfolio size.

40


•
Capital Requirements. Our subservicing business eliminates the need for capital to fund MSRs and execute related derivatives and limits our need to fund servicing advances. Our subservicing agreements generally contain provisions that require the subservicing client to pre-fund advances on the subserviced loans or to reimburse us for those advances on a periodic basis. 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.

•
Client Retention & Agreement Termination Rights. The terms of a substantial portion of our 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. This risk is further magnified by our client concentration exposure. As of December 31, 2016 , our subservicing portfolio (by units) related to the following client relationships: 42% from Pingora Loan Servicing, LLC, 22% from HSBC and 14% from Morgan Stanley.

In the fourth quarter of 2016, our subservicing portfolio declined by approximately 211,000 units, or 44% , driven by: (i) Merrill Lynch’s insourcing of their servicing activities and (ii) HSBC’s sale of a population of MSRs relating to loans that we subserviced. There can be no assurances that our subservicing agreements or relationships will not be subject to further change.

If 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. 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.

For more information, see "—Risk Management—Counterparty and Concentration Risk" and “Part I—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 Pingora Loan Servicing, LLC, HSBC, and Morgan Stanley. 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. "


41


Segment Metrics:
 
December 31,
 
2016
 
2015
 
2014
 
($ In millions)
Total Loan Servicing Portfolio:
 
 
 
 
 
Unpaid Principal Balance
$
174,642

 
$
226,259

 
$
227,272

 
 
 
 
 
 
Number of loans in owned portfolio (units)
567,647

 
642,379

 
712,643

Number of subserviced loans (units)
264,718

 
450,295

 
446,381

Total number of loans serviced (units)
832,365

 
1,092,674

 
1,159,024

 
 
 
 
 
 
Capitalized Servicing Portfolio:
 
 
 
 
 
Unpaid Principal Balance
$
84,657

 
$
98,990

 
$
112,686

Capitalized servicing rate
0.82
%
 
0.89
%
 
0.89
%
Capitalized servicing multiple
2.9

 
3.1

 
3.1

Weighted-average servicing fee (in basis points)
28

 
29

 
29

 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Total Loan Servicing Portfolio:
 
 
 
 
 
Average Portfolio UPB
$
220,458

 
$
225,787

 
$
226,438

 
 
 
 
 
 
Capitalized Servicing Portfolio:
 
 
 
 
 
Average Portfolio UPB
92,303

 
105,343

 
123,090

Payoffs and principal curtailments
19,211

 
19,092

 
18,463

Sales
996

 
3,445

 
6,929

 

42

Segment Results:
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Net loan servicing income:
 

 
 

 
 

Loan servicing income
$
353

 
$
394

 
$
448

Change in fair value of mortgage servicing rights
(238
)
 
(187
)
 
(320
)
Net derivative gain related to mortgage servicing rights
10

 
29

 
82

Net loan servicing income
125

 
236

 
210

Net interest expense:


 
 

 
 

Interest income
11

 
4

 
4

Secured interest expense
(11
)
 
(11
)
 
(9
)
Unsecured interest expense
(42
)
 
(34
)
 
(44
)
Net interest expense
(42
)
 
(41
)
 
(49
)
Other income
—

 
3

 
2

Net revenues
83

 
198

 
163

Salaries and related expenses
68

 
56

 
60

Foreclosure and repossession expenses
35

 
51

 
56

Professional and third-party service fees
35

 
28

 
31

Technology equipment and software expenses
17

 
16

 
16

Occupancy and other office expenses
17

 
16

 
17

Depreciation and amortization
3

 
2

 
2

Other operating expenses
131

 
160

 
84

Total expenses
306

 
329

 
266

Segment loss
$
(223
)
 
$
(131
)
 
$
(103
)

2016 Compared With 2015 :  Mortgage Servicing segment loss was $223 million during 2016 compared to a loss of $131 million in 2015 .  Net revenues decreased to $ 83 million , down $115 million or 58% , compared with 2015 primarily driven by a decline in Loan servicing income and unfavorable results from our MSR market-related fair value adjustments.  Total expenses decreased to $306 million , down $23 million or 7% , compared to the prior year primarily driven by lower Foreclosure and repossession expenses, lower provisions for Legal and regulatory reserves and a decrease in Other expenses. These decreases were partially offset by an increase in Repurchase and foreclosure-related charges, higher Corporate overhead allocation, an increase in Salaries and related expenses and an increase in Professional and third-party service fees.
 
Net revenues.   Servicing fees from our capitalized portfolio decreased by $38 million , or 13% , compared to the prior year driven by a 12% decrease in the average capitalized loan servicing portfolio.  Subservicing fees decreased by $3 million , or 4% , compared to the prior year, primarily driven by declines in the average number of loans in our subserviced portfolio from the previously discussed insourcing and MSR sale actions of Merrill Lynch and HSBC, respectively, during the fourth quarter of 2016. Late fees and other ancillary servicing revenue increased by $1 million , or 3% , due to deboarding fees received from these client terminations that was partially offset by a loss on the sale of delinquent FNMA servicing in 2016 and higher repurchase activity related to Ginnie Mae buyout eligible loans as compared to the prior year.

MSR valuation changes from actual prepayments of the underlying mortgage loans decreased by $17 million , or 13% , due to a 14 basis point decrease in the value of actual prepayments compared to the prior year. MSR changes in value from actual receipts of recurring cash flows decreased by $14 million , or 35% , due to a lower average capitalized servicing rate in 2016 compared to the prior year, as well as a favorable impact from the MSR value changes of Ginnie Mae buyout eligible loan transactions.

Market-related fair value adjustments decreased the value of our MSRs by $100 million during 2016 which was partially offset by net gains on MSR derivatives of $10 million from changes in interest rates.  The $100 million negative Market-related fair value adjustments during 2016 included: (i) $61 million of negative market adjustments related to changes in interest rates, a flattening of the yield curve and a calibration of our valuation model considering the pricing associated with the MSR agreements executed in the fourth quarter of 2016 and (ii) $39 million of negative model adjustments primarily related to $46 million to reflect increased servicing costs and foreclosure losses that was partially offset by $5 million in favorable adjustments for updates to our prepayment model to align modeled and actual prepayments.


43

During 2015 , Market-related fair value adjustments decreased the value of our MSRs by $18 million and net gains on MSR derivatives were $29 million from changes in interest rates.  The $18 million negative Market-related fair value adjustments during 2015 include a $30 million decrease primarily from model updates to reflect increased servicing costs and foreclosure losses that was partially offset by an $8 million increase from an 18 basis point increase in the modeled primary mortgage rate and $4 million in favorable adjustments associated with updates to our prepayment model to align modeled and actual prepayments.

Total expenses.   Salaries and related expenses increased to $68 million , up $12 million or 21% , compared to the prior year and included $2 million of severance costs incurred during 2016. The remaining increase was attributable to $5 million associated with an increased allocation of mortgage shared service employees to the Mortgage Servicing segment, $3 million from higher incentive compensation, and $2 million from higher contract labor to assist with short-term customer service projects.

Foreclosure and repossession expense decreased by $16 million or 31% compared to the prior year primarily driven by lower foreclosure activity and improved portfolio delinquencies that were partially the result of sales of MSRs with respect to delinquent government loans.

Professional and third-party service fees increased to $35 million , up $7 million or 25% , compared to the prior year primarily driven by expenses incurred during 2016 related to compliance activities.

Repurchase and foreclosure-related charges increased to $19 million , up $13 million which was primarily driven by increased expenses that will not be reimbursed pursuant to mortgage insurance programs and exposure for legacy repurchase claims from certain private investors.
 
We continue to be subject to various regulatory investigations, examinations and inquiries related to our legacy mortgage servicing practices, and in both 2015 and 2016, we received further clarity about our expected cost of settling these matters. As a result, we recorded $38 million of provisions for Legal and regulatory reserves during 2016 , as compared to $78 million in the prior year. Refer to Note 15, 'Commitments and Contingencies' in the accompanying Notes to Consolidated Financial Statements for further information.

Other expenses decreased by $9 million compared to prior year primarily due to a $9 million provision incurred during 2015 for certain non-recoverable fees associated with foreclosure activities in which the reimbursement of fees to borrowers was completed in 2016.

Corporate overhead allocation increased by $7 million compared to the prior year primarily due to an increased allocation of expenses to the Mortgage Servicing segment in 2016. See “—Other” for a more detailed discussion of the expenses included in the Corporate overhead allocation.
 
2015 Compared With 2014 :  Mortgage Servicing segment loss was $131 million during 2015 compared to a loss of $103 million in 2014.  Net revenues increased to $198 million, up $35 million, or 21%, compared with 2014 primarily driven by favorable comparisons in our MSR market-related fair value adjustments that were partially offset by a decline in loan servicing income and lower net gains on MSR derivatives.  Total expenses increased to $329 million, up $63 million, or 24%, compared to the prior year primarily driven by the increase in Other operating expenses, including higher provisions for Legal and regulatory reserves, an increase in Corporate overhead allocation, and an increase in Repurchase and foreclosure-related charges. These increases were partially offset by lower Salaries and related expenses and Foreclosure and repossession expenses.
 
Net revenues.   Servicing fees from our capitalized portfolio decreased by $53 million, or 15%, compared to the prior year driven by a 14% decrease in the average capitalized loan servicing portfolio.  Subservicing fees increased by $11 million, or 19%, compared to the prior year, primarily driven by recurring fees that we began charging to certain clients in the fourth quarter of 2014 related to compliance with the CFPB's single point of contact servicing rules, $5 million of operating benefits from renegotiating our subservicing agreements and a 9% increase in the average number of loans in our subserviced portfolio. This was partially offset by a $2 million decrease related to delinquency improvements in the subservicing portfolio which reduces our fee per loan. Late fees and other ancillary revenue were $35 million, down $12 million, or 26% compared to the prior year which includes a $4 million loss on the sale of delinquent FNMA servicing in 2015 and an $8 million decline in other ancillary revenue from the total servicing portfolio primarily driven by improving delinquencies and lower fees from HAMP modifications which roll off during the three year earning period. 

Relatively lower interest rates in 2015 led to an increase in refinancing closings which resulted in an 8% increase in payoffs in our capitalized loan servicing portfolio compared to the prior year.  The higher payoff activity compared with 2014, and a

44

7 basis points increase in the average MSR value of prepayments drove a $19 million, or 17%, unfavorable MSR valuation change from actual prepayments of the underlying mortgage loans.
 
Market-related fair value adjustments decreased the value of our MSRs by $18 million during 2015 and net gains on MSR derivatives were $29 million from changes in interest rates.  The $18 million negative Market-related fair value adjustments during 2015 include a $30 million decrease primarily from model updates to reflect increased servicing costs and foreclosure losses that was partially offset by an $8 million increase from an 18 basis point increase in the modeled primary mortgage rate and $4 million in favorable adjustments associated with updates to our prepayment model to align modeled and actual prepayments. During 2014, Market-related fair value adjustments decreased the value of our MSRs by $165 million and net gains on MSR derivatives were $82 million from changes in interest rates. The $165 million negative Market-related fair value adjustments were driven by a 71 basis point decline in the mortgage rate used to value our MSR asset and a flattening of the yield curve that was partially offset by lower sensitivity to higher actual prepayments on our capitalized servicing portfolio and a $44 million increase in the value of our MSRs from adjustments in modeled prepayment speeds. 

Allocated unsecured interest expense decreased to $34 million, down $10 million, or 23%, compared to the prior year which reflects the impact from our capital strategy actions to reduce our corporate unsecured debt levels and a decline in allocated costs driven by a lower average balance of MSRs.

Total expenses.   Salaries and related expenses decreased by $4 million compared to the prior year which was primarily driven by a decrease in the average number of employees and a decrease in management incentives from 2014.

Professional and third-party service fees decreased to $28 million, down $3 million, or 10%, compared to the prior year primarily driven by nonrecurring expenses incurred during 2014 related to compliance activities.

Foreclosure and repossession expense decreased by $5 million compared to the prior year primarily driven by delinquent servicing sales of government loans, resulting in lower delinquent servicing costs from the reduced population.

Repurchase and foreclosure-related charges were $6 million for 2015 which was primarily driven by expenses not reimbursed pursuant to government mortgage insurance programs. We recorded a $2 million benefit during 2014 for Repurchase and foreclosure-related charges which was primarily attributable to a decline in the population of outstanding repurchase requests from private investors and the impact of lower repurchase activity trends on projected future repurchase requests that were partially offset by a $5 million provision related to the resolution agreement with Fannie Mae to substantially resolve all outstanding and certain future repurchase and indemnification obligations for loans delivered prior to July 1, 2012.
 
We have continued to be subject to various regulatory investigations, examinations and inquiries related to our legacy mortgage servicing practices. As a result, we recorded $78 million of provisions for Legal and regulatory reserves during 2015, compared to $27 million in the prior year.

Other expenses increased by $6 million compared to prior year primarily due to a $9 million provision for certain non-recoverable fees associated with foreclosure activities, that was partially offset by a $3 million decrease in quality related costs from compensatory fees associated with foreclosure proceedings.

Corporate overhead allocation increased by $11 million compared to the prior year due to costs associated with the modernization and security of our information technology systems. See “—Other” for a discussion of the Corporate overhead allocation.
 

45

Selected Income Statement Data:  
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Loan servicing income:
 

 
 

 
 

Servicing fees from capitalized portfolio
$
266

 
$
304

 
$
357

Subservicing fees
67

 
70

 
59

Late fees and other ancillary servicing revenue
36

 
35

 
47

Curtailment interest paid to investors
(16
)
 
(15
)
 
(15
)
Total
$
353

 
$
394

 
$
448

 
 
 
 
 
 
Changes in fair value of mortgage servicing rights:
 
 
 

 
 

Actual prepayments of the underlying mortgage loans
$
(112
)
 
$
(129
)
 
$
(110
)
Actual receipts of recurring cash flows
(26
)
 
(40
)
 
(45
)
Market-related fair value adjustments
(100
)
 
(18
)
 
(165
)
Total
$
(238
)
 
$
(187
)
 
$
(320
)
 
 
 
 
 
 
Other operating expenses:
 
 
 

 
 

Corporate overhead allocation
$
51

 
$
44

 
$
33

Legal and regulatory reserves
38

 
78

 
27

Repurchase and foreclosure-related charges
19

 
6

 
(2
)
Other expenses
23

 
32

 
26

Total
$
131

 
$
160

 
$
84


The following are descriptions of the contents and drivers of the financial results of the Mortgage Servicing segment:
 
Loan servicing income is primarily driven by the average capitalized loan servicing portfolio, the number of loans in our subservicing portfolio and the average servicing and subservicing fee.  Servicing fees from the capitalized portfolio is driven by recurring servicing fees that are recognized upon receipt of the coupon payment from the borrower and recorded net of guarantee fees due to the investor.  For loans that are subserviced, we receive a stated amount per loan which is less than our average servicing fee related to the capitalized portfolio.  Curtailment interest paid to investors represents uncollected interest from the borrower that is required to be passed onto investors and is primarily driven by the number of loan payoffs.  In addition to late fees received from borrowers, Late fees and other ancillary servicing revenue includes tax service fees, the net gain or loss from the sale of MSRs and other servicing revenue, including loss mitigation revenue.

Changes in fair value of mortgage servicing rights include actual prepayments of the underlying mortgage loans, actual receipts of recurring cash flows and market-related fair value adjustments.  The fair value of our MSRs is estimated based upon projections of expected future cash flows considering prepayment estimates, our historical prepayment rates, portfolio characteristics, interest rates based on interest rate yield curves, implied volatility, servicing costs and other economic factors.  Market-related fair value adjustments represent the change in fair value of MSRs due to changes in market inputs and assumptions used in the valuation model. Actual prepayments are driven by two factors: (i) the number of loans that prepaid during the period and (ii) the current value of the mortgage servicing right asset at the time of prepayment. 
 
Foreclosure and repossession expenses are associated with servicing loans in foreclosure and real estate owned and are primarily driven by the size, composition and delinquency status of our loan servicing portfolio. These expenses also include unreimbursed servicing and interest costs of government loans.
 
Other operating expenses consist of Repurchase and foreclosure-related charges, Corporate overhead allocation, Legal and regulatory reserves and other servicing related expenses.  Repurchase and foreclosure-related charges are primarily driven by the actual and projected volumes of repurchase and indemnification requests, our success rate in appealing repurchase requests, expected loss severities and expenses that may not be reimbursed pursuant to government mortgage insurance programs or in the event we do not file insurance claims.  Expected loss severities are impacted by various economic factors including delinquency rates and home price values while our success rate in appealing repurchase requests can fluctuate based on the validity and composition of repurchase demands and the underlying quality of the loan files. Legal and regulatory reserves are estimated losses from litigation and various regulatory investigations, examinations and inquiries related to our legacy mortgage servicing practices.

46

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. In January 2016, we evaluated the overhead allocation rate to each segment based on current revenues, expenses, headcount and usage, which resulted in an increase in the rate of allocation to our Mortgage Servicing segment with a corresponding decrease to our Mortgage Production segment for 2016 as compared to 2015 and 2014.
 
Results:  
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Net revenues
$
—

 
$
6

 
$
11

Salaries and related expenses
61

 
54

 
67

Professional and third-party service fees
99

 
109

 
62

Technology equipment and software expenses
21

 
18

 
18

Occupancy and other office expenses
3

 
3

 
3

Depreciation and amortization
5

 
5

 
9

Exit and disposal costs
8

 
—

 
—

Other operating expenses:
 
 
 
 
 
Loss on early debt retirement
—

 
30

 
24

Other
9

 
11

 
5

Total expenses before allocation
206

 
230

 
188

Corporate overhead allocation:
 
 
 
 
 
Mortgage Production segment
(118
)

(131
)
 
(98
)
Mortgage Servicing segment
(51
)

(44
)
 
(33
)
Total expenses
37

 
55

 
57

 
 
 
 
 
 
Net loss before income taxes
$
(37
)
 
$
(49
)
 
$
(46
)
 
2016 Compared With 2015 :  Net loss before income taxes was $37 million , compared to a loss of $49 million in 2015 .  The net loss of the Other segment primarily represents losses that are not allocated back to our reportable segments. For 2016, the net loss primarily represents costs associated with our strategic review and Exit and disposal costs related to our exit of the PLS business, while for 2015, the net loss primarily represents losses related to the early retirement of unsecured debt and costs associated with re-engineering our business. Net revenues for 2015 were $6 million and related to the sale of the Fleet business through income from a transition services agreement that was substantially complete by the end of second quarter of 2015. Total expenses before allocation decreased to $206 million , down $24 million , or 10% , primarily resulting from the absence of a loss on early debt retirement in 2016. The decrease in expenses was also driven from lower Professional and third-party service fees, that was partially offset with higher Salaries and related expenses.

Total expenses .   Salaries and related expenses increased by $7 million in 2016 , or 13% , compared with prior year primarily from increased incentive compensation of $5 million. The remaining $2 million of expenses related to an increase in the use of contract labor for information technology resources and modest employee salary increases during 2016.

Professional and third-party service fees declined $10 million in 2016, a decrease of 9% compared to prior year. This decrease was primarily from the higher costs in 2015 associated with the modernization and security of our information technology systems including costs to separate our information technology systems from the Fleet business, implementing new compliance requirements in our origination business, providing services under the transition services agreement and other investments from our re-engineering efforts. This was partially offset by $32 million of strategic review costs in 2016.


47

Exit and disposal costs were $8 million for the year ended December 31, 2016 , as a result of our announced exit of the PLS channel within our Mortgage Production segment. These costs included $4 million of severance and retention expenses for impacted Other shared services employees, $3 million in contract termination costs for information technology support used in the PLS channel, and $1 million in impairment of technology-related assets.

Other operating expenses decreased by $32 million , or 78% , compared to the prior year primarily due to the 2015 Loss on early debt retirement for the exchange of the Convertible notes due in 2017.

2015 Compared With 2014 :  Net loss before income taxes was $49 million , compared to a loss of $46 million in 2014 .  The net loss of the Other segment primarily represents losses related to the early retirement of unsecured debt and includes other expenses that are not allocated back to our reportable segments, such as costs associated with re-engineering our business. For 2014, Other also includes certain general corporate overhead expenses that were previously allocated to the Fleet business.  Net revenues were $6 million for 2015 and $11 million for 2014 which were driven by income from a transition services agreement related to the sale of the Fleet business. Total expenses before allocation increased to $230 million , up $42 million, or 22%, compared to the prior year primarily driven by an increase in Professional and third-party service fees and an increase in Other operating expenses from higher debt retirement losses, that were partially offset by lower Salaries and related expenses. 
Total expenses .   Salaries and related expenses decreased by $13 million in 2015 , or 19%, compared to the prior year primarily due to a $10 million decrease in severance costs associated with the re-engineering of our operations in 2014, a decrease in management incentive compensation of $10 million, and a $3 million decrease in Salaries and related expenses primarily resulting from the decreased employee headcount from our re-engineering efforts. This was partially offset by a $10 million increase in Salaries, benefits and incentives from the transfer of certain employees from our segments into our corporate shared service platform beginning in January 2015 related to our efforts to re-engineer our support infrastructure for a stand-alone mortgage business. 
Professional and third-party service fees increased by $47 million in 2015 , or 76%, compared with 2014, primarily due to a $34 million increase in Professional and third-party service fees compared to the prior year for costs associated with the modernization and security of our information technology systems, implementing new compliance requirements in our origination business, providing services under the transition services agreement and other investments from our re-engineering efforts. The remaining $13 million of costs were not allocated to our reportable segments primarily related to actions to separate our information technology systems from the Fleet business and costs associated with evaluating strategic growth opportunities.
Other operating expenses increased by $12 million, or 41%, compared to the prior year primarily due to $6 million of higher debt retirement losses related to capital strategy actions. During the year ended December 31, 2015, we recorded a $30 million loss related to the exchange of the Convertible notes due in 2017, compared to a $24 million loss during the prior year associated with the early repayment of the Senior Notes due in 2016. In addition, there was a $5 million increase in Other operating expenses related to the transfer of costs from our segments into our corporate shared services platform.
The following are descriptions of the contents and drivers of our financial results: 
Net revenues for 2014 and 2015 include income associated with a transition services agreement in which we provided to Element Financial Corporation certain transition services after the closing of the sale of the Fleet business related to, among others, information technology, human resources and financial services.  A majority of the costs incurred by us to provide such transition services are included in Professional and third-party service fees. The transition services agreement was complete in 2015.
Salaries and related expenses represent costs associated with operating corporate functions and our centralized management platform and consist of salaries, payroll taxes, benefits and incentives paid to shared service support employees.  These expenses are primarily driven by the average number of permanent employees.
Exit and disposal costs consist of costs related to our announced exit of the PLS channel. These costs include employee severance and retention costs of impacted shared service support employees, contract termination costs of information technology support and asset impairment of technology-related assets used in the PLS channel.
Other operating expenses includes losses associated with the early retirement or conversion of debt, and other costs associated with our corporate shared services platform.
Net loss before income taxes includes expenses that are not allocated to our reportable segments that include losses related to the early retirement of debt, costs associated with our strategic review and re-engineering our business, and Exit and disposal costs. For 2014, this includes certain general corporate overhead expenses that were previously allocated to the Fleet business. 

48

Discontinued Operations
 
During 2014, we entered into a Stock Purchase Agreement to sell all of the issued and outstanding equity interests of our Fleet business, and the transaction closed effective on July 1, 2014.  As a result of the sale of the Fleet business, Fleet Management Services is no longer a reportable segment, and the results of the Fleet business and transaction-related amounts are included within Income from discontinued operations, net of tax in the Consolidated Statements of Operations and have been excluded from continuing operations and segment results for all periods presented.

The results of discontinued operations are summarized below:  
 
Year Ended December 31, 2014
 
(in millions, except per share data)
Net revenues
$
820

Total expenses
774

Income before income taxes (1) 
46

Income tax expense (1) 
15

Gain from sale of discontinued operations, net of tax
241

Income from discontinued operations, net of tax
$
272

 
 
Earnings per share from discontinued operations:
 

Basic and Diluted
$
4.94

_______________
(1)  
Represents the results of the Fleet business.
 
During the year ended December 31, 2014, we recognized a $241 million net gain on the disposition of the Fleet business which includes a gain of $22 million resulting from the reclassification of currency transaction adjustments from Accumulated other comprehensive income.  The income tax expense related to the Gain on sale of discontinued operations was $227 million for the year ended December 31, 2014, which includes $52 million of expense associated with the earnings of our Canadian subsidiaries that were previously considered to be indefinitely invested.  Upon the classification of the Fleet business as held for sale during the second quarter of 2014, the accumulated earnings were no longer deemed to be indefinitely invested and we recognized the tax expense related to the cumulative earnings of such Canadian subsidiaries.


49

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. Our risk management framework and governance structure is intended to provide oversight and ongoing management of the risks inherent in our business activities and create a culture of risk awareness.  Our Chief Executive Officer and Chief Risk and Compliance Officer are responsible for the design, implementation and maintenance of our enterprise risk management program.
The Finance, Compliance & Risk Management Committee of the Board of Directors provides oversight with respect to our risk management function and the policies, procedures and practices used in identifying and managing our material risks.
 
Our Compliance and Risk Management organization oversees governance processes and monitoring of these risks including the establishment of risk strategy and documentation of risk policies and controls.  The Compliance and Risk Management organization operates independently of the business, but works in partnership to provide oversight of enterprise risk management and controls. This includes establishing enterprise-level risk management policies, appropriate governance activities and creating risk transparency through risk reporting.
 
Risks unique to our business are governed through various committees including, but not limited to: (i) interest rate risk, including development of hedge strategy and policies, monitoring hedge positions and counterparty risk; (ii) quality control, including audits related to the processing, underwriting and closing of loans, findings of any fraud-related reviews and reviews of post-closing functions, such as FHA insurance and monitoring of overall portfolio delinquency trends and recourse activity; (iii) credit risk, including establishing credit policy, product development and changes to underwriting guidelines; and (iv) operational risk, including the development of policies and governance activities, monitoring risks related to cyber security and business continuity plans and ensuring compliance with applicable laws and regulations.
 
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.
 
We are subject to variability in our results of operations due to fluctuations in interest rates.  In a declining interest rate environment, we would expect the results of our origination business within the Mortgage Production segment to be positively impacted by higher loan origination volumes and improved loan margins.  However, in a rising interest rate environment, we would expect a negative impact to the results of our origination business. With respect to a declining interest rate environment, we expect the results of our servicing business to decline due to higher actual and projected loan prepayments related to our capitalized loan servicing portfolio; while in a rising interest rate environment, we expect a positive effect.
 
Refer to “—Item 7A. 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. 

Mortgage Loans and Interest Rate Lock Commitments
 
Interest rate lock commitments represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding.  The fair values of our Mortgage loans held for sale, which are held in inventory awaiting sale into the secondary market, and our Interest rate lock commitments, are subject to changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market.  As a result, we are exposed to interest rate risk and related price risk during the period from the date of the lock commitment through (i) the lock commitment cancellation or expiration date; or (ii) the date of sale into the secondary mortgage market.  Loan commitments generally range between 30 and 90 days, and we typically sell mortgage loans within 30 days of origination.
 
A combination of options and forward delivery commitments on mortgage-backed securities or whole loans are used to hedge our commitments to fund mortgages and our loans held for sale.  These forward delivery commitments fix the forward sales price that will be realized in the secondary market and thereby reduce the interest rate and price risk to us.  Our expectation of the amount of our interest rate lock commitments that will ultimately close is a key factor in determining the notional amount of derivatives used in hedging the position.


50

For more information, see “Part I—Item 1A. Risk Factors— Risks Related to Our Business — Our hedging strategies related to our mortgage pipeline may not be successful in mitigating our risks associated with changes in interest rates. Further, our hedging counterparties may be unwilling to trade with us on substantially similar terms to our historical trades pending the completion of our strategic actions. " in this Form 10-K.
 
Mortgage Servicing Rights
 
Mortgage servicing rights (“MSRs”) are inherently subject to substantial interest rate risk as the mortgage notes underlying the MSRs permit the borrowers to prepay the loans.  Therefore, the value of MSRs generally tends to diminish in periods of declining interest rates (as prepayments increase) and increase in periods of rising interest rates (as prepayments decrease). Historically, we have used derivatives to hedge against changes in fair value of our MSRs. However, as a result of our recent sale agreements to sell substantially all of our MSRs, we have terminated substantially all of our MSR derivatives. Accordingly, we have risk related to the changes in the fair value of our MSRs until the transactions settle.

For more information, 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 this Form 10-K.
 
Consumer Credit Risk
 
We are not subject to the majority of the credit-related risks inherent in maintaining a mortgage loan portfolio because loans are not held for investment purposes.  We sell nearly all of the mortgage loans that we originate in the secondary mortgage market on a non-recourse basis within 30 days of origination.  Conforming loan sales are primarily in the form of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae (collectively, the "Agencies").
 
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.  The representation and warranties made by us are set forth in our loan sale agreements and relate to, among other things, the ownership of the loan, the validity of the lien securing the loan, the underwriting standards required by the investor, the loan’s compliance with applicable local, state and federal laws and, for loans with a loan-to-value ratios greater than 80%, the existence of primary mortgage insurance.  Investors routinely request loan files to review for potential breaches of representation and warranties. In the event a breach of these representation and warranties is identified by an investor, the investor will issue a repurchase demand, and we may be required to repurchase the mortgage loan or indemnify the investor against loss.  We subject the population of repurchase and indemnification requests to a comprehensive review and appeals process to establish the validity of the claim and determine our corresponding obligation.

Established Reserves

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.  This liability 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.  As loans are repurchased, we reduce our estimated losses related to repurchase and indemnification obligations and record reserves for on-balance sheet loans in foreclosure and real estate owned which will likely not be recoverable from guarantors, insurers or investors.
 



51

The table below presents our repurchase and foreclosure-related reserves activity and the number of repurchase and indemnification requests received:
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
($ In millions)
Balance, beginning of period
$
89

 
$
93

 
$
142

Realized losses
(42
)
 
(19
)
 
(65
)
Increase in reserves due to:
 
 
 

 
 
Change in assumptions
19

 
6

 
6

New loan sales
7

 
9

 
10

Balance, end of period
$
73

 
$
89

 
$
93

 
 
 
 
 
 
Repurchase and indemnification requests received (number of loans)
384

 
460

 
936

 
In December 2016, we entered into resolution agreements with 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. We paid a total of $18 million to the Agencies during the fourth quarter of 2016 to settle this exposure, and the aggregate settlement amount did not significantly exceed our recorded reserves. As of December 31, 2016, our Loan repurchase and indemnification liability primarily consisted of (i) losses for private loans where a repurchase or indemnification obligation could exist from breaches of representation and warranties, (ii) losses for specific non-performing loans where we believe we will be required to indemnify the investor and (iii) losses for government loans that may not be reimbursed pursuant to mortgage insurance programs.  Our liability from loan repurchases and indemnification requests does not reflect losses from litigation or governmental examinations, investigations or inquiries.
   
Given the inherent uncertainties involved in estimating losses associated with future repurchase and indemnification requests and government mortgage insurance programs, there is a reasonable possibility that future losses may be in excess of the recorded liability.  As of December 31, 2016 , the estimated amount of reasonably possible losses in excess of the recorded liability was $20 million . The estimate is based on our expectation of future defaults and the historical defect rate for government insured loans and is based upon significant judgments and assumptions which can be influenced by many factors, including: (i) home prices and the levels of home equity; (ii) the quality of our underwriting procedures; (iii) borrower delinquency and default patterns; and (iv) general economic conditions. 

See Note 14, 'Credit Risk' , in the accompanying Notes to Consolidated Financial Statements and “—Critical Accounting Policies and Estimates” for additional information regarding our repurchase and foreclosure-related reserves.

Counterparty and Concentration Risk
We are exposed to risk in the event of non-performance by counterparties to various agreements, derivative contracts, and sales transactions. In general, we manage such risk by evaluating the financial position and creditworthiness of counterparties, monitoring the amount for which we are at risk, requiring collateral, typically cash, in instances in which financing is provided and/or dispersing the risk among multiple counterparties.  We also manage our exposure to risk from derivative counterparties through entering into bilateral collateral agreements and legally enforceable master netting agreements with many counterparties.  As of December 31, 2016 , there were no significant concentrations of credit risk related to our net exposure with any individual counterparty with respect to our derivative transactions.
Production
For the year ended December 31, 2016 , our mortgage loan originations were derived from our relationships with significant counterparties as follows:
•
25% through our PLS relationship with Merrill Lynch;
•
21% through our PLS relationship with Morgan Stanley;
•
20% through the Real Estate channel, from our relationships with Realogy and its affiliates; and
•
10% through our PLS relationship with HSBC.
In November 2016, as an outcome of our strategic review process, we announced our intentions to exit our PLS business, which represented 79% of our total closing volume (based on dollars) for the year ended December 31, 2016 . In February 2017, we entered into an agreement to sell certain assets of PHH Home Loans, which constitutes substantially all of our Real Estate channel

52

and represented 20% of our total closing volume (based on dollars) for the year ended December 31, 2016 . If the asset sale of PHH Home Loans is successfully 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 this Form 10-K.
Servicing
Our Mortgage Servicing segment has exposure to concentration risk associated with the amount of our servicing portfolio for which we must maintain compliance with the requirements of the GSE servicing guides. As of December 31, 2016 , 59% of our servicing portfolio relates to loans governed by these servicing guides.
We utilize several risk mitigation strategies in an effort to minimize losses from delinquencies, foreclosures and real estate owned including: collections, loan modifications, and foreclosure and property disposition. Since the majority of the risk resides with the investor and not with us, these techniques may vary based on individual investor and insurer requirements.
The greatest concentrations of properties securing the mortgage loans in our total servicing portfolio are located in the following states:
 
December 31,
 
2016
 
2015
Major Geographical Concentrations:
 

 
 

California
20.2
%
 
19.2
%
New York
11.4
%
 
15.2
%
Florida
6.3
%
 
6.7
%
New Jersey
5.7
%
 
5.8
%
Other
56.4
%
 
53.1
%
 
The following table summarizes the percentage of loans that are greater than 90 days delinquent, in foreclosure and real estate owned based on the unpaid principal balance for significant geographical concentrations:
 
December 31, 2016
New York
27.9
%
New Jersey
13.1
%
Florida
8.0
%
California
5.7
%

Our Mortgage Servicing segment also has exposure to concentration risk and client retention risk with respect to our subservicing agreements. As of December 31, 2016 , our subservicing portfolio (by units) related to the following client relationships: 42% from Pingora Loan Servicing, LLC, 22% from HSBC and 14% from Morgan Stanley.

A substantial portion of our 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.  Our total subservicing units declined by approximately 211,000 units in the fourth quarter of 2016, or 44% of the total units driven by: (i) Merrill Lynch’s insourcing of their servicing activities and (ii) HSBC’s sale of a population of MSRs relating to loans that we subserviced. There can be no assurances that our subservicing agreements or relationships will not be subject to further change.

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; two of our top three subservicing clients are currently PLS clients, 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.


53

For further discussion of concentration risks related to our subservicing agreements, see “Part I—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 Pingora Loan Servicing, LLC, HSBC, and Morgan Stanley. 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. ” in this Form 10-K.

Liquidity Risk

We are exposed to liquidity risk through our ongoing needs to originate and finance mortgage loans, sell mortgage loans into secondary markets, retain mortgage servicing rights, repay maturing debt, meet our contractual obligations and otherwise fund our operations.  Liquidity is an essential component of our ability to operate and grow our business; therefore, it is crucial that we maintain adequate levels of excess liquidity to fund our businesses during normal economic cycles and events of market stress.  We rely on internal cash flow generation and external financing sources to fund a portion of our operations.  To achieve our liquidity objectives, we consider current cash position, business conditions, expected cash flow generation, upcoming debt maturities, potential refinancing strategies and capital market conditions that dictate the availability of liquidity.

As we execute on our strategic actions, we are currently expecting significant changes to our business profile, liquidity and capital structure and funding requirements, including expected changes in our mortgage origination volumes driven by the sales or exit of certain businesses. As such, our ability to renew our mortgage warehouse facilities may be more limited than our historical experience. For further discussion of our risks related to our warehouse agreements, see “Part I—Item 1A. Risk Factors— Risks Related to Our Business — Our mortgage asset-backed debt arrangements, a significant portion of which are short-term agreements, are an important source of our liquidity.  If any of our funding arrangements are terminated, not renewed or otherwise become unavailable to us, we may be unable to find replacement financing on economically viable terms, if at all. If a substantial portion of such arrangements are terminated, not renewed, and cannot be replaced, it would adversely affect our ability to fund our operations. ” in this Form 10-K.

We periodically evaluate our liquidity sources and uses.  Senior management regularly reviews our current liquidity position and projected liquidity needs including any potential and/or pending events that could impact liquidity positively or negatively.  Additionally, management has established internal processes to monitor the availability under our existing debt arrangements. We address liquidity risk by maintaining committed borrowing capacity under mortgage funding facilities and cash on hand in excess of our expected operating needs and attempting to manage the timing of our market access by extending the tenor of our funding arrangements.  The Finance, Compliance & Risk Management Committee reviews the liquidity and financing plan to assess whether management has appropriately planned and provided for liquidity risks and subsequently recommends the plan for approval by the Board of Directors on an annual basis.
 
Operational Risk

Operational risk is inherent in our business practices and related support functions. Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems, human factors or external events.  Operational risk may occur in any of our business activities and can manifest itself in various ways including, but not limited to, errors resulting from business process failures, material disruption in business activities, system breaches and misuse of sensitive information and failures of outsourced business processes.  These events could result in non-compliance with laws or regulations, regulatory fines and penalties, litigation or other financial losses, including potential losses resulting from lost client relationships.
 
Our business is subject to extensive regulation by federal, state and local government authorities, which require us to operate in accordance with various laws, regulations, and judicial and administrative decisions. While we are not a bank, our private label business subjects us to both direct and indirect banking supervision (including examinations by our private label clients' regulators), and each private label client requires a unique compliance model, which creates complexities and potential inefficiencies in our operations. In recent years, there have been a number of developments in laws and regulations that have required, and will likely continue to require, widespread changes to our business. The frequent introduction of new rules, changes to the interpretation or application of existing rules, increased focus of regulators, and near-zero defect performance expectations have increased our operational risk related to compliance with laws and regulations.

54


To monitor and control this risk, we have established policies, procedures and a controls framework that are designed to provide sound and consistent risk management processes and transparent operational risk reporting.  The Compliance and Risk Management organization receives reports and information regarding risk issues directly from our business process owners.  We have established risk management tools that include:

•
Risk and control self-assessments to evaluate key control design and operating effectiveness, and determine if control enhancements are necessary;
•
Operational event reporting and tracking which provides information about operational breakdowns and the root cause, as well as the status of efforts to remediate;
•
Third party risk oversight which provides a framework to assess and monitor the level of risk and complexity of third party relationships; and
•
An independent assessment by Internal Audit of the design and effectiveness of our key controls, regulatory compliance and reporting.

Our operational risk includes managing risks relating to information systems and information security.  As a service provider, we actively utilize technology and information systems to operate our business and support business development.  We also must safeguard the confidential personal information of our customers, as well as the confidential personal information of the employees and customers of our clients.  We consider industry best practices to manage our technology risk, and we continually develop and enhance the controls, processes and systems to protect our information systems and data from unauthorized access.

See “Part I—Item 1A. Risk Factors— Other Risks — A failure in or breach of our technology infrastructure or information protection programs, or those of our outsource providers, could result in the inadvertent disclosure of the confidential personal information of our customers, as well as the confidential personal information of the customers of our clients.  Any such failure or breach, including as a result of cyber-attacks against us or our outsource partners, could have a material and adverse effect on our business, reputation, results of operations, financial position or cash flows. " for more information.


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.

We manage our liquidity and capital structure to achieve our strategic objectives, to fund business operations and to meet contractual obligations, including maturities of our indebtedness. In developing our liquidity plan, we consider how our needs may be impacted by various factors, including operating requirements during the period, risks and contingencies, upcoming debt maturities and working capital needs. We also assess market conditions and capacity for debt issuance in various markets that may provide funding alternatives for our business needs.  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.

Our total unrestricted cash position as of December 31, 2016 is $906 million , which includes $67 million of cash in variable interest entities.  We have identified expected uses of our cash over the next 18 months which, in addition to any cash used in connection with any required offer to repurchase our senior unsecured notes following the closing of our MSR sale to New Residential or our PHH Home Loans joint venture asset sales, include the following estimated outflows: 
•
$220 million related to the exit of the PLS business, including expected operating losses and costs to complete the exit;
•
$40 million for costs associated with re-engineering and transitioning our business; and
•
$60 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 $114 million related to our legal and regulatory reserves, and $140 million related to other contingencies for mortgage loan repurchases, reasonably possible losses for legal and regulatory matters in excess of reserves, MSR sale agreement indemnifications, and other contingencies.
  

55

We intend to transition to a capital-light business model comprised of subservicing and portfolio retention services. Once we have the appropriate level of certainty with respect to the amount and timing of sources and uses of cash from our strategic actions (including any cash generated from the MSR and PHH Home Loans joint venture asset sales, if executed), we intend to take the necessary actions to commence any returns of capital to shareholders. However, the method, timing and amount of the return of capital to our shareholders, if any, will depend on several factors including the execution of, and proceeds realized from, our MSR sales, the value realized from PHH Home Loans joint venture, the successful execution of our PLS exit, the resolution of our outstanding legal and regulatory matters, the successful completion of other restructuring and capital management activities, including debt repayment, and the working capital requirements and contingency needs for the remaining business. There can be no assurances we will complete any return of capital to our shareholders. For more information, see “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 this Form 10-K.

In the first quarter of 2016, we completed a $100 million of open market repurchase program that started in November 2015, resulting in the retirement of 6.350 million shares at an average price per share of $15.75. Our authorization from our Board of Directors to repurchase up to an additional $150 million under the open market repurchase program expired on December 31, 2016.

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.  We expect aggregate capital expenditures to be approximately $10 million for 2017, in comparison to actual expenditures of $17 million for 2016 .


Cash Flows
 
The following table summarizes the changes in Cash and cash equivalents: 
 
Year Ended
December 31,
 
 
 
2016
 
2015
 
Change
 
(In millions)
Cash provided by (used in):
 

 
 

 
 

Operating activities
$
73

 
$
121

 
$
(48
)
Investing activities
50

 
62

 
(12
)
Financing activities
(123
)
 
(536
)
 
413

Net increase (decrease) in Cash and cash equivalents
$
—

 
$
(353
)
 
$
353


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 impacted by significant non-cash activities which include: (i) the capitalization of mortgage servicing rights in our Mortgage Production segment and (ii) the change in fair value of mortgage servicing rights in our Mortgage Servicing segment. 
 
During the year ended December 31, 2016 , cash provided by our operating activities was $73 million , primarily driven by a $60 million decrease in Mortgage loans held for sale between December 31, 2016 and 2015, which was the result of timing differences between origination and sale as of the end of each period. The increase in cash was also driven by operating benefits from amendments to our private label and subservicing agreements. This was partially offset by cash used for re-engineering efforts, strategic review costs and legal settlements.

During the year ended December 31, 2015 , cash provided by our operating activities was $121 million , which was primarily driven by the impact of timing differences between the origination and sale of mortgages as Mortgage loans held for sale in our consolidated Balance Sheets decreased by $172 million between December 31, 2015 and 2014. Those amounts were partially offset by losses from operations and cash used for growth and re-engineering efforts.


56

Investing Activities  
Our 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, purchases of property and equipment and changes in the funding requirements of restricted cash.

During the year ended December 31, 2016 , cash provided by our investing activities was $50 million . The balance was mainly driven by $60 million of net cash received from MSR derivatives for settlements and driven by relative changes in interest rates. During 2016, we announced the sale of substantially all of our MSR portfolio, which resulted in the settlement of the majority of our MSR derivatives. In addition, there was $12 million of cash received from the proceeds on the sale of MSRs under our MSR flow sale arrangements. These balances were partially offset with $17 million in purchases of property and equipment and an increase in our restricted cash balance.

During the year ended December 31, 2015 , cash provided by our investing activities was $62 million , which was primarily driven by $47 million of cash received from proceeds on the sale of mortgage servicing rights which reflects sales under our MSR flow sale arrangements and the sale of a population of highly delinquent government insured loans that was completed during the fourth quarter of 2014. In addition, cash provided by investing activities included $35 million of net cash received from MSR derivatives related to the settlement of certain MSR-related instruments. These balances were partially offset with $31 million in purchases of property and equipment driven by our efforts to re-engineer our business and enhance our technology platform.   

Financing Activities  
Our cash flows from financing activities include proceeds from and payments on borrowings under our mortgage warehouse facilities and our servicing advance facility.  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 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 year ended December 31, 2016 , cash used in our financing activities was  $123 million which primarily related to $88 million of net payments on our secured borrowings resulting from decreased funding requirements for Mortgage loans held for sale and Servicing advances. Additionally, $23 million was used to retire shares in our open market share repurchase program.

During the year ended December 31, 2015 , cash used in our financing activities was $536 million which primarily related to $275 million of cash paid to complete the exchange of the Convertible notes due in 2017 and repurchases of our Common stock of $77 million.  In addition, we had $165 million of net payments on secured borrowings primarily resulting from decreased funding requirements for Mortgage loans held for sale.  


57

Debt

The following table summarizes our Debt as of December 31, 2016 : 
 
Balance
 
Collateral (1)
 
(In millions)
Warehouse facilities
$
556

 
$
593

Servicing advance facility
99

 
169

Unsecured debt, net
607

 
—

Total
$
1,262

 
$
762

 
______________
(1)  
Assets held as collateral are not available to pay our general obligations.
 
See Note 11, 'Debt and Borrowing Arrangements' in the accompanying Notes to Consolidated Financial Statements for additional information regarding the components of our debt and for additional discussion of risks related to our asset-backed debt, see “Part I—Item 1A. Risk Factors— Risks Related to Our Business — Our mortgage asset-backed debt arrangements, a significant portion of which are short-term agreements, are an important source of our liquidity.  If any of our funding arrangements are terminated, not renewed or otherwise become unavailable to us, we may be unable to find replacement financing on economically viable terms, if at all. If a substantial portion of such arrangements are terminated, not renewed, and cannot be replaced, it would adversely affect our ability to fund our operations. ”
 
Warehouse facilities
 
Warehouse facilities primarily represent variable-rate mortgage repurchase facilities to support the origination of mortgage loans.  Mortgage repurchase facilities, also called warehouse lines of credit, are one component of our funding strategy, and they provide creditors a collateralized interest in specific mortgage loans that meet the eligibility requirements under the terms of the facility during the warehouse period.  The source of repayment of the facilities is typically from the sale or securitization of the underlying loans into the secondary mortgage market.
 
We utilize both committed and uncommitted warehouse facilities, and we evaluate our capacity needs under these facilities based on forecasted volume of mortgage loan closings and sales.  During the year ended December 31, 2016 , at our election, we reduced the capacity for certain facilities in response to the current mortgage environment, our expectations of volumes and to reduce expenses associated with the facilities.
 
Our funding strategies for mortgage originations may also include the use of committed and uncommitted mortgage gestation facilities.  Gestation facilities effectively finance mortgage loans that are eligible for sale to an agency prior to the issuance of the related mortgage-backed security.
 
Our ability to maintain liquidity through mortgage warehouse facilities is dependent on:
•
market demand for mortgage-backed securities and liquidity in the secondary mortgage market;
•
lenders' satisfactory assessment of PHH Corporation, PHH Mortgage and PHH Home Loans as a borrower and/or guarantor, including how they are affected by the strategic actions;
•
the quality and eligibility of assets underlying the arrangements;
•
our ability to negotiate terms acceptable to us;
•
our ability to access the asset-backed debt market, including creditor assessment of our credit risk;
•
our ability to maintain a sufficient level of eligible assets or credit enhancements;
•
our ability to access the secondary market for mortgage loans; and
•
our ability to comply with certain financial covenants.
 

58

Mortgage warehouse facilities consisted of the following as of December 31, 2016 : 
 
Balance
 
Total
Capacity
 
Available
Capacity (1)
 
Maturity
Date
 
 
 
(In millions)
 
 
 
 
 
Debt:
 

 
 

 
 

 
 
 
Committed facilities:
 

 
 

 
 

 
 
 
Fannie Mae
$
—

 
$
150

 
$
150

 
3/31/17
 
Wells Fargo Bank, N.A.
290

 
450

 
160

 
4/2/17
 
Bank of America, N.A.
211

 
350

 
139

 
3/31/17
 
Barclays Bank PLC
55

 
100

 
45

 
3/28/17
 
Committed warehouse facilities
556

 
1,050

 
494

 
 
 
Uncommitted facilities:
 

 
 

 
 

 
 
 
Fannie Mae
—

 
1,850

 
1,850

 
n/a
 
Barclays Bank PLC
—

 
100

 
100

 
n/a
 
Total
$
556

 
$
3,000

 
$
2,444

 
 
 
 
 
 
 
 
 
 
 
 
Off-Balance Sheet Gestation Facilities:
 

 
 

 
 

 
 
 
Uncommitted facilities:
 

 
 

 
 

 
 
 
JP Morgan Chase Bank, N.A.
$
—

 
$
150

 
$
150

 
n/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
 
Under most of our mortgage servicing agreements, we are required to advance our own funds for scheduled principal, interest, tax and insurance payments when the mortgage loan borrower has failed to make the scheduled payments; and to cover foreclosure costs and various other items that are required to preserve the assets being serviced.  Generally, we collect on these servicing advance receivables through future payments from the respective borrower, from liquidation proceeds, or from insurance claims following foreclosure or liquidation.  We are generally exposed to losses from these receivables only to the extent that the respective servicing guidelines are not followed or if we have a breach of the representations and warranty provisions of our loan sale agreements.  Also, in many cases, we can cease making advances when the advances are no longer deemed to be recoverable from liquidation proceeds.  As discussed below, our strategies to fund these servicing advance receivables include the issuance of asset-backed notes.
 
In addition, under certain of our subservicing agreements, we are required to advance our own funds to preserve the assets being serviced.  Our subservicing agreements generally contain provisions that require the subservicing client to pre-fund advances on the subserviced loans or to reimburse us for those advances on a monthly or other periodic basis. We are exposed to risk with respect to this process, because if the client fails to make such reimbursement, we may be required to fund unreimbursed advances for an extended period.

As of December 31, 2016 , there are $628 million of Servicing advance receivables on our Consolidated Balance Sheet, including $239 million from our own funds, and the remainder funded as outlined below:
 
Balance
 
Total
Capacity
 
Available
Capacity (1)
 
Maturity
Date
 
 
 
(In millions)
 
 
 
 
 
Debt:
 

 
 

 
 

 
 
 
PSART Servicing Advance facility
$
99

 
$
155

 
$
56

 
6/15/18
(2)  
Subservicing advance liabilities:
 

 
 

 
 

 
 
 
Client-funded amounts
290

 
n/a

 
n/a

 
n/a
 
Total
$
389

 
 

 
 

 
 
 
  ______________
(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)  
The facility has a revolving period through June 15, 2017, after which the facility goes into amortization.  The maturity date of June 15, 2018 presented above represents the final repayment date of the amortizing notes.

59

 
PSART Servicing Advance Facility.   PHH Servicer Advance Receivables Trust (“PSART”), a special purpose bankruptcy remote trust, was formed for the purpose of issuing non-recourse asset-backed notes, up to a maximum principal amount of $155 million , secured by servicing advance receivables. PSART was consolidated as a result of the determination that we are the primary beneficiary of the variable interest entity, as discussed in Note 19, 'Variable Interest Entities' in the accompanying Notes to Consolidated Financial Statements.
 
PSART issues variable funding notes that have a revolving period, during which time the monthly collection of advances are applied to pay down the notes and create additional availability to fund advances. The notes have a revolving period through June 15, 2017 and the final maturity of the notes is June 15, 2018. Upon expiration of the revolving period, the notes enter a repayment period, whereby the noteholders’ commitment to fund new advances (through the purchase of additional notes) expires, and we are required to repay the outstanding balance through advance collections or additional payments on or before final maturity.  In all cases, including upon an increased pace of amortization or an event of default as described below, all amortization and repayment of the notes is serviced from the ongoing recovery on the servicing advances that secure the notes.
 
Our ability to maintain liquidity through PSART is dependent upon:

•
the eligibility of servicing advance receivables underlying the arrangement and our ability to recover advances in a timely and efficient manner;
•
maintaining our role as servicer of the underlying mortgage assets; and
•
our ability to comply with certain financial and other covenants, the breach of which could result in the ability of the noteholders to terminate their commitment to fund new advances through the purchase of additional notes, an increased pace of amortization for the notes and/or an event of default.

In addition to the foregoing factors, our ability to maintain liquidity through the issuance of asset-backed securities ("ABS") secured by servicing advance receivables is dependent on:

•
market demand for ABS, specifically demand for ABS collateralized by mortgage receivables;
•
our ability to service in accordance with applicable guidelines and the quality of our servicing, both of which will impact noteholders’ willingness to commit to financing for an additional 364 days; and
•
our ability to negotiate terms acceptable to us.

If the MSR sales to New Residential are executed successfully, we are required to use the cash generated from the sale of Servicing advances financed through PSART to repay the related outstanding debt. Refer to “—Executive Summary” for further information.

Subservicing Advance Liabilities.  When our subservicing client pre-funds advances or reimburses us for such advances, as described above, a subservicing advance liability is recorded for cash received from the subservicing client, and is repaid to the client upon the collection of the mortgage servicing advance receivables. As we transition to a subservicing focused, capital-light business model, we plan to increase our use of client-funded arrangements and minimize our funding needs for servicing advance receivables.
 
Our ability to maintain liquidity through such client-funded arrangements is dependent on:
•
the creditworthiness of our subservicing clients and their ability to fund and/or reimburse the servicing advances; and
•
our adherence to the applicable servicing guidelines when making the advances.


60

Unsecured Debt
 
Unsecured borrowing arrangements consisted of the following as of December 31, 2016 : 
 
Balance
 
Balance
at Maturity
 
Maturity
Date
 
(In millions)
 
 
 
7.375% Term notes due in 2019
272

 
275

 
09/01/19
 
6.375% Term notes due in 2021
335

 
340

 
08/15/21
 
Total
$
607

 
$
615

 
 
 

See Note 16, 'Stock-Related Matters' in the accompanying Notes to Consolidated Financial Statements for information regarding restrictions on our ability to make share-related payments pursuant to certain debt arrangements.  Such share-related payments include the declaration and payment of dividends, making any distribution on account of our Common stock, or the purchase, repurchase, redemption or retirement of our Common stock.

As of February 21, 2017 , our credit ratings on our senior unsecured debt were as follows:

 
Senior
Debt
 
Short-Term
Debt
Moody’s Investors Service
B1
 
NP
Standard & Poor's
B-
 
N/A

In April 2016, following our announcements of a comprehensive review of all strategic options and origination reductions in the private label business, Standard & Poor's downgraded our senior unsecured rating from B+ to B. In October 2016, following announcements of Merrill Lynch terminating its private label origination services agreement and HSBC's sale of a significant portion of their owned servicing rights to a purchaser who will not retain us as a subservicer, Moody’s downgraded our senior unsecured rating from Ba3 to B1 and assigned a Stable Outlook, while Standard & Poor's downgraded our issuer credit rating from B to B- and maintained a Negative Outlook.

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— Risks Related to Our Business — 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. ”



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CONTRACTUAL OBLIGATIONS

The following table summarizes our future contractual obligations as of December 31, 2016 :  
 
Less than
1 year
 
1 -3 years
 
3-5 years
 
More than
5 years
 
Total
 
(In millions)
Warehouse facilities (1)
$
556

 
$
—

 
$
—

 
$
—

 
$
556

Servicing advance facility (1) (2)
99

 
—

 
—

 
—

 
99

Unsecured debt
—

 
275

 
340

 
—

 
615

Interest expense on Unsecured debt
42

 
84

 
43

 
—

 
169

Operating leases (3)
18

 
29

 
23

 
12

 
82

Purchase commitments
29

 
2

 
—

 
—

 
31

Loan repurchase agreements
2

 
—

 
—

 
—

 
2

 
$
746

 
$
390

 
$
406

 
$
12

 
$
1,554

________________
(1)  
The table above excludes future cash payments related to interest expense on our warehouse facilities, servicing advance facility and capital leases, which totaled $24 million for 2016. Interest is calculated on most of our debt obligations based on variable rates referenced to LIBOR.
  (2)  
Maturities of the Servicing advance facility represent estimated payments based on the expected cash inflows of the receivables.  The contractual final repayment date of the facility is June 15, 2017.
 (3)  
Excludes $7 million of minimum sublease income due in the future under non-cancelable subleases.

For further information about our Asset-backed debt facilities and Unsecured debt, see “—Liquidity and Capital Resources—Debt” and Note 11, 'Debt and Borrowing Arrangements' in the accompanying Notes to Consolidated Financial Statements.
 
Operating lease obligations include leases in Mt. Laurel, New Jersey, Jacksonville, Florida, Williamsville, New York, Bannockburn, Illinois and other smaller regional locations throughout the U.S.  During January 2017, we signed an agreement to terminate our lease in Williamsville effective on August 31, 2017. In February 2017, we signed an agreement to assign our interests under the lease of our Jacksonville, Florida office and to sell information technology and other equipment and fixtures located in such office to LenderLive. However, we remain jointly and severally liable with LenderLive to the landlord for the lease obligations over the 7 year remaining term of the Jacksonville lease.

Purchase commitments include various commitments to purchase services from specific suppliers made by us in the ordinary course of our business, and the majority of our commitments relate to information technology services and software expenses.  For further information about our Operating lease and Purchase commitments, see Note 15, 'Commitments and Contingencies' in the accompanying Notes to Consolidated Financial Statements. There are no significant capital lease obligations as of December 31, 2016 .
 
Loan repurchase obligations represent the unpaid principal amount of loans that have completed the repurchase request review process and the claims are pending final execution or payment.  See Note 14, 'Credit Risk' in the accompanying Notes to Consolidated Financial Statements and “—Risk Management” for further information regarding our loan repurchase exposure and related reserves.

Other Obligations
 
Loan Origination Pipeline.  As of December 31, 2016 , we had commitments with agreed-upon rates or rate protection that we expect to result in closed mortgage loans of $862 million .
 
Commitments to sell loans generally have fixed expiration dates or other termination clauses and may require the payment of a fee. We may settle the forward delivery commitments on MBS or whole loans on a net basis including the posting of collateral; therefore, the commitments outstanding do not necessarily represent future cash obligations. Our $2.1 billion (gross notional) of forward delivery commitments on MBS or whole loans as of December 31, 2016 generally will be settled within 90 days of the individual commitment date.
 
For further information about our commitments to fund or sell mortgage loans, see Note 6, 'Derivatives' in the accompanying Notes to Consolidated Financial Statements.

62

 
MSR Sales.  As of December 31, 2016 , we had commitments to sell $83.5 billion of unpaid principal balance of loans with a fair value of $678 million that were included in the capitalized portfolio. These include two sales that collectively constitute substantially all of our MSRs to Lakeview and New Residential, which are subject to approvals and consents as previously discussed, as well as our third party flow sales. Additionally, as of December 31, 2016 , we had commitments to sell MSRs related to $43 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.

For further information about our commitments to sell Mortgage servicing rights, see Note 5, 'Transfers and Servicing of Mortgage Loans' in the accompanying Notes to Consolidated Financial Statements.
 
Unrecognized Income Tax Benefits.   The future contractual obligations outlined above exclude an $8 million liability for income tax contingencies as of December 31, 2016 since we cannot predict with reasonable certainty or reliability of the timing of cash settlements to the respective taxing authorities for these estimated contingencies. For more information regarding our liability for income tax contingencies, see Note 13, 'Income Taxes' in the accompanying Notes to Consolidated Financial Statements.

Compensation Agreements . We have entered into retention agreements and have granted cash-based incentive compensation awards that obligate us to make future cash payments to the related employees, if they remain employed through specified vesting dates. If any employees are involuntarily terminated without cause prior to those dates, we owe the lump sum as soon as practicable.

The total amount of our compensation-related contractual obligations is $20 million, of which $9 million is accrued within Accounts payable and accrued expenses as of December 31, 2016 .


OFF-BALANCE SHEET ARRANGEMENTS AND GUARANTEES
 
In the ordinary course of business, we enter into numerous agreements that contain guarantees and indemnities whereby we indemnify another party for breaches of representations and warranties. In addition, we utilize an uncommitted off-balance sheet mortgage gestation facility as a component of our financing strategy.
 
See “—Liquidity and Capital Resources—Debt—Warehouse facilities” above, and Note 15, 'Commitments and Contingencies' in the accompanying Notes to the Consolidated Financial Statements for additional information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1, 'Summary of Significant Accounting Policies' and Note 15, 'Commitments and Contingencies' in the accompanying Notes to Consolidated Financial Statements. These accounting policies are integral in understanding our financial position and results of operations because we are required to make estimates and assumptions that may affect the value of our assets and liabilities and financial results. The accounting policies that we believe are critical due to the highly difficult, subjective and complex judgments and estimates relating to matters that are inherently uncertain include: (i) Fair value measurements; (ii) Mortgage servicing rights; (iii) Income taxes; (iv) Loan repurchase and indemnification liability; and (v) Litigation and regulatory accruals.
Additionally, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If actual results differ from our judgments and estimates, it could have a material adverse effect on our business, financial position, results of operations and cash flows. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time, and we discuss our critical accounting policies and estimates with our Audit Committee of our Board of Directors on an ongoing basis.
Fair Value Measurements
We record certain assets and liabilities at fair value, and we have an established and documented process for determining fair value measurements. In addition, we utilize fair value measurements in our review of the carrying value of long-lived assets and equity method investments for impairment, whenever events or changes in circumstances indicate that such carrying value may not be recoverable. We determine fair value based on quoted market prices, if available. If quoted prices are not available, fair value is estimated based upon other observable inputs and may include valuation techniques such as present value cash flow models, option-pricing models or other conventional valuation methods.

63

We use unobservable inputs when observable inputs are not available. These inputs are based upon our judgments and assumptions, which represent our assessment of the assumptions market participants would use in pricing the asset or liability, which may include: (i) information about current pricing for similar products; (ii) modeled assumptions based on internally-sourced data and characteristics of the specific instrument; and (iii) counterparty risk, credit quality and liquidity.

As of December 31, 2016 , 44% of our Total assets were measured at fair value on a recurring basis and 46% of our assets measured at fair value on a recurring basis were valued using primarily observable inputs and are comprised of the majority of our Mortgage loans held for sale and derivative assets and liabilities used to manage risk on our mortgage servicing rights, mortgage loans held for sale, and related lock commitments.
As of December 31, 2016 , 54% of our assets measured at fair value on a recurring basis were valued using significant unobservable inputs and include:
•
Mortgage servicing rights. See "—Mortgage Servicing Rights" below.
•
Certain non-conforming Mortgage loans held for sale, including Scratch and Dent (loans with origination flaws or performance issues) and second lien loans. We value these loans based upon either a collateral-based valuation model or a discounted cash flow model. As the market for these loans is not liquid, we utilize assumptions in the valuation that reflect our best estimate of the current market, which may include spreads from collateral values in recent transactions.
•
Interest rate lock commitments ("IRLCs"). As there is a lack of an observable market for trading IRLCs, fair value is based upon the estimated fair value of the underlying mortgage loan, adjusted for: (i) estimated costs to complete and originate the loan and (ii) an adjustment to reflect the estimated percentage of commitments that will result in a closed mortgage loan, which can vary based on the age of the underlying commitment and changes in mortgage interest rates.

The use of different assumptions may have a material effect on the estimated fair value amounts recorded in our financial statements, and the actual amounts realized in the sale or settlement of these instruments may vary materially from the recorded amounts. See Note 18, 'Fair Value Measurements' in the accompanying Notes to Consolidated Financial Statements for further discussions of our measurements at fair value.
Mortgage Servicing Rights
The fair value of our mortgage servicing rights ("MSRs") is estimated based upon projections of expected future cash flows, including service fee income and costs to service the loans, actual and expected prepayment rates, portfolio characteristics, interest rates based on interest rate yield curves, implied volatility, servicing costs and other economic factors which are determined based on current market conditions. The December 31, 2016 determination of fair value also includes calibration of our valuation model considering the pricing associated with the MSR agreements executed in the fourth quarter of 2016.
We use a third-party model as a basis to forecast prepayment rates at each monthly point for each interest rate path based around the implied forward interest rate, calculated using a probability weighted option adjusted spread ("OAS") model. The OAS model is used to generate and discount the expected future cash flows to value the MSR. Prepayment rates are based on historical observations of prepayment behavior in similar periods, comparing current mortgage rates to the mortgage interest rate in our servicing portfolio and incorporates loan characteristics (e.g., loan type and note rate) and factors such as recent prepayment experience, the relative sensitivity of our capitalized servicing portfolio to refinance if interest rates decline and estimated levels of home equity.
The evaluation of our MSRs is governed by a committee, which consists of key members of management, to approve our MSR valuation policies and ensure that the fair value of our MSRs is appropriate considering all available internal and external data. We validate assumptions used in estimating the fair value of our MSRs against a number of third-party sources, which may include peer surveys, MSR broker surveys, third-party valuations and other market-based sources. While our current valuation reflects our best estimate of servicing costs, future regulatory changes in servicing standards, as well as changes in individual state foreclosure legislation, may have an impact on our servicing cost assumption and our MSR valuation in future periods.
The key assumptions used in the valuations of MSRs include prepayment rates, discount rate and delinquency rates. If we experience a 10% adverse change in prepayment speeds, OAS and delinquency rates, the fair value of our MSRs would be reduced by $20 million , $32 million and $11 million , respectively. These sensitivities are hypothetical and 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 fair value may not be linear. Also, the effect of a variation in a particular assumption is calculated without changing any other assumption; in reality, changes in one assumption may result in changes in another, which may magnify or counteract the sensitivities. Further, this analysis does not assume any impact resulting from our intervention to mitigate these variations.

64

Income Taxes
We are subject to the income tax laws of the various jurisdictions in which we operate, including U.S. federal, state and local jurisdictions, as well as Canadian jurisdictions for periods prior to the sale of the Fleet business in 2014. These tax laws are complex and are subject to different interpretations by the taxpayer and the relevant government taxing authorities.  When determining our current income tax expense, we must make judgments about the application of these inherently complex tax laws.
Deferred income taxes are determined using the balance sheet method. Recognition of deferred taxes is based upon estimates of future results and management's judgment; however, deferred tax assets are reduced by valuation allowances if it is more likely than not that some portion of the deferred tax asset will not be realized. We had a valuation allowance of $44 million as of December 31, 2016 .
We evaluate our deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available evidence, using a "more likely than not" standard with respect to whether deferred tax assets will be realized. This evaluation considers, among other factors, our historical operating results, our expectations of future profitability including our execution of the PLS exit and the asset sales, the duration of the applicable statutory carryforward periods and available tax planning strategies. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related temporary differences in the financial basis and the tax basis of the assets become deductible. Should a change in circumstances, including differences between our future operating results and estimates, lead to a change in our judgments about the realization of deferred tax assets in future years, we would adjust the valuation allowances in the period that the change in circumstances occurs, along with a charge or credit to income tax expense. Significant changes to our estimates and assumptions may result in an increase or decrease to our tax expense in a subsequent period.
Our interpretations of the complex tax laws in the jurisdictions in which we operate are subject to review and examination by the various governmental taxing authorities and disputes may arise over the respective tax positions. We record liabilities for income tax contingencies using a two-step process. We must first presume the tax position will be examined by the relevant taxing authority and determine whether it is "more likely than not" that the position will be sustained upon examination, based on its technical merits. Once an income tax position meets the "more likely than not" recognition threshold, it is then measured to determine the amount of the benefit to recognize in the financial statements.
Liabilities for income tax contingencies are reviewed periodically and are adjusted as events occur that affect our estimates, such as the availability of new information, subsequent transactions or events, the lapsing of applicable statutes of limitations, the conclusion of tax audits, the measurement of additional estimated liabilities based on current calculations (including interest and/or penalties), the identification of new income tax contingencies, the release of administrative tax guidance affecting our estimates of income tax liabilities or the rendering of relevant court decisions. The ultimate resolution of income tax contingency liabilities could have a significant impact on our effective income tax rate in a given financial statement period. Liabilities for income tax contingencies, including accrued interest and penalties, was $8 million as December 31, 2016 .
Loan Repurchase and Indemnification Liability
Representations and warranties are provided to investors and insurers on a significant portion of loans sold and are also assumed on purchased mortgage servicing rights for loans that are owned by the Agencies or included in Agency-guaranteed securities. As a result, we may be required to repurchase the mortgage loan or indemnify the investor against loss in the event of a breach of representations and warranties. 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. The liability for probable losses includes estimates associated with: (i) losses for loans where a repurchase or indemnification obligation could exist from breaches of representation and warranties, (ii) losses for specific non-performing loans where we believe we will be required to indemnify the investor and (iii) losses for government loans that may not be reimbursed pursuant to mortgage insurance programs. 

The key assumptions used in our estimate are impacted by a variety of factors, including actual defaults, estimated future defaults, the estimated probability we will receive a repurchase request, historical loss experience, estimated home price values, our success rates in appealing repurchase requests and other economic conditions, including the political environment and oversight of the Agencies and related changes in Agency programs and guidelines, and the overall economic condition of borrowers and the U.S. economy. Changes to any one of these factors could significantly impact the estimate of our liability. We continue to evaluate our reserve based on the level and type of repurchase requests received, the defects identified and other relevant facts and circumstances. In order to monitor repurchase demand practices, we also maintain regular contact with the Agencies and with the private label clients for which we originate fee-based loans and incorporate any new information into our reserve estimates as it becomes available.

65


Legal and Regulatory Contingencies
We are currently subject to various regulatory investigations, examinations and inquiries related to our mortgage origination and servicing practices. In addition, we are defendants in various legal proceedings, which include private and civil litigation. The measurement of our accruals for legal and regulatory contingencies is a critical accounting estimate because of the significant judgment involved in estimating the likelihood and range of potential liability involved, uncertainty related to the potential outcome of certain matters, coupled with the material impact on our results of operations, cash flows and financial position that could result from changes in our estimates or the ultimate resolution of these matters.

An accrual is established for pending or threatened litigation, claims or assessments 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 and other legal proceedings, it is not always possible to determine a reasonable estimate of the amount of a probable loss, and we may estimate a range of possible loss for consideration in these 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, our estimates may change from time to time, and such changes may be material to our consolidated results of operations. There can be no assurance that the ultimate resolution of such matters will not result in losses in excess of our recorded accruals, or in excess of our estimate of reasonably possible losses, and the ultimate resolution of any particular matter, or matters, may have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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 Consolidated Financial Statements.


Item 7A.  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. The valuation of our Mortgage servicing rights 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.

Sensitivity Analysis
 
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.
 
We use a duration-based model in determining the impact of interest rate shifts on our debt portfolio, certain other interest-bearing liabilities and interest rate derivatives portfolios.  The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.
 
We utilize a probability weighted option-adjusted spread model to determine the fair value of mortgage servicing rights and the impact of parallel interest rate shifts on mortgage servicing rights.  The primary assumptions in this model are prepayment speeds, option-adjusted spread (discount rate) and weighted-average delinquency rates.  However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between mortgage-backed securities, swaps and Treasury rates and changes in primary and secondary mortgage market spreads.  We rely on market sources in determining the impact of interest rate shifts for mortgage loans, interest rate lock commitments, forward delivery commitments on mortgage-backed securities or whole loans and option

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contracts.  In addition, for interest rate lock commitments, the borrower’s propensity to close their mortgage loans under the commitment is used as a primary assumption.

Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets.  There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.
 
The following table summarizes the estimated change in the fair value of our Mortgage pipeline, Mortgage servicing rights and related derivatives and unsecured debt that are sensitive to interest rates as of December 31, 2016 given hypothetical instantaneous parallel shifts in the yield curve: 
 
Change in Fair Value
 
Down
100 bps
 
Down
50 bps
 
Down
25 bps
 
Up
25 bps
 
Up
50 bps
 
Up
100 bps
 
(In millions)
Mortgage pipeline
 

 
 

 
 

 
 

 
 

 
 

Mortgage loans held for sale
$
13

 
$
8

 
$
4

 
$
(4
)
 
$
(9
)
 
$
(18
)
Interest rate lock commitments (1)
13

 
8

 
4

 
(5
)
 
(11
)
 
(25
)
Forward loan sale commitments (1)
(25
)
 
(15
)
 
(7
)
 
8

 
18

 
37

Option contracts (1)
(1
)
 
(1
)
 
(1
)
 
1

 
3

 
7

Total Mortgage pipeline
—

 
—

 
—

 
—

 
1

 
1

 
 
 
 
 
 
 
 
 
 
 
 
MSRs and related derivatives (2)
 

 
 

 
 

 
 

 
 

 
 

Mortgage servicing rights
(147
)
 
(70
)
 
(33
)
 
31

 
59

 
106

Derivatives related to MSRs (1)
4

 
2

 
1

 
(1
)
 
(3
)
 
(5
)
Total MSRs and related derivatives
(143
)
 
(68
)
 
(32
)
 
30

 
56

 
101

 
 
 
 
 
 
 
 
 
 
 
 
Unsecured term debt
(21
)
 
(10
)
 
(5
)
 
5

 
10

 
20

Total, net
$
(164
)
 
$
(78
)
 
$
(37
)
 
$
35

 
$
67

 
$
122

________________
(1)  
Included in Other assets or Other liabilities in the Consolidated Balance Sheets.

(2)  
In the fourth quarter of 2016, we significantly reduced 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. For further discussion of those agreements, and discussions of required shareholder approvals and other requirements that must be met to complete such sales, see Note 5, 'Transfers and Servicing of Mortgage Loans' in the accompanying Notes to Consolidated Financial Statements . At December 31, 2015, when we had a higher derivative hedge coverage on our MSRs, the decline in fair value on our Total MSRs and related derivatives was estimated to be from $20 million to $60 million when driven by a 25 bps to 100 bps decline in interest rates, respectively.



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Item 8.  Financial Statements and Supplementary Data

Index to the Consolidated Financial Statements

 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Schedules:
 



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of PHH Corporation:
We have audited the accompanying consolidated balance sheets of PHH Corporation and subsidiaries (the "Company") as of December 31, 2016 and 2015 , and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2016 . Our audits also included the financial statement schedules listed in Item 8. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PHH Corporation and subsidiaries as of December 31, 2016 and 2015 , and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 , in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016 , based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania
February 28, 2017


69


PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
REVENUES
 

 
 

 
 

Origination and other loan fees
$
280

 
$
284

 
$
231

Gain on loans held for sale, net
262

 
298

 
264

Net loan servicing income:
 

 
 

 
 

Loan servicing income
353

 
394

 
448

Change in fair value of mortgage servicing rights
(238
)
 
(187
)
 
(320
)
Net derivative gain related to mortgage servicing rights
10

 
29

 
82

Net loan servicing income
125

 
236

 
210

Net interest expense:
 

 
 

 
 

Interest income
43

 
44

 
42

Secured interest expense
(33
)
 
(35
)
 
(35
)
Unsecured interest expense
(42
)
 
(55
)
 
(95
)
Net interest expense
(32
)
 
(46
)
 
(88
)
Other (loss) income
(13
)
 
18

 
22

Net revenues
622

 
790

 
639

 
 
 
 
 
 
EXPENSES
 

 
 

 
 

Salaries and related expenses
345

 
323

 
358

Commissions
64

 
79

 
78

Loan origination expenses
64

 
91

 
85

Foreclosure and repossession expenses
35

 
51

 
56

Professional and third-party service fees
156

 
171

 
127

Technology equipment and software expenses
42

 
37

 
37

Occupancy and other office expenses
47

 
50

 
51

Depreciation and amortization
16

 
18

 
23

Exit and disposal costs
41

 
—

 
—

Other operating expenses
116

 
183

 
108

Total expenses
926

 
1,003

 
923

Loss from continuing operations before income taxes
(304
)
 
(213
)
 
(284
)
Income tax benefit
(111
)
 
(82
)
 
(99
)
Loss from continuing operations, net of tax
(193
)
 
(131
)
 
(185
)
Income from discontinued operations, net of tax
—

 
—

 
272

Net (loss) income
(193
)
 
(131
)
 
87

Less: net income attributable to noncontrolling interest
9

 
14

 
6

Net (loss) income attributable to PHH Corporation
$
(202
)
 
$
(145
)
 
$
81

 
 
 
 
 
 
Basic and Diluted (loss) earnings per share:
 
 
 
 
 
From continuing operations
$
(3.77
)
 
$
(2.62
)
 
$
(3.47
)
From discontinued operations
—

 
—

 
4.94

Total attributable to PHH Corporation
$
(3.77
)
 
$
(2.62
)
 
$
1.47


See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Net (loss) income
$
(193
)
 
$
(131
)
 
$
87

 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 

 
 

 
 

Currency translation adjustment
—

 
—

 
(22
)
Change in unfunded pension liability, net
—

 
1

 
(5
)
Total other comprehensive income (loss), net of tax
—

 
1

 
(27
)
Total comprehensive (loss) income
(193
)
 
(130
)
 
60

Less: comprehensive income attributable to noncontrolling interest
9

 
14

 
6

Comprehensive (loss) income attributable to PHH Corporation
$
(202
)
 
$
(144
)
 
$
54

 
See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED BALANCE SHEETS
(In millions, except share data) 
 
 
December 31,
 
2016
 
2015
ASSETS
 

 
 

Cash and cash equivalents
$
906

 
$
906

Restricted cash
57

 
47

Mortgage loans held for sale
683

 
743

Accounts receivable, net
66

 
81

Servicing advances, net
628

 
691

Mortgage servicing rights
690

 
880

Property and equipment, net
36

 
47

Other assets
109

 
247

Total assets   (1)
$
3,175

 
$
3,642

 
 
 
 
LIABILITIES
 

 
 

Accounts payable and accrued expenses
$
193

 
$
251

Subservicing advance liabilities
290

 
314

Debt, net
1,262

 
1,348

Deferred taxes, net
101

 
182

Loan repurchase and indemnification liability
49

 
62

Other liabilities
157

 
137

Total liabilities   (1)
2,052

 
2,294

Commitments and contingencies (Note 15)


 


 
 
 
 
EQUITY
 

 
 

Preferred 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;
   53,599,433 shares issued and outstanding at December 31, 2016;
   55,007,983 shares issued and outstanding at December 31, 2015
1

 
1

Additional paid-in capital
887

 
911

Retained earnings
214

 
416

Accumulated other comprehensive loss (2)
(10
)
 
(10
)
Total PHH Corporation stockholders’ equity
1,092

 
1,318

Noncontrolling interest
31

 
30

Total equity
1,123

 
1,348

Total liabilities and equity
$
3,175

 
$
3,642

 
See accompanying Notes to Consolidated Financial Statements.
 
Continued.

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CONSOLIDATED BALANCE SHEETS-(Continued)
(In millions)
______________
(1)  
The Consolidated Balance Sheets include assets of variable interest entities which can be used only to settle the obligations and liabilities of variable interest entities which creditors or beneficial interest holders do not have recourse to PHH Corporation and subsidiaries as follows:
 
 
December 31,
 
2016
 
2015
ASSETS
 
 
 
Cash and cash equivalents
$
67

 
$
80

Restricted cash
24

 
18

Mortgage loans held for sale
350

 
389

Accounts receivable, net
9

 
5

Servicing advances, net
150

 
157

Property and equipment, net
1

 
1

Other assets
12

 
12

Total assets
$
613

 
$
662

 
 
 
 
LIABILITIES
 

 
 

Accounts payable and accrued expenses
$
11

 
$
14

Debt
399

 
456

Other liabilities
5

 
6

Total liabilities
$
415

 
$
476



(2)  
Includes amounts recorded related to the Company's defined benefit pension plan, net of income tax benefits of $6 million as of both December 31, 2016 and 2015. During the years ended December 31, 2016 and 2015, there were no amounts reclassified out of Accumulated other comprehensive loss.


See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In millions, except share data)
 
 
PHH Corporation Stockholders’ Equity
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
Beginning Balance
57,265,517

 
$
1

 
$
1,142

 
$
507

 
$
16

 
$
24

 
$
1,690

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
—

 
—

 
—

 
81

 
(27
)
 
6

 
60

Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(4
)
 
(4
)
Stock compensation expense
—

 
—

 
8

 
—

 
—

 
—

 
8

Stock issued under share-based payment plans (includes $6 of excess tax benefit)
840,901

 
—

 
16

 
—

 
—

 
—

 
16

Repurchase and retirement of Common stock
(6,962,695
)
 
—

 
(178
)
 
(22
)
 
—

 
—

 
(200
)
Conversion of Convertible notes
—

 
—

 
(4
)
 
—

 
—

 
—

 
(4
)
Recognition of deferred taxes related to Convertible notes
—

 
—

 
5

 
—

 
—

 
—

 
5

Balance at December 31, 2014
51,143,723

 
$
1

 
$
989

 
$
566

 
$
(11
)
 
$
26

 
$
1,571

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive (loss) income
—

 
—

 
—

 
(145
)
 
1

 
14

 
(130
)
Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(10
)
 
(10
)
Stock compensation expense
—

 
—

 
9

 
—

 
—

 
—

 
9

Stock issued under share-based payment plans
204,126

 
—

 
2

 
—

 
—

 
—

 
2

Repurchase and retirement of Common stock
(6,415,519
)
 
(1
)
 
(72
)
 
(5
)
 
—

 
—

 
(78
)
Conversion of Convertible notes
10,075,653

 
1

 
(19
)
 
—

 
—

 
—

 
(18
)
Recognition of deferred taxes related to Convertible notes
—

 
—

 
2

 
—

 
—

 
—

 
2

Balance at December 31, 2015
55,007,983

 
$
1

 
$
911

 
$
416

 
$
(10
)
 
$
30

 
$
1,348

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive (loss) income
—

 
—

 
—

 
(202
)
 
—

 
9

 
(193
)
Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(8
)
 
(8
)
Stock compensation expense
—

 
—

 
8

 
—

 
—

 
—

 
8

Stock issued under share-based payment plans (includes $9 benefit of excess tax shortfall)
100,222

 
—

 
(9
)
 
—

 
—

 
—

 
(9
)
Repurchase and retirement of Common stock
(1,508,772
)
 
—

 
(23
)
 
—

 
—

 
—

 
(23
)
Balance at December 31, 2016
53,599,433

 
$
1

 
$
887

 
$
214

 
$
(10
)
 
$
31

 
$
1,123


See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

 
Year Ended December 31,
 
2016
 
2015
 
2014
Cash flows from operating activities:
 

 
 

 
 

Net (loss) income
$
(193
)
 
$
(131
)
 
$
87

Adjustments to reconcile Net (loss) income to net cash provided by (used in) operating activities:
 

 
 

 
 

Net gain on sale of business
—

 
—

 
(241
)
Capitalization of originated mortgage servicing rights
(60
)
 
(101
)
 
(97
)
Net loss on mortgage servicing rights and related derivatives
228

 
158

 
238

Vehicle depreciation
—

 
—

 
596

Depreciation and amortization
16

 
18

 
28

Loss on early extinguishment of debt
—

 
30

 
24

Origination of mortgage loans held for sale
(10,513
)
 
(13,512
)
 
(12,612
)
Proceeds on sale of and payments from mortgage loans held for sale
10,838

 
13,965

 
12,784

Net gain on interest rate lock commitments, mortgage loans held for sale and related derivatives
(266
)
 
(297
)
 
(230
)
Deferred income tax benefit
(91
)
 
(70
)
 
(96
)
Asset impairments
38

 
—

 
—

Other adjustments and changes in other assets and liabilities, net
76

 
61

 
(492
)
Net cash provided by (used in) operating activities
73

 
121

 
(11
)
Cash flows from investing activities:
 

 
 

 
 

Net cash received on derivatives related to mortgage servicing rights
60

 
35

 
70

Proceeds on sale of mortgage servicing rights
12

 
47

 
67

Purchases of property and equipment
(17
)
 
(31
)
 
(15
)
(Increase) decrease in restricted cash
(10
)
 
9

 
(87
)
Proceeds from sale of business, net of cash transferred and transaction costs
—

 
—

 
1,096

Purchases of certificates of deposit
—

 
—

 
(250
)
Proceeds from maturities of certificates of deposit
—

 
—

 
250

Investment in vehicles
—

 
—

 
(850
)
Proceeds on sale of investment vehicles
—

 
—

 
201

Other, net
5

 
2

 
7

Net cash provided by investing activities
50

 
62

 
489

Cash flows from financing activities:
 

 
 

 
 

Proceeds from secured borrowings
12,306

 
17,213

 
18,254

Principal payments on secured borrowings
(12,394
)
 
(17,378
)
 
(18,065
)
Principal payments on unsecured borrowings
—

 
(245
)
 
(435
)
Cash tender premiums for convertible debt
—

 
(30
)
 
—

Issuances of Common stock
—

 
2

 
10

Repurchase of Common stock
(23
)
 
(77
)
 
(200
)
Cash paid for debt issuance costs
(4
)
 
(7
)
 
(21
)
Distributions to noncontrolling interest
(8
)
 
(10
)
 
(4
)
Other, net
—

 
(4
)
 
(3
)
Net cash used in financing activities
(123
)
 
(536
)
 
(464
)

See accompanying Notes to Consolidated Financial Statements.
 
Continued.

75
Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(In millions)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Net increase (decrease) in Cash and cash equivalents
$
—

 
$
(353
)
 
$
14

Cash and cash equivalents at beginning of period
906

 
1,259

 
1,245

Cash and cash equivalents at end of period
$
906

 
$
906

 
$
1,259

 
 
 
 
 
 
Supplemental Disclosure of Cash Flows Information:
 

 
 

 
 

Interest payments
$
66

 
$
72

 
$
125

Income tax (refunds) payments, net
(29
)
 
9

 
543

Payments for debt retirement premiums
—

 
—

 
22


See accompanying Notes to Consolidated Financial Statements.

76
Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Organization
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.
 
The 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 and its subsidiaries are consolidated within the Consolidated Financial Statements and the ownership interest of Realogy Services Venture Partner LLC, a subsidiary of Realogy Holdings Corp. ("Realogy") is presented as a noncontrolling interest.  Intercompany balances and transactions have been eliminated from the Consolidated Financial Statements.
 
Preparation of Financial Statements
The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission. 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, 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, 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.
 
Effective on July 1, 2014, the Company sold its Fleet Management Services business and related fleet entities (collectively the “Fleet business”) to certain wholly-owned subsidiaries of Element Financial Corporation.  The results of the Fleet business are presented as discontinued operations in the Consolidated Statements of Operations and have been excluded from continuing operations and segment results for all periods presented.  The cash flows and comprehensive income related to the Fleet business have not been segregated and are included in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income, respectively, for all periods presented.  Amounts related to the Fleet business are excluded from the Notes to Consolidated Financial Statements unless otherwise noted.  See Note 3, 'Discontinued Operations' for additional information.
 
Unless otherwise noted, and except for share and per share data, dollar amounts presented within these Notes to Consolidated Financial Statements are in millions.
 
Changes in Accounting Policies
Share-Based Payments.  In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.”  The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition, rather than being reflected in estimating the grant-date fair value of the award.  The Company adopted this guidance prospectively as of January 1, 2016, and there was no impact to the Company's financial statements.

Consolidation.  In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis.”  The update impacts an entity’s consolidation analysis of its variable interest entities, particularly those that have fee arrangements and related party relationships.  The update eliminates certain conditions for evaluating whether a fee paid to a decision maker or a service provider represents a variable interest, and places more emphasis in the evaluation of variable interests other than fee arrangements.  Additionally, the amendments reduce the extent to which related party arrangements cause an entity to be considered a primary beneficiary.  This guidance was adopted retrospectively as of January 1, 2016, and the Company updated its consolidation analyses for relevant entities. The adoption of this update did not change any consolidation conclusions, and there was no impact to the Company's financial statements or disclosures.


77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest.   In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs related to a recognized debt liability be presented in the Balance Sheets as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts.  In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issue Costs Associated with Line-of-Credit Arrangements,” which states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

The Company adopted this guidance retrospectively as of January 1, 2016, which resulted in a $10 million decrease to both Other assets and Debt in the Consolidated Balance Sheets as of December 31, 2015. The Company elected not to reclassify debt issuance costs related to line-of-credit and mortgage warehouse arrangements, which continue to be presented in Other assets for all periods. The adoption of this standard did not impact the Company’s results of operations or cash flows.
 
Intangibles—Goodwill and Other—Internal-Use Software.  In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.”  This update clarifies whether a cloud computing arrangement should be accounted for as a software license or as a service contract by the customer, depending on the terms of the arrangement.  In addition, the guidance requires all software licenses within the scope of the internal use software subtopic to be accounted for consistent with other licenses of intangible assets.  The Company adopted this guidance prospectively to all arrangements entered into or materially modified after January 1, 2016. The adoption of this standard did not have an impact to the Company's financial statements.

Presentation of Financial Statements.  In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide footnote disclosures in certain circumstances.  Management’s evaluation should be based on relevant conditions and events that are known at the date financial statements are issued.  The Company adopted this guidance during the fourth quarter of 2016 and it did not have an impact to the Company's financial statements or disclosures.

Recently Issued Accounting Pronouncements
Revenue Recognition.  In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers.”  The objective of the guidance is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and IFRS.  The Amendment supersedes most current revenue recognition guidance, including industry-specific guidance. The Amendment also enhances disclosure requirements around revenue recognition and the related cash flows.  The FASB has issued several amendments to the new revenue standard ASU 2014-09, including:
•
ASU 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross versus Net).” The amendments to this update were issued in March 2016 and are intended to improve the implementation guidance on principal versus agent considerations in ASU 2014-09 by clarifying how an entity should identify the unit of accounting (i.e. the specified good or service) and how an entity should apply the control principle to certain types of arrangements.
•
ASU 2016-10, “Identifying Performance Obligations and Licensing.” The amendments to this update were issued in April 2016 and are intended to improve the implementation guidance on identifying performance obligations by reducing the cost and complexity of identifying promised goods or services and improving the guidance for determining whether promises are separately identifiable. The amendments also provide implementation guidance on accounting for licenses of intellectual property.
•
ASU 2016-12, "Narrow-Scope Improvements and Practical Expedients." The amendments to this update were issued in May 2016 and clarify certain core recognition principles and provide practical expedients available at transition. The improvements address collectability, sales tax presentation, non-cash consideration, contract modifications and completed contracts at transition.
•
ASU 2016-20, "Technical Corrections and Improvements to Topic 606." This update was issued in December 2016 to increase stakeholders' awareness of the proposals and to expedite improvements to ASU 2014-09 and amends or clarifies thirteen narrow aspects of the revenue recognition guidance.

The revenue standards and subsequent 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. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods

78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

within that period. The Company does not expect to early adopt the revenue standard. The Company has reviewed the scope of the guidance and monitored the determinations of the FASB Transition Resource Group and determined that certain revenue streams are not within the scope of the standard and that those current accounting policies will not change. However, the Company continues to evaluate certain select revenue streams, including subservicing fees, and the impact that this guidance will have on its financial statements and disclosures. The Company has not yet selected a transition method of adoption.
 
Financial Instruments.  In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This update revises an entity's accounting related to the classification and measurement of investments in equity securities (except those accounted for under the equity method of accounting or those that result in consolidation of the investee), changes the presentation of certain fair value changes relating to instrument specific credit risk for financial liabilities and amends certain disclosure requirements associated with the fair value of financial instruments. This update is effective for the first interim and annual periods beginning after December 15, 2017 with early adoption permitted for certain provisions of the update. The Company is currently evaluating the impact of adopting this new standard.

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This standard is applicable to financial instruments not accounted for at fair value, including but not limited to, trade receivables and off-balance sheet credit exposures. This update is effective for the first interim and annual periods beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. At adoption, this update will be applied using a modified retrospective approach. The Company is currently evaluating the impact of adopting this new standard.

Leases.  In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This update revises an entity’s accounting for operating leases by a lessee, among other changes, and requires a lessee to recognize a liability to make lease payments and an asset representing its right to use the underlying asset for the lease term in the statement of financial position. The distinction between finance and operating leases has not changed, and the update does not significantly change the effect of finance and operating leases on the statement of comprehensive income and the statement of cash flows. Additionally, this update requires both qualitative and specific quantitative disclosures. This update is effective for the first interim and annual periods beginning after December 15, 2018, with early adoption permitted. At adoption, this update will be applied using a modified retrospective approach. The Company is currently evaluating the impact of adopting this new standard.

Derivatives and Hedging.  In March 2016, the FASB issued ASU 2016-06, “Contingent Put and Call Options in Debt Instruments.” This update clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to perform only a specific four-step decision sequence. An entity is no longer required to assess whether the contingency for exercising the option is indexed to interest rate or credit risk. This update is effective for the first interim and annual periods beginning after December 15, 2016, with early adoption permitted. At adoption, this update will be applied using a modified retrospective approach. The Company does not expect the adoption of this new standard to have a significant impact on its financial statements.

Share-Based Payments.  In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting." This update is intended to simplify 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. This update is effective for the first interim and annual periods beginning after December 15, 2016, with early adoption permitted. At adoption, this update will be applied either prospectively, retrospectively or by using a modified retrospective approach, depending on the area of change. Certain aspects will require reclassification of prior period amounts; however, the Company does not expect the adoption of this new standard to have a significant impact on its financial statements or disclosures.

Statement of Cash Flows.  In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments." This update addresses a number of specific cash flow issues and is intended to reduce diversity in practice in how entities present and classify certain cash receipts and cash payments in the statement of cash flows. 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. For issues that are impracticable to apply retrospectively, the amendments may be applied prospectively from the earliest date practicable. The Company is currently evaluating the impact of adopting this new standard.

In November 2016, the FASB issued ASU 2016-18, "Restricted Cash." This update requires restricted cash to be included in the beginning and end-of-period total amounts shown on the statement of cash flows, and also requires certain disclosures for significant

79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

balances of restricted cash. 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 is currently evaluating the impact of adopting this guidance.

Consolidation. In October 2016, the FASB issued ASU 2016-17, "Interests Held through Related Parties That Are under Common Control." This update requires 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. This update is effective for the first interim and annual periods beginning after December 15, 2016, with early adoption permitted. At adoption, this update will be applied retrospectively. The Company does not expect the adoption of this update to change any consolidation conclusions, or have a significant impact on its financial statements or disclosures.

Business Combinations. In January 2017, the FASB issued ASU 2017-01, "Clarifying the Definition of a Business." This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. 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 is currently evaluating the impact of adopting this guidance.

Other Income. In February 2017, the FASB issued ASU 2017-05, "Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets." This update defines what constitutes an “in substance nonfinancial asset”, requires that all entities account for the derecognition of a business in accordance with ASC 810 and clarifies that an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations. This update may be applied retrospectively to all prior periods presented or through a cumulative adjustment in the year of adoption, and is effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this guidance.
 
Revenue Recognition
Mortgage Production.   Mortgage Production includes the origination and sale of residential mortgage loans, which are originated through various channels, including relationships with financial institutions, real estate brokerage firms, and corporate clients. The Company also purchased mortgage loans originated by third parties.  Revenues from Mortgage Production include:
 
Origination and other loan fees. Origination and other loan fees consist of fee income earned on all loan originations, including loans closed to be sold and fee-based closings. Fee income consists of amounts earned related to application and underwriting fees, fees on canceled loans and amounts earned from financial institutions related to brokered loan fees and related to origination assistance fees resulting from private label mortgage outsourcing activities. Fees associated with the origination and acquisition of mortgage loans are recognized as earned.
 
Gain on loans held for sale.   Gain on loans held for sale, net includes the realized and unrealized gains and losses on sales of mortgage loans, as well as the changes in fair value of all loan-related derivatives, including interest rate lock commitments and freestanding loan-related derivatives.
 
Interest income.   Interest income is recognized on loans held for sale for the period from loan funding to sale, which is typically within 30 days .  Loans are placed on non-accrual status when any portion of the principal or interest is 90 days past due or earlier if factors indicate that the ultimate collectability of the principal or interest is not probable. Interest received from loans on non-accrual status is recorded as income when collected. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible.
 
Mortgage Servicing.   Mortgage Servicing involves the servicing of residential mortgage loans on behalf of an investor.  Revenues from Mortgage Servicing include:
 
Loan servicing income—Capitalized servicing portfolio .  Loan servicing income from the capitalized servicing portfolio represents recurring servicing and other ancillary fees earned for servicing mortgage loans owned by investors.  Servicing fees received for servicing mortgage loans owned by investors are based on a stipulated percentage of the outstanding monthly principal balance on such loans, or the difference between the weighted-average yield received on the mortgage loans and the amount paid to the investor, less guaranty fees and interest on curtailments.  Loan servicing income is receivable only out of interest collected from

80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

mortgagors and is recorded as income when collected. Late charges and other miscellaneous fees collected from mortgagors are also recorded as income when collected.

Loan servicing income—Subserviced portfolio .  Loan servicing income related to the subserviced portfolio includes fee income related to loans that are subserviced for clients that own the underlying servicing rights. Contractual subservicing fees are generally based on a stated amount per loan and vary depending on the delinquency status of the loan and the terms of each subservicing agreement. Fees related to the subserviced portfolio are accrued in the period the services are performed.
 
Sales of Financial Assets
Originated mortgage loans are principally sold directly to, or pursuant to programs sponsored by, government-sponsored entities and other investors. Additionally, during 2016, the Company has entered into agreements to sell substantially all of its existing Mortgage servicing rights (“MSRs”). See Note 5, 'Transfers and Servicing of Mortgage Loans' for additional information.

Each type of loan sale agreement is evaluated for sales treatment through a review that includes both an accounting and a legal analysis to determine whether or not the transferred assets have been isolated from the transferor, the extent of the continuing involvement and the existence of any protection provisions.

Each MSR sale agreement is evaluated for sales treatment through a review that includes an analysis of the approvals required by the investor and the purchaser, as well as a review of any seller financing or interim servicing provisions. MSR sales are further evaluated to determine that both title to the MSRs and substantially all risks and rewards have been transferred to the purchaser prior to recognizing a transfer of MSRs as a sale.

To the extent the transfer of loan or MSR assets qualifies as a sale, the asset is derecognized and the gain or loss is recorded on the sale date. In the event the transfer of assets does not qualify as a sale, the transfer would be treated as a secured borrowing. For MSR sale agreements where the Company has continuing involvement through an ongoing subservicing arrangement, to the extent the transfer of MSRs qualifies as a sale, any loss is recorded on the sale date and any gain amount is recognized over the life of the subservicing agreement.
 
Income Taxes
Current tax expense represents the amount of taxes currently payable to or receivable from a taxing authority plus amounts accrued for income tax contingencies (including tax, penalty and interest). Deferred tax expense generally represents the net change in the deferred tax asset or liability balance during the year plus any change in the valuation allowance, excluding any changes in amounts recorded in Additional paid-in capital or Accumulated other comprehensive income (loss) in the Consolidated Balance Sheets.
 
Deferred income taxes are determined using the balance sheet method.  This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes using the current enacted tax rates.  Deferred tax assets and liabilities are regularly reviewed to assess their potential realization and to establish a valuation allowance when it is “more likely than not” that some portion will not be realized.
 
The Company is subject to the income tax laws of the various jurisdictions in which it operates, including U.S. federal, state and local jurisdictions.  A consolidated federal income tax return is filed.  Depending upon the jurisdiction, the Company files consolidated or separate legal entity state income tax returns.  With respect to the Company’s operations prior to the sale of the Fleet business in 2014, the Company was also subject to income tax laws of Canada.
 
Cash and Cash Equivalents
Cash and cash equivalents include marketable securities with original maturities of three months or less.
 
Restricted Cash
Restricted cash includes amounts specifically designated to repay debt, to provide over-collateralization within warehouse facilities and the servicing advance facility, to support letters of credit, and to collect and hold for use in pending mortgage closings.
 

81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage Loans Held for Sale
Mortgage loans held for sale represent loans originated or purchased and held until sold to secondary market investors. Mortgage loans are typically warehoused for a period after origination or purchase before sale into the secondary market.  Servicing rights may be retained upon sale of mortgage loans in the secondary market.  Mortgage loans held for sale are measured at fair value on a recurring basis and are recognized in Gain on loans held for sale, net in the Consolidated Statements of Operations.
 
Servicing Advances, net
The Company is required under most of its mortgage servicing agreements to advance funds to meet contractual principal and interest payments to investors and to pay tax, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced.  Advances are recovered either from the borrower in subsequent payments, from liquidation proceeds or from insurance claims following foreclosure or liquidation.  The Company is exposed to losses only to the extent that the respective servicing guidelines are not followed and records a reserve against the advances when it is probable that the servicing advance will be uncollectable.  As of both December 31, 2016 and 2015 , the recorded reserve for uncollectible servicing advances was $5 million .  In certain circumstances, the Company may be required to remit funds on a non-recoverable basis, which are expensed as incurred.
 
Mortgage Servicing Rights
A mortgage servicing right is the right to receive a portion of the interest coupon and fees collected from the mortgagor for performing specified mortgage servicing activities. Mortgage servicing activities consist of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses such as taxes and insurance and otherwise administering the mortgage loan servicing portfolio. Mortgage servicing rights are created through either the direct purchase of servicing from a third party or through the sale of an originated mortgage loan with servicing retained. The servicing rights relate to a single class of residential mortgage loans, which are measured at fair value on a recurring basis.
 
The initial value of capitalized mortgage servicing rights is recorded as an addition to Mortgage servicing rights in the Consolidated Balance Sheets and within Gain on loans held for sale, net in the Consolidated Statements of Operations. Valuation changes adjust the carrying amount of Mortgage servicing rights in the Consolidated Balance Sheets and are recognized in Change in fair value of mortgage servicing rights in the Consolidated Statements of Operations.  Subsequent measurements including the market-related fair value adjustments and actual prepayments of the underlying mortgage loan and receipts of recurring cash flows are recorded in Change in fair value of mortgage servicing rights.
 
Property and Equipment  
Property and equipment (including leasehold improvements) are recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization expense are computed utilizing the straight-line method over the following estimated useful lives:
 
Capitalized software
3 to 5 years
Furniture, fixtures and equipment
3 to 7 years
Capital leases
Lesser of the remaining lease term or 5 years
Leasehold improvements
Lesser of the remaining lease term or 20 years

Internal software development costs are capitalized during the application development stage. The costs capitalized relate to external direct costs of materials and services and employee costs related to the time spent on the project during the capitalization period. Capitalized software is evaluated for impairment annually or when changing circumstances indicate that amounts capitalized may be impaired. Impaired items are written down to their estimated fair values at the date of evaluation.
 
Mortgage Loans in Foreclosure and Real Estate Owned
Mortgage loans in foreclosure and Real estate owned include loans that have been repurchased for breaches in representation and warranty obligations. As loans are repurchased, the Company reduces the estimated losses related to repurchase and indemnification obligations and records reserves for on-balance sheet loans in foreclosure and adjustments to value for real estate owned based on the expected amount which will likely not be recoverable from guarantors, insurers or investors.

82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Mortgage loans in foreclosure represent the unpaid principal balance of mortgage loans for which foreclosure proceedings have been initiated, plus recoverable advances made on those loans. These amounts are recorded net of an allowance for probable losses on such mortgage loans and related advances.
 
Real estate owned, which are acquired from mortgagors in default, plus recoverable advances made on those loans, are recorded at the lower of: (i) the adjusted carrying amount at the time the property is acquired; or (ii) fair value based upon the estimated net realizable value of the underlying collateral less the estimated costs to sell.

Derivative Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates. As a matter of policy, derivatives are not used for speculative purposes. Derivative instruments are measured at fair value on a recurring basis and are included in Other assets or Other liabilities in the Consolidated Balance Sheets.   The Company does not have any derivative instruments designated as hedging instruments.
 
Subservicing Advance Liabilities
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.
 
Loan Repurchase and Indemnification Liability
The Company has established a Loan repurchase and indemnification liability for various representation and warranties that are provided in connection with its capacity as a loan originator and servicer. The liability for probable losses includes estimates associated with: (i) losses for loans where a repurchase or indemnification obligation could exist from breaches of representation and warranties, (ii) losses for specific non-performing loans where the Company believes it will be required to indemnify the investor and (iii) losses for government loans that may not be reimbursed pursuant to mortgage insurance programs.

The Company estimates its obligation for representations and warranties using a model that incorporates historical repurchase and indemnification experience, servicing portfolio performance and other market-based information. The model considers borrower performance (both actual and estimated future defaults), estimated future repurchase and indemnification requests (impacted by current and expected loan file requests, investor demand patterns, expected relief from the expiration of repurchase obligations and levels of origination defects), success rates in appealing repurchase requests (or the ability to cure the origination defects) and projected loss severity rates upon repurchase of the loan (adjusted for home price forecasts). The liability related to specific non-performing loans is based on a loan-level analysis which considers the delinquency status of the loan and projected loss severity rates. To estimate the liability related to losses for loans that may not be reimbursed pursuant to mortgage insurance programs, the Company considers government loans currently in foreclosure, historical origination defect rates and projected loss severity rates.

The Company establishes an initial reserve at fair value for expected losses relating to loan sales at the date the loans are de-recognized from the Balance Sheet which is recorded as a reduction of the transaction gain or loss within Gain on loans held for sale, net in the Consolidated Statement of Operations. Subsequent updates to the recorded liability from changes in assumptions are recorded through Other operating expenses in the Consolidated Statement of Operations.

Custodial Accounts
The Company has a fiduciary responsibility for servicing accounts related to customer escrow funds and custodial funds due to investors aggregating $3.4 billion and $3.5 billion as of December 31, 2016 and 2015 , respectively. These funds are maintained in segregated bank accounts, and these amounts are not included in the assets and liabilities presented in the Consolidated Balance Sheets. The Company receives certain benefits from these deposits, as allowable under federal and state laws and regulations. Income earned on these escrow accounts is recorded in the Consolidated Statements of Operations either as Interest income or as a reduction of Secured interest expense.
 
Subsequent Events
Subsequent events are evaluated through the date of filing with the Securities and Exchange Commission.
 

83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Exit Costs

PLS Exit

On November 8, 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 Consolidated Statement of Operations, including our estimate of remaining and total program costs:
 
Year Ended December 31, 2016
 
Severance and Termination Benefits
 
Facility Exit Costs
 
Contract Termination & Other Costs
 
Asset Impairment
 
Total
 
(In millions)
Costs incurred this period
$
22

 
$
—

 
$
4

 
$
15

 
$
41

Cumulative costs recognized in prior periods
—

 
—

 
—

 
—

 
—

Estimate of remaining costs
20

 
25

 
29

 
—

 
74

Total
$
42

 
$
25

 
$
33

 
$
15

 
115


Asset impairment represents a non-cash expense of $15 million for the year ended December 31, 2016 . The Company assesses potential impairment of its assets by comparing the asset fair value to the expected value recoverable based on the present value of estimated future cash flow of the related business unit. In the fourth quarter of 2016, property and equipment associated with the PLS business, within the Mortgage Production Segment, and certain shared services assets used in supporting the PLS business within Other, was determined to be impaired.

The following is a summary of the program costs by segment for the year ended December 31, 2016 :
 
 
Mortgage Production Segment
 
Other
 
Total
 
 
(In millions)
Costs incurred this period
 
$
33

 
$
8

 
$
41

Cumulative costs recognized in prior periods
 
—

 
—

 
—

Estimate of remaining costs
 
64

 
10

 
74

Total
 
$
97

 
$
18

 
$
115


The Company's Exit cost liability is included in Accounts payable and accrued expenses within the Consolidated Balance Sheets. A summary of the activity is as follows:
 
Year Ended December 31, 2016
 
Severance and Termination Benefits
 
Facility Exit Costs
 
Contract Termination & Other Costs
 
Total
 
(In millions)
Balance, beginning of period
$
—

 
$
—

 
$
—

 
$
—

Charges
22

 
—

 
4

 
26

Paid
—

 
—

 
(1
)
 
(1
)
Balance, end of period
$
22

 
$
—

 
$
3

 
$
25



84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reorganization

On February 15, 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. To execute this reorganization and change the focus of its operations, the Company estimates that it will incur pre-tax costs of $30 million to $40 million , which are in addition to the PLS exit program. Costs estimated for this program include severance, acceleration of existing retention and incentive awards and other costs. The Company expects it will execute on these plans by the second quarter of 2018. The Company did not recognize any amounts in the December 31, 2016 financial statements related to these plans, as decisions were not completed until the first quarter of 2017.

3. Discontinued Operations

In 2014, the Company entered into a definitive agreement to sell its Fleet business to Element Financial Corporation for a purchase price of $1.4 billion . The sale was completed effective on July 1, 2014.
 
The results of discontinued operations are summarized below:  
 
Year Ended
 
December 31, 2014
 
(In millions)
Net revenues (1)
$
820

Total expenses (1)
774

Income before income taxes (1)
46

Income tax expense (1)
15

Gain from sale of discontinued operations, net of tax
241

Income from discontinued operations, net of tax
$
272

__________________
(1)  
Represents the results of the Fleet business.

The Gain from sale of discontinued operations, net of tax for the year ended December 31, 2014 includes a gain of $22 million resulting from the reclassification of currency translation adjustments from Accumulated other comprehensive income.  Income tax expense related to the Gain on sale of discontinued operations was $227 million for the year ended December 31, 2014, which includes $52 million of expense associated with the earnings of Canadian subsidiaries that were previously considered to be indefinitely invested.  Upon the classification of these entities as held for sale during the second quarter of 2014, the accumulated earnings were no longer deemed to be indefinitely invested, and the Company recognized expense related to the cumulative earnings of such Canadian subsidiaries.

The Company and Element Financial Corporation entered into a transition services arrangement, whereby the Company performed certain administrative or overhead functions following the completion of the sale, in exchange for a fee. As of December 31, 2016, services covered under the agreement are complete. For the years ended December 31, 2014 and 2015, revenues associated with the transition services agreement are included in Other income in the Consolidated Statements of Operations. A majority of the costs incurred by the Company to provide such transition services are included in Professional and third-party service fees and billed to Element Financial Corporation based upon the terms of the transition services agreement. The Company has no continuing involvement in the operations, results or cash flows of the Fleet business.
 

4. 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. Share repurchases or issuances are included in the outstanding shares as of each settlement date. See further discussions of share activity in Note 16, 'Stock-Related Matters' .

85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
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. The computation also excludes shares related to the issuance of the Convertible notes due 2014 and the related purchased options as they were required to be settled in cash, which matured and expired, respectively, on September 1, 2014.

Weighted-average common shares outstanding includes the following activity:

Year ended December 31, 2016 :
•
the repurchase of 1,508,772 shares during January 2016 under an open market repurchase program.

Year ended December 31, 2015 :
•
the repurchase of 4,841,267 shares during November 2015 and December 2015 under an open market repurchase program;
•
the issuance of 10,075,653 shares during June 2015 which represented the amount by which the conversion value exceeded the note principal under an exchange offer of certain convertible debt; and
•
the receipt and retirement of 1,574,252 shares during March 2015 which represented the final delivery of shares under accelerated repurchase agreements.

Year ended December 31, 2014 :
•
the initial receipt and retirement of 6,962,695 shares during August 2014 related to two separate accelerated share repurchase agreements.

The following table summarizes the calculations of basic and diluted earnings or loss per share attributable to PHH Corporation for the periods indicated: 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions, except share and per share data)
 
Loss from continuing operations, net of tax
$
(193
)
 
$
(131
)
 
$
(185
)
Less: net income attributable to noncontrolling interest
9

 
14

 
6

Net loss from continuing operations attributable to PHH Corporation
(202
)
 
(145
)
 
(191
)
Income from discontinued operations, net of tax
—

 
—

 
272

Net (loss) income attributable to PHH Corporation
$
(202
)
 
$
(145
)
 
$
81

 
 
 
 
 
 
Weighted-average common shares outstanding — basic and diluted (1) 
53,627,170

 
55,201,713

 
55,001,300

 
 
 
 
 
 
Basic and Diluted (loss) earnings per share:
 

 
 

 
 

From continuing operations
$
(3.77
)
 
$
(2.62
)
 
$
(3.47
)
From discontinued operations
—

 
—

 
4.94

Total attributable to PHH Corporation
$
(3.77
)
 
$
(2.62
)
 
$
1.47

__________________
(1)  
The Company had a net loss from continuing operations attributable to PHH Corporation and, as a result, there were no potentially dilutive securities included in the denominator for computing dilutive earnings per share.


86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes anti-dilutive securities excluded from the computation of dilutive shares:
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Outstanding stock-based compensation awards (1)
1,980,240

 
1,386,775

 
1,584,373

Assumed conversion of debt securities
—

 
4,341,369

 
8,997,305

______________
(1)  
For the year ended December 31, 2016 , excludes 353,265 shares that are contingently issuable for which the contingency has not been met.
 
5. Transfers and Servicing 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 Ginnie Mae (collectively, the "Agencies" or "GSEs") or (ii) sales to private investors. During the year ended December 31, 2016 , 52% of mortgage loan sales were to, or pursuant to programs sponsored by, the GSEs and the remaining 48% were sold to private investors.
 
The Company may have continuing involvement in mortgage loans sold by retaining one or more of the following: servicing rights and servicing obligations, recourse obligations and/or beneficial interests (such as interest-only strips, principal-only strips or subordinated interests).  The Company is exposed to interest rate risk through its continuing involvement with mortgage loans sold, including mortgage servicing and other retained interests, as the value of those instruments fluctuate as changes in interest rates impact borrower prepayments on the underlying mortgage loans. During the years ended December 31, 2016 and 2015 , the Company did not retain any interests from sales or securitizations other than Mortgage servicing rights ("MSRs").
 
During the year ended December 31, 2016 , MSRs were initially retained on 56% of mortgage loans sold. Conforming conventional loans serviced are sold or securitized through Fannie Mae or Freddie Mac programs. Government loans serviced are generally sold or securitized through Ginnie Mae programs and are either insured against loss by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Affairs. Additionally, non-conforming mortgage loans are serviced for various private investors on a non-recourse basis.
 
A majority of mortgage loans are sold on a non-recourse basis; however, in connection with the sales of these assets, representations and warranties have been made that are customary for loan sale transactions, including eligibility characteristics of the mortgage loans and underwriting responsibilities. See Note 14, 'Credit Risk' for a further description of representation and warranty obligations.
 
The total servicing portfolio consists of loans associated with capitalized mortgage servicing rights, loans held for sale and the portfolio associated with loans subserviced for others.  The total servicing portfolio was $174.6 billion and $226.3 billion , as of December 31, 2016 and 2015 , respectively.  MSRs recorded in the Consolidated Balance Sheets are related to the capitalized servicing portfolio and are created primarily through sales of originated loans on a servicing-retained basis or through the direct purchase of servicing from a third party.
 
Pending MSR Transactions

While the Company has historically retained MSRs on its Balance sheet from the majority of its loan sales, the Company has announced its intentions to sell its existing MSR assets in a series of transactions as part of the conclusions reached from the strategic review process, as discussed further below. If the sales of substantially all of the MSRs are completed, the Company does not anticipate retaining a significant amount of capitalized MSRs in the future.


87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 committed under sale agreements, based on the portfolio as of December 31, 2016 :
 
December 31, 2016
 
UPB
 
Fair Value
 
(In millions)
MSR commitments:
 
 
 
New Residential Investment Corp.
$
69,937

 
$
579

Lakeview Loan Servicing, LLC
13,369

 
97

Other counterparties
158

 
2

Non-committed
1,193

 
12

Total MSRs
$
84,657

 
$
690


In addition, the Company has commitments to transfer approximately $300 million of Servicing advances to the counterparties of these agreements (based on the December 31, 2016 portfolio).

Lakeview/GNMA Portfolio. On November 8, 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 $10.3 billion of unpaid principal balance, $77 million of MSR fair value, and $11 million of Servicing advances. The Company expects to receive total proceeds of $88 million from the initial transfer. The sale of the remaining population of MSRs committed under this agreement continues to be subject to approvals of clients who were the origination source of the MSRs. 

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 pending sale to Lakeview, to New Residential Mortgage LLC ("New Residential"), a wholly-owned subsidiary of New Residential Investment Corporation. The consummation of the transactions contemplated by this MSR sale agreement is subject to the approvals of PHH Corporation shareholders, the GSEs and private investors, as well as other customary closing requirements. Further, the sale of 33% of the MSRs underlying this agreement continues to be subject to the approval of clients who were the origination source of the MSRs. The agreement is also contingent upon the execution of a portfolio recapture and retention agreement with New Residential, and other customary closing conditions.

In connection with this transfer, the Company entered into a subservicing agreement with New Residential, pursuant to which the Company would subservice the loans sold in this transaction for an initial period of three years, subject to certain transfer and termination provisions (units based on the December 31, 2016 portfolio).

Other counterparties. The Company has agreements to sell a portion of its newly-created MSRs to third parties through flow-sale agreements, where it will have continuing involvement as a subservicer, as outlined in the preceding table. In addition, as of December 31, 2016 , the Company had commitments to sell MSRs through third-party flow sales related to $43 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.

Mortgage Servicing Rights

The activity in the loan servicing portfolio associated with capitalized servicing rights consisted of:  
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Balance, beginning of period
$
98,990

 
$
112,686

 
$
129,145

Additions
5,874

 
8,841

 
8,933

Payoffs and curtailments
(19,211
)
 
(19,092
)
 
(18,463
)
Sales
(996
)
 
(3,445
)
 
(6,929
)
Balance, end of period
$
84,657

 
$
98,990

 
$
112,686

 

88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The activity in capitalized MSRs consisted of:  
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Balance, beginning of period
$
880

 
$
1,005

 
$
1,279

Additions
60

 
101

 
97

Sales
(12
)
 
(39
)
 
(51
)
Changes in fair value due to:
 

 
 

 
 

Realization of expected cash flows
(138
)
 
(169
)
 
(155
)
Changes in market inputs or assumptions used in the valuation model
(100
)
 
(18
)
 
(165
)
Balance, end of period
$
690

 
$
880

 
$
1,005

 
The value of MSRs is driven by the net positive cash flows associated with servicing activities.  These cash flows include contractually specified servicing fees, late fees and other ancillary servicing revenue and were recorded within Loan servicing income as follows:  
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Servicing fees from capitalized portfolio
$
266

 
$
304

 
$
357

Late fees
15

 
15

 
17

Other ancillary servicing revenue
21

 
20

 
30

 
As of December 31, 2016 and 2015 , the MSRs had a weighted-average life of 6.3 and 6.4 years , respectively. See Note 18, 'Fair Value Measurements' for additional information regarding the valuation of MSRs.

The following table sets forth information regarding cash flows relating to loan sales in which the Company has continuing involvement:  
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Proceeds from new loan sales or securitizations
$
6,071

 
$
9,075

 
$
9,226

Servicing fees from capitalized portfolio (1) 
266

 
304

 
357

Purchases of previously sold loans  (2) 
(295
)
 
(128
)
 
(64
)
Servicing advances  (3) 
(1,584
)
 
(2,083
)
 
(1,963
)
Repayment of servicing advances  (3) 
1,647

 
2,086

 
1,935

______________
(1)   
Excludes late fees and other ancillary servicing revenue.
(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 the Consolidated Balance Sheets, except for advances related to mortgage loans in foreclosure or real estate owned, which are included in Other assets.
 
During the years ended December 31, 2016 , 2015 and 2014 , pre-tax gains of $266 million , $300 million and $276 million , respectively, related to the sale or securitization of residential mortgage loans were recognized in Gain on loans held for sale, net in the Consolidated Statements of Operations.
 


89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Derivatives

The Company’s principal market exposure is to interest rate risk, specifically long-term U.S. Treasury and mortgage interest rates, due to their impact on mortgage-related assets and commitments. From time to time, various financial instruments are used to manage and reduce this risk, including swap contracts, forward delivery commitments on mortgage-backed securities or whole loans, futures and options contracts. Derivative instruments are recorded in Other assets and Other liabilities in the Consolidated Balance Sheets.  The Company does not have any derivative instruments designated as hedging instruments. 
 
Interest Rate Lock Commitments.   Interest rate lock commitments (“IRLCs”) represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The loan commitment binds the Company (subject to the loan approval process) to fund the loan at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. The loan commitments generally range between 30 and 90 days ; however, the borrower is not obligated to obtain the loan. The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Forward delivery commitments on mortgage-backed securities or whole loans and options on forward contracts are used to manage the interest rate and price risk. Historical commitment-to-closing ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs.
 
Mortgage Loans Held for Sale.   The Company is subject to interest rate and price risk on Mortgage loans held for sale from the loan funding date until the date the loan is sold into the secondary market. Forward delivery commitments on mortgage-backed securities or whole loans are primarily used to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Forward delivery commitments may not be available for all products that the Company originates; therefore, a combination of derivative instruments, including forward delivery commitments for similar products, may be used to minimize the interest rate and price risk.
 
Mortgage Servicing Rights.   Mortgage servicing rights (“MSRs”) are subject to substantial interest rate risk as the mortgage notes underlying the servicing rights permit the borrowers to prepay the loans. Therefore, the value of MSRs generally tend to diminish in periods of declining interest rates (as prepayments increase) and increase in periods of rising interest rates (as prepayments decrease). Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards and product characteristics.

In the fourth quarter of 2016, the Company significantly reduced its MSR-related derivative hedge coverage as a result of its MSR sale agreements that fix the prices the Company expects to realize at future transfer dates. For further discussion of those agreements, and discussions of required shareholder approvals and other requirements that must be met to complete such sales, see Note 5, 'Transfers and Servicing of Mortgage Loans' in the accompanying Notes to Consolidated Financial Statements .

See Note 18, 'Fair Value Measurements' for further discussion regarding the measurements of derivative instruments.
 
The following table summarizes the gross notional amount of derivatives: 
 
December 31,
 
2016
 
2015
 
(In millions)
Notional amounts:
 

 
 

Interest rate lock commitments expected to close
$
862

 
$
1,048

Forward delivery commitments
2,104

 
2,468

MSR-related agreements
260

 
3,945

Option contracts
120

 
125

 

The Company is exposed to risk in the event of non-performance by counterparties in its derivative contracts. In general, the Company manages such risk by evaluating the financial position and creditworthiness of counterparties, monitoring the amount of exposure and/or dispersing the risk among multiple counterparties. The Company’s derivatives may also be governed by an ISDA or an MSFTA, and bilateral collateral agreements are in place with certain counterparties. When the Company has more than one outstanding derivative transaction with a single counterparty and a legally enforceable master netting agreement is in

90

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

effect with that counterparty, the Company considers its exposure to be the net fair value of all positions with that counterparty including the value of any cash collateral amounts posted or received.
 
In addition, the Company has global netting arrangements with certain counterparties whereby the Company’s outstanding derivative and cash collateral positions may be settled net against amounts outstanding under borrowing arrangements and other obligations when an event of default has occurred.  These amounts are not presented net in the Consolidated Balance Sheets as the netting provisions are contingent upon an event of default.
 
The following tables present the balances of outstanding derivative instruments on a gross basis and the application of counterparty and collateral netting:
 
December 31, 2016
 
Gross Assets
 
Offsetting
Payables
 
Cash Collateral
Paid
 
Net Amount
 
(In millions)
ASSETS
 

 
 

 
 

 
 

Subject to master netting arrangements:
 

 
 

 
 

 
 

Forward delivery commitments
$
13

 
$
(43
)
 
$
31

 
$
1

MSR-related agreements
19

 
(22
)
 
4

 
1

Option contracts
1

 
(1
)
 
—

 
—

Derivative assets subject to netting
33

 
(66
)
 
35

 
2

Not subject to master netting arrangements:
 

 
 

 
 

 
 

Interest rate lock commitments
18

 
—

 
—

 
18

Forward delivery commitments
1

 
—

 
—

 
1

Derivative assets not subject to netting
19

 
—

 
—

 
19

Total derivative assets
$
52

 
$
(66
)
 
$
35

 
$
21


 
Gross Liabilities
 
Offsetting
Receivables
 
Cash Collateral
Received
 
Net Amount
 
(In millions)
LIABILITIES
 

 
 

 
 

 
 

Subject to master netting arrangements:
 

 
 

 
 

 
 

Forward delivery commitments
$
4

 
$
(10
)
 
$
11

 
$
5

MSR-related agreements
65

 
(55
)
 
2

 
12

Option contracts
—

 
(1
)
 
2

 
1

Derivative assets subject to netting
69

 
(66
)
 
15

 
18

Total derivative liabilities
$
69

 
$
(66
)
 
$
15

 
$
18

 

91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
December 31, 2015
 
Gross Assets
 
Offsetting
Payables
 
Cash Collateral
Received
 
Net Amount
 
(In millions)
ASSETS
 

 
 

 
 

 
 

Subject to master netting arrangements:
 

 
 

 
 

 
 

Forward delivery commitments
$
2

 
$
(2
)
 
$
—

 
$
—

MSR-related agreements
27

 
—

 
(23
)
 
4

Derivative assets subject to netting
29

 
(2
)
 
(23
)
 
4

Not subject to master netting arrangements:
 

 
 

 
 

 
 

Interest rate lock commitments
21

 
—

 
—

 
21

Forward delivery commitments
1

 
—

 
—

 
1

Derivative assets not subject to netting
22

 
—

 
—

 
22

Total derivative assets
$
51

 
$
(2
)
 
$
(23
)
 
$
26

 
 
Gross Liabilities
 
Offsetting
Receivables
 
Cash Collateral
Received
 
Net Amount
 
(In millions)
LIABILITIES
 

 
 

 
 

 
 

Subject to master netting arrangements:
 

 
 

 
 

 
 

Forward delivery commitments
$
2

 
$
(2
)
 
$
2

 
$
2

Total derivative liabilities
$
2

 
$
(2
)
 
$
2

 
$
2

 
The following table summarizes the gains (losses) recorded in the Consolidated Statements of Operations for derivative instruments:
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Gain on loans held for sale, net:
 

 
 

 
 

Interest rate lock commitments
$
315

 
$
261

 
$
309

Forward delivery commitments
(1
)
 
(7
)
 
(89
)
Option contracts
—

 
(2
)
 
(4
)
Net derivative gain related to mortgage servicing rights:
 

 
 

 
 

MSR-related agreements
10

 
29

 
82




92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Property and Equipment, Net
 
Property and equipment, net consisted of:
 
December 31,
 
2016
 
2015
 
(In millions)
Capitalized software
$
130

 
$
131

Furniture, fixtures and equipment
33

 
32

Capital leases
9

 
9

Leasehold improvements
25

 
24

 
197

 
196

Less: Accumulated depreciation and amortization
(161
)
 
(149
)
Total
$
36

 
$
47


During 2016, the Company recorded impairment charges of $8 million in leasehold improvements and $7 million in capitalized software, resulting from the announced plan to exit the PLS business. See Note 2, 'Exit Costs' for a discussion of the impairment analysis.


8. Other Assets
 
Other assets consisted of:
 
December 31,
 
2016
 
2015
 
(In millions)
Derivatives
$
21

 
$
26

Mortgage loans in foreclosure, net (1)
21

 
24

Real estate owned, net (2)
16

 
21

Income taxes receivable
14

 
23

Repurchase eligible loans (3) 
13

 
104

Equity method investments (4)
10

 
32

Deferred financing costs
1

 
3

Other
13

 
14

Total
$
109

 
$
247

 
(1)  
As of both December 31, 2016 and 2015 , Mortgage loans in foreclosure is net of Allowance for probable foreclosure losses of $10 million .
(2)  
As of December 31, 2016 and 2015 , Real estate owned is net of Adjustment to value for real estate owned of $14 million and $17 million , respectively.
(3)  
As of December 31, 2015, Repurchase eligible loans included a portfolio of GNMA loans that were part of a pending repurchase transaction that settled in January 2016. There were no similar buyout transactions pending as of December 31, 2016.
Repurchase eligible loans represent certain mortgage loans sold pursuant to Government National Mortgage Association 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 than 90 days 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 the Consolidated Balance Sheets.
(4)  
See Note 18, 'Fair Value Measurements' for a discussion of the 2016 impairment of this asset.



93

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Accounts Payable and Accrued Expenses
 
Accounts payable and accrued expenses consisted of:
 
December 31,
 
2016
 
2015
 
(In millions)
Accounts payable
$
77

 
$
76

Accrued payroll and benefits
50

 
38

Exit cost liability (Note 2)
25

 
—

Accrued interest
16

 
16

Repurchase eligible loans (Note 8)
13

 
104

Accrued servicing related expenses
12

 
17

Total
$
193

 
$
251



10. Other Liabilities

Other liabilities consisted of:
 
December 31,
 
2016
 
2015
 
(In millions)
Legal and regulatory matters (Note 15)
$
114

 
$
105

Derivatives
18

 
2

Pension and other post-employment benefits
11

 
11

Income tax contingencies
8

 
9

Other
6

 
10

Total
$
157

 
$
137

 


94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Debt and Borrowing Arrangements

The following table summarizes the components of Debt:
 
December 31, 2016
 
December 31, 2015
 
Balance
 
Interest
Rate (1)
 
Available
Capacity (2)
 
Balance
 
(In millions)
Committed warehouse facilities
$
556

 
2.9
%
 
$
494

 
$
632

Uncommitted warehouse facilities
—

 
—

 
1,950

 
—

Servicing advance facility
99

 
2.7
%
 
56

 
111

 
 
 
 
 
 
 
 
Term notes due in 2019
275

 
7.375
%
 
n/a

 
275

Term notes due in 2021
340

 
6.375
%
 
n/a

 
340

Unsecured credit facilities
—

 
—

 
3

 
—

Unsecured debt, face value
615

 
 

 
 

 
615

   Debt issuance costs (3)
(8
)
 
 
 
 
 
(10
)
Unsecured debt, net
607

 
 
 
 
 
605

Total
$
1,262

 
 

 
 

 
$
1,348

 
(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.
(3)  
Deferred issuance costs were reclassified from the prior year presentation in Other assets to a reduction in Unsecured debt.
 
Assets held as collateral that are not available to pay the Company’s general obligations as of December 31, 2016 consisted of:
 
 
Warehouse
Facilities
 
Servicing
Advance
Facility
 
(In millions)
Restricted cash
$
9

 
$
19

Servicing advances
—

 
150

Mortgage loans held for sale (unpaid principal balance)
584

 
—

Total
$
593

 
$
169

 

95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides the contractual debt maturities as of December 31, 2016 :
 
 
Warehouse
Facilities
 
Servicing
Advance
Facility (1)
 
Unsecured
Debt
 
Total
 
(In millions)
Within one year
$
556

 
$
99

 
$
—

 
$
655

Between one and two years
—

 
—

 
—

 
—

Between two and three years
—

 
—

 
275

 
275

Between three and four years
—

 
—

 
—

 
—

Between four and five years
—

 
—

 
340

 
340

Thereafter
—

 
—

 
—

 
—

 
$
556

 
$
99

 
$
615

 
$
1,270

 
 
(1)  
Maturities of the Servicing advance facility represent estimated payments based on the expected cash inflows of the receivables.

See Note 18, 'Fair Value Measurements' for the measurement of the fair value of Debt.
 
Mortgage Warehouse Debt

Mortgage warehouse debt primarily represents variable-rate asset-backed facilities to support the origination of mortgage loans, which provide creditors a collateralized interest in specific mortgage loans that meet the eligibility requirements under the terms of the facility.  The source of repayment of the facilities is typically from the sale or securitization of the underlying loans into the secondary mortgage market. The Company evaluates its capacity needs for warehouse facilities, and adjusts the amount of available capacity under these facilities in response to the current mortgage environment and origination needs.
 
Committed Facilities
 
Committed repurchase facilities have up to a 364 -day term.  However, in 2016, the Company entered into shorter term facilities with certain of its lenders to allow both the Company and the lender to evaluate facility needs and agreement terms following the conclusion of the Company’s strategic review process. As of December 31, 2016 , the Company has outstanding committed mortgage repurchase facilities with Barclays Bank PLC, Fannie Mae, Bank of America, N.A., and Wells Fargo Bank, N.A., and the range of maturity dates is March 28, 2017 to April 2, 2017. Upon expiration of these existing agreements, the Company expects to negotiate terms for repurchase facility commitments to meet its forecasted capacity needs.
 
On March 29, 2016 , the Company entered into a new committed mortgage repurchase facility of $100 million and an uncommitted mortgage repurchase facility of $100 million with Barclays Bank PLC. The expiration date of the committed facility is March 28, 2017.

On March 31, 2016 , the committed mortgage repurchase facilities with Wells Fargo Bank were extended to April 2, 2017. On June 22, 2016, the facilities were returned to a $450 million capacity, after having been downsized in the March amendment. 
  
On December 14, 2016 , at the Company's request, the committed repurchase facilities with Fannie Mae were reduced to $150 million , the facility was extended to March 31, 2017, and the uncommitted repurchase facility was reduced to $1.85 billion . The total combined committed and uncommitted facilities with Fannie Mae are $2 billion .

On June 17, 2016 , the $250 million committed and $325 million uncommitted mortgage repurchase facilities with Credit Suisse First Boston Mortgage Capital LLC expired and were not renewed.

On December 22, 2016 , the committed repurchase facility with Bank of America was reduced by $50 million to $350 million at the Company's request, and the facility was extended to March 31, 2017.


96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Uncommitted Facilities
 
As of December 31, 2016 , the Company has $1.85 billion and $100 million of uncommitted mortgage repurchase facilities with Fannie Mae and Barclays Bank PLC, respectively.

Servicing Advance Facility
 
PHH Servicer Advance Receivables Trust 2013-1 (“PSART”), a special purpose bankruptcy remote trust was formed for the purpose of issuing non-recourse asset-backed notes, secured by servicing advance receivables. PSART was consolidated as a result of the determination that the Company is the primary beneficiary, as discussed in Note 19, 'Variable Interest Entities' .
 
On June 15, 2016, PSART extended the Note Purchase Agreement with Wells Fargo for the Series 2015-1 variable funding notes with an aggregate maximum principal amount of $155 million . PSART issues variable funding notes that have a revolving period, during which time the monthly collection of advances are applied to pay down the notes and create additional availability to fund advances. The Series 2015-1 Notes have a revolving period through June 15, 2017 and the final maturity of the notes is June 15, 2018.  The notes bear interest, payable monthly, based on LIBOR plus an agreed-upon margin. Upon expiration of the revolving period, the notes enter a repayment period, whereby the noteholders’ commitment to fund new advances (through the purchase of additional notes) expires, and PSART is required to repay the outstanding balance through advance collections or additional payments on or before final maturity.
 
Unsecured Debt

As of December 31, 2016, the Company’s unsecured debt obligations include series of Term notes which are senior unsecured and unsubordinated obligations that rank equally with all existing and future senior unsecured debt.
 
Senior notes due 2019.  The 7.375% 2019 Senior note series has $275 million of principal due September 1, 2019.  Senior notes due 2019 are governed by an existing indenture dated January 17, 2012 with The Bank of New York Mellon Trust Company, N.A. as trustee.  The notes are redeemable by the Company upon payment of a make-whole premium, in accordance with the optional redemption clause in the indenture. 
 
Senior notes due 2021.  The 6.375% 2021 Senior note series has $340 million of principal due August 15, 2021.  Senior notes due 2021 are governed by an existing indenture dated January 17, 2012 with The Bank of New York Mellon Trust Company, N.A. as trustee.  The notes are redeemable by the Company at any time after August 15, 2017 and in accordance with the optional redemption clause in the indenture.
 
Debt Covenants

Certain debt arrangements require the maintenance of certain financial ratios and contain other affirmative and negative covenants, termination events, conditions precedent to borrowing, and other restrictions, including, but not limited to, covenants relating to material adverse changes, consolidated net worth, leverage, liquidity, profitability, available committed mortgage warehouse borrowing capacity maintenance, restrictions on indebtedness of the Company and its material subsidiaries, mergers, liens, liquidations, and restrictions on certain types of payments, including dividends and stock repurchases. Certain other debt arrangements, including the Fannie Mae committed facility, contain provisions that permit the Company or the counterparty to terminate the arrangement upon the occurrence of certain events including those described below.
 
Among other covenants, certain mortgage repurchase facilities require that the Company maintain: (i) on the last day of each fiscal quarter, net worth of at least $750 million ; (ii) a ratio of indebtedness to tangible net worth no greater than 4.50 to 1; (iii) a minimum of $750 million in committed mortgage warehouse financing capacity excluding any mortgage warehouse capacity provided by GSEs; (iv) a ratio of unsecured indebtedness to tangible net worth of not more than 1.25 to 1; and (v) maintenance of $150 million of cash and cash equivalents in excess of its liability for legal and regulatory matters.  These covenants represent the most restrictive net worth, liquidity, and debt to equity covenants; however, certain other outstanding debt agreements contain liquidity and debt to equity covenants that are less restrictive.
 

97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Under certain of the Company’s financing, servicing, hedging and related agreements and instruments, the lenders or trustees have the right to notify the Company if they believe it has breached a covenant under the operative documents and may declare an event of default. If one or more notices of default were to be given, the Company believes it would have various periods in which to cure certain of such events of default. If the Company does not cure the events of default or obtain necessary waivers within the required time periods, the maturity of certain debt agreements could be accelerated and the ability to incur additional indebtedness could be restricted. In addition, an event of default or acceleration under certain agreements and instruments would trigger cross-default provisions under certain of the Company’s other agreements and instruments.
 
As of December 31, 2016 , the Company was in compliance with all financial covenants related to its debt arrangements.

See Note 16, 'Stock-Related Matters' for information regarding restrictions on the Company’s ability to pay dividends pursuant to certain debt arrangements.
 
12. Pension and Other Post-Employment Benefits

Defined Contribution Savings Plans.   The Company and PHH Home Loans sponsor separate defined contribution savings plans that provide certain eligible employees an opportunity to accumulate funds for retirement and contributions of participating employees are matched on the basis specified by these plans. The costs for the matching contributions are included in Salaries and related expenses in the Consolidated Statements of Operations except for contributions in 2014 related to employees of the Fleet business, which are included in Income from discontinued operations, net of tax.  Salaries and related expenses included contributions of $7 million , $8 million and $8 million for the years ended December 31, 2016 , 2015 and 2014 , respectively.
 
Defined Benefit Pension Plan and Other Post-Employment Benefits Plan .  The Company sponsors a domestic non-contributory defined benefit pension plan, which covers certain current and former eligible employees. Benefits are based on an employee’s years of credited service and a percentage of final average compensation, or as otherwise described by the plan. In addition, a post-employment benefits plan is maintained for retiree health and welfare costs of certain eligible employees. Both the 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.
 
The following table shows the change in the benefit obligation, plan assets and funded status for the defined benefit pension plans:
 
Pension Benefits
 
Other Post-Employment
Benefits
 
2016
 
2015
 
2016
 
2015
 
(In millions)
Benefit obligation
$
48

 
$
47

 
$
1

 
$
1

Fair value of plan assets
38

 
37

 
—

 
—

Unfunded status recognized in Other liabilities
$
(10
)
 
$
(10
)
 
$
(1
)
 
$
(1
)
 
 
 
 
 
 
 
 
Amounts recognized in Accumulated other comprehensive income
$
16

 
$
16

 
$
—

 
$
—


The net periodic benefit cost related to the defined benefit pension plan was $1 million for the year ended December 31, 2016 and was included in Salaries and related expenses. The amount was not significant for each of the years ended December 31, 2015 and 2014. The net periodic benefit costs related to the other post-employment benefit plan were not significant for each of the years ended December 31, 2016 , 2015 , and 2014.

As of December 31, 2016 , future expected benefit payments to be made from the defined benefit pension plan’s assets, which reflect expected future service, are $2 million in each of the years ending December 31, 2017 through 2020, $3 million for the year ending December 31, 2021, and $14 million for the subsequent five years ending December 31, 2026.
 
The Company’s policy is to contribute amounts to the defined benefit pension plan sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws and additional amounts at the discretion of the Company.  There were no contributions made to the plan for the years ended December 31, 2016 and 2015 , and contributions are not expected to be significant for the year ended December 31, 2017.

98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Income Taxes

Income Tax Provision
 
The following table summarizes Income tax benefit:
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Current:
 

 
 

 
 

Federal
$
—

 
$
—

 
$
(461
)
State
—

 
(1
)
 
(31
)
Income tax contingencies:
 

 
 

 
 

Change in income tax contingencies
(2
)
 
—

 
6

Interest and penalties
—

 
—

 
1

Total current income tax benefit
(2
)
 
(1
)
 
(485
)
 
 
 
 
 
 
Deferred:
 

 
 

 
 

Federal
(100
)
 
(79
)
 
373

State
(9
)
 
(2
)
 
13

Total deferred income tax (benefit) expense
(109
)
 
(81
)
 
386

Income tax benefit
$
(111
)
 
$
(82
)
 
$
(99
)
 
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:
 
 
December 31,
 
2016
 
2015
 
(In millions)
Deferred tax assets:
 

 
 

Federal loss carryforwards
$
23

 
$
24

State loss carryforwards and credits
39

 
39

Accrued legal and regulatory matters
46

 
37

Reserves and allowances
36

 
45

Other accrued liabilities
34

 
20

Gross deferred tax assets
178

 
165

Valuation allowance
(44
)
 
(46
)
Deferred tax assets, net of valuation allowance
134

 
119

 
 
 
 
Deferred tax liabilities:
 

 
 

Mortgage servicing rights
234

 
297

Other
1

 
4

Deferred tax liabilities
235

 
301

Net deferred tax liability
$
101

 
$
182


The deferred tax assets valuation allowance relates to state loss carryforwards and non-loss deferred tax assets. The valuation allowance will be reduced when and if it is determined that it is more likely than not that all or a portion of the deferred tax assets will be realized. The federal loss carryforwards will expire in 2036. The state loss carryforwards will expire from 2016 to 2037.
 

99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The deferred tax liabilities represent the future tax 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 mortgage servicing rights 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.
 
Effective Tax Rate
 
Total income taxes differ from the amount that would be computed by applying the U.S. federal statutory rate as follows:

 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Loss from continuing operations before income taxes
$
(304
)
 
$
(213
)
 
$
(284
)
Statutory federal income tax rate
35
 %
 
35
 %
 
35
 %
Income taxes computed at statutory federal rate
$
(106
)
 
$
(75
)
 
$
(99
)
State and local income taxes, net of federal tax benefits
(15
)
 
(14
)
 
(12
)
Liabilities for income tax contingencies
(2
)
 
—

 
7

Changes in rate and apportionment factors
1

 
3

 
1

Changes in valuation allowance
5

 
10

 
5

Nondeductible expenses
6

 
6

 
—

Noncontrolling interest
(3
)
 
(5
)
 
(2
)
Other
3

 
(7
)
 
1

Income tax benefit
$
(111
)
 
$
(82
)
 
$
(99
)
Effective tax rate
(36.7
)%
 
(38.4
)%
 
(35.1
)%
 
State and local income taxes, net of federal tax benefits. Represents the impact to the effective tax rate from the pre-tax income or loss as well as the mix of income or loss from the operations by entity and state income tax jurisdiction.  For the year ended December 31, 2016 as compared to 2015 , the effective state tax rate is lower due to the Company’s loss from its operations in multiple jurisdictions that are taxed at a lower apportionments and a lower state income tax rate.
 
Liabilities for income tax contingencies. Represents the impact to the effective tax rate from changes in the liabilities for income tax contingencies associated with new uncertain tax positions taken during the period or the resolution and settlement of prior uncertain tax positions with various taxing authorities.  For the year ended December 31, 2016 , the change was driven by the expiration of statute of limitations related to tax positions taken in prior years. For the year ended December 31, 2014, the change was primarily driven by state tax filing positions expected to be taken related to the sale of the Fleet business.
 
Changes in rate and apportionment factors.   Represents the impact to the effective tax rate from deferred tax items for changes in apportionment factors and state tax rate and reflect the impact of applying statutory changes to apportionment weight, apportionment sourcing and corporate income tax rates that were enacted by various states.
 
Changes in valuation allowance.   Represents the impact to the effective tax rate from state loss carryforwards generated during the year and certain cumulative non net operating loss deferred tax assets for which the Company believes it is more likely than not that the amounts will not be realized. For the years ended December 31, 2016 and 2015, state tax losses generated were $4 million and $5 million , respectively, and the remaining changes were from non net operating loss deferred tax assets for which a valuation allowance is warranted. For the year ended December 31, 2014, the amount was driven by items impacted by the change in composition of the subsidiaries included in state returns from the sale of the Fleet business and state tax losses generated by the Mortgage business.
 
Nondeductible expenses. For the years ended December 31, 2016 and 2015 , the amount represents the impact to the effective tax rate from nondeductible expenses primarily related to legal and regulatory matters of $6 million and $4 million , respectively. Additionally for 2015, premiums of $1 million were paid to exchange the Convertible notes due in 2017.

Noncontrolling interest. Represents the impact to the effective tax rate from Realogy Corporation’s portion of income taxes related to the income or loss attributable to PHH Home Loans.  The impact is driven by PHH Home Loans’ election to report as a partnership for federal and state income tax purposes, whereby, the tax expense is reported by the individual LLC members. 

100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accordingly, the Company’s Income tax expense or benefit includes only its proportionate share of the income tax related to the income or loss generated by PHH Home Loans. 

Other. For the years ended December 31, 2016 and 2015, the amount was driven from adjustments resulting from the comparison of items included in the prior year provision to the final income tax returns. For the year ended December 31, 2015, the amount was also impacted by adjustments to deferred tax items related to the sale of the Fleet business.
 
Unrecognized Income Tax Benefits
 
Unrecognized income tax benefits are recognized related to tax positions included in: (i) previously filed income tax returns and (ii) financial results expected to be included in income tax returns to be filed for periods through the date of the Consolidated Financial Statements. The Company recognizes tax benefits from uncertain income tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authority based on the technical merits of the position.  An uncertain income tax position that meets the “more likely than not” recognition threshold is then measured to determine the amount of the benefit to recognize.
 
An unrecognized tax benefit, or a portion of an unrecognized tax benefit, is presented in the Consolidated Balance Sheets within Other liabilities to the extent a net operating loss carryforward is not available at the reporting date to settle any additional income taxes resulting from the tax position. In other instances where a net operating loss carryforward is available, the amounts are recorded as a reduction to the Company’s Deferred tax assets in the Consolidated Balance Sheets.

Activity related to the Company's unrecognized income tax benefits (including the liability for potential payment of interest and penalties) consisted of:
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Balance, beginning of period
$
11

 
$
11

 
$
4

Activity related to tax positions taken during the current year
—

 
—

 
7

Activity related to tax positions taken during prior years
(3
)
 
—

 
—

Balance, end of period
$
8

 
$
11

 
$
11

 
The estimated liability for the potential payment of interest and penalties included in the liability for unrecognized income tax benefits was $2 million as of both December 31, 2016 and 2015 , respectively.
 
The amount of unrecognized income tax benefits may change in the next twelve months primarily due to activity in future reporting periods related to income tax positions taken during prior years. This change may be material; however, the impact of these unrecognized income tax benefits cannot be projected on the results of operations or financial position for future reporting periods due to the volatility of market and other factors. The effective income tax rate would be positively impacted by $8 million as of December 31, 2016 in the event of a favorable resolution of income tax contingencies or reductions in valuation allowances and $11 million as of both December 31, 2015 and 2014 .
 
The Company and its subsidiaries remain subject to examination by the IRS for the tax years ended December 31, 2013 through 2016.  As of December 31, 2016 , foreign and state income tax filings were subject to examination for periods including and subsequent to 2008, dependent upon jurisdiction.


14. Credit Risk
 
The Company is subject to the following forms of credit risk:
•
Consumer credit risk — through mortgage banking activities as a result of originating and servicing residential mortgage loans

•
Counterparty credit risk — through derivative transactions, sales agreements and various mortgage loan origination and servicing agreements

101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consumer Credit Risk
 
The Company is not subject to the majority of the risks inherent in maintaining a mortgage loan portfolio because loans are not held for investment purposes and are generally sold to investors within 30 days of origination.  The majority of mortgage loan sales are on a non-recourse basis and if the loans were originated in accordance with applicable underwriting standards, the Company may not have exposure to future risk of loss; however, in its capacity as a loan originator and servicer, the Company has exposure to loan repurchases and indemnifications through representation and warranty provisions and government servicing contracts.

The following tables summarize certain information regarding the total loan servicing portfolio, which includes loans associated with the capitalized Mortgage servicing rights as well as loans subserviced for others:  
 
December 31,
 
2016
 
2015
 
(In millions)
Loan Servicing Portfolio Composition
 

 
 

Owned
$
85,472

 
$
99,869

Subserviced
89,170

 
126,390

Total
$
174,642

 
$
226,259

 
 
 
 
Conventional loans
$
151,004

 
$
197,971

Government loans
21,801

 
24,087

Home equity lines of credit
1,837

 
4,201

Total
$
174,642

 
$
226,259

 
 
 
 
Weighted-average interest rate
3.8
%
 
3.8
%
 
 
December 31,
 
2016
 
2015
 
Number of
Loans
 
Unpaid
Balance
 
Number of
Loans
 
Unpaid
Balance
Portfolio Delinquency (1)
 

 
 

 
 

 
 

30 days
2.23
%
 
1.58
%
 
2.22
%
 
1.55
%
60 days
0.60

 
0.41

 
0.44

 
0.30

90 or more days
0.76

 
0.57

 
0.82

 
0.62

Total
3.59
%
 
2.56
%
 
3.48
%
 
2.47
%
Foreclosure/real estate owned (2)
1.80
%
 
1.54
%
 
1.74
%
 
1.51
%
_____________
(1)  
Represents portfolio delinquencies as a percentage of the total number of loans and the total unpaid balance of the portfolio.

(2)  
As of December 31, 2016 and 2015 , the total servicing portfolio included 11,539 and 15,487 of loans in foreclosure with an unpaid principal balance of $2.3 billion and $3.0 billion , respectively.

Repurchase and Foreclosure-Related Reserves
 
Representations and warranties are provided to investors and insurers on a significant portion of loans sold, and are also assumed on purchased mortgage servicing rights for loans that are owned by the Agencies or included in Agency-guaranteed securities.  In the event of a breach of these representations and warranties, the Company may be required to repurchase the mortgage loan or indemnify the investor against loss.  For conventional loans, if there is no breach of a representation and warranty provision, there is no obligation to repurchase the loan or indemnify the investor against loss.  The Company has limited exposure related to VA and FHA insured loans.  In limited circumstances, the full risk of loss on loans sold is retained to the extent the liquidation of the underlying collateral is insufficient. In some instances where the Company has purchased loans from third parties, it may have the ability to recover the loss from the third party originator.  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.

102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
A summary of the activity in repurchase and foreclosure-related reserves is as follows:
 
 
Year Ended December 31,
 
2016
 
2015
 
(In millions)
Balance, beginning of period
$
89

 
$
93

Realized losses
(42
)
 
(19
)
Increase in reserves due to:
 

 
 

Changes in assumptions
19

 
6

New loan sales
7

 
9

Balance, end of period
$
73

 
$
89


Repurchase and foreclosure-related reserves consist of the following:
 
December 31,
 
2016
 
2015
 
(In millions)
Loan repurchase and indemnification liability
$
49

 
$
62

Adjustment to value for real estate owned
14

 
17

Allowance for probable foreclosure losses
10

 
10

Total
$
73

 
$
89


Loan Repurchases and Indemnifications
 
As of December 31, 2016 and 2015 , liabilities for probable losses related to repurchase and indemnification obligations of $49 million and $62 million , respectively, are presented in the Consolidated Balance Sheets. 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).

In December 2016, the Company entered into resolution agreements with 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 resolution agreements do not cover loans with certain defects, which include but are not limited to, loans with certain title issues or with violations of law. The settlement amounts did not significantly exceed the Company's recorded reserves.

After executing the resolution agreements, 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 loan repurchase and indemnification requests and government insurance programs, there is a reasonable possibility that future losses may be in excess of the recorded liability.  As of December 31, 2016 , the estimated amount of reasonably possible losses in excess of the recorded liability was $20 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 December 31, 2016 , $75 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; 24% of which were at least 90 days delinquent (calculated based upon the unpaid principal balance of the loans).


103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Counterparty Credit Risk
 
Counterparty credit risk exposure includes risk of non-performance by counterparties to various agreements and sales transactions. Such risk is managed by evaluating the financial position and creditworthiness of such counterparties and/or requiring collateral, typically cash, in derivative and financing transactions. The Company attempts to mitigate counterparty credit risk associated with derivative contracts by monitoring the amount for which it is at risk with each counterparty to such contracts, requiring collateral posting, typically cash, above established credit limits, periodically evaluating counterparty creditworthiness and financial position, and where possible, dispersing the risk among multiple counterparties.  As of December 31, 2016 , there were no significant concentrations of credit risk with any individual counterparty or a group of counterparties with respect to derivative transactions.
 
During the year ended December 31, 2016 , the Company's mortgage loan originations were derived from the following PLS relationships: 25% from Merrill Lynch Home Loans, a division of Bank of America, National Association, 21% from Morgan Stanley Private Bank, N.A. and 10% from HSBC Bank USA. In November 2016, as an outcome of the strategic review process, the Company announced its intentions to exit the PLS business and these client relationships, which represented 79% of total closing volume (based on dollars) for the year ended December 31, 2016 .

During the year ended December 31, 2016 , 20% of mortgage loan originations were derived from the Company's relationship with Realogy and its affiliates, substantially all of which was originated by PHH Home Loans. 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. See Note 23, 'Subsequent Events' for further information.

The Company's Mortgage Servicing segment also has exposure to concentration risk and client retention risk with respect to its subservicing agreements. As of December 31, 2016 , the subservicing portfolio (by units) related to the following client relationships: 42% from Pingora Loan Servicing, LLC, 22% from HSBC Bank USA and 14% from Morgan Stanley Private Bank, N.A. A substantial portion of the Company's 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. 
 

15. Commitments and Contingencies
 
Legal Contingencies
 
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 is 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. 

104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


As of December 31, 2016 , the Company’s recorded liability associated with legal and regulatory contingencies was $114 million and is presented in Other liabilities in the 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 recorded liability may be up to $85 million in aggregate as of December 31, 2016 .

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.
 
The following are descriptions of the Company’s significant legal and regulatory matters.
 
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.
In February 2017, the Court of Appeals granted the CFPB's request to rehear the case en banc. Arguments in the appeal are currently scheduled for May 2017.
The Company continues to believe that it has complied with RESPA and other laws applicable to its former mortgage reinsurance activities. Given the nature of this matter and the current status, the Company cannot estimate the amount of loss, or a range of possible losses, if any, in connection with this matter.

MMC and NYDFS 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. The Company continues to engage in substantive discussions with the MMC regarding the proposal. The Company believes it has meritorious explanations and defenses to the findings.

As of December 31, 2016 , the Company included an estimate of probable losses in connection with the MMC matter in the recorded liability.
 
In the fourth quarter of 2016, the Company entered into a consent order with the New York Department of Financial Services (the "NYDFS") to close out pending examination report findings, including New York findings stemming from the MMC examination. Under the terms of the order, the Company paid a civil monetary penalty of $28 million in the fourth quarter of 2016, will engage an independent third-party auditor for a period of 12 months, and will conduct a review of a sample of loans originated from 2008 to 2014 to review certain origination practices and disclosures.

HUD Subpoenas. The Company has 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

105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. This investigation could lead to a demand or claim under the False Claims Act, which allows for civil penalties and treble damages substantially in excess of actual losses. Several large mortgage originators that participate in FHA lending programs have been subject to similar investigations, which have resulted in settlement agreements that included the payment of substantial fines and penalties.

The Company has been cooperating in this investigation since its receipt of the subpoenas in 2013, and certain current and former employees of the Company have been deposed in connection with this matter. The Company is continuing its discussions with HUD about the ongoing investigation. As of December 31, 2016 , the Company included an estimate of probable losses in connection with this matter in the recorded liability.

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. The settlement is subject to court approval. The Company’s recorded estimate of probable losses as of December 31, 2016 for this matter was not materially different than the losses it expects to incur in connection with the resolution.
 
Other Subpoenas and Investigations.  The Company has received document subpoenas from the U.S. Attorney’s Offices for the Southern and Eastern 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. In July 2016, the U.S. Attorney’s Office for the Eastern District of New York requested production of additional documents responsive to the subpoenas. There can be no assurance that claims or litigation will not arise from these inquiries, or that fines and penalties, as well as other consumer or injunctive relief, will not be incurred in connection with any of these matters.

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.  While the FHFA, as regulator and conservator for Fannie Mae and Freddie Mac, does not have regulatory authority over the Company or its subsidiaries, there can be no assurance that Fannie Mae and/or Freddie Mac will not assert additional claims as a result of this inquiry.
 
Net Worth Requirements
 
In addition to the capital requirements of the Company as outlined in Note 11, 'Debt and Borrowing Arrangements' , certain subsidiaries of the Company are subject to various regulatory capital requirements as a result of their mortgage origination and servicing activities.  The Company’s wholly owned subsidiary, PHH Mortgage Corporation (“PHH Mortgage”), is subject to various regulatory capital requirements administered by the Department of Housing and Urban Development (“HUD”), which governs non-supervised, direct endorsement mortgagees, and Ginnie Mae, Fannie Mae and Freddie Mac, which sponsor programs that govern a significant portion of PHH Mortgage's mortgage loans sold and servicing activities.  Additionally, PHH Mortgage is required to maintain minimum net worth requirements for many of the states in which it sells and services loans.  Each state has its own minimum net worth requirement; however, none of the state requirements are material to its financial statements.
 
Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary remedial actions by regulators that, if undertaken, could: (i) remove the PHH Mortgage’s ability to sell and service loans to or on behalf of the Agencies; and (ii) have a direct material effect on the Company’s financial statements, results of operations and cash flows.
 
In accordance with the regulatory capital guidelines, PHH Mortgage must meet specific quantitative measures of cash, assets, liabilities, profitability and certain off-balance sheet items calculated under regulatory accounting practices. Further, changes in regulatory and accounting standards, as well as the impact of future events on PHH Mortgage’s results, may significantly affect the Company’s net worth adequacy.
 

106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Among PHH Mortgage’s various capital requirements related to its outstanding mortgage origination and servicing agreements and other third-party agreements, including debt covenants, the most restrictive of these requires PHH Mortgage to maintain a minimum net worth balance of $670 million as of December 31, 2016 .  As of December 31, 2016 , PHH Mortgage’s actual net worth was $672 million and the Company was in compliance with the requirements. The Company intends to negotiate revised required capital levels as part of its first quarter 2017 facility renewals.
 
Lease and Purchase Commitments
 
The Company is committed to making rental payments under noncancelable operating related to various facilities and equipment. As of December 31, 2016 , the Company did not have any significant capital lease obligations. In addition, during the normal course of business, various commitments are made to purchase goods or services from specific suppliers, including those related to capital expenditures.
 
During the years ended December 31, 2016 , 2015 , and 2014 , rental expense of $22 million , $22 million , and $20 million , respectively, was recorded in Occupancy and other office expenses in the Consolidated Statements of Operations.
 
The following table summarizes the Company’s commitments as of December 31, 2016 : 
 
Future Minimum
Operating Lease
Payments (1)
 
Purchase
Commitments
 
(In millions)
2017
$
18

 
$
29

2018
16

 
1

2019
13

 
1

2020
12

 
—

2021
11

 
—

Thereafter
12

 
—

Total
$
82

 
$
31

________________
(1)  
Excludes $7 million of minimum sublease income due in the future under noncancelable subleases.

Off-Balance Sheet Arrangements and Guarantees
 
In the ordinary course of business, numerous agreements are entered into that contain guarantees and indemnities where a third-party is indemnified for breaches of representations and warranties. Such guarantees or indemnifications are granted under various agreements, including those governing leases of real estate, access to credit facilities, use of derivatives and issuances of debt or equity securities. The guarantees or indemnifications issued are for the benefit of the buyers in sale agreements and sellers in purchase agreements, landlords in lease contracts, financial institutions in credit facility arrangements and derivative contracts and underwriters in debt or equity security issuances.
 
While some guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these guarantees, and the maximum potential amount of future payments cannot be estimated. With respect to certain guarantees, such as indemnifications of landlords against third-party claims, insurance coverage is maintained that mitigates any potential payments.
 
Representations and Warranties.  See Note 14, 'Credit Risk' for a discussion of the representations and warranties that are provided to purchasers and insurers on a significant portion of loans sold and those that are assumed on purchased mortgage servicing rights.
 
Guarantees related to Mortgage Warehouse Debt.  In connection with certain Mortgage warehouse borrowing arrangements, the Company has entered into agreements to unconditionally and irrevocably guarantee payment on the obligations of its subsidiaries.



107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. Stock-Related Matters
Share Repurchase Programs
The Company’s Board of Directors authorized up to $450 million in share repurchases, including $200 million in Accelerated Share Repurchases (“ASR”) and up to $250 million in open market purchases through December 31, 2016. All shares received under the share repurchase programs are retired upon receipt and are reported as a reduction of shares issued and outstanding. The cash paid was recorded as a reduction of stockholders’ equity in the Consolidated Balance Sheets.

Accelerated Share Repurchase Programs.  In 2014, the Company entered into two separate ASR agreements to repurchase an aggregate of $200 million of PHH’s Common stock pursuant to a Collared ASR agreement and an Uncollared ASR agreement.  In 2014, the Company received 6,962,695 shares upfront based upon the minimum share delivery under the collared agreement and 80% share delivery under the Uncollared agreement based upon the stock price at inception. The Company completed both ASR programs after the Company received the final 1,574,252 shares in March 2015.

Open Market Purchases.  In November 2015, the Company commenced a $100 million open market share repurchase program and for the year ended December 31, 2015, the Company paid $77 million to retire 4,841,267 shares under the program. In January 2016, the Company paid $23 million to retire 1,508,772 additional shares to complete the $100 million open market program. There was no additional share repurchase activity for the year ended December 31, 2016 . The Board of Directors' authorization for open market share repurchases expired on December 31, 2016 , and there are no remaining authorizations.
 
Restrictions on Share-Related Payments
As of December 31, 2016 , the Company is not prohibited in its ability to make share-related payments including the declaration and payment of dividends, the repurchase of Common stock, or making any distribution on account of its Common stock. The provisions of the Company's debt arrangements, capital requirements of the Company's operating subsidiaries and other legal requirements and regulatory constraints may restrict the Company from making such share-related payments. 

The Company has not declared or paid cash dividends on its Common stock since it began operating as an independent, publicly traded company in 2005.
 
Limitations and restrictions on the Company’s ability to make share-related payments include but are not limited to:
 
a)
Restrictions under the Company’s senior note indentures from making a share-related payment if, after giving effect to the payment, the debt to tangible equity ratio calculated as of the most recently completed month end exceeds 6 to 1; however, even if such ratio is exceeded, the Company may declare or pay any dividend or make a share-related payment so long as the Company’s corporate ratings are equal to or better than: Baa3 from Moody’s Investors Service and BBB- from Standard & Poor’s (in each case on stable outlook or better); and
 
b)
Limitations in the amount of share-related payments that can be distributed by the Company due to maintaining compliance with the financial covenants contained in certain subsidiaries’ mortgage warehouse funding agreements, including but not limited to: (i) the maintenance of net worth of at least $750 million on the last day of each fiscal quarter; and (ii) a ratio of unsecured indebtedness to tangible net worth of no greater than 1.25 to 1.
 
In addition, the Company is limited in the amount of share-related payments that can be distributed due to capital that is required to be maintained at its subsidiaries.  The amount of intercompany dividends, share-related payments and other fund transfers that certain of the Company’s subsidiaries can declare or distribute to the Company or to other consolidated subsidiaries (and ultimately to the Company) is limited due to provisions of their debt arrangements, capital requirements, and other legal requirements and regulatory constraints.  The aggregate restricted net assets of these subsidiaries totaled $772 million as of December 31, 2016 .

108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. Stock-Based Compensation

The PHH Corporation 2014 Equity and Incentive Plan (the “Plan”) governs awards of share based compensation.  The plan allows awards in the form of stock options, stock appreciation rights, restricted stock units and other stock- or cash-based awards.  The aggregate number of shares of PHH Common stock available to be issued under the Plan is 8,567,433 , of which 5,814,648 were still available for grant as of December 31, 2016. The Company's outstanding awards consist of the following:

•
Stock Options are granted with exercise prices at the fair market value of the Company’s shares of Common stock, which is considered equal to the closing share price on the date of grant. Stock option awards have a maximum contractual term of ten years from the grant date.

•
Restricted stock units (“RSUs”) are classified as equity awards and include service-based, performance-based and market-based restricted stock units to purchase shares of Common stock. RSUs entitle employees to receive one share of the Company's Common stock upon the vesting of each RSU.

•
Restricted cash units (“RCUs”) are classified as liability awards and include service-based, performance-based and market-based restricted cash units to be settled in cash under the Plan. RCUs entitle employees to receive a cash payout equal to the closing share price (on the vesting date) of one share of common stock for each unit granted.

The following table summarizes expense recognized in Salaries and related expenses in the Consolidated Statements of Operations related to stock-based compensation arrangements:
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
 
 
(In millions)
 
 
Stock-based compensation expense for equity awards
$
9

 
$
9

 
$
8

Stock-based compensation expense for liability awards
1

 
2

 
4

Income tax benefit related to stock-based compensation expense
(4
)
 
(4
)
 
(5
)
Stock-based compensation expense, net of income taxes
$
6

 
$
7

 
$
7

 
Equity Awards

Awards granted by the Company under the Plan that are expected to be settled in shares of its Common stock include Stock Options and RSUs. All outstanding and unvested stock options and RSUs have vesting conditions pursuant to a change in control. In addition, RSUs are granted to non-employee Directors as part of their compensation for services rendered as members of the Company’s Board of Directors. New shares of Common stock are issued to employees and Directors to satisfy the stock option exercise and RSU conversion obligations.
 
Stock Options

There were no options granted during the years ended December 31, 2016 , 2015 or 2014 . The following table summarizes stock option activity for the year ended December 31, 2016 :
 
Number of
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(In years)
 
Aggregate
Intrinsic
Value
(In millions)
Outstanding at January 1, 2016
1,077,876

 
$
17.79

 
 
 
 

Forfeited or expired
(176,566
)
 
17.49

 
 
 
 

Outstanding at December 31, 2016
901,310

 
$
17.85

 
5.5
 
$
—

Exercisable at December 31, 2016 (1)
901,310

 
$
17.85

 
5.5
 
$
—

  _____________________
 
(1)  
Option awards became fully-vested during 2016 and there is no amount of unrecognized compensation cost related to outstanding stock options as of December 31, 2016 .


109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were no options exercised during the year ended December 31, 2016 . The intrinsic value of options exercised during the years ended December 31, 2015 and 2014 was $1 million and $2 million , respectively.

Restricted Stock Units
 
RSUs are granted with vesting conditions based on fulfillment of a service condition (generally up to three years from the grant date) and may also require achievement of certain operating performance criteria or achievement of certain market-based targets associated with the Company's stock price.

Expense for equity-based awards with market or service conditions is recognized over the service period based on the grant-date fair value of the award, net of estimated forfeitures, whereas expense for awards with performance conditions is recognized over the service period based on the expected achievement of the performance conditions. As of December 31, 2016 , there was $14 million of unrecognized compensation cost related to outstanding and unvested equity-based RSUs expected to be recognized over a weighted-average period of 2.1 years.

The following tables summarize restricted stock unit activity for the year ended December 31, 2016 :
 
Number of
RSUs
 
Weighted-
Average
Grant-Date
Fair Value
Performance-based & Market-based RSUs
 

 
 

Outstanding at January 1, 2016
429,144

 
$
14.04

Granted
394,952

 
13.01

Forfeited
(1,799
)
 
18.67

Canceled due to non-achievement of performance or market condition
(196,989
)
 
13.17

Outstanding at December 31, 2016 
625,308

 
$
13.65

RSUs expected to be converted into shares of Common stock (1)
272,043

 
$
13.01

 
 
 
 
Service-based RSUs
 

 
 

Outstanding at January 1, 2016
347,872

 
$
22.33

Granted (2) 
684,679

 
13.49

Forfeited
(1,760
)
 
24.24

Converted
(145,674
)
 
22.36

Outstanding at December 31, 2016
885,117

 
$
15.48

RSUs expected to be converted into shares of Common stock
884,240

 
$
15.47

_____________________
 
(1)  
The performance criteria impact the number of awards that may vest. The number of RSUs related to these performance and market-based awards represents the expected number to be earned based upon if the contingency was met as of December 31, 2016.
(2)  
Includes 50,522 RSUs earned by non-employee Directors for services rendered as members of the Board of Directors.

In 2016 , 2015 and 2014 , certain executives were awarded RSUs with market-based vesting conditions with weighted-average grant-date fair value of $13.01 , $18.67 and $11.32 , respectively.  The weighted-average grant-date fair value of these market-based RSUs was estimated using a Monte Carlo simulation valuation model with the following assumptions:
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
Grant date stock price
$
13.00

 
$
24.24

 
$
22.93

Risk-free interest rate
1.09
%
 
0.94
%
 
0.94
%
Expected volatility
45.7
%
 
30.2
%
 
35.3
%
Dividend yield
—

 
—

 
—

 
The risk-free interest rate reflected the yield on zero-coupon Treasury securities with a term approximating the expected life of the RSUs.  The expected volatility was based on historical volatility of the Company’s Common stock.
 

110

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The total fair value of RSUs converted into shares of Common stock was $2 million for each of the years ended December 31, 2016 , 2015 and 2014 .

Liability Awards

RCU awards granted by the Company under the Plan that are expected to be settled in cash are recorded as liabilities within Accounts payable and accrued expenses in the Consolidated Balance Sheets. RCUs are settled with a cash payment for each unit vested based on the closing share price on the vesting date and generally vest over three years beginning on the first anniversary of the date of grant.

Expense for liability awards is recognized based on a re-measurement of the fair value of the awards at the end of each reporting period, including an estimate of the expected achievement of market or performance conditions, if any. As of December 31, 2016 , there was an insignificant amount of unrecognized compensation cost related to outstanding and unvested liability-based RCUs that are expected to vest and be recognized over a weighted-average period of 1.2 years.

As of December 31, 2016 and 2015 , $1 million and $5 million , respectively, is accrued related to the expected payout for liability awards within Accounts payable and accrued expenses in the Consolidated Balance Sheets. The total amount of cash paid for share-based liability awards was $3 million and $4 million for the years ended December 31, 2016 and 2015 , respectively.

 
18. Fair Value Measurements
 
Fair value is based on quoted market prices, where available. If quoted prices are not available, fair value is estimated based upon other observable inputs. Unobservable inputs are used when observable inputs are not available and are based upon judgments and assumptions, which are the Company’s assessment of the assumptions market participants would use in pricing the asset or liability.  These inputs may include assumptions about risk, counterparty credit quality, the Company’s creditworthiness and liquidity and are developed based on the best information available.
 
A three-level valuation hierarchy is used to classify inputs into the measurement of assets and liabilities at fair value. The valuation hierarchy is based upon the relative reliability and availability to market participants of inputs for the valuation of an asset or liability as of the measurement date. Level One represents the highest level based upon unadjusted quoted prices to Level Three which are based upon unobservable inputs that reflect the assumptions a market participant would use in pricing the asset or liability.  When the valuation technique used in determining fair value of an asset or liability utilizes inputs from different levels of the hierarchy, the level in which the asset or liability its entirety is categorized is based upon the lowest level input that is significant to the measurement.
 
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. There have been no changes in valuation methodologies and classification pursuant to the valuation hierarchy during the years ended December 31, 2016 or 2015 .
 
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 December 31, 2016 or 2015 .
 

111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recurring Fair Value Measurements
 
The following summarizes the fair value hierarchy for instruments measured at fair value on a recurring basis:
 
December 31, 2016
 
Level
One
 
Level
Two
 
Level
Three
 
Cash
Collateral
and Netting
 
Total
 
 
 
 
 
(In millions)
 
 
 
 
ASSETS
 

 
 

 
 

 
 

 
 

Mortgage loans held for sale
$
—

 
$
636

 
$
47

 
$
—

 
$
683

Mortgage servicing rights
—

 
—

 
690

 
—

 
690

Other assets—Derivative assets:
 

 


 


 


 
 

Interest rate lock commitments
—

 
—

 
18

 
—

 
18

Forward delivery commitments
—

 
14

 
—

 
(12
)
 
2

MSR-related agreements
—

 
19

 
—

 
(18
)
 
1

Option contracts
—

 
1

 
—

 
(1
)
 
—

LIABILITIES
 

 
 

 
 

 
 

 
 

Other liabilities—Derivative liabilities:
 

 
 

 
 

 
 

 
 

Forward delivery commitments
$
—

 
$
4

 
$
—

 
$
1

 
$
5

MSR-related agreements
—

 
65

 
—

 
(53
)
 
12

Option contracts
—

 
—

 
—

 
1

 
1

 
 
December 31, 2015
 
Level
One
 
Level
Two
 
Level
Three
 
Cash
Collateral
and Netting
 
Total
 
 
 
 
 
(In millions)
 
 
 
 
ASSETS
 

 
 

 
 

 
 

 
 

Mortgage loans held for sale
$
—

 
$
704

 
$
39

 
$
—

 
$
743

Mortgage servicing rights
—

 
—

 
880

 
—

 
880

Other assets—Derivative assets:
 
 
 

 
 

 
 

 
 

Interest rate lock commitments
—

 
—

 
21

 
—

 
21

Forward delivery commitments
—

 
3

 
—

 
(2
)
 
1

MSR-related agreements
—

 
27

 
—

 
(23
)
 
4

LIABILITIES
 
 
 

 
 

 
 

 
 

Other liabilities—Derivative liabilities:
 
 
 

 
 

 
 

 
 

Forward delivery commitments
$
—

 
$
2

 
$
—

 
$
—

 
$
2

 
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.   The Company elected to record Mortgage loans held for sale (“MLHS”) at fair value.  This election is intended to both better reflect the underlying economics and eliminate the operational complexities of risk management activities related to MLHS and hedge accounting requirements.
 
For Level Two MLHS, fair value is estimated through a market approach by using either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan including the value attributable to servicing rights and credit risk; or (ii) current commitments to purchase loans. The Agency mortgage-backed security market is a highly liquid and active secondary market for conforming conventional loans whereby quoted prices are published on a regular basis and exist for securities at the pass-through level. The Company has the ability to access this market, and this is the market into which conforming mortgage loans are typically sold.
 

112

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Level Three MLHS include second lien and Scratch and Dent loans, and are valued based upon a discounted cash flow model or a collateral-based valuation model, respectively. Scratch and Dent loans represent mortgage loans with origination flaws or performance issues.
 
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: 
 
December 31, 2016
 
December 31, 2015
 
Total
 
Loans 90 days or
more past due and
on non-accrual 
status
 
Total
 
Loans 90 days or
more past due and
on non-accrual 
status
 
(In millions)
Carrying amount
$
683

 
$
7

 
$
743

 
$
9

Aggregate unpaid principal balance
687

 
10

 
738

 
11

Difference
$
(4
)
 
$
(3
)
 
$
5

 
$
(2
)
 

The following table summarizes the components of Mortgage loans held for sale: 
 
December 31,
 
2016
 
2015
 
(In millions)
First mortgages:
 

 
 

Conforming
$
531

 
$
616

Non-conforming
105

 
88

Total first mortgages
636

 
704

Second lien
3

 
4

Scratch and Dent
44

 
35

Total
$
683

 
$
743

 
Mortgage Servicing Rights . 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 (developed using a model described below), the Company’s historical prepayment rates, portfolio characteristics, interest rates based on interest rate yield curves, implied volatility and other economic factors. A probability weighted option adjusted spread (“OAS”) model generates and discounts cash flows for the MSR valuation. The OAS model generates numerous interest rate paths, then calculates the MSR cash flow at each monthly point for each path and discounts those cash flows back to the current period. The MSR value is determined by averaging the discounted cash flows from each of the interest rate paths. The interest rate paths are generated with a random distribution centered around implied forward interest rates, which are determined from the interest rate yield curve at any given point of time.
 
A key assumption in the estimate of the fair value of MSRs is forecasted prepayments. A third-party model is used as a basis to forecast prepayment rates at each monthly point for each interest rate path in the OAS model. Prepayment rates used in the development of expected future cash flows are based on historical observations of prepayment behavior in similar periods, comparing current mortgage interest rates to the mortgage interest rates in the servicing portfolio. The rates incorporate loan characteristics (e.g., loan type and note rate) and factors such as recent prepayment experience, the relative sensitivity of the capitalized loan servicing portfolio to refinance if interest rates decline and estimated levels of home equity. 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 December 31, 2016 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 5, 'Transfers and Servicing of Mortgage Loans' for further discussion of the MSR sale commitments.
 

113

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables summarize certain information regarding the initial and ending capitalization rate of MSRs:
 
Year Ended December 31,
 
2016
 
2015
Initial capitalization rate of additions to MSRs
1.02
%
 
1.14
%
 
 
December 31,
 
2016
 
2015
Capitalization servicing rate
0.82
%
 
0.89
%
Capitalization servicing multiple
2.9

 
3.1

Weighted-average servicing fee (in basis points)
28

 
29

 
 
The significant assumptions used in estimating the fair value of MSRs were as follows (in annual rates): 
 
December 31,
 
2016
 
2015
Weighted-average prepayment speed (CPR)
9.2
%
 
9.1
%
Option adjusted spread, in basis points (OAS)
1,430

 
977

Weighted-average delinquency rate
5.1
%
 
5.3
%
 
The following table summarizes the estimated change in the fair value of MSRs from adverse changes in the significant assumptions:
 
December 31, 2016
 
Weighted-
Average
Prepayment
Speed
 
Option
Adjusted
Spread
 
Weighted-
Average
Delinquency
Rate
 
(In millions)
Impact on fair value of 10% adverse change
$
(20
)
 
$
(32
)
 
$
(11
)
Impact on fair value of 20% adverse change
(38
)
 
(57
)
 
(22
)
 
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 or from the MSR sale commitments discussed in the preceding section.
 
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.
 

114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivative Instruments . Derivative instruments are classified within Level Two and Level Three of the valuation hierarchy.  See Note 6, 'Derivatives' for additional information regarding derivative instruments.
 
Interest Rate Lock Commitments (“IRLCs”) are classified within Level Three of the valuation hierarchy. IRLCs represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The fair value of IRLCs is based upon the estimated fair value of the underlying mortgage loan, including the expected net future cash flows related to servicing the mortgage loan, adjusted for: (i) estimated costs to complete and originate the loan and (ii) an adjustment to reflect the estimated percentage of IRLCs that will result in a closed mortgage loan under the original terms of the agreement (or “pullthrough”).
 
The average pullthrough percentage used in measuring the fair value of IRLCs as of December 31, 2016 and 2015 was 77% and 74% , respectively. The pullthrough 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 pullthrough 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 pullthrough percentage, and the impact to fair value of a change in pullthrough would be partially offset by the related change in price.
 
Forward Delivery Commitments are classified within Level Two of the valuation hierarchy. Forward delivery commitments fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. The fair value of forward delivery commitments is primarily based upon the current agency mortgage-backed security market to-be-announced pricing specific to the loan program, delivery coupon and delivery date of the trade. Best effort sales commitments are also executed for certain loans at the time the borrower commitment is made. These best effort sales commitments are valued using the committed price to the counterparty against the current market price of the interest rate lock commitment or mortgage loan held for sale.
 
MSR-Related Agreements are classified within Level Two of the valuation hierarchy.  MSR-related agreements represent a combination of derivatives used to offset possible adverse changes in the fair value of MSRs, which include options on swap contracts, to-be-announced securities and interest rate swap contracts, among other instruments.  The fair value of MSR-related agreements is determined using quoted prices for similar instruments.

Option Contracts are classified within Level Two of the valuation hierarchy. Option contracts represent the right to buy or sell mortgage-backed securities at specified prices in the future. The fair value of option contracts is based upon the underlying current to be announced pricing of the agency mortgage-backed security market, and a market-based volatility.
  
Level Three Measurements
 
Instruments classified within Level Three of the fair value hierarchy contain significant inputs to the valuation that are based upon unobservable inputs that reflect the Company’s assessment of the assumptions a market participant would use in pricing the asset or liability.  The fair value of assets and liabilities classified within Level Three of the valuation hierarchy also typically includes observable factors, and the realized or unrealized gain or loss recorded from the valuation of these instruments would also include amounts determined by observable factors.
 

115

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Activity of assets and liabilities classified within Level Three of the valuation hierarchy consisted of: 
 
Year Ended December 31,
 
2016
 
2015
 
MLHS
 
MSRs
 
IRLCs,
net
 
MLHS
 
MSRs
 
IRLCs,
net
 
(In millions)
Balance, beginning of period
$
39

 
$
880

 
$
21

 
$
42

 
$
1,005

 
$
22

Purchases, Issuances, Sales and Settlements:
 
 
 
 
 
 
 
 
 
 
 
Purchases
13

 
—

 
—

 
28

 
—

 
—

Issuances
6

 
60

 
—

 
5

 
101

 
—

Sales
(24
)
 
(12
)
 
—

 
(33
)
 
(39
)
 
—

Settlements
(11
)
 
—

 
(318
)
 
(10
)
 
—

 
(262
)
 
(16
)
 
48

 
(318
)
 
(10
)
 
62

 
(262
)
Realized and unrealized gains (losses)
included in:
 
 
 
 
 
 
 
 
 
 
 
Gain on loans held for sale, net
(1
)
 
—

 
315

 
1

 
—

 
261

Change in fair value of MSRs
—

 
(238
)
 
—

 
—

 
(187
)
 
—

Interest income
3

 
—

 
—

 
5

 
—

 
—

 
2

 
(238
)
 
315

 
6

 
(187
)
 
261

Transfers into Level Three
42

 
—

 
—

 
38

 
—

 
—

Transfers out of Level Three
(20
)
 
—

 
—

 
(37
)
 
—

 
—

Balance, end of period
$
47

 
$
690

 
$
18

 
$
39

 
$
880

 
$
21

 
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.  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 Consolidated Statement of Operations related to assets and liabilities classified within Level Three of the valuation hierarchy that are included in the Consolidated Balance Sheets were as follows: 
 
Year Ended December 31,
 
2016
 
2015
 
(In millions)
Gain on loans held for sale, net
$
11

 
$
17

Change in fair value of mortgage servicing rights
(100
)
 
(18
)
 
 
Fair Value of Other Financial Instruments
 
As of December 31, 2016 and 2015 , 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, Accounts receivable, Restricted cash and Servicing advance receivables, the carrying value approximates fair value due to the short-term nature of such instruments.
 
Debt.   As of both December 31, 2016 and 2015 , the total fair value of Debt was $1.3 billion , and is measured using Level Two inputs. As of December 31, 2016 , the fair value was estimated using the following valuation techniques: (i) $623 million was measured using a market based approach, considering the current market pricing of recent trades for similar instruments or the current expected ask price for the Company’s debt instruments; and (ii) $655 million was measured using observable spreads and terms for recent pricing of similar instruments.
 

116

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Non-Recurring Fair Value Measurements
 
Other Assets — Equity method investments. In the fourth quarter of 2016, the Company evaluated its equity method investment of Speedy Title and Appraisal Review Services LLC ("STARS") for impairment as a result of the negative impact the PLS exit will have on STARS operating results.  The exit of the PLS channel will significantly reduce STARS appraisal volume and its projected cash flows. Due to the uncertainty of the cash flows associated with an income approach, the Company performed the assessment of fair value based on an orderly liquidation of the entity.  This assessment resulted in an impairment charge of $23 million , which was recorded in Other (loss) income during the year ended December 31, 2016.

There was no impairment charge recorded during the year ended December 31, 2015 .
 
Other Assets — Mortgage loans in foreclosure and Real estate owned.   The evaluation of impairment reflects an estimate of losses currently incurred at the balance sheet date, which will likely not be recoverable from guarantors, insurers or investors. Mortgage loans in foreclosure represent loans for which foreclosure proceedings have been initiated and Real estate owned (“REO”) includes properties acquired from mortgagors in default. Fair value is based on the market value of the underlying collateral, determined on a loan or property level basis, less estimated costs to sell. The market value of the collateral is estimated by considering appraisals and broker price opinions, which are updated on a periodic basis to reflect current housing market conditions.  Mortgage loans in foreclosure are measured at fair value whereas REO is recorded at the lower of adjusted carrying amount at the time the property is acquired or fair value.  The non-recurring fair value measurements associated with mortgage loans in foreclosure and REO are based upon assumptions from Level Three of the valuation hierarchy. 

During the years ended December 31, 2016 and 2015 , Repurchase and foreclosure-related charges totaled $19 million and $6 million , respectively.  These amounts were recorded in Other operating expenses and include changes in the estimate of losses related to loan repurchases and indemnifications in addition to the provision for or benefit from valuation adjustments for mortgage loans in foreclosure and REO. See Note 14, 'Credit Risk' and Note 8, 'Other Assets' for further information regarding the balances of mortgage loans in foreclosure, REO, and exposures to loan repurchases and indemnifications.

 
19. Variable Interest Entities

The Company determines whether an entity is a variable interest entity (“VIE”) and whether it is the primary beneficiary at the date of initial involvement with the entity. The Company reassesses whether it is the primary beneficiary of a VIE upon certain events that affect the VIE’s equity investment at risk and upon certain changes in the VIE’s activities. The purposes and activities of the VIE are considered in determining whether the Company is the primary beneficiary, including the variability and related risks the VIE incurs and transfers to other entities and their related parties. Based on these factors, a qualitative assessment is made and, if inconclusive, a quantitative assessment of whether it would absorb a majority of the VIE’s expected losses or receive a majority of the VIE’s expected residual returns. If the Company determines that it is the primary beneficiary of the VIE, the VIE is consolidated within the financial statements.
 
The Company’s involvement in variable interest entities primarily relate to PHH Home Loans, a joint venture with Realogy Corporation, and a special purpose bankruptcy remote trust that issues asset-backed notes secured by servicing advance receivables.  The activities of significant variable interest entities are more fully described below.
 

117

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets and liabilities of significant variable interest entities are included in the Consolidated Balance Sheets as follows:
 
December 31, 2016
 
December 31, 2015
 
PHH Home
Loans
 
Servicing
Advance
Receivables
Trust
 
PHH Home
Loans
 
Servicing
Advance
Receivables
Trust
 
(In millions)
ASSETS
 

 
 

 
 

 
 
Cash
$
67

 
$
—

 
$
80

 
$
—

Restricted cash
5

 
19

 
5

 
13

Mortgage loans held for sale
350

 
—

 
389

 
—

Accounts receivable, net
9

 
—

 
5

 
—

Servicing advances, net
—

 
150

 
—

 
157

Property and equipment, net
1

 
—

 
1

 
—

Other assets
11

 
1

 
11

 
1

Total assets
$
443

 
$
170

 
$
491

 
$
171

Assets held as collateral (1) 
$
320

 
$
169

 
$
361

 
$
170

 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 

 
 

Accounts payable and accrued expenses
$
11

 
$
—

 
$
14

 
$
—

Debt
300

 
99

 
345

 
111

Other liabilities
5

 
—

 
6

 
—

Total liabilities (2) 
$
316

 
$
99

 
$
365

 
$
111

 
___________________
(1)  
Represents amounts not available to pay the Company’s general obligations.  See Note 11, 'Debt and Borrowing Arrangements' for further information.
(2)  
Excludes intercompany payables.
 
In addition to the assets and liabilities of significant variable interest entities that were consolidated as outlined above, the Company had the following involvement with these entities as of and for the years ended December 31:

 
Net income (loss) (1)
 
2016
 
2015
 
2014
 
(In millions)
PHH Home Loans
$
16

 
$
28

 
$
16

Servicing Advance Receivables Trust
(4
)
 
(5
)
 
(5
)
 
 
PHH Corporation
Investment (2)
 
Intercompany
receivable (2)
 
2016
 
2015
 
2016
 
2015
 
(In millions)
PHH Home Loans
$
57

 
$
57

 
$
13

 
$
14

Servicing Advance Receivables Trust
83

 
69

 
—

 
—

 
_________________
(1)  
Includes adjustments for the elimination of intercompany transactions.
(2)  
Amounts are eliminated in the Consolidated Balance Sheets.
 

118

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PHH Home Loans

See Note 23, 'Subsequent Events' for information on agreements related to PHH Home Loans that were executed in February 2017, specific to the Company's plans to sell certain assets of PHH Home Loans and exit the existing joint venture relationship.
 
Purpose and Structure. The Company owns 50.1% of PHH Home Loans and Realogy Corporation owns the remaining 49.9% . The operations of PHH Home Loans are governed by the PHH Home Loans Operating Agreement.  PHH Home Loans was formed for the purpose of originating and selling mortgage loans primarily sourced through Realogy’s owned real estate brokerage business, NRT, and corporate relocation business, Cartus.  All loans originated by PHH Home Loans are sold to unaffiliated third-party investors or PHH Mortgage, in all cases at arm’s length terms. The PHH Home Loans Operating Agreement provides that at least 15% of the total loans originated by PHH Home Loans are sold to unaffiliated third party investors. PHH Home Loans does not hold any mortgage loans for investment purposes or retain mortgage servicing rights.
 
During the years ended December 31, 2016 , 2015 and 2014 , PHH Home Loans originated residential mortgage loans of $7.1 billion , $7.9 billion and $7.4 billion , respectively, and PHH Home Loans brokered or sold $2.0 billion , $2.7 billion and $3.3 billion , respectively, of mortgage loans to the Company under the terms of a loan purchase agreement.  For the year ended December 31, 2016 , 20% of the mortgage loans originated by the Company were derived from Realogy Corporation’s affiliates, of which 96% were originated by PHH Home Loans.  As of December 31, 2016 , the Company had outstanding commitments to purchase or fund $97 million of mortgage loans and lock commitments expected to result in closed mortgage loans from PHH Home Loans.
 
The Company manages PHH Home Loans through its subsidiary, PHH Broker Partner, with the exception of certain specified actions that are subject to approval through PHH Home Loans’ board of advisors, which consists of representatives of Realogy and the Company. The board of advisors has no managerial authority, and its primary purpose is to provide a means for Realogy to exercise its approval rights over those specified actions of PHH Home Loans for which Realogy’s approval is required. PHH Mortgage operates under a Management Services Agreement with PHH Home Loans, pursuant to which PHH Mortgage provides certain mortgage origination processing and administrative services for PHH Home Loans. In exchange for such services, PHH Home Loans pays PHH Mortgage a fee per service and a fee per loan, subject to a minimum amount.
 
Realogy’s ownership interest is presented in the Consolidated Financial Statements as a noncontrolling interest. The Company’s determination of the primary beneficiary was based on both quantitative and qualitative factors, which indicated that its variable interests will absorb a majority of the expected losses and receive a majority of the expected residual returns of PHH Home Loans. The Company has maintained the most significant variable interests in the entity, which include the majority ownership of common equity interests, the outstanding Intercompany Line of Credit, PHH Home Loans Loan Purchase and Sale Agreement and the Management Services Agreement. The Company has been the primary beneficiary of PHH Home Loans since its inception, and there have been no current period events that would change the decision regarding whether or not to consolidate PHH Home Loans.

Contributions and Distributions.  PHH Home Loans is financed through equity contributions, sales of mortgage loans to PHH Mortgage and other investors, and secured and unsecured subordinated indebtedness. The Company did not make any capital contributions to support the operations of PHH Home Loans during the years ended December 31, 2016 , 2015 and 2014 .  The Company is not solely obligated to provide additional financial support to PHH Home Loans.
 
Subject to certain regulatory and financial covenant requirements, net income generated by PHH Home Loans may be distributed quarterly to its members pro rata based upon their respective ownership interests. PHH Home Loans may also require additional capital contributions from the Company and Realogy under the terms of the Operating Agreement if it is required to meet minimum regulatory capital and reserve requirements imposed by any governmental authority or any creditor of PHH Home Loans or its subsidiaries. Distributions received from PHH Home Loans were $8 million , $10 million and $4 million during the years ended December 31, 2016 , 2015 and 2014 , respectively.
 
Other Support. The Company maintains an unsecured subordinated Intercompany Line of Credit with PHH Home Loans with $60 million in available capacity as of December 31, 2016 .  This indebtedness is not collateralized by the assets of PHH Home Loans. The Company has extended the subordinated financing to increase PHH Home Loans’ capacity to fund mortgage loans and to support certain covenants of the entity. There were no borrowings under this Intercompany Line of Credit during the years ended December 31, 2016 and 2015 .
 
Realogy Agreements. Unless terminated earlier, the Company's relationship with Realogy continues until January 31, 2055.  However, beginning on February 1, 2015 under the PHH Home Loans Operating Agreement, Realogy has the right at any time to give us two years notice of their intent to terminate their interest in PHH Home Loans. In addition, the Strategic Relationship

119

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Agreement and the PHH Home Loans Operating Agreement outline certain terms and events that give Realogy the right to terminate the joint venture for cause.
 
Upon Realogy’s termination of the joint venture, whether for cause or upon two years ’ notice without cause, Realogy will have the right either: (i) to require that the Company purchase their interest in PHH Home Loans at fair value, plus, in certain cases, liquidated damages or (ii) to cause the Company to sell its interest in PHH Home Loans to an unaffiliated third party designated by Realogy at fair value plus, in certain cases, liquidated damages. In the case of a termination by Realogy following a change in control of PHH, the Company may be required to make a cash payment to Realogy in an amount equal to PHH Home Loans’ trailing 12 months net income multiplied by  2 years.
 
The Company has the right to terminate the Operating Agreement upon, among other things, a material breach by Realogy of a material provision of the agreement, in which case the Company has the right to purchase Realogy’s interest in PHH Home Loans at a price derived from an agreed-upon formula based upon fair market value (which is determined with reference to that trailing 12 months EBITDA) for PHH Home Loans and the average market EBITDA multiple for mortgage banking companies.
 
Upon termination, all of PHH Home Loans agreements will terminate automatically (excluding certain privacy, non-competition, venture-related transition provisions and other general provisions), and Realogy will be released from any restrictions under the PHH Home Loans agreements that may restrict its ability to pursue a partnership, joint venture or another arrangement with any third-party mortgage operation.  The termination of this joint venture and other Realogy agreements would have a significant impact on our volumes of mortgage loan originations and related Net revenues.
 
Servicing Advance Receivables Trust
 
In 2014, PHH Servicer Advance Receivables Trust (“PSART”) and PHH Servicer Advance Funding Depositor, LLC (the “Depositor”) (collectively, the “Servicing Advance Receivables Trust”) were formed.  PSART is a special purpose bankruptcy remote trust and was formed for the purpose of issuing asset-backed notes secured by servicing advance receivables.  The Company, the Depositor and PSART entered into a Receivables Purchase and Contribution Agreement under which the Company has conveyed (and may in the future convey) to the Depositor the contractual right to the reimbursement of certain mortgage loan servicing advances made by the Company related to its servicing activities.  The Depositor in turn sells the servicing advances to PSART.  The Company has been the primary beneficiary of PSART and the Depositor since its inception, based on their nature and purpose, and there have been no current period events that would change that conclusion.
 
PSART has entered into an agreement to issue asset-backed notes as further discussed in Note 11, 'Debt and Borrowing Arrangements' .  Certain capital transactions are executed between the Company and the Depositor whereby PHH Mortgage contributes receivables to the Depositor and receives distributions upon the issuance of notes or the leveraging of note series.  During the year ended December 31, 2016 , PHH Mortgage contributed Accounts receivable of $575 million to the Depositor, and received distributions of $560 million .
 
 
20. Related Party Transactions
 
Thomas P. Gibbons, one of the Company’s Directors, is Vice Chairman and Chief Financial Officer of the Bank of New York Mellon Corporation, the Bank of New York Mellon, and BNY Mellon, N.A. (collectively “BNY Mellon”).  The Company has certain relationships with BNY Mellon, including financial services, commercial banking and other transactions. BNY Mellon functions as the custodian for loan files and functions as the indenture trustee on the Senior notes due in 2019 and 2021 and the Servicing advance facility.  The Company also executes forward loan sales agreements and certain MSR-related derivative agreements with BNY Mellon.  These transactions were entered into in the ordinary course of business upon terms, including interest rate and collateral, substantially the same as those prevailing at the time. The fees paid to BNY Mellon, including interest expense, during the years ended December 31, 2016 , 2015 and 2014 were not significant.  



120

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

21. 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 results of the Fleet business have been excluded from continuing operations and segment results for all periods presented. See Note 3, 'Discontinued Operations' for additional information.

The heading Other includes expenses that are not allocated back to the two reportable segments and for 2014, includes certain general corporate overhead expenses that were previously allocated to the Fleet business. 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 from continuing operations 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 Corporation’s noncontrolling interest in the profit or loss of PHH Home Loans.
 
Segment results as of and for the years ended December 31 were as follows:
 
Total Assets
 
2016
 
2015
 
(In millions)
Mortgage Production segment
$
913

 
$
1,036

Mortgage Servicing segment
1,428

 
1,802

Other
834

 
804

Total
$
3,175

 
$
3,642


 
Net Revenues
 
Segment (Loss) (1)
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
 
(In millions)
Mortgage Production segment
$
539

 
$
586

 
$
465

 
$
(53
)
 
$
(47
)
 
$
(141
)
Mortgage Servicing segment
83

 
198

 
163

 
(223
)
 
(131
)
 
(103
)
Other
—

 
6

 
11

 
(37
)
 
(49
)
 
(46
)
Total
$
622

 
$
790

 
$
639

 
$
(313
)
 
$
(227
)
 
$
(290
)
______________
(1)  
The following is a reconciliation of Income or loss from continuing operations before income taxes to Segment profit or loss: 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
 
(In millions)
Loss before income taxes
$
(304
)
 
$
(213
)
 
$
(284
)
Less: net income attributable to noncontrolling interest
9

 
14

 
6

Segment loss
$
(313
)
 
$
(227
)
 
$
(290
)
 
 
Interest Income
 
Interest Expense
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
 
(In millions)
Mortgage Production segment
$
32

 
$
40

 
$
38

 
$
22

 
$
45

 
$
77

Mortgage Servicing segment
11

 
4

 
4

 
53

 
45

 
53

Total
$
43

 
$
44

 
$
42

 
$
75

 
$
90

 
$
130



121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22. Selected Quarterly Financial Data—(unaudited)

The following tables present selected unaudited quarterly financial data:
 
Quarter Ended
 
March 31,
2016
 
June 30,
2016
 
September 30,
2016
 
December 31,
2016
 
(In millions, except per share data)
Net revenues
$
157

 
$
196

 
$
197

 
$
72

Loss before income taxes
(49
)
 
(20
)
 
(29
)
 
(206
)
Net loss
(30
)
 
(9
)
 
(21
)
 
(133
)
Net loss attributable to PHH Corporation
(30
)
 
(12
)
 
(27
)
 
(133
)
 
 
 
 
 
 
 
 
Basic and Diluted loss per share attributable to PHH Corporation
$
(0.56
)
 
$
(0.22
)
 
$
(0.50
)
 
$
(2.49
)

 
Quarter Ended
 
March 31,
2015
 
June 30,
2015
 
September 30,
2015
 
December 31,
2015
 
(In millions, except per share data)
Net revenues
$
261

 
$
237

 
$
169

 
$
123

Income (loss) before income taxes
31

 
(74
)
 
(87
)
 
(83
)
Net income (loss)
23

 
(56
)
 
(47
)
 
(51
)
Net income (loss) attributable to PHH Corporation
21

 
(62
)
 
(50
)
 
(54
)
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to PHH Corporation:
 

 
 

 
 

 
 

Basic
$
0.40

 
$
(1.20
)
 
$
(0.84
)
 
$
(0.92
)
Diluted
$
0.34

 
$
(1.20
)
 
$
(0.84
)
 
$
(0.92
)


122

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

23. Subsequent Events

PHH Home Loans Transactions

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. PHH Home Loans is a joint venture between the Company and Realogy Corporation, which provides mortgage origination services for brokers associated with brokerages owned or franchised by Realogy Corporation, and represented substantially all of our Real Estate channel, and 20% of the Company’s total mortgage production volume (based on dollars) for the year ended December 31, 2016 .

The execution of these transactions is subject to closing conditions as set forth in the agreements, including PHH shareholder approval, the execution of a portion of the New Residential MSR sales, the receipt of agency approvals and the acceptance by a specified percentage of PHH Home Loans employees (including loan originators) of employment offers from the buyer, among other conditions. After the completion of these transactions, the Company would no longer operate through its Real Estate channel.

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 our PHH Home Loans joint venture to Guaranteed Rate Affinity, LLC, which is a newly formed joint venture formed by subsidiaries of Realogy Holdings Corp. and Guaranteed Rate, Inc.

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.

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. If consummated, the Company would expect to close this transaction by the end of 2017 and estimates that it will receive proceeds of $92 million in connection with these transactions.

The Company did not recognize any amounts in the December 31, 2016 financial statements related to the PHH Home Loans transactions. Refer to Note 19, 'Variable Interest Entities' for further information about PHH Home Loans' structure and relationship with Realogy.

Other

See Note 2, 'Exit Costs' for information regarding exit costs of the Company's reorganization plans that were announced in February 2017.

See Note 5, 'Transfers and Servicing of Mortgage Loans' for information regarding the initial sale of GNMA MSRs under the Lakeview agreement that closed in February 2017.



123

PHH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 

PHH CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In millions)

 
Year Ended December 31,
 
2016
 
2015
 
2014
REVENUES
 

 
 

 
 

Other income
$
—

 
$
6

 
$
11

Interest income
3

 
3

 
—

Net revenues
3

 
9

 
11

EXPENSES
 

 
 

 
 

Salaries and related expenses
61

 
54

 
67

Interest expense
45

 
58

 
95

Depreciation and amortization
5

 
5

 
9

Professional and third-party service fees
99

 
109

 
62

Technology equipment and software expenses
21

 
18

 
18

Exit and disposal costs
8

 
—

 
—

Other operating expenses
12

 
44

 
32

Total expenses before allocation
251

 
288

 
283

Corporate overhead allocation to subsidiaries
(169
)
 
(175
)
 
(131
)
Unsecured interest expense allocation to subsidiaries
(42
)
 
(55
)
 
(95
)
Total expenses
40

 
58

 
57

Loss before income taxes and equity in loss of subsidiaries
(37
)
 
(49
)
 
(46
)
Income tax benefit
(12
)
 
(23
)
 
(13
)
Loss before equity in loss of subsidiaries
(25
)
 
(26
)
 
(33
)
Equity in loss of subsidiaries, excluding discontinued operations
(177
)
 
(119
)
 
(158
)
Loss from continuing operations, net of tax
(202
)
 
(145
)
 
(191
)
Income from discontinued operations, net of tax
—

 
—

 
272

Net (loss) income
$
(202
)
 
$
(145
)
 
$
81

Other comprehensive income (loss), net of tax:
 

 
 

 
 

Currency translation adjustment
—

 
—

 
(22
)
Change in unfunded pension liability, net
—

 
1

 
(5
)
Total other comprehensive income (loss), net of tax
—

 
1

 
(27
)
Total comprehensive (loss) income
$
(202
)
 
$
(144
)
 
$
54



124

PHH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 

PHH CORPORATION
CONDENSED BALANCE SHEETS
(In millions)
 
 
December 31,
 
2016
 
2015
ASSETS
 

 
 

Cash and cash equivalents
$
783

 
$
745

Restricted cash
11

 
10

Accounts receivable, net
5

 
5

Due from subsidiaries
212

 
273

Investment in subsidiaries
721

 
881

Property and equipment, net
13

 
12

Other assets
37

 
76

Total assets
$
1,782

 
$
2,002

 
 
 
 
LIABILITIES
 

 
 

Accounts payable and accrued expenses
$
65

 
$
50

Debt, net
607

 
615

Other liabilities
18

 
19

Total liabilities
690

 
684

Commitments and contingencies


 


 
 
 
 
EQUITY
 

 
 

Preferred stock
—

 
—

Common stock
1

 
1

Additional paid-in capital
887

 
911

Retained earnings
214

 
416

Accumulated other comprehensive loss
(10
)
 
(10
)
Total PHH Corporation stockholders’ equity
1,092

 
1,318

Total liabilities and equity
$
1,782

 
$
2,002



125

PHH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 

PHH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
22

 
$
(19
)
 
$
(522
)
 
 
 
 
 
 
Cash flows from investing activities:
 

 
 

 
 

  Net decrease in amounts due from subsidiaries
47

 
10

 
—

  Purchases of property and equipment
(7
)
 
(8
)
 
(5
)
  (Increase) decrease in restricted cash
(1
)
 
(1
)
 
1

  Proceeds from sale of business, net of transaction costs
—

 
—

 
1,369

  Purchases of certificates of deposit
—

 
—

 
(250
)
  Proceeds from maturities of certificates of deposit
—

 
—

 
250

  Net cash provided by investing activities
39

 
1

 
1,365

 
 
 
 
 
 
Cash flows from financing activities:
 

 
 

 
 

  Net cash (used in) provided by consolidated subsidiaries
—

 
—

 
(69
)
  Principal payments on unsecured borrowings
—

 
(245
)
 
(435
)
  Cash tender premiums for convertible debt
—

 
(30
)
 
—

  Issuances of Common stock
—

 
2

 
10

  Repurchase of Common stock
(23
)
 
(77
)
 
(200
)
  Other, net
—

 
(2
)
 
(3
)
  Net cash used in financing activities
(23
)
 
(352
)
 
(697
)
Net increase (decrease) in Cash and cash equivalents
38

 
(370
)
 
146

Cash and cash equivalents at beginning of period
745

 
1,115

 
969

Cash and cash equivalents at end of period
$
783

 
$
745

 
$
1,115


Supplemental Disclosure of Cash Flows Information:
 

 
 

 
 

Payments for debt retirement premiums
$
—

 
$
—

 
$
22

Interest payments
42

 
49

 
83

Income tax (refunds) payments, net
(29
)
 
9

 
534






126

PHH CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
 

 
PHH Corporation and
Subsidiaries
 
PHH Corporation
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
 
(In millions)
Deferred tax valuation allowance:
 

 
 

 
 

 
 

 
 

 
 

Balance, beginning of period
$
46

 
$
35

 
$
26

 
$
11

 
$
5

 
$
5

Additions:
 

 
 

 
 

 
 

 
 

 
 

Charged to costs and expenses
5

 
10

 
5

 
2

 
6

 
2

Charged to other accounts
(7
)
 
1

 
4

 
(2
)
 
—

 
—

Reductions
—

 
—

 
—

 
—

 
—

 
(2
)
Balance, end of period
$
44

 
$
46

 
$
35

 
$
11

 
$
11

 
$
5



127
Table of Contents

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this Report on Form 10-K, 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 December 31, 2016 .
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States, which is commonly referred to as GAAP. The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating and evaluating our internal control over financial reporting. Because of these inherent limitations, internal control over financial reporting cannot provide absolute assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that our internal control over financial reporting may become inadequate because of changes in conditions or other factors, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 as required under Section 404 of the Sarbanes-Oxley Act of 2002. Management’s assessment of the effectiveness of our internal control over financial reporting was conducted using the criteria in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management concluded that our internal control over financial reporting was effective as of December 31, 2016 .  The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their attestation report which is included in this Form 10-K.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of PHH Corporation:

We have audited the internal control over financial reporting of PHH Corporation and subsidiaries (the "Company") as of December 31, 2016 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
  
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016 , based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2016 of the Company and our report dated February 28, 2017 expressed an unqualified opinion on those financial statements and financial statement schedules.

/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania
February 28, 2017



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Table of Contents

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance
 
Information required by this Item is incorporated herein by reference to the information under the headings “Executive Officers,” “Board of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance” and “Committees of the Board” in our definitive Proxy Statement related to our 2017 Annual Meeting of Stockholders, which we expect to file with the Commission, pursuant to Regulation 14A, no later than 120 days after December 31, 2016 (the “ 2017 Proxy Statement”).

Item 11. Executive Compensation
 
Information required under this Item is incorporated herein by reference to the information under the headings “Executive Compensation,” “Director Compensation” and “Compensation Committee Report” in our 2017 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required under this Item is incorporated herein by reference to the information under the headings “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in our 2017 Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information required under this Item is incorporated herein by reference to the information under the headings “Certain Relationships and Related Transactions” and “Board of Directors” in our 2017 Proxy Statement.

Item 14.  Principal Accounting Fees and Services

Information required under this Item is incorporated herein by reference to the information under the heading “Principal Accountant Fees and Services” in our 2017 Proxy Statement.

PART IV

Item 15. Exhibits
 
(a)(1). Financial Statements
 
Information in response to this Item is included in Item 8 of Part II of this Form 10-K.
 
(a)(2). Financial Statement Schedules
 
Information in response to this Item is included in Item 8 of Part II of this Form 10-K and incorporated herein by reference to Exhibit 12 attached to this Form 10-K.
 
(a)(3) and (b). Exhibits

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

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Table of Contents

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 28 th day of February, 2017.

 
PHH CORPORATION
 
 
 
 
By:
/s/ GLEN A. MESSINA  
 
 
Name: Glen A. Messina
 
 
Title: President and Chief Executive Officer
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. The undersigned hereby constitute and appoint Glen A. Messina, Robert B. Crowl and William F. Brown, and each of them, their true and lawful agents and attorneys-in-fact with full power and authority in said agents and attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in their respective names as Directors and officers of PHH Corporation, any amendment or supplement hereto. The undersigned hereby confirm all acts taken by such agents and attorneys-in-fact, or any one or more of them, as herein authorized.

Signature
 
Title
 
Date
 
 
 
 
 
/s/ GLEN A. MESSINA
 
President, Chief Executive Officer and Director
(Principal Executive Officer)
 
February 28, 2017
Glen A. Messina
 
 
 
 
 
 
 
 
/s/ ROBERT B. CROWL
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
February 28, 2017
Robert B. Crowl
 
 
 
 
 
 
 
 
/s/ MICHAEL R. BOGANSKY
 
Senior Vice President, Controller
(Principal Accounting Officer)
 
February 28, 2017
Michael R. Bogansky
 
 
 
 
 
 
 
 
/s/ JAMES O. EGAN
 
Non-Executive Chairman of the Board of Directors
 
February 28, 2017
James O. Egan
 
 
 
 
 
 
 
 
 
/s/ JANE D. CARLIN
 
Director
 
February 28, 2017
Jane D. Carlin
 
 
 
 
 
 
 
 
 
/s/ THOMAS P. GIBBONS
 
Director
 
February 28, 2017
Thomas P. Gibbons
 
 
 
 
 
 
 
 
 
/s/ CHARLES P. PIZZI
 
Director
 
February 28, 2017
Charles P. Pizzi
 
 
 
 
 
 
 
 
 
/s/ DEBORAH M. REIF
 
Director
 
February 28, 2017
Deborah M. Reif
 
 
 
 
 
 
 
 
 
/s/ CARROLL R. WETZEL, JR.
 
Director
 
February 28, 2017
Carroll R. Wetzel, Jr.
 
 
 
 

131
Table of Contents

EXHIBIT INDEX

Exhibit No.
 
Description
 
Incorporation by Reference
 
 
 
 
 
2.1
 
Agreement for the Purchase and Sale of Servicing Rights, dated December 28, 2016, by and between New Residential Mortgage LLC, PHH Mortgage Corporation and, solely for the limited purposes set forth therein, PHH Corporation. (Certain of the schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K, but the Company undertakes to furnish a copy of the schedules or similar attachments to the Securities and Exchange Commission upon request.)
 
Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on December 28, 2016.
 
 
 
 
 
2.2
 
Asset Purchase Agreement, dated February 15, 2017, by and among Guaranteed Rate Affinity, LLC, PHH Home Loans, LLC, RMR Financial, LLC and PHH Corporation. (Certain of the schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K, but the Company undertakes to furnish a copy of the schedules or similar attachments to the Securities and Exchange Commission upon request.)
 
Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on February 15, 2017.
 
 
 
 
 
2.3
 
JV Interests Purchase Agreement, dated February 15, 2017, by and between Realogy Services Venture Partner LLC and PHH Corporation. (Certain of the schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K, but the Company undertakes to furnish a copy of the schedules or similar attachments to the Securities and Exchange Commission upon request.)
 
Incorporated by reference to Exhibit 2.2 to our Current Report on Form 8-K filed on February 15, 2017.
 
 
 
 
 
3.1
 
Amended and Restated Articles of Incorporation, as amended and supplemented through June 12, 2013.
 
Incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the year ended December 31, 2015 filed on February 26, 2016.
 
 
 
 
 
3.2
 
Amended and Restated By-Laws, as amended through December 17, 2015.
 
Incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K for the year ended December 31, 2015 filed on February 26, 2016.
 
 
 
 
 
4.1
 
Specimen common stock certificate.
 
Incorporated by reference to Exhibit 4.1 to our Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 15, 2005.
 
 
 
 
 
4.2
 
See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of Incorporation, as amended and supplemented, and the Amended and Restated By-Laws, as amended, of the registrant defining the rights of holders of common stock of the registrant.
 
Incorporated by reference to Exhibit 3.1 filed herewith and Exhibit 3.2 filed herewith.
 
 
 
 
 
4.3
 
Indenture, dated as of January 17, 2012, between PHH Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee.
 
Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on January 17, 2012.
 
 
 
 
 
4.3.1
 
First Supplemental Indenture, dated as of January 17, 2012, between PHH Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee.
 
Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on January 17, 2012.
 
 
 
 
 
4.3.2
 
Form of 6.00% Convertible Senior Note due 2017.
 
Incorporated by reference to Exhibit A of Exhibit 4.2 to our Current Report on Form 8-K filed on January 17, 2012.
 
 
 
 
 
4.3.3
 
Second Supplemental Indenture, dated as of August 23, 2012, between PHH Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee.
 
Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on August 23, 2012.
 
 
 
 
 
4.3.4
 
Form of 7.375% Senior Note due 2019.
 
Incorporated by reference to Exhibit A of Exhibit 4.2 to our Current Report on Form 8-K filed on August 23, 2012.

132
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Exhibit No.
 
Description
 
Incorporation by Reference
 
 
 
 
 
4.3.5
 
Third Supplemental Indenture, dated as of August 20, 2013, between PHH Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee.
 
Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on August 20, 2013.
 
 
 
 
 
4.3.6
 
Form of 6.375% Senior Note due 2021.
 
Incorporated by reference to Exhibit A of Exhibit 4.2 to our Current Report on Form 8-K filed on August 20, 2013.
 
 
 
 
 
10.1
 
Form of Indemnification Agreement for Directors and Officers.
 
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 21, 2015.
 
 
 
 
 
10.2†
 
PHH Corporation Unanimous Written Consent of the Board of Directors effective August 18, 2010.
 
Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on August 20, 2010.
 
 
 
 
 
10.3†
 
PHH Corporation Management Incentive Plan.
 
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 6, 2010.
 
 
 
 
 
10.3.1†
 
Form of PHH Corporation Management Incentive Plan Award Notice.
 
Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on April 6, 2010.
 
 
 
 
 
10.4†
 
Amended and Restated 2005 Equity and Incentive Plan (as amended and restated through June 17, 2009).
 
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 22, 2009.
 
 
 
 
 
10.4.1†
 
First Amendment to the PHH Corporation Amended and Restated 2005 Equity and Incentive Plan, effective August 18, 2010.
 
Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on August 20, 2010.
 
 
 
 
 
10.4.2†
 
Form of PHH Corporation 2005 Equity and Incentive Plan Non-Qualified Stock Option Agreement, as amended.
 
Incorporated by reference to Exhibit 10.28 to our Quarterly Report on Form 10-Q for the period ended March 31, 2005 filed on May 16, 2005.
 
 
 
 
 
10.4.3†
 
Form of PHH Corporation 2005 Equity and Incentive Plan Non-Qualified Stock Option Conversion Award Agreement.
 
Incorporated by reference to Exhibit 10.29 to our Quarterly Report on Form 10-Q for the period ended March 31, 2005 filed on May 16, 2005.
 
 
 
 
 
10.4.4†
 
Form of PHH Corporation 2005 Equity and Incentive Plan Non-Qualified Stock Option Award Agreement, as revised June 28, 2005.
 
Incorporated by reference to Exhibit 10.36 to our Quarterly Report on Form 10-Q for the period ended June 30, 2005 filed on August 12, 2005.
 
 
 
 
 
10.4.5†
 
Form of PHH Corporation 2005 Equity and Incentive Plan Restricted Stock Unit Award Agreement, as revised June 28, 2005.
 
Incorporated by reference to Exhibit 10.37 to our Quarterly Report on Form 10-Q for the period ended June 30, 2005 filed on August 12, 2005.
 
 
 
 
 
10.4.6†
 
Form of 2011 Non-Qualified Stock Option Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on November 18, 2011.
 
 
 
 
 
10.4.7†
 
Form of February 2012 Non-Qualified Stock Option Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 24, 2012.
 
 
 
 
 
10.4.8†
 
Form of February 2012 Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on February 24, 2012.
 
 
 
 
 
10.4.9†
 
Form of September 2012 Performance Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on October 3, 2012.
 
 
 
 
 
10.4.10†
 
Form of September 2012 Non-Qualified Stock Option Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on October 3, 2012.
 
 
 
 
 


133
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Exhibit No.
 
Description
 
Incorporation by Reference
 
 
 
 
 
10.4.11†
 
Form of 2014 Performance Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.7.12 to our Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014.
 
 
 
 
 
10.4.12†
 
Form of 2014 Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.7.13 to our Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014.
 
 
 
 
 
10.4.13†
 
Form of Amendment, dated as of July 11, 2014, to the Restricted Stock Unit Award Agreements.
 
Incorporated by reference to Exhibit 10.7.1 to our Quarterly Report on Form 10-Q for the period ended September 30, 2014 filed on November 5, 2014.
 
 
 
 
 
10.4.14†
 
Form of Amendment, dated as of July 11, 2014, to the Non-Qualified Stock Option Award Agreements.
 
Incorporated by reference to Exhibit 10.7.2 to our Quarterly Report on Form 10-Q for the period ended September 30, 2014 filed on November 5, 2014.
 
 
 
 
 
10.5†
 
Form of 2012 Restrictive Covenant Agreement.
 
Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 3, 2012.
 
 
 
 
 
10.6†
 
PHH Corporation 2014 Equity and Incentive Plan
 
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 29, 2014.
 
 
 
 
 
10.6.1†
 
Form of 2014 Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the period ended September 30, 2014 filed on November 5, 2014.
 
 
 
 
 
10.6.2†
 
Form of September 2014 Restricted Stock Unit Award Notice and Agreement, as amended.
 
Incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 27, 2015.
 
 
 
 
 
10.6.3†
 
Form of October 2014 Performance Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the period ended September 30, 2014 filed on November 5, 2014.
 
 
 
 
 
10.6.4†
 
Form of October 2014 Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the period ended September 30, 2014 filed on November 5, 2014.
 
 
 
 
 
10.6.5†
 
Form of 2015 Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended March 31, 2015 filed on May 7, 2015.
 
 
 
 
 
10.6.6†
 
Form of 2015 Performance Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the period ended March 31, 2015 filed on May 7, 2015.
 
 
 
 
 
10.6.7†**
 
Form of 2016 Performance Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the period ended June 30, 2016 filed on August 9, 2016.
 
 
 
 
 
10.6.8†
 
Form of 2016 Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the period ended June 30, 2016 filed on August 9, 2016.
 
 
 
 
 
10.6.9†
 
Form of May 2016 Performance Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the period ended June 30, 2016 filed on August 9, 2016.
 
 
 
 
 
10.6.10†
 
Form of May 2016 Restricted Stock Unit Award Notice and Agreement.
 
Incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the period ended June 30, 2016 filed on August 9, 2016.
 
 
 
 
 

134
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Exhibit No.
 
Description
 
Incorporation by Reference
 
 
 
 
 
10.6.11†
 
Form of Amendment to the 2015 Performance Restricted Stock Unit Award Pursuant to the PHH Corporation 2014 Equity and Incentive Plan
 
Filed herewith.
 
 
 
 
 
10.7†
 
Resolutions terminating the PHH Corporation 2014 Non-Employee Director Compensation Program.
 
Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended September 30, 2014 filed on November 5, 2014.
 
 
 
 
 
10.8†
 
PHH Corporation Equity Compensation Program for Non-Employee Directors.
 
Incorporated by reference to Exhibit 10.9 to our Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 27, 2015.
 
 
 
 
 
10.9†
 
Form of 2014 Restrictive Covenant Agreement.
 
Incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the period ended September 30, 2014 filed on November 5, 2014.
 
 
 
 
 
10.10†
 
PHH Corporation Tier I Severance Pay Plan.
 
Incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on October 3, 2012.
 
 
 
 
 
10.10.1†
 
Amended and Restated Tier I Severance Pay Plan.
 
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 25, 2016.
 
 
 
 
 
10.11†
 
PHH Corporation Tier II Severance Pay Plan.
 
Incorporated by reference to Exhibit 10.17 to our Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 27, 2015.
 
 
 
 
 
10.12†
 
PHH 2015 Corporation Management Incentive Plan (Under the PHH Corporation 2014 Equity and Incentive Plan).
 
Incorporated by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q for the period ended June 30, 2016 filed on August 9, 2016.
 
 
 
 
 
10.13
 
Underwriting Agreement, dated August 9, 2012, by and between PHH Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several Underwriters.
 
Incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K filed on August 14, 2012.
 
 
 
 
 
10.13.1
 
Underwriting Agreement, dated August 6, 2013, by and between PHH Corporation and J.P. Morgan Securities LLC, as representative of the several Underwriters.
 
Incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K filed on August 12, 2013.
 
 
 
 
 
10.14‡‡
 
Amended and Restated Limited Liability Company Operating Agreement of PHH Home Loans, LLC, dated January 31, 2005, as amended by Amendment No. 1 to Operating Agreement, dated May 12, 2005, and by Amendment No. 2 to Operating Agreement, dated March 31, 2006.
 
Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended September 30, 2015 filed on November 5, 2015.
 
 
 
 
 
10.15‡‡
 
Strategic Relationship Agreement, dated January 31, 2005, by and among Realogy Services Group LLC (f/k/a Cendant Real Estate Services Group, LLC), Realogy Services Venture Partner LLC (successor to Cendant Real Estate Services Venture Partner, Inc.), PHH Corporation, PHH Mortgage Corporation, PHH Broker Partner Corporation and PHH Home Loans, LLC, as amended by Amendment No. 1 to the Strategic Relationship Agreement, dated May 12, 2005, and by the Amended and Restated Amendment No. 2 to the Strategic Relationship Agreement, dated October 21, 2015.
 
Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the period ended September 30, 2015 filed on November 5, 2015.
 
 
 
 
 
10.16‡‡
 
Flow Mortgage Loan Subservicing Agreement, dated as of December 28, 2016, between New Residential Mortgage LLC, as Servicing Rights Owner, and PHH Mortgage Corporation, as Servicer
 
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 28, 2016.
 
 
 
 
 

135
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Exhibit No.
 
Description
 
Incorporation by Reference
 
 
 
 
 
10.17
 
Support Agreement, dated February 15, 2017, by and among Guaranteed Rate, Inc., Realogy Holdings Corp. and PHH Corporation.
 
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 15, 2017.
 
 
 
 
 
12
 
Computation of Ratio of Earnings to Fixed Charges.
 
Filed herewith.
 
 
 
 
 
21
 
Subsidiaries of the Registrant.
 
Filed herewith.
 
 
 
 
 
23
 
Consent of Independent Registered Public Accounting Firm.
 
Filed herewith.
 
 
 
 
 
24
 
Powers of Attorney
 
Incorporated by reference to the signature page to this Annual Report on Form 10-K.
 
 
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
 
 
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Furnished herewith.
 
 
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Furnished herewith.
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
Filed herewith.
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Filed herewith.
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
Filed herewith.
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document
 
Filed herewith.
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
Filed herewith.
 
 
 
 
 
101.DEF
 
XBRL 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 an order under the Exchange Act which portions have been omitted and filed separately with the Commission.


136


Exhibit 10.6.11

FORM OF AMENDMENT TO THE
PERFORMANCE RESTRICTED STOCK UNIT AWARD
PURSUANT TO THE PHH CORPORATION 2014 EQUITY AND INCENTIVE PLAN

This AMENDMENT is made as of the ___ day of _____________, 2017, by PHH Corporation, a corporation duly organized and existing under the laws of the State of Maryland (the “ Company ”).

INTRODUCTION

The Company maintains the PHH Corporation 2014 Equity and Incentive Plan (the “ EIP ”) which provides for the grants of other stock-based awards, including restricted stock units, subject to vesting terms and conditions as the Human Capital and Compensation Committee (the “ Committee ”) of the Board of Directors may establish. The Committee granted performance based restricted stock units in February 2015 (the “ Awards ”) which, for purposes of measuring performance, compare the total shareholder return of the Company to the total shareholder return of the component companies in the Keefe, Bruyette & Woods Mortgage Finance Index (the “ Index ”) for each of three applicable measurement periods beginning January 1, 2015 and ending December 31st of 2015, 2016, and 2017, respectively. However, on December 16, 2016, the Index was discontinued. To preserve the intended performance measures under the Awards as closely as possible, the Company desires to amend each of the outstanding Awards to replace the use of the Index with the Index component companies as of December 16, 2016 for the measurement periods ending December 31, 2016 and 2017. The Committee has the authority to adopt this amendment under Section 3.1(f) of the EIP.

AMENDMENT

NOW, THEREFORE, the Company does hereby amend each outstanding Award effective as of December 16, 2016, by deleting the second paragraph following the chart in Part I. of Schedule 1 to the Award (that begins “The component companies…”) and substituting therefor the following:

“For the measurement period ending December 31, 2015, the component companies of the KBW Mortgage Finance Index will be the component companies in the index for the entire Measurement Period ending December 31, 2015. For the Measurement Periods ending December 31, 2016 and December 31, 2017, the component companies of the KBW Mortgage Finance Index will be the component companies in the index as of its discontinuance on December 16, 2016.
Notwithstanding the foregoing, component companies in the KBW Mortgage Finance Index on the first day of the Measurement Period that declare bankruptcy during the Measurement Period shall be included in the list of TSR performance of the component companies as a negative one hundred percent (-100%).”

Except as set forth herein, the Award shall remain in full force and effect as prior to this Amendment.

IN WITNESS WHEREOF, the Company has adopted this Amendment as of the day and year first above written.

PHH CORPORATION

By:                     
Its:                     





Exhibit 12
 
PHH CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ in millions, except ratios)
 
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Earnings available to cover fixed charges:
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations before income taxes
$
(304
)
 
$
(213
)
 
$
(284
)
 
$
140

 
$
(14
)
Adjustments for equity method investments
(1
)
 
—

 
1

 
(3
)
 
2

Fixed charges
81

 
97

 
137

 
192

 
218

Total
$
(224
)
 
$
(116
)
 
$
(146
)
 
$
329

 
$
206

 
 
 
 
 
 
 
 
 
 
Fixed charges:
 
 
 
 
 
 
 
 
 
Interest expense (1)
$
75

 
$
90

 
$
130

 
$
185

 
$
212

Estimated interest portion of net rental expense (2)
6

 
7

 
7

 
7

 
6

Total
$
81

 
$
97

 
$
137

 
$
192

 
$
218

 
 
 
 
 
 
 
 
 
 
Ratio of earnings to fixed charges (3)
—

 
—

 
—

 
1.71

 
—

Coverage deficiencies
$
305

 
$
213

 
$
283

 
$
—

 
$
12


______________
(1)         Consists of interest expense on all indebtedness including amortization of deferred financing costs.
 
(2)         One-third of rental expense, net of income from subleases is deemed an appropriate representative of the interest rate factor.
 
(3)         The ratio of earnings to fixed charges was less than 1:1 driven by the following:

(i) for 2016, unfavorable changes in fair value of our mortgage servicing rights, expenses associated with our strategic review, exit and disposal costs related to the PLS exit, provisions for legal and regulatory reserves and costs to re-engineer our business;

(ii) for 2015 and 2014, unfavorable changes in fair value of our mortgage servicing rights, provisions for legal and regulatory reserves, charges related to early debt retirement and, for 2015 only, costs to re-engineer our business; and

(iii) for 2012, unfavorable changes in fair value to our mortgage servicing rights.





Exhibit 21
 
SUBSIDIARIES OF REGISTRANT
As of December 31, 2016
 
Name of Subsidiary
 
Jurisdiction of
Incorporation
or Formation
Atrium Insurance Corporation
 
NY
Atrium Reinsurance Corporation
 
VT
Long Island Mortgage Group, Inc.
 
NY
NE Moves Mortgage, LLC
 
MA
Pacific Access Mortgage, LLC
 
HI
PHH Broker Partner Corporation
 
MD
PHH Canadian Holdings, Inc.
 
DE
PHH Corporate Services, Inc.
 
DE
PHH de Brasil Paricopaceos Ltda.
 
Brazil
PHH Home Loans, LLC (dba Cartus Home Loans; Coldwell Banker Home Loans; PHH Home Mortgage LLC; Sunbelt Lending Services)
 
DE
PHH Mortgage Capital LLC
 
DE
PHH Mortgage Corporation (dba Burnet Mortgage Services; Century 21 Mortgage; Coldwell Banker Mortgage; ERA Mortgage; Instamortgage.com; MortgageSave.com; MortgageQuestions.com; Mortgage Service Center; PHH Mortgage Services)
 
NJ
PHH Servicer Advance Funding Depositor, LLC
 
DE
PHH Servicer Advance Receivables Trust 2013-1
 
DE
PHH Services B.V.
 
Netherlands
RMR Financial, LLC (dba Axiom Financial; First Capital; Mortgage California; Princeton Capital; Rocky Mountain Mortgage Loans)
 
CA
Speedy Title & Appraisal Review Services LLC
 
DE





Exhibit 23
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the incorporation by reference in Registration Statement No. 333-208672 on Form S-3 and Registration Nos. 333-161020, 333-122477 and 333-196190 on Form S-8 of our reports dated February 28, 2017 , relating to the consolidated financial statements and financial statement schedules of PHH Corporation and the effectiveness of PHH Corporation’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of PHH Corporation and subsidiaries for the year ended December 31, 2016 .
 
/s/ Deloitte & Touche LLP
 
Philadelphia, Pennsylvania
February 28, 2017
 




Exhibit 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Glen A. Messina, certify that:
 
1. I have reviewed this Annual Report on Form 10-K of PHH Corporation;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
 
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
By:
/s/ Glen A. Messina
 
 
Glen A. Messina
 
 
President and Chief Executive Officer
 
Date: February 28, 2017




Exhibit 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Robert B. Crowl, certify that:
 
1. I have reviewed this Annual Report on Form 10-K of PHH Corporation;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
 
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
By:
/s/ Robert B. Crowl
 
 
Robert B. Crowl
 
 
Executive Vice President and Chief Financial Officer
 
Date: February 28, 2017




Exhibit 32.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of PHH Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:
 
(i) the Annual Report on Form 10-K of the Company for the period ended December 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
 
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
By:
/s/ Glen A. Messina
 
 
Glen A. Messina
 
 
President and Chief Executive Officer
 
Date: February 28, 2017
 
A signed original of this written statement required by Section 906 has been provided to PHH Corporation and will be retained by PHH Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
 
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of PHH Corporation, whether made before or after the date hereof, regardless of any general incorporation language in such filing.




Exhibit 32.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
 
Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of PHH Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:
 
(i) the Annual Report on Form 10-K of the Company for the period ended December 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
 
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
By:
/s/ Robert B. Crowl
 
 
Robert B. Crowl
 
 
Executive Vice President and Chief Financial Officer
 
Date: February 28, 2017
 
A signed original of this written statement required by Section 906 has been provided to PHH Corporation and will be retained by PHH Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
 
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of PHH Corporation, whether made before or after the date hereof, regardless of any general incorporation language in such filing.