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HOME LOAN SERVICING SOLUTIONS, LTD. - 10-K/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data and unless otherwise indicated)

August 18, 2014

INTRODUCTION

The following discussion of our results of operations, changes in financial condition and liquidity should be read in conjunction with our Consolidated Financial Statements and the related notes, all included elsewhere in this report on Form 10-K/A.

The financial information included herein related to the 2013 and 2012 consolidated financial statements has been restated for the effects of the adjustment described in the Explanatory Note and in Part IV, Item 15, "Exhibits and Financial Statement Schedules - Note 17, Restatement".

OVERVIEW

Strategic Priorities

Now in our second year of operations, we continue to execute upon our chief objective which is to acquire Mortgage Servicing Assets, while also proactively pursuing residential mortgage asset classes with little credit or valuation risk. During the past year, we completed four purchases from Ocwen which added $119.7 billion of UPB to our servicing portfolio, and we currently hold the rights to service $180.4 billion of UPB as of December 31, 2013. From an operational perspective, the transactions between HLSS and Ocwen were completed as planned, and we believe that all servicing requirements under the PSAs were met in all material respects.



Our results for the years ended December 31 are discussed in more detail below.

Changes in Results of Operations Summary

The following table summarizes our consolidated operating results for the years ended December 31, 2013, 2012 and 2011 which includes periods prior to March 5, 2012 when we were a development stage enterprise. 2013 2012 2011 Consolidated: Revenue $ 239,832$ 49,870 $ - Operating expenses 11,870 6,150 273 Income (loss) from operations 227,962 43,720 (273 ) Interest expense 110,071 24,057 - Income (loss) before income taxes 117,891 19,663 (273 ) Income tax expense 234 46 - Net income (loss) $ 117,657$ 19,617$ (273 ) Year Ended December 2013 versus December 2012. Our Interest income increased year over year, primarily because our average UPB for the years ended December 31, 2013 and 2012, was $134.4 billion and $27.7 billion. An additional $119.7 billion of UPB in Rights to MSRs purchased from Ocwen during 2013 contributed to the increased 2013 average UPB balances. We also recognized a decrease in our interest income of $10,037 and $7,254, respectively, for the years ended December 31, 2013 and 2012 as a result of a corresponding decrease in the fair value of our Notes receivable - Rights to MSRs. Lastly, lower prepayment speeds for the UPB tied to our Notes receivable - Rights to MSRs contributed to greater Interest income during 2013. Average prepayment speeds declined from 14.2% during 2012 to 12.9% during 2013. Operating expenses increased year over year primarily because the scale of our business significantly increased from 2012 to 2013 as a result of follow-on and flow Rights to MSRs purchases. Operating expenses are primarily comprised of salaries and wages, Related party expenses and General and administrative expenses. Our average headcount for the year ended December 31, 2013 as compared to December 31, 2012 increased from twelve to seventeen which primarily contributed to the increase in the Compensation and benefits portion of 25



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operating expenses. Related party expenses are related to the Ocwen Professional Services Agreement and the Altisource Administrative Services Agreement. The increase in Related party expenses primarily related to increased use of business strategy, tax and legal services as part of the Ocwen Professional Services Agreement. The increase in General and administrative expenses is primarily related to tax and legal expenses related to our research and pursuit of new investment opportunities. Lastly, we had twelve full months of operations during 2013 compared to ten months of operations during the comparable 2012 period which contributed to higher expense levels for all income statement line items. The most significant contributor to the Interest expense increase is from our Match funded liabilities. Larger average Match funded liability balances contributed $150,910 to the year over year increase in Interest expense which was partially offset by a decrease in Interest expense attributable to lower effective interest rates of $73,954. In addition, Other borrowings contributed $9,058 to the increase in Interest expense, $431 of which was attributable to the amortization of debt issuance costs and the remainder was attributable to accrued interest on our outstanding balance. Income tax expense increased year over year due to increased earnings in 2013 compared to 2012. However, our effective tax rate year over year remained flat at 0.2% for 2013 compared to 0.2% in 2012. Year Ended December 2012 versus December 2011. We were a development stage enterprise until March 5, 2012 and therefore our 2012 operating results are not fully comparable to 2011. Revenue in 2012 primarily includes Interest income recorded from our Notes receivable - Rights to MSRs. Also included in revenue for the year ended December 31, 2012 are the amounts billed to Ocwen for services we provide under the Ocwen Professional Services Agreement and interest earned on corporate account balances. Operating expenses for the year ended December 31, 2012 increased primarily due to compensation and benefits and professional services. Additionally, Interest expense increased significantly for the year ended December 31, 2012 due to outstanding Match funded liabilities drawn on in connection with our asset purchases during the year.



We incurred $46 of income tax expense for the year ended December 31, 2012, compared to $0 of income tax expense during the comparable 2011 period. The increase was due to us being profitable in our first year of operations. During 2011 we were a development stage enterprise with no revenues and certain expenses related to the start-up of our business.

Summary Operating Information

We operate our business as a single reportable segment. For purposes of our internal management reporting, we separately report the components of Interest income - notes receivable - Rights to MSRs which include Servicing fee revenue, Servicing expense, Amortization of Notes receivable - Rights to MSRs and Change in fair value of Notes receivable - Rights to MSRs. We provide a reconciliation of our reported results to our internal management reporting for the years ended December 31, 2013 and 2012 in the following tables. We did not provide reconciliations for the year ended December 31, 2011 because we were a development stage enterprise during that period, and our operations were limited to raising capital to complete the Initial Acquisition. Operating items during that period consisted primarily of start-up costs and are not comparable to the years ended December 31, 2013 and 2012. We executed our agreements with Ocwen with the intent that we would receive the total amount of the servicing fees collected and that we would pay Ocwen a subservicing fee that is determined based on its collections and advance ratio performance. We evaluate our operating performance and manage our business considering servicing fees collected and subservicing fees paid and maintain our internal management reporting on this basis. The following table presents our consolidated results of operations in accordance with U.S. GAAP ("GAAP") reconciled to our internally reported financial results. 26



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Our total revenue, total operating expenses and income from operations as presented in our Management Reporting format shown below should be considered in addition to, and not as a substitute for: total revenue, total operating expenses and income from operations determined in accordance with GAAP.

Consolidated Management Results (GAAP) Reporting (Restated) Adjustments (Non-GAAP) For the year ended December 31, 2013: Revenue Servicing fee revenue (1) $ - $ 633,377$ 633,377 Interest income - notes receivable - Rights to MSRs (2) 235,826 (235,826 ) - Interest income - other 2,195 - 2,195 Related party revenue 1,811 - 1,811 Total revenue 239,832 397,551 637,383 Operating expenses Compensation and benefits 5,825 - 5,825 Servicing expense (3) - 317,702 317,702 Amortization of Notes receivable - Rights to MSRs (4) - 69,812 69,812 Change in fair value of Notes receivable - Rights to MSRs (5) - 10,037 10,037 Related party expenses 1,400 - 1,400 General and administrative expenses 4,645 - 4,645 Total operating expenses 11,870 397,551 409,421 Income from operations $ 227,962 $ - $ 227,962 Consolidated Management Results (GAAP) Reporting (Restated) Adjustments (Non-GAAP) For the year ended December 31, 2012: Revenue Servicing fee revenue (1) $ - $ 117,789$ 117,789 Interest income - notes receivable - Rights to MSRs (2) 47,445 (47,445 ) - Interest income - other 109 - 109 Related party revenue 2,316 - 2,316 Total revenue 49,870 70,344 120,214 Operating expenses Compensation and benefits 3,751 - 3,751 Servicing expense (3) - 50,173 50,173 Amortization of Notes receivable - Rights to MSRs (4) - 12,917 12,917 Change in fair value of Notes receivable - Rights to MSRs (5) - 7,254 7,254 Related party expenses 755 - 755 General and administrative expenses 1,644 - 1,644 Total operating expenses 6,150 70,344 76,494 Income from operations $ 43,720 $ - $ 43,720



(1) Servicing fee revenue reflects servicing fees received under the agreements

with Ocwen.

(2) Interest income - notes receivable - Rights to MSRs represents the net amount

of servicing fees received less servicing fees paid, amortization of the

Notes receivable - Rights to MSRs and changes in the fair value of Notes

receivable - Rights to MSRs. We exclude this interest income from our

Management Reporting and instead report the individual components, including

Servicing fee revenue, Servicing expense, Amortization of Notes receivable -

Rights to MSRs and Change in fair value of Notes receivable - Rights to MSRs.

27



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Table of Contents (3) Servicing expense reflects the fee we paid under the agreements with Ocwen.

(4) Amortization of MSRs reflects reductions in the value of the Notes receivable

- Rights to MSRs due to UPB run-off.

(5) Our methodology of determining the fair value of Notes receivable - Rights to

MSRs is described in Part IV, Item 15, "Exhibits and Financial Statement -

Schedules - Note 3, Fair Value of Financial Instruments." In our consolidated

statements of operations, we record changes in fair value as a component of

Interest income - notes receivable - Rights to MSRs. In our consolidated

statements of cash flows, we record changes in fair value as Reductions to

notes receivable - Rights to MSRs, and we record operating cash flows to the

extent that an increase in fair value exceeds amortization.

Year ended December 2013 versus 2012. Servicing fee revenue increased year over year because we owned the servicing rights for significantly greater average UPB during 2013. Servicing fee revenue is a function of principal and interest collected during the period and the contractual servicing fee rate. Average UPB for the year ended December 31, 2013 was $134.4 billion, compared to $27.7 billion for the preceding year. The servicing expense paid to Ocwen during the year ended December 31, 2013 included $75,970 for the base fee and $241,732 in incentive fees. The servicing expense paid to Ocwen during the comparable 2012 period included $14,135 for the base fee and $36,038 in incentive fees. The difference is primarily attributable to increased average UPB year over year. Amortization of MSRs relates to reduction in UPB due to portfolio run-off and is greater during 2013 due to larger average UPB.



The following table provides selected portfolio statistics as of December 31:

(in thousands, except for loan count data) 2013 2012 % Change Residential Assets Serviced UPB: Performing loans (1) $ 145,658,596$ 60,788,667 140 % Non-performing loans 31,425,514 16,714,970 88 Non-performing real estate 3,319,098 1,857,237 79 Total residential assets serviced $ 180,403,208$ 79,360,874 127 Percent of total UPB: Servicing portfolio 100.0 % 100.0 % - Non-performing residential assets serviced 19.3 % 23.4 % (18 ) Number of: Performing loans (1) 970,584 451,255 115 Non-performing loans 159,327 88,534 80 Non-performing real estate 18,282 10,160 80 Total number of residential assets serviced 1,148,193 549,949 109 % Percent of total number: Non-performing residential assets serviced 15.5 % 18.0 % (14 )



(1) Performing loans include those loans that are current or have been delinquent

for less than 90 days in accordance with their original terms and those loans

for which borrowers are making scheduled payments under loan modification,

forbearance or bankruptcy plans. Performing loans also include loans for

which we have master servicing rights which are reported based on scheduled

UPB. We consider all other loans to be non-performing.

The following table provides selected portfolio statistics for the years ended December 31:

(in thousands, except for loan count data) 2013 2012 % Change Average residential assets serviced $ 134,385,215$ 27,736,418 385 % Prepayment speed (average CPR) 12.9 % 14.2 % (9 ) Average number of residential assets serviced 872,782 194,157 350 % 28



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The following tables provide information regarding changes in our portfolio of residential assets serviced during 2013 and 2012:

Loan

(in thousands, except for loan count data) UPB



Count

Servicing portfolio at January 1, 2013 $ 79,360,874 549,949 Additions 119,652,473 686,036 Runoff (18,610,139 ) (87,792 ) Servicing portfolio at December 31, 2013 $ 180,403,208 1,148,193 Loan (in thousands, except for loan count data) UPB



Count

Servicing portfolio at January 1, 2012 $ -

- Additions 82,727,374 564,006 Runoff (3,366,500 ) (14,057 )



Servicing portfolio at December 31, 2012$ 79,360,874 549,949

As of December 31, 2013, the balance of deferred servicing fees related to delinquent borrower payments was $470.3 million compared to $233.3 million at December 31, 2012.

Change in Financial Condition Summary

The overall increase in total assets of $3,732,613 and total liabilities of $3,389,545 during the year ended December 31, 2013, compared to December 31, 2012, primarily resulted from:

The completion of four asset purchases from Ocwen totaling $4,257,121;

Issuance of 15,132,053 ordinary shares which resulted in net proceeds to

us of $333,551;



A new senior secured term loan facility which increased total liabilities

by $343,386; and



Advance facilities activity: we received $550,371 in Match funded advance

remittances and had net proceeds of $3,024,800 from Match funded

liabilities.

The assets acquired included Notes receivable - Rights to MSRs which had a balance of $633,769 representing 8.7% of total assets at December 31, 2013. Notes receivable - Rights to MSRs are carried at fair value which is determined based on an appraisal prepared with the assistance of an independent valuation firm and requires the use of significant unobservable inputs. The most significant assumptions used in the appraisal are:



Discount rates reflecting the risk of earning the future income streams

ranging from 15% to 22%;



Interest rate used for calculating the cost of servicing advances of

1-Month LIBOR + 3.75%; Mortgage loan prepayment projections ranging from 12% to 28% of the related mortgage lifetime projected prepayment rate; and



Delinquency rate projections ranging from 15% to over 35% of the aggregate

UPB of the underlying mortgage loans.

The independent valuation firm reviewed the collateral attributes and the historical payment performance of the underlying mortgage servicing portfolio and compared them with similar mortgage servicing portfolios and with standard industry mortgage performance benchmarks to arrive at the assumptions set forth above. The selected collateral attributes and performance comparisons utilized were the voluntary prepayment performance, delinquency and foreclosure performance, operational cost comparison, average loan balance, weighted average coupon and note rate distribution, loan product type classification, geographic distribution and servicing advance behavior. The unobservable inputs that have the most significant effect on the fair value of Notes receivable - Rights to MSRs are the mortgage loan prepayment rate projections and delinquency rate projections; however, any significant increase (decrease) in discount rates, interest rates, mortgage loan prepayment projections or delinquency rate projections, each in isolation, would result in a substantially lower (higher) valuation. 29



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We also have unobservable inputs for our derivatives which are not exchange-traded, and therefore quoted market prices or other observable inputs are not available. The fair value of our interest rate swap agreements are based on certain information provided by third-party pricing sources. Third-party valuations are derived from proprietary models based on inputs that include yield curves and contractual terms such as fixed interest rates and payment dates. We have not adjusted the information obtained from the third-party pricing sources; however, we review this information to ensure that it provides a reasonable basis for estimating fair value. Our review is designed to identify information that appears stale, information that has changed significantly from the prior period, and other indicators that the information may not be accurate. We determined that potential credit and counterparty risks had an immaterial impact on the valuation of our derivatives. As of December 31, 2013, derivative assets and liabilities were 0.05% and 0.01% of our total assets and liabilities. Total equity amounted to $1,216,447 at December 31, 2013 as compared to $873,379 at December 31, 2012. This increase of $343,068 is primarily due to the net proceeds of our 2013 equity issuances of $333,551 and Net income of $117,657 offset by dividends declared of $111,383. In addition, we recorded $3,243 of unrealized gains, net of taxes, in other comprehensive income on interest rate swaps that we designated as cash flow hedges.



LIQUIDITY AND CAPITAL RESOURCES

We define liquidity as unencumbered cash balances plus unused, collateralized advance financing capacity. Our liquidity as of December 31, 2013, as measured by cash and available credit, was $160,973, an increase of $51,735 from December 31, 2012. At December 31, 2013 and 2012 our cash position was $87,896 and $76,048. We had collateralized available capacity at December 31, 2013 and 2012 of $73,077 and $33,190. Recent developments in the asset backed securities market where we obtain the majority of our advance financing include lower yields across all rating classes and demand for non-investment grade notes. Issuing non-investment grade notes in the future could increase the borrowing rate in our servicing advance facilities. Significant increases in interest rates in the future could impact our ability to efficiently fund servicing advances and therefore have a negative impact on our earnings. At current pricing, reinvesting the proceeds of such an issuance could increase our return on equity. Regarding the investment of cash, our investment policies emphasize principal preservation and availability by limiting the investment to demand deposit accounts.



Material changes in our capital structure over the last two years include:

2013: On January 22, 2013, the underwriters exercised a portion of their over-allotment option from our December 24, 2012 offering of ordinary shares in the amount of 970,578 ordinary shares. We received net proceeds of $17,633 from the over-allotment exercise. On June 26, 2013, we issued 13,000,000 of our ordinary shares, and an additional 1,161,475 of ordinary shares were issued in connection with the exercise of the underwriters' over-allotment option. The total gross proceeds from the issuance of these additional shares to HLSS were $325,714. After deducting underwriting discounts, commissions and expenses payable by HLSS, the aggregate net proceeds we received were $315,918. On June 27, 2013, we entered into a $350,000 senior secured term loan facility. The senior secured term loan facility has an expected maturity date of June 27, 2020 and an interest rate of 3.50% plus one month LIBOR, with a 1.00% LIBOR floor. 30



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2012: On March 5, 2012, we closed the IPO resulting in the issuance of 13,333,333 of our ordinary shares. The total gross proceeds from the offering to HLSS were $186,667. After deducting underwriting discounts and commissions and offering expenses paid by HLSS, the aggregate net proceeds we received totaled $170,486. On March 5, 2012, simultaneously with the IPO, William C. Erbey, the founder of our company and the Chairman of the Board of Directors, purchased 714,285 of our ordinary shares in a private placement. The total proceeds from the private placement to HLSS were $10,000. We did not incur underwriting discounts or commissions in respect of these shares. On April 2, 2012, we issued 129,600 additional ordinary shares to the underwriters in connection with the exercise of their over-allotment option under the IPO. The total gross proceeds from the issuance of these additional shares to HLSS were $1,814. After deducting underwriting discounts, commissions and expenses paid by HLSS, the aggregate net proceeds we received were $1,577. On September 12, 2012, we issued 16,387,500 of our ordinary shares, 2,137,500 of which were pursuant to the exercise by the underwriters of their over-allotment option. The total gross proceeds from the issuance of these additional shares to HLSS were $249,909. After deducting underwriting discounts, commissions and expenses paid by HLSS, the aggregate net proceeds we received were $236,034. On December 24, 2012, we issued 25,300,000 of our ordinary shares. In addition, the underwriters had an over-allotment option for the purchase of 3,795,000 of our ordinary shares, a portion of which were exercised in 2013. The total gross proceeds from the issuance of these shares to HLSS were $480,700. After deducting underwriting discounts, commissions and expenses paid by HLSS, the aggregate net proceeds we received were $462,261.



Prior to our IPO we were a development stage enterprise and therefore did not have any material changes to our capital structure during 2011.

Investment policy and funding strategy.

Our primary sources of funds for near-term liquidity are:

Interest income - notes receivable - Rights to MSRs; and Proceeds from Match funded liabilities.



An expected long-term source of liquidity is the proceeds from the issuances of equity capital or corporate debt.

Our primary uses of funds are:

Payments for advances in excess of collections on our existing servicing

portfolio; Payments of interest and operating costs; Purchases of MSRs and related servicing advances; and Repayments of borrowings. In managing our liquidity position, our primary focus is on maintaining sufficient cash and unused borrowing capacity to meet our advancing obligations, pay expenses and purchase additional assets. We regularly monitor and project our cash position and borrowing capacity and consider this in sizing asset purchases. 31



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At December 31, 2013, $727,878 of our total maximum borrowing capacity remained unused. We maintain unused borrowing capacity for two reasons:

As a protection should advances increase due to increased delinquencies; and

To provide capacity for the acquisition of additional servicing rights.

Outlook. We believe that our cash balance and unused advance financing capacity are sufficient to meet foreseeable requirements.

Debt financing summary. As of December 31, 2013, we had $727,878 of unused borrowing capacity. Our ability to continue to pledge collateral under our advance facilities depends on the performance of the collateral. Currently, the large majority of our collateral qualifies for financing. The debt covenants for our advance facilities require that we maintain minimum levels of liquid assets. Failure to comply with these covenants could result in restrictions on new borrowings or the early termination of our advance facilities. We believe we are in compliance with these covenants and do not expect them to restrict our activities. We also do not anticipate the need for additional borrowing outside of our normal advance activities or future purchases of mortgage servicing rights. The debt covenants for our advance facilities require us to maintain total cash and excess borrowing capacity of the lesser of $100,000 and the greater of $25,000 or 0.01% of total UPB outstanding plus 3.25% of total Match funded advances outstanding. The minimum cash and excess borrowing capacity requirement at December 31, 2013 was $100,000 which was exceeded by both our unrestricted cash of $88,971 (which includes our interest-earning collateral deposits) and our excess borrowing capacity of $727,878. We also have a minimal tangible equity requirement that is 0.25% of our UPB plus 5.0% of our outstanding Match funded advances. Our tangible equity at December 31, 2013 of $1,216,447 exceeded the minimal tangible equity requirement of $770,397. Thus, we believe we are in compliance with the covenants of our advance facilities as of December 31, 2013 and do not expect them to restrict our activities. The debt covenants for our senior secured term loan facility place restrictions on other unsecured indebtedness, require a minimum debt to tangible equity ratio of less than 6 to 1, minimum borrowing base coverage ratio of 1.5 to 1 and mandate the delivery of certified financial reports to our lender. Should we be deemed to be in default under the provisions of our senior secured term loan facility the unpaid principal amount of and accrued interest on the senior secured term loan facility would immediately become due.



Under the provisions of our senior secured term loan facility our restrictions on unsecured indebtedness include:

Unsecured indebtedness not to exceed the greater of 0.75% of consolidated

total assets or $50,000; and Unsecured indebtedness under any working capital facility in an outstanding principal amount not to exceed $50,000 at any time.



We had no unsecured indebtedness as of December 31, 2013 other than our senior secured term loan facility.

On June 13, 2013, in connection with our senior secured term loan facility agreement, we were issued credit ratings of Ba3/Stable and B+/Stable from Moody's and S&P. A downgrade in our corporate credit ratings could impact our ability to issue additional term loans within our current senior secured term loan facility or a newly created senior secured term loan facility; however, our ability to secure additional financing for servicing advances is largely dependent on the rating of the pledged collateral and not on our corporate credit rating. Liquidity Risk. We are exposed to liquidity risk should the cash required to make new advances pursuant to servicing contracts and our agreements with Ocwen exceed the amount of advance repayments. In general, we finance our operations through operating cash flows and have advance financing facilities in place with sufficient capacity to cover the majority of cash required to make new advances. However, our advance financing facilities contain borrowing conditions which if not met, could affect our ability to borrow on new advances and affect our liquidity. 32



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Cash flows for the years ended December 31.

The following table presents a summary of our cash flows for the years ended December 31: 2013 2012 2011 Net income (loss) (1) $ 117,657$ 19,617$ (273 ) Adjustments for non-cash items (1) 17,336 6,960



-

Change in working capital accounts 490,416 64,071



256

Cash flow from operating activities (1) 625,409 90,648



(17 )

Cash flow from investing activities (1) (4,178,682 ) (3,198,602 ) -

Cash flow from financing activities 3,565,121 3,183,719

-

Net increase (decrease) in cash 11,848 75,765



(17 )

Cash at beginning of period 76,048 283 300 Cash at end of period $ 87,896$ 76,048$ 283



(1) The financial information included herein related to the 2013 and 2012

consolidated financial statements has been restated for the effects of the

adjustment described in the Explanatory Note and in Part IV, Item 15,

"Exhibits and Financial Statement Schedules - Note 17, Restatement".

Year ended December 31, 2013. Our operating activities provided $625,409 of cash. Components of operating cash flows included amounts provided by changes in working capital accounts of $490,416 and by our Net income of $117,657, adjusted for amortization of debt issuance costs of $16,950 and accretion of our original issuance discount related to our senior secured term loan facility of $386. The primary contributors to the changes in working capital accounts were reductions in Match funded advances of $550,371 and increases in debt service accounts of $36,134, Related party receivables of $42,951 and Related party payables of $10,439. The remainder of the working capital activity relates to a net increase in cash flows from operations due to movements in other assets and other liabilities of $8,691. The primary driver of the increase in Related party receivables during the period was a change in the advance collections due from Ocwen of $38,974. Increases in Related party payables were primarily attributable to a change in subservicing fees payable to Ocwen of $7,224 related to December 2013 subservicing activity. The collection of Match funded advances of $550,371 was used to pay down $388,938 of our Match funded liabilities, and $57,407 of the collections were deposited in debt reserve accounts for the payment of Match funded liabilities on the first funding date in 2014. This all resulted in net cash provided of $104,026 from the collection of our Match funded advances. Refer to the financing activities discussion below for more details regarding Match funded liability cash movements during the current period. Lastly, the increase in debt service accounts relates to payments made to the trustees of our advance financing facilities. The trustees release these funds to pay down our Match funded liabilities on scheduled funding dates. Our investing activities used $4,178,682 of cash during the year ended December 31, 2013 which primarily related to our acquisition of Rights to MSRs and Match funded advances associated with our four asset purchases from Ocwen. We paid $415,995 to Ocwen for Notes receivable - Rights to MSRs and $3,842,536 for Match funded advances. Finally, we had a reduction in Notes receivable - Rights to MSRs of $79,849 which is attributable to UPB runoff and the application of the interest method. Our financing activities provided $3,565,121 of cash. New ordinary share issuances during the period provided $334,390 of cash, offset by offering costs of $839. We borrowed $3,451,263 on our servicing advance financing facilities related to our asset purchases from Ocwen, and overall, we had net proceeds from Match funded liabilities of $3,024,800 during the period. We received $344,750 in proceeds in connection with the issuance of debt under our senior secured term loan facility to help fund our Follow On 3 purchase from Ocwen. 33



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These amounts were offset by payments of debt issuance costs of $28,794 and quarterly principal payments totaling $1,750 on our senior secured term loan facility. Additionally, we paid dividends of $107,436.

Year ended December 31, 2012. Our operating activities provided $90,648 of cash. Components of operating cash flow included amounts provided by changes in working capital accounts, such as reductions in Match funded advances of $142,403 and by our Net income of $19,617, adjusted for amortization of debt issuance costs of $6,960. Match funded advance reductions were in the normal course of business and reflect the collection of our outstanding Match funded advances. These proceeds were immediately used to pay down related Match funded liabilities. Debt issuance costs are associated with our Match funded liability activities and relate to various legal, accounting, rating agency and banking related expenses. We amortize these expenses over their estimated life which is tied to the expected term of the respective Match funded liability for which a debt issuance costs is associated. Other working capital account changes primarily relate to debt service accounts and Related party receivables. We had an increase in debt service accounts of $52,990 which is a reflection of both timing and the scale of the funding and subsequent collection of our Match funded advances. The increase in Related party receivables is due to: servicing fees collected by Ocwen prior to December 31, 2012 of $4,966, in-transit Match funded advance collections made on our behalf of $21,265, professional services fees receivables of $1,322 which were earned as part of the Ocwen Professional Services Agreement and smaller other related party receivables which amount to $718 in the aggregate. Additional cash flows were used by increases in other assets of $26 and generated from increases in Related party payables of $1,465 (the majority of which was due to subservicing fees payable to Ocwen) and increases in other liabilities of $1,490 which is the net of an increase of $2,234 in interest expense payable, partially offset by decreases in accrued professional services. Our investing activities used $3,198,602 of cash which was primarily related to the acquisition of Rights to MSRs, Match funded advances and other related assets net of liabilities assumed in connection with our acquisitions during the year. We acquired Notes receivable - Rights to MSRs ($316,622), Match funded advances ($2,825,817) and the net assets of an Ocwen advance financing SPE ($76,334) from Ocwen. Subsequent to acquisition, our Notes receivable - Rights to MSRs had reductions of $20,171 which is attributable to UPB run-off and the application of the interest method. Our financing activities provided $3,183,719 of cash. We had three equity offerings during 2012 which provided $885,457 of cash, net of underwriting and advisory fees. Our offering proceeds were further offset by offering costs of $5,099 which related to various, legal, accounting and printing costs associated with our offerings. We borrowed $2,394,327 on our servicing advance financing facility related to the asset purchases from Ocwen. Our initial borrowings from asset purchases were offset by repayments to the facility of $61,841 during the year. Repayments are made in conjunction with the collection of our outstanding Match funded advances. In order to secure borrowings on our servicing advance financing facilities we incur various legal, accounting, rating agency and banking related expenses. We account for these as debt issuance costs, and our total payments during the year for debt issuance costs were $10,808. Lastly, we paid dividends of $18,317. Year ended December 31, 2011. We were a development stage enterprise until March 5, 2012. We used $17 of cash for operating activities which consisted of a net loss of $273; the net loss was offset by an increase in Related party payables of $1,487, offset by a decrease in other liabilities of $1,300, and decrease in other assets of $69. These movements were related to pre IPO organizational activities and are not fully comparable to the years ended December 31, 2013 and 2012. 34



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CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND OTHER MATTERS

Contractual Obligations

We believe that we have adequate resources to fund all unfunded commitments to the extent required and meet all contractual obligations as they come due. Such contractual obligations include payments on our operating leases and senior secured term loan facility. The following table sets forth certain information regarding our contractual obligations as of December 31, 2013: Payments due by period Less than More than Total 1 year 1-3 yrs 3-5 yrs 5 yrs Operating leases (1) $ 70$ 70 $ - $ - $ - Other borrowings (2) 348,250 3,500 7,000 7,000 330,750 Total contractual cash obligations $ 348,320$ 3,570$ 7,000$ 7,000$ 330,750



(1) We sublease office space from Altisource in Atlanta, Georgia and West Palm

Beach, Florida in the aggregate amount of $7 per month. The leases terminate

on October 31, 2014.

(2) Our senior secured term loan facility has an expected maturity date of

September 27, 2020 and requires scheduled quarterly principal payments of

$875. Any remaining principal outstanding on the senior secured term loan

facility becomes due at maturity.

Match funded liabilities are excluded from the table above as they represent non-recourse debt that has been collateralized by Match funded advances which are not available to satisfy general claims against HLSS. Holders of the notes issued by the SPEs have no recourse against any assets other than the Match funded advances that serve as collateral for the securitized debt. Interest incurred on Match funded liabilities was $83,137 and $16,158 during the years ended December 31, 2013 and 2012. Future Interest expense may vary depending on utilization, changes in LIBOR and spreads and the execution of hedging strategies.



Off-Balance Sheet Arrangements

In the normal course of business, we may enter into transactions with a variety of financial institutions and other companies that we do not reflect on our Consolidated Balance Sheet. We are subject to potential financial loss if the counterparties to our off-balance sheet transactions are unable to complete an agreed upon transaction. We seek to limit counterparty risk through financial analysis, dollar limits and other monitoring procedures. We have also entered into non-cancelable operating leases principally for our office facilities.



Derivatives. We record all derivative transactions at fair value on our Consolidated Balance Sheet. We use these derivatives to hedge our interest rate risk. The notional amounts of our derivative contracts do not reflect our exposure to credit loss.

Involvement with SPEs. We use SPEs in the financing of our Match funded advances. We use match funded securitization facilities to finance our Match funded advances. These SPEs to which the advances are transferred in the securitization transactions are included in our Consolidated Financial Statements because we are the primary beneficiary of these SPEs which also are variable interest entities "VIEs". The holders of the debt of the SPEs can look only to the assets of the SPEs for satisfaction of the debt and have no recourse against HLSS. VIEs. If we determine that we are the primary beneficiary of a VIE, we report the VIE in our Consolidated Financial Statements. As of December 31, 2013, we have no VIEs other than our two advance financing SPEs.



Related Parties

We entered into various agreements at market rates with Ocwen and Altisource in connection with the Initial Acquisition. William C. Erbey, our founder and the Chairman of our Board of Directors, is also the Chairman of the Board of Directors of Ocwen and Altisource. 35



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We entered into the Subservicing Agreement with Ocwen pursuant to which we may engage Ocwen to act as the subservicer of pools of residential mortgage loans underlying the mortgage servicing rights that we acquire from Ocwen under the terms of the Purchase Agreement and related sales supplements specific to each transaction. The specific terms of the subservicing arrangement with respect to each pool of mortgage loans, including the mortgage loans underlying the Acquired Mortgage Servicing Rights purchased by us pursuant to the Purchase Agreement, are (and may be in the future) documented pursuant to separate subservicing supplements to the Subservicing Agreement. Services provided by us pursuant to the Ocwen Professional Services Agreement include valuation and analysis of mortgage servicing rights, capital markets activities, advance financing management, treasury management, legal services and other similar services. Services provided by Ocwen under this agreement include business strategy, legal, tax, licensing and regulatory compliance support services, risk management services and other similar services. The Ocwen Professional Services Agreement has an initial term of six years. The agreement is subject to termination by either party upon the occurrence of certain events. Services provided to us pursuant to the Altisource Administrative Services Agreement include human resources administration (benefit plan design, recruiting, hiring and training and compliance support), legal and regulatory compliance support services, general business consulting, corporate services (facilities management, security and travel services), finance and accounting support services (financial analysis, financial reporting and tax services), risk management services, vendor management and other related services. The Altisource Administrative Services Agreement is effective for an initial term of six years, subject to extension for an additional six years, and is subject to termination by either party upon the occurrence of certain events.



Under both agreements noted above, we use actual costs incurred plus a 15% mark-up as a proxy for market rates.

For the years ended December 31, 2013 and 2012, pursuant to the Purchase Agreement and related sales supplements with Ocwen, we retained net servicing fees of $315,675 and $67,616. We recorded $235,826 and $47,445 as Interest income - notes receivable - Rights to MSRs, $69,812 and $12,917 as a reduction of Notes receivable - Rights to MSRs and $10,037 and $7,254 as a decrease in the fair value of Notes receivable - Rights to MSRs. We purchased non-acquisition related servicing advances made by Ocwen of $8,781,034 and $1,303,955. Ocwen billed us $555 and $100 under the Ocwen Professional Services Agreement. We billed Ocwen $1,811 and $2,316 under the Ocwen Professional Services Agreement. Revenue and expenses from the Ocwen Professional Services Agreement are included in Related party revenue and Related party expenses, respectively. Altisource billed us $845 and $655 for services provided to us during the years ended December 31, 2013 and 2012, under the Altisource Administrative Services Agreement. We reported these amounts as a component of Related party expenses for each period then ended. Subsequent Events



Subsequent to our balance sheet date of December 31, 2013:

On January 10, 2014, we paid cash dividends of $10,653 or $0.15 per ordinary share.



On January 16, 2014, we declared dividends of $0.15 per ordinary share for

the months of January, February and March, 2014. The dividends will be

payable to holders of record of our ordinary shares as follows: Amount per Record Date Payment Date Ordinary Share January 31, 2014 February 10, 2014 $0.15 February 28, 2014 March 10, 2014 $0.15 March 31, 2014 April 10, 2014 $0.15



On January 17, 2014, we completed the issuance of $600,000 of one-year and

$200,000 of three-year term notes at a weighted average spread over

one-month LIBOR of 1.09%. The proceeds were used to reduce the borrowings

on our variable funding notes. 36



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CRITICAL ACCOUNTING POLICIES

The need to estimate the impact or outcome of future events influences our ability to measure and report our operating results and financial position. Our critical accounting policies relate to the estimation and measurement of these risks. Because they inherently involve significant judgments and uncertainties, an understanding of these policies is fundamental to understanding Management's Discussion and Analysis of Results of Operations and Financial Condition. The following is a summary of our more subjective and complex accounting policies as they relate to our overall business strategy.



Valuation of Notes Receivable - Rights to MSRs and Recognition of Interest Income

Accounting Standards Codification ("ASC") 860, Transfers and Servicing, specifically prohibits accounting for a transfer of servicing rights as a sale if legal title to such servicing rights has not passed to the purchaser. As a result, we are required to account for the purchase of the Rights to MSRs as a financing transaction. We record the purchase price paid to Ocwen as a "Notes receivable - Rights to MSRs." We amortize the Notes receivable - Rights to MSRs using the interest method of accounting. At each reporting date, we determine the fair value and adjust the carrying value of the Notes receivable - Rights to MSRs to this amount. Interest income - Notes receivable - Rights to MSRs represents the servicing fees earned on the underlying mortgage servicing rights less any amounts due to Ocwen for the servicing activities that it performs. In addition, Interest income - Notes receivable - Rights to MSRs is reduced by amortization of the Notes receivable - Rights to MSRs, calculated using the interest method of accounting, and is increased or decreased by incremental changes in the fair value of the Note receivable - Rights to MSRs. Interest income is our primary source of income. See Part IV, Item 15, "Exhibits and Financial Statement Schedules - Note 10, Interest Income" for more information about how we calculate Interest income - Notes receivable - Rights to MSRs.



We established the value of the Notes receivable - Rights to MSRs based on an appraisal prepared with the assistance of an independent valuation firm. We summarize the most significant assumptions used in the appraisal below:

Discount rates reflecting the risk of earning the future income streams

from the Notes receivable - Rights to MSRs ranging from 15% to 22%;



Interest rate used for calculating the cost of servicing advances of

1-Month LIBOR + 3.75%; Mortgage loan prepayment projections ranging from 12% to 28% of the related mortgage lifetime projected prepayment rate; and



Delinquency rate projections ranging from 15% to 35% of the aggregate UPB

of the underlying mortgage loans.

The independent valuation firm reviewed the collateral attributes and the historical payment performance of the underlying mortgage servicing portfolio and compared them with similar mortgage servicing portfolios and with standard industry mortgage performance benchmarks to arrive at the assumptions set forth above. The selected collateral attributes and performance comparisons utilized were the voluntary prepayment performance, delinquency and foreclosure performance, operational cost comparison, average loan balance, weighted average coupon and note rate distribution, loan product type classification, geographic distribution and servicing advance behavior. The unobservable inputs that have the most significant effect on the fair value of Notes receivable - Rights to MSRs are the mortgage loan prepayment rate projections and delinquency rate projections; however, any significant increase (decrease) in discount rates, interest rates, mortgage loan prepayment projections or delinquency rate projections, each in isolation, would result in a substantially lower (higher) valuation.



RECENT ACCOUNTING DEVELOPMENTS

Recent Accounting Pronouncements

See Part IV, Item 15, "Exhibits and Financial Statement Schedules - Note 1, Summary of Significant Accounting Policies - Recent Accounting Pronouncements."

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