News Column

PHH CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 5, 2014

The following discussion should be read in conjunction with the "Cautionary Note Regarding Forward-Looking Statements", "Part II-Item 1A. Risk Factors" and our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and "Part I-Item 1. Business","Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements included in our 2013 Form 10-K.



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

Overview Results of Operations Risk Management Liquidity and Capital Resources Critical Accounting Policies and Estimates Recently Issued Accounting Pronouncements OVERVIEW We are a leading outsource provider of mortgage services. We conduct our business through two reportable segments: Mortgage Production and Mortgage Servicing. Our Mortgage Production segment originates, purchases and sells mortgage loans through PHH Mortgage. Our Mortgage Servicing segment services mortgage loans originated by PHH Mortgage and acts as a subservicer for certain clients that own the underlying servicing rights. Our Mortgage Production and Mortgage Servicing segments have experienced, and may continue to experience, high degrees of earnings volatility due to significant exposure to interest rates and the real estate markets, which impacts our loan origination volumes, valuation of our mortgage servicing rights and repurchase and foreclosure-related charges. See "-Risk Management" in this Form 10-Q for additional information regarding our interest rate and market risks. As a result of our definitive agreement to sell 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 (Loss) income from discontinued operations, net of tax and Assets and Liabilities held for sale for all periods presented. See further discussion in "-Results of Operations-Discontinued Operations". 36

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Table of Contents Executive Summary Financial Performance Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions, except per share data) Net revenues $ 196$ 415 $ 307 $ 751 Total expenses 217 282 421 546 (Loss) income from continuing operations, net of tax (9) 86 (69) 134 (Loss) earnings per share from continuing operations: Basic $ (0.23)$ 1.30$ (1.23)$ 1.92 Diluted (0.23) 1.15 (1.23) 1.68 Our financial results from continuing operations for the second quarter of 2014 reflect the challenging mortgage industry environment, including declines in industry origination volumes, margin compression, increased competition and a higher regulatory focus. Net revenues of our Mortgage Production segment declined $136 million (51%) from the second quarter of 2013, reflecting a 35% decline in applications, a 62% decline in IRLCs and a 75 bps (22%) decrease in total loan margins. Total closings also declined by 37% compared to the second quarter of 2013, primarily driven by a 62% decline in refinance closings, consistent with the relative interest rate environments and industry demand. Our actions taken in the second half of 2013 and first quarter of 2014 to reduce staffing levels in our Mortgage Production segment in response to expected client and industry demand have resulted in salary expense reductions in production and overhead functions. Despite the cost reduction efforts, the results of our Mortgage Production segment still reflected the industry-wide reductions in mortgage loan originations. As a result, the Mortgage Production segment recorded a $27 million Segment loss in the second quarter of 2014, compared to Segment profit of $44 million in the second quarter of 2013. As discussed further below under "-Mortgage Re-Engineering" we are working towards further adjustments to our direct operating expense and staffing levels to match expected mortgage volumes and to re-engineer our support infrastructure to operate as a stand-alone mortgage business. We expect a highly challenging mortgage industry environment to continue throughout 2014. If the current mortgage market conditions and interest rate levels persist, our Mortgage Production segment will likely continue to be unprofitable and cash consumptive for the second half of 2014. We are continuing to experience favorable trends in mortgage loan repurchase and indemnification requests. During the second quarter of 2014, repurchase requests for pre-2009 origination years were minimal as the Agencies substantially completed their file reviews for these originations years by the end of 2013. We also experienced a continued downward trend in new repurchase requests for more recent origination years (2009 to 2012) in the second quarter of 2014. As a result, we recorded a $1 million benefit for repurchase and foreclosure-related charges in the second quarter of 2014, compared to $11 million of charges for the second quarter of 2013. See "-Risk Management" for additional information regarding our loan repurchase obligations and potential exposure. Net revenues of our Servicing segment declined $83 million (55%) from the second quarter of 2013, reflecting the change in mortgage interest rates that led to market-related changes in value of our mortgage servicing rights. During the second quarter of 2014, we recorded $12 million of unfavorable market-related changes in value of our mortgage servicing rights from a 29 basis point decrease in the primary rate used to value our MSR asset, compared to favorable changes of $155 million for the second quarter of 2013 from a 76 bps increase in rate.



Operating and Capital Strategy

We completed the sale of the Fleet business effective on July 1, 2014 for cash consideration of $1.4 billion, and expect to realize net proceeds of $821 million (estimated, and subject to certain post closing purchase price adjustments and the final determination of income taxes). The net proceeds from the sale have increased our excess cash above key cash requirements and we intend to utilize excess cash after the completion of the sale by returning 37 --------------------------------------------------------------------------------



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capital to shareholders, reducing our unsecured debt, re-engineering the company as a stand-alone mortgage business, and growing the business. See "-Liquidity and Capital Resources" for further discussion outlining our unrestricted cash, cash requirements and excess cash amounts.



Return of Capital to Shareholders

Our Board of Directors has authorized up to $450 million in share repurchases. In the third quarter of 2014, we expect to commence a $200 million accelerated stock repurchase (ASR) program. We further expect that the ASR will be followed by up to $250 million in open market purchases in the twelve months following the ASR, subject to market conditions and satisfaction of the other requirements of the program.



Accelerate Reduction of Unsecured Debt

Our strategic vision for PHH is a more capital-light, fee-based business with greater scale, operational efficiency and capital efficiency. On July 7 2014, we gave notice to the trustee of our intention to redeem the outstanding principal of the Senior Notes due 2016 on August 7, 2014. We anticipate this transaction will require approximately $200 million in cash. We will be further reducing our unsecured debt upon the retirement of our 2014 Convertible notes at maturity in September 2014. These actions are consistent with our objectives for unsecured debt for a stand-alone mortgage business, namely:



Lowering our debt to our target levels of $750 million to $1.0 billion;

Reducing our cost of debt; and Extending the maturity ladder of our unsecured debt.



After completing the repayment of the Senior Notes due 2016 and the 2014 Convertible Notes, our next unsecured debt maturity will not be until 2017.

Mortgage Re-Engineering We intend to deploy up to $200 million to re-engineer our operations and support infrastructure for a stand-alone mortgage business in a lower volume, home purchase driven mortgage market. While we have reduced our Total expenses by $125 million, or 23%, in the six months ended June 30, 2014 as compared to the same period of the prior year, mortgage industry origination volume for the full year is projected to be down 41% from 2013 levels according to Fannie Mae's July 2014 Economic and Housing Outlook. We are targeting our direct operating expense and staffing levels to match expected mortgage origination volumes. Additionally, we will be focusing on consolidating our support infrastructure to operate as a stand-alone mortgage business, and restructuring our private label business model to meet our operational and financial objectives and those of our clients. We expect the benefits of our re-engineering efforts to be phased in during the first half of 2015 and be fully realized on an annualized basis by mid-to-late 2015. In our discussions thus far with respect to the private label agreements, we have not been able to achieve all of the pricing adjustments necessary to meet our financial objectives. However, both we and our Private Label clients have an interest in updating these contracts prior to their renewal dates to ensure these programs support our respective business objectives. We remain cautiously optimistic that these contracts can be restructured or renewed on mutually beneficial terms. The timing to complete this process, however, remains uncertain due to the complexity of these contracts and our desire to build a differentiated model that has the flexibility to adapt to future market changes. We believe the end result of these negotiations should be a stronger business model with better economics and an improved value proposition for our PLS clients. For more information, see "Part II-Item 1A. Risk Factors-Risks Related to our Company- The profitability of our Mortgage Production segment has been adversely affected by the increased mix of fee-based closings originated under our existing private label client contracts. We are currently evaluating a number of alternatives to restructure these contracts to improve the economics of the underlying contractual relationships; however, there can be no assurances that we will be successful in these efforts." in this Form 10-Q. Growth Initiatives We intend to invest up to $150 million in growth initiatives to enhance scale and profitability and diversify our revenue streams across Mortgage Production and Servicing. We will be focused on expanding our target market within the existing private label client base and growing our origination volume through outsourcing 38

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opportunities with regional and community banks and credit unions. We believe that we can grow our share in the home purchase market through improved capture rates and additional investments in the Real Estate channel. We will also be focused on increasing our servicing portfolio in connection with growing our origination volume. We will evaluate selective inorganic growth investments to leverage our fixed-cost infrastructure to expand our retail mortgage market presence and grow our servicing portfolio. For more information, see "Part II-Item 1A. Risk Factors-Risks Related to our Company- We may not be able to fully or successfully execute or implement our business strategies or achieve our objectives, including our initiatives to re-engineer and grow our mortgage business. " in this Form 10-Q.



Legal and Regulatory Environment

Consistent with other companies in the mortgage industry, we have experienced inquiries, examinations and requests for information from regulators and attorneys general of certain states as well as various government agencies.

In

addition, we are working diligently in assessing and understanding the implications of the developments in the regulatory environment, and we are devoting substantial resources towards implementing all of the new rules and responding to inquiries, examinations, and proceedings, while meeting the needs and expectations of our clients. 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, potential regulatory fines and penalties, and we could experience an increase in mortgage origination or servicing related litigation in the future. Although our probable losses, payments and costs related to these matters have not been material to date, the ultimate resolution of any particular matter could be material to our results of operations or cash flows for the period in which such matter is resolved. For more information, see "Part II-Item 1A. Risk Factors-Risks Related to Our Company-Our Mortgage businesses are complex and heavily regulated, and the full impact of regulatory developments to our businesses remains uncertain. In addition, we are subject to litigation, regulatory investigations, inquiries and proceedings and we may incur fines, penalties, and increased costs that could negatively impact our future results of operations, liquidity and cash flows or damage our reputation." in this Form 10-Q and Note 12, "Commitments and Contingencies" in the accompanying Notes to Condensed Consolidated Financial Statements. In January 2014, the CFPB initiated an administrative proceeding alleging that our reinsurance activities have violated certain provisions of the Real Estate Settlement Procedures Act. We believe that we have complied with the Real Estate Settlement Procedures Act and other laws applicable to our former mortgage reinsurance activities, and are continuing to vigorously defend against the CFPB's allegations. We cannot estimate the amount of loss or a range of possible losses, if any, associated with this matter, and there can be no assurance that the ultimate resolution of this matter will not result in losses, fines or penalties which could be material to our results of operations, cash flows or financial position. We are monitoring increases in litigation and settlements among our peers in the mortgage industry around servicing practices for lender-placed insurance, also called "forced-placed insurance". We are currently subject to pending litigation alleging that our servicing practices around lender-placed insurance were not in compliance with applicable laws. Through our mortgage servicing subsidiary, we did have certain outsourcing arrangements for the purchase of lender-placed hazard insurance for borrowers whose coverage had lapsed. We believe we have meritorious defenses to these allegations; however, the resolution of such matter may result in adverse judgments, other relief against us, as well as monetary payments or other agreements and obligations, any of which may be material to our results of operations, cash flows or financial position. In connection with the sale of the Fleet business, which became effective on July 1, 2014, we have indemnified Element against certain liabilities that may arise in connection with the transaction and business activities prior to the completion of the transaction. The term of these indemnifications, which generally pertain to breaches by us of our representations and warranties or our covenants under the purchase agreement, is generally through March 31, 2016, except that the term of our indemnifications for breaches of certain fundamental representations and warranties or its covenants or excluded liabilities is generally through the expiration of the applicable statute of limitations or, with respect to covenants to be performed after closing, the date performance is fulfilled or completed. Due to the nature of indemnified items, it is not possible to make a reasonable estimate of the maximum potential loss or range of loss, and no specific recourse provisions exist. 39 --------------------------------------------------------------------------------

Table of Contents RESULTS OF OPERATIONS Continuing Operations



The following tables present our consolidated results of operations from continuing operations and segment profit or loss for our reportable segments:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions, except per share data) Mortgage fees $ 59 $ 82$ 106$ 161 Gain on mortgage loans, net 80 197 131 384 Mortgage net finance expense (23) (29) (53) (57) Loan servicing income 110 88 225 196 Valuation adjustments related to mortgage servicing rights, net (32) 74 (105) 63 Other income 2 3 3 4 Net revenues 196 415 307 751 Total expenses 217 282 421 546 (Loss) income from continuing operations before income taxes (21) 133 (114) 205 Income tax (benefit) expense (12) 47 (45) 71 (Loss) income from continuing operations, net of tax (9) 86 (69) 134 Less: net income attributable to noncontrolling interest 4 12 2 24 Net (loss) income from continuing operations attributable to PHH Corporation $ (13)$ 74$ (71)$ 110 (Loss) earnings per share from continuing operations: Basic $ (0.23)$ 1.30$ (1.23)$ 1.92 Diluted $ (0.23)$ 1.15$ (1.23)$ 1.68 Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Segment (Loss) Profit:(1) Mortgage Production segment $ (27)$ 44$ (87)$ 89 Mortgage Servicing segment 10 81 (19) 98 Other(2) (8) (4) (10) (6)



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(1) Segment profit (loss) is described in Note 16, "Segment Information", in the accompanying Notes to Condensed Consolidated Financial Statements.

(2) Includes certain income and expenses that are not allocated back to our reportable segments and certain general corporate overhead expenses that were previously allocated to the Fleet business. See "-Other" for more information. The results of operations for reportable segments are reported on a pre-tax basis and are discussed in more detail in the following sections. We record our interim tax provision or benefit from continuing operations by applying a projected full-year effective income tax rate to our quarterly pre-tax income or loss for results that we deem to be reliably estimable. Certain results dependent on fair value adjustments are considered to not be reliably estimable, and therefore we record discrete year-to-date income tax provisions on those results. Our effective income tax rate for the six months ended June 30, 2014 and 2013 was (39.3)% and 34.6%, respectively. See Note 10, "Income Taxes" in the accompanying Notes to Condensed Consolidated Financial Statements for further information. 40

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Table of Contents Discontinued Operations



On June 2, 2014, we entered into a Stock Purchase Agreement to sell all of the issued and outstanding equity interests of our Fleet Management Services business ("Fleet business"). The Fleet business was focused on providing commercial fleet management services to corporate clients and government agencies throughout the U.S. and Canada which included vehicle maintenance, accident management, driver safety training and fuel card programs.

The transaction closed effective on July 1, 2014, and we estimate a net gain on the disposition of $243 million will be recognized, which includes both transaction-related costs and related income taxes. The estimated gain of $243 million is based on March 31, 2014 Balance sheets, and is subject to post-closing adjustments and final determination of income taxes. Income tax expense related to discontinued operations for the second quarter and six months ended June 30, 2014 includes approximately $52 million of discrete items (as described below) included in the estimate of net gain on disposition. The remaining gain on disposition will be recognized in the third quarter of 2014 as the net proceeds received less the net assets disposed of and related tax amounts. 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 (Loss) income from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations and have been excluded from continuing operations and segment results for all periods presented. Assets and liabilities to be disposed of with the Fleet business are presented as Assets held for sale and Liabilities held for sale in the Condensed Consolidated Balance Sheets as of each period presented. The following table summarizes (Loss) income from discontinued operations, net of tax which includes the results of the Fleet business and transaction-related amounts: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions, except per share data) Net revenues $ 415 $ 407$ 820$ 801 Total expenses 406 382 789 752 Income before income taxes 9 25 31 49 Income tax expense related to discontinued operations 55 9 61 17 (Loss) income from discontinued operations, net of tax $ (46)$ 16$ (30)$ 32 (Loss) earnings per share from discontinued operations: Basic $ (0.79)$ 0.28$ (0.52)$ 0.56 Diluted $ (0.79)$ 0.25$ (0.52)$ 0.50 Total expenses related to discontinued operations includes transaction-related costs associated with the sale which were $15 million and $16 million during the second quarter and six months ended June 30, 2014, respectively. Income tax expense related to discontinued operations for the second quarter and six months ended June 30, 2014 includes provisions for earnings of our Canadian subsidiaries included in the Fleet business that were previously considered to be indefinitely invested. Upon the classification of the Fleet business as held for sale, the accumulated earnings are no longer deemed to indefinitely invested and we recognized the tax expense related to the cumulative earnings of such Canadian subsidiaries. See Note 2, "Discontinued Operations" in the accompanying Condensed Consolidated Financial Statements for additional information. 41

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Table of Contents Mortgage Production Segment The current interest rate environment has continued to negatively affect loan margins and origination volumes. A variety of other factors have also continued to affect the industry, including an increasingly complex regulatory compliance environment and changes to mortgage backed security programs, including increases in guarantee fees. Future conforming origination volumes and loan margins may be negatively impacted by higher interest rates and increases in guarantee fees. During the first half of 2014, the origination environment has continued to trend towards a lower volume, home purchase driven mortgage market. According to Fannie Mae's July 2014 Economic and Housing Outlook, the industry experienced a 50% decline in total loan originations during the six months ended June 30, 2014 compared to the prior year driven largely by a 68% decrease in refinancing activity. On a full year basis, Fannie Mae is forecasting industry loan originations for 2014 to decline to $1.1 trillion compared to $1.9 trillion during 2013, consisting of a 64% decline in refinancing originations and a 5% decrease in purchase closings. Our refinance closings were down 62% during the six months ended June 30, 2014 compared to the prior year which was driven by lower overall consumer demand from relatively higher interest rates and a 72% decline in HARP closings. During the second quarter of 2014, interest rates retreated back from the recent elevated levels; however, we did not see a corresponding increase in our refinance application activity as the decline in rates did not generate refinance incentive to the borrowers. While Fannie Mae is projecting purchase closings to be down 10% during the six months of June 30, 2014 compared to the six months of June 30, 2013, our purchase closings increased by 10% during the same period. Despite our increase in purchase closings (based on unpaid principal balance), our results of operations were negatively impacted by a 6% decline in the number of purchase closing units. During 2013, we observed a shift in the mix of our originations to a greater percentage of fee-based closings which has continued into the first half of 2014. Fee-based closings generally consist of higher average loan amounts than saleable closings and are impacted by the mortgage product and loan programs our PLS clients market to their customers, as well as the amount of mortgage loans our clients want to retain on their balance sheets. Fee-based closings represented 65% and 44% of our total origination volume during the six months ended June 30, 2014 and 2013, respectively. See "Part II-Item 1A. Risk Factors-Risks Related to Our Company-The profitability of our Mortgage Production segment has been adversely affected by the increased mix of fee-based closings originated under our existing private label client contracts. We are currently evaluating a number of alternatives to restructure these contracts to improve the economics of the underlying contractual relationships; however, there can be no assurances that we will be successful in these efforts." in this Form 10-Q for more information. 42 --------------------------------------------------------------------------------

Table of Contents Segment Metrics: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 ($ In millions) Loans closed to be sold $ 3,292$ 7,897$ 5,901$ 15,744 Fee-based closings 6,002 6,874 10,777 12,346 Total closings $ 9,294$ 14,771$ 16,678$ 28,090 Purchase closings $ 5,732$ 5,344$ 9,322$ 8,483 Refinance closings 3,562 9,427 7,356 19,607 Total closings $ 9,294$ 14,771$ 16,678$ 28,090 Retail closings - PLS $ 6,587$ 9,503$ 12,007$ 18,013 Retail closings - Real Estate 2,397 3,877 3,953 6,908 Total retail closings 8,984 13,380 15,960 24,921 Wholesale/correspondent closings 310 1,391 718 3,169 Total closings $ 9,294$ 14,771$ 16,678$ 28,090 Retail - PLS (in units) 13,598 24,976 25,620 48,902 Retail - Real Estate (in units) 9,520 15,703 16,272



27,979

Total retail 23,118 40,679 41,892



76,881

Wholesale/correspondent (in units) 1,455 6,131 3,118

14,082 Total closings (in units) 24,573 46,810 45,010 90,963 Loans sold $ 3,053$ 7,989$ 5,976$ 16,222 Applications $ 12,846$ 19,704$ 23,215$ 35,869 IRLCs expected to close $ 2,060$ 5,386$ 3,810$ 10,341 Total loan margin (in basis points) 273 348 281 359 Segment Results: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Mortgage fees $ 59$ 82$ 106$ 161 Gain on mortgage loans, net 80 197 131 384 Mortgage interest income 11 16 18 35 Mortgage interest expense (23) (33) (47) (67) Mortgage net finance expense (12) (17) (29) (32) Other income 2 3 3 4 Net revenues 129 265 211 517 Salaries and related expenses 80 113 157 223 Occupancy and other office expenses 7 9 15 17 Other depreciation and amortization 3 3 6 6 Other operating expenses 62 84 118 158 Total expenses 152 209 296 404 (Loss) income before income taxes (23) 56 (85) 113 Less: net income attributable to noncontrolling interest 4 12 2 24 Segment (loss) profit $ (27)$ 44$ (87)$ 89 43

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Table of Contents Quarterly Comparison: Mortgage Production segment loss was $27 million during 2014, compared to a segment profit of $44 million during the prior year quarter. Net revenues decreased to $129 million, down $136 million, or 51%, compared with the second quarter of 2013 driven by lower refinance activity, an increased mix of fee-based closings and lower loan margins and economic hedge results. Total expenses decreased to $152 million, down $57 million, or 27%, compared with the prior year quarter primarily driven by a decline in origination volumes which resulted in lower salaries and related expenses and production direct expenses. Total expenses compared to the second quarter of 2013 also included a decrease in operating costs related to customer service and outsourcing fees. Net revenues. Mortgage fees decreased to $59 million, down $23 million, or 28%, from the prior year quarter. A 43% decline in total retail closing units from lower refinance closings contributed to a $14 million decrease in application fees, appraisal income and other underwriting income. In addition, we experienced a $7 million decrease in origination assistance fees from our PLS channel resulting from a 46% decline in PLS closing units compared to the prior year quarter. Gain on mortgage loans, net was $117 million lower compared to the prior year quarter driven by a $98 million decline in gain on loans related to a 62% decrease in IRLCs expected to close and a 75 basis points decline in average total loan margins, coupled with a $27 million decrease in economic hedge results. Consistent with our expectations, the decrease in IRLCs expected to close and average total loan margins was attributable to lower consumer demand for refinancing activity and an increased mix of fee-based production (where we do not enter into an IRLC). The decline in economic hedge results compared to the second quarter of 2013 was primarily attributable to a lower impact from pullthrough assumptions associated with a decrease in the average outstanding balance of IRLCs expected to close and lower execution gains on mortgage loans sold. Total expenses. During the second half of 2013, we announced actions to reduce headcount in response to projected declines in industry origination volumes which primarily drove a $14 million, or 20%, decline in Salaries, benefits and incentives compared to the prior year quarter. Commissions were down $13 million, or 38%, compared to the second quarter of 2013 primarily driven by a 38% decrease in real estate channel closings. The lower overall closing and application volumes in 2014 also resulted in a decrease in contract labor and overtime and production-related direct expenses. Other expenses decreased to $16 million, down $8 million, or 33%, compared to the second quarter of 2013. We continued to improve our operating execution and benefited from a combined $3 million decline in customer service related expenses and outsourcing fees compared to the prior year quarter. The remaining $5 million decrease in Other expenses primarily related to nonrecurring professional fees incurred in 2013 for risk management costs and the realization of other corporate cost reduction initiatives.



See "-Other" for a discussion of the corporate overhead allocation.

Year-to-Date Comparison: Mortgage Production segment loss was $87 million during 2014, compared to a segment profit of $89 million during the prior year. Net revenues decreased to $211 million, down $306 million, or 59%, compared with the six months ended June 30, 2013 driven by lower refinance activity, an increased mix of fee-based closings and lower loan margins and economic hedge results. Total expenses decreased to $296 million, down $108 million, or 27%, compared with the prior year primarily driven by a decline in origination volumes which resulted in lower salaries and related expenses and production direct expenses. Total expenses compared to the six months ended June 30, 2013 also included a decrease in operating costs related to customer service, professional and outsourcing fees. Net revenues. Mortgage fees decreased to $106 million, down $55 million, or 34%, from the prior year. A 46% decline in total retail closing units from lower refinance closings contributed to a $31 million decrease in application fees, appraisal income and other underwriting income. In addition, we experienced a $20 million decrease in origination assistance fees from our PLS channel resulting from a 48% decline in PLS closing units compared to the prior year. Gain on mortgage loans, net was $253 million lower compared to the prior year driven by a $203 million decline in gain on loans related to a 63% decrease in IRLCs expected to close and a 78 basis points decline in average total loan margins, coupled with a $61 million decrease in economic hedge results. The decline in economic hedge results compared to the six months ended June 30, 2013 was primarily attributable to a lower impact from pullthrough assumptions associated with a decrease in the average outstanding balance of IRLCs expected to close and lower execution gains on mortgage loans sold. 44 --------------------------------------------------------------------------------



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Total expenses. The headcount reductions described above primarily drove a $27 million, or 19%, decline in Salaries, benefits and incentives compared to the prior year. Commissions were down $26 million, or 42%, compared to 2013 driven by a 43% decrease in real estate channel closings. The lower overall closing and application volumes in 2014 also resulted in a decrease in contract labor and overtime and production-related direct expenses. Other expenses decreased to $30 million, down $18 million, or 38%, compared to the six months ended June 30, 2013 which consisted of a combined $9 million decline in customer service related expenses and outsourcing fees and $9 million related to nonrecurring professional fees incurred in 2013 for risk management costs and the realization of other corporate cost reduction initiatives.



See "-Other" for a discussion of the corporate overhead allocation.

Selected Income Statement Data:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Gain on mortgage loans, net: Gain on loans $ 68$ 166$ 116$ 319 Change in fair value of Scratch and Dent and certain non-conforming mortgage loans (2) (10) (9) (20) Economic hedge results 14 41 24 85 Total change in fair value of mortgage loans and related derivatives 12 31 15 65 Total $ 80$ 197 $



131 $ 384

Salaries and related expenses: Salaries, benefits and incentives $ 57$ 71$ 118$ 145 Commissions 21 34 36 62 Contract labor and overtime 2 8 3 16 Total $ 80$ 113$ 157$ 223 Other operating expenses: Corporate overhead allocation $ 23$ 26$ 46 48 Production-related direct expenses 23 34 42 62 Other expenses 16 24 30 48 Total $ 62$ 84$ 118 158 45

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Following are descriptions of the contents and drivers of the financial results of the Mortgage Production segment:

Mortgage fees consist of fee income earned on all loan originations, including loans closed to be sold and fee-based closings. Retail closings and fee-based closings are key drivers of Mortgage fees. Fee income consists of amounts earned related to application and underwriting fees and fees on cancelled loans. Fee income also consists of amounts earned from financial institutions related to brokered loan fees and origination assistance fees resulting from our private-label mortgage outsourcing activities.



Gain on mortgage loans, net includes realized and unrealized gains and losses on our mortgage loans, as well as the changes in fair value of our 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 wholesale/correspondent closings and certain retail closings from our private label clients, 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, interest rate lock commitments 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 and commissions paid to employees involved in the loan origination process. 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. Other operating expenses consist of production-related direct expenses, allocations for corporate overhead and other production related expenses. Production-related direct expenses represent variable costs directly related to the volume of loan originations and consist of appraisal, underwriting and other direct loan origination expenses and are primarily driven by the volume of applications. 46

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Table of Contents Mortgage Servicing Segment In recent periods, our servicing operations have been negatively impacted by conditions in the housing market and general economic factors, including higher unemployment rates, which have led to elevated levels of delinquencies, increases in repurchase and indemnification requests and high loss severities on defaulted loans. These factors, plus the increased regulatory focus on servicing activities, have increased, and will likely continue to increase, servicing costs across the industry. Although we believe the Agencies have substantially completed their reviews of loan files from pre-2009 vintages, repurchase and indemnification requests from all investors and insurers have been volatile in recent periods. There continues to be inherent uncertainty around recent repurchase and indemnification request trends, as well as uncertainty around the full impact of the new representation and warranty framework for conventional loans sold or delivered after January 1, 2013. See "-Risk Management" for additional information regarding loan repurchase and indemnification trends and our related reserves. Segment Metrics: As of June 30, 2014 2013 ($ In millions) Total loan servicing portfolio $ 225,902 $



228,637

Number of loans in owned portfolio 778,108



851,506

Number of subserviced loans 402,291



408,191

Total number of loans serviced 1,180,399



1,259,697

Capitalized loan servicing portfolio $ 123,959 $



133,061

Capitalized servicing rate 0.96 % 0.94 % Capitalized servicing multiple 3.3



3.2

Weighted-average servicing fee (in basis points) 29 29 Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Average total loan servicing portfolio $ 225,905$ 204,961$ 226,138$ 195,595 Average capitalized loan servicing portfolio 125,513 134,962 126,837 136,813 Payoffs, sales and principal curtailments of capitalized portfolio 5,361 10,246 9,614 20,758 47

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Table of Contents Segment Results: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Mortgage interest income $ 1$ 3 $ 2 $ 4 Mortgage interest expense (12) (15) (26) (29) Mortgage net finance expense (11) (12) (24) (25) Loan servicing income 110 88 225 196 Change in fair value of mortgage servicing rights (52) 75 (131) 80 Net derivative gain (loss) related to mortgage servicing rights 20 (1) 26 (17) Valuation adjustments related to mortgage servicing rights, net (32) 74 (105) 63 Net loan servicing income 78 162 120 259 Net revenues 67 150 96 234 Salaries and related expenses 14 14 29 25 Occupancy and other office expenses 5 3 9 6 Other depreciation and amortization - 1 1 1 Other operating expenses 38 51 76 104 Total expenses 57 69 115 136 Segment profit (loss) $ 10$ 81$ (19)$ 98 Quarterly Comparison: Mortgage Servicing segment profit was $10 million during 2014, a decrease of $71 million, or 88%, from the prior year quarter. Net revenues decreased to $67 million, down $83 million, or 55%, compared with the second quarter of 2013 driven by unfavorable MSR market-related fair value adjustments that were partially offset by lower prepayment activity, net gains on MSR derivatives and a loss recorded in 2013 related to the termination of an inactive reinsurance contract. Total expenses decreased to $57 million, down $12 million, or 17%, compared with the prior year quarter primarily driven by lower repurchase and foreclosure-related charges. Net revenues. Servicing fees from our capitalized portfolio decreased by $9 million, or 9%, compared to the prior year quarter driven by a 7% decrease in the average capitalized loan servicing portfolio and a decline in the weighted average servicing fee. Lower refinancing activity in 2014 resulted in a 61% decrease in payoffs in our capitalized loan servicing portfolio, which drove a $9 million, or 69%, decrease in curtailment interest paid to investors and a $40 million decrease in MSR valuation changes from actual prepayments of the underlying mortgage loans. During the second quarter of 2014, market-related fair value adjustments decreased the value of our MSRs by $12 million. We observed a 29 basis point decline in the mortgage rate used to value our MSR asset during the second quarter of 2014; however prepayments in our capitalized portfolio declined by 61% compared to the prior year quarter as the refinance incentive decreased and prepayments became less sensitive to changes in interest rates. During the second quarter of 2013, market-related fair value adjustments increased the value of our MSRs by $155 million primarily due to a 76 basis points increase in the mortgage rate used to value our MSR asset that was partially offset by higher expected prepayment activity from HARP refinances and a decrease in projected servicing cash flows for delinquent and foreclosed loans. Changes in interest rates and the composition of our MSR derivative portfolio during each period drove a net gain on MSR derivatives of $20 million during 2014, compared to a net loss of $1 million during the second quarter of 2013. Loan servicing income for 2014 includes the full impact from the assumption of a subservicing portfolio with an unpaid principal balance of $47 billion in the second quarter of 2013. Subservicing fees were $13 million during the second quarter of 2014, an increase of $4 million from the prior year quarter resulting from an increase in the average number of loans in our subserviced portfolio and the subservicing fee earned per loan. We expect the trends in subservicing to continue in 2014, consistent with our strategy to position the mortgage business to be less capital intensive, and have more fee-based revenue streams. Net reinsurance loss for 2013 included a nonrecurring $21 million pre-tax loss related to the termination of our remaining reinsurance contract. 48 --------------------------------------------------------------------------------



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Total expenses. The Agencies substantially completed their repurchase and indemnification requests for pre-2009 vintage years by the end of 2013. During the second quarter of 2014, we observed a continued downward trend in new repurchase requests for more recent originations years (2009 to 2012) which resulted in a decline in our actual and projected number of repurchase and indemnification requests that was offset by an increase in our expected loss severities. As a result, we recorded a $1 million benefit for repurchase and foreclosure-related charges during 2014. The $11 million of repurchase and foreclosure-related charges during the second quarter of 2013 reflected the impact of additional clarity from the Agencies on the total number of loan file reviews expected to be completed for pre-2009 origination years and reduced government insurance claims proceeds. Other expenses decreased by $2 million in 2014, or 6%, primarily due to a $5 million decrease in unreimbursed servicing and interest costs from delinquent and foreclosed government loans that was partially offset by a $3 million increase in costs associated with managing a larger subservicing portfolio, various regulatory proceedings and Agency compensatory fees related to foreclosures.



See "-Other" for a discussion of the corporate overhead allocation.

Year-to-Date Comparison: Mortgage Servicing segment loss was $19 million during 2014, compared to a segment profit of $98 million during the prior year. Net revenues decreased to $96 million, down $138 million, or 59%, compared with the six months ended June 30, 2013 driven by unfavorable MSR market-related fair value adjustments that were partially offset by lower prepayment activity, net gains on MSR derivatives and a loss recorded in 2013 related to the termination of an inactive reinsurance contract. Total expenses decreased to $115 million, down $21 million, or 15%, compared with the prior year primarily driven by lower repurchase and foreclosure-related charges and direct foreclosure and REO expenses that were partially offset by higher salaries and related expenses associated with the increased subservicing portfolio and an increase in corporate overhead allocations. Net revenues. Servicing fees from our capitalized portfolio decreased by $17 million, or 9%, compared to the prior year driven by a 7% decrease in the average capitalized loan servicing portfolio and a decline in the weighted average servicing fee. Lower refinancing activity in 2014 resulted in a 66% decrease in payoffs in our capitalized loan servicing portfolio, which drove a $19 million, or 73%, decrease in curtailment interest paid to investors and an $85 million decrease in MSR valuation changes from actual prepayments of the underlying mortgage loans. During the six months ended June 30, 2014, market-related fair value adjustments decreased the value of our MSRs by $57 million. We observed a 42 basis point decline in the mortgage rate used to value our MSR asset during the six months ended June 30, 2014; however prepayments in our capitalized portfolio declined by 66% compared to the prior year as the refinance incentive decreased and prepayments became less sensitive to changes in interest rates. During the six months ended June 30, 2013, market-related fair value adjustments increased the value of our MSRs by $237 million primarily due to a 107 basis points increase in the mortgage rate used to value our MSR asset that was partially offset by higher expected prepayment activity from HARP refinances and a decrease in projected servicing cash flows for delinquent and foreclosed loans. Changes in interest rates during each period drove a net gain on MSR derivatives of $26 million during 2014, compared to a net loss of $17 million during the prior year. Subservicing fees were $26 million during the six months ended June 30, 2014, an increase of $12 million from the prior year resulting from an increase in the average number of loans in our subserviced portfolio related to the assumption of a subservicing portfolio in the second quarter of 2013 and an increase in the subservicing fee earned per loan. Net reinsurance loss for 2013 included a nonrecurring $21 million pre-tax loss related to the termination of our remaining reinsurance contract. 49 --------------------------------------------------------------------------------



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Total expenses. During the six months ended June 30, 2014, we observed a continued downward trend in new repurchase requests for more recent originations years (2009 to 2012) which resulted in a decline in our actual and projected number of repurchase and indemnification requests that was offset by an increase in our expected loss severities. As a result, we recorded a $1 million benefit for repurchase and foreclosure-related charges during 2014. The $26 million of repurchase and foreclosure-related charges during the six months ended June 30, 2013 reflected the impact of additional clarity from the Agencies on the total number of loan file reviews expected to be completed for pre-2009 origination years, a continued elevated level of total requests and reduced government insurance claims proceeds. Salaries and related expenses increased by $4 million compared to the prior year which was primarily driven by an increase in the average number of permanent employees from the transfer of certain employees into our servicing operations when we commenced subservicing activities on the portfolio that was assumed in the second quarter of 2013. Other expenses decreased by $5 million in 2014, or 7%, which consisted of a $7 million decrease in unreimbursed servicing and interest costs from delinquent and foreclosed government loans and a $3 million decrease in tax service fee expenses related to lower closing volumes that were partially offset by a $4 million increase in costs associated with managing a larger subservicing portfolio and various regulatory proceedings.



See "-Other" for a discussion of the corporate overhead allocation.

Selected Income Statement Data:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Loan servicing income: Servicing fees from capitalized portfolio $ 90$ 99$ 182$ 199 Subservicing fees 13 9 26 14 Late fees and other ancillary servicing revenue 11 13 24 28 Curtailment interest paid to investors (4) (13) (7) (26) Net reinsurance loss - (20) - (19) Total $ 110$ 88$ 225$ 196 Changes in fair value of Mortgage Servicing Rights: Actual prepayments of the underlying mortgage loans $ (29)$ (69)$ (51)$ (136) Actual receipts of recurring cash flows (11) (11) (23) (21) Market-related fair value adjustments (12) 155 (57) 237 Total $ (52)$ 75$ (131)$ 80 Other operating expenses: Corporate overhead allocation $ 7$ 6$ 15$ 11 Repurchase and foreclosure-related charges (1) 11 (1) 26 Other expenses 32 34 62 67 Total $ 38$ 51$ 76$ 104 50

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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 and the average servicing 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 nominal 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. Net reinsurance income or loss represents premiums earned on reinsurance contracts, net of ceding commission and provisions for reinsurance reserves. 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. Generally, the value of our MSRs is expected to increase when interest rates rise and decrease when interest rates decline due to the effect those changes in interest rates have on prepayment estimates. Other factors noted above as well as the overall market demand for MSRs may also affect the valuation. 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. 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. Other operating expenses consist of repurchase and foreclosure-related charges, allocations for corporate overhead 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 and expected loss severities. 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.



Other expenses are primarily costs directly associated with servicing loans in foreclosure and real estate owned, professional fees and outsourcing fees.

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Table of Contents 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. Other also includes certain income and expenses that are not allocated to our reportable segments and certain general corporate overhead expenses that were previously allocated to the Fleet business. Beginning in the third quarter of 2014, all costs associated with general and administrative functions and managing our overall corporate function will be allocated to the Mortgage Production and Mortgage Servicing segments. See "-Operating and Capital Strategy" for a discussion of our intention to re-engineer our support infrastructure for a stand-alone mortgage business. Results: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Salaries and related expenses $ 18$ 13$ 30$ 28 Occupancy and other office expenses - 1 1



2

Other depreciation and amortization 3 2 5



4

Other operating expenses 17 20 35



31

Total expenses before allocation 38 36 71 65 Corporate overhead allocation (30) (32) (61) (59) Total expenses 8 4 10 6 Net loss before income taxes $ (8)$ (4)$ (10)$ (6) Quarterly Comparison: Total expenses before corporate allocations increased to $38 million, up $2 million, or 6%, compared with the prior year quarter primarily driven by an increase salaries and related expenses that was partially offset by lower operating expenses. Total expenses. Salaries and related expenses increased by $5 million in 2014, or 38%, compared with the prior year quarter primarily due to severance costs associated with the re-engineering of our operations and support infrastructure for a stand-alone mortgage business and higher management incentive compensation. Salaries and related expenses attributable to our headcount were lower compared to the second quarter of 2013 which was driven by the actions we took during the second half of 2013 to realign our fixed cost structure within our support and overhead functions and the initiation of outsourcing arrangements for internal audit and information technology. Total Other operating expenses decreased by $3 million, or 15%, compared to the second quarter of 2013 primarily due to nonrecurring expenses incurred during 2013 related to executive and risk management strategic initiatives which was partially offset by costs related to outsourcing arrangements for internal audit and information technology. 52

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Table of Contents Year-to-Date Comparison: Total expenses before corporate allocations increased to $71 million, up $6 million, or 9%, compared with the prior year driven by an increase in professional and consulting fees and higher salaries and related expenses. Total expenses. Salaries and related expenses increased by $2 million in 2014, or 7%, compared with the prior year primarily due to severance costs associated with the re-engineering of our operations and support infrastructure for a stand-alone mortgage business and higher management incentive compensation which was partially offset by lower expenses from the decline in headcount described above. Professional fees increased to $25 million in 2014, up 32%, compared to the prior year primarily driven by costs related to outsourcing arrangements for internal audit and technology infrastructure management and application development that were not in effect during the six months ended June 30, 2013 which was partially offset by nonrecurring expenses incurred during 2013 related to executive and risk management strategic initiatives.



Selected Income Statement Data:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (In millions) Other operating expenses: Professional fees $ 12$ 13$ 25$ 19 Other expenses 5 7 10 12 Total $ 17$ 20$ 35$ 31 Corporate overhead allocation:(1) Mortgage Production segment $ 23$ 26$ 46$ 48 Mortgage Servicing segment 7 6 15 11 Other (30) (32) (61) (59) Total $ - $ - $ - $ -



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(1) In 2014, we evaluated the overhead allocation to our segments based upon

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.



Following are descriptions of the contents and drivers of our financial results:

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.

Other operating expenses consist primarily of professional, consulting and information technology costs associated with our centralized management platform.

Corporate overhead allocation to each segment is determined based upon the actual and estimated usage by function or expense category.

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Table of Contents RISK MANAGEMENT



Our continuing operations 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 risk; and (iv) liquidity risk.

See "Part II-Item 1A. Risk Factors-Risks Related to Our Company-We are subject to inherent risks associated with the strategic agreements that we entered into to sell our fleet business, as well as risks specific to our business, and we could be exposed to losses or liabilities in the future in connection with the sale. These risks and uncertainties could have a material adverse impact on our businesses generally, including our client, employee, lender, vendor and counterparty relationships, as well as our results of operations, cash flows, liquidity or financial position. " in this Form 10-Q for information regarding certain risks related to the sale of our Fleet business. 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 asset-backed debt and our unsecured revolving credit facility. We anticipate that such interest rates will remain our primary benchmark for market risk for the foreseeable future. Refer to "-Item 3. Quantitative and Qualitative Disclosures About Market Risk" for an analysis of the impact of 25 bps, 50 bps and 100 bps changes in interest rates on the valuation of assets and liabilities sensitive to interest rates. Consumer Credit Risk



Our exposures to consumer credit risk include:

Loan repurchase and indemnification obligations from breaches of representation and warranty provisions of our loan sales or servicing agreements, which may result in indemnification payments or exposure to loan defaults and foreclosures; and



A decline in the fair value of mortgage servicing rights as a result of increases in involuntary prepayments from increasing portfolio delinquencies.

Loan Repurchases and Indemnifications

Repurchase and foreclosure-related reserves are maintained for probable losses related to repurchase and indemnification obligations and on-balance sheet loans in foreclosure and real estate owned. 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. These assumptions include the estimated amount and timing of repurchase and indemnification requests, the expected success rate of defending against requests, estimated insurance claim proceeds and denials and estimated loss severities on repurchases and indemnifications. The liability for loan repurchases and indemnifications does not reflect losses from litigation or governmental and regulatory examinations, investigations or inquiries. 54 --------------------------------------------------------------------------------



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Repurchase and foreclosure-related reserves consist of the following:

June 30, December 31, 2014 2013 (In millions)



Loan repurchase and indemnification liability $ 70 $ 100 Adjustment to value for real estate owned

21 22 Allowance for probable foreclosure losses 19 20 Total $ 110 $ 142



The table below presents the trend over the most recent quarters of our repurchase and foreclosure-related reserves activity and the number of repurchase and indemnification requests received:

Three Months Ended June 30, March 31, December 31, September 30, June 30, 2014 2014 2013 2013 2013 ($ In millions)



Balance, beginning of period $ 120$ 142 $ 180

$ 191 $ 194 Realized losses (10) (24) (21) (15) (20) Increase (decrease) in reserves due to: Change in assumptions (1) - (19) - 11 New loan sales 1 2 2 4 6 Balance, end of period $ 110$ 120 $ 142 $ 180 $ 191 Repurchase and indemnification requests received (number of loans) 194 382 1,017 735 603 In recent years, we have experienced elevated levels of mortgage loan repurchase and indemnification requests as the Agencies focused on completing their reviews of loans for pre-2009 origination years. We believe the Agencies substantially completed their reviews of loans originated prior to 2009 by the end of 2013 and the number of repurchase and indemnification requests we experienced during the six months ended June 30, 2014 was consistent with our expectations. The unpaid principal balance of our unresolved requests for loans originated between 2005 and 2008 has declined to $54 million as of June 30, 2014, from $72 million as of March 31, 2014 and $143 million at the end of 2013. We expect this trend in the composition of our unresolved requests to continue in 2014 as the remaining pre-2009 origination year requests are resolved. See Note 11, "Credit Risk", in the accompanying Notes to Condensed Consolidated Financial Statements for additional information regarding our repurchase and foreclosure-related reserves. Actual losses incurred in connection with loan repurchases and indemnifications could vary significantly from and exceed the recorded liability and we may be required to increase our loan repurchase and indemnification liability in the future. Accordingly, there can be no assurance that actual losses or estimates of reasonably possible losses associated with loan repurchases and indemnifications will not be in excess of the recorded liability or that we will not be required to increase the recorded liability in the future. Given the inherent uncertainties involved in estimating losses associated with future repurchase and indemnification requests, there is a reasonable possibility that future losses may be in excess of the recorded liability. As of June 30, 2014, the estimated amount of reasonably possible losses in excess of the recorded liability was $25 million which relates to our estimate of repurchase and foreclosure-related charges that may not be reimbursed pursuant to government mortgage insurance programs in the event we do not file insurance claims. The estimate is based on our expectation of future defaults and the historical defect rate for government insured loans. Our estimate of reasonably possible losses does not represent probable losses 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. 55 --------------------------------------------------------------------------------



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We subject the population of repurchase and indemnification requests received to a review and appeal process to establish the validity of the claim and corresponding obligation. The following table presents the unpaid principal balance of our unresolved requests by status: June 30, 2014 December 31, 2013 Investor Insurer Investor Insurer Requests Requests Total (4) Requests

Requests Total (4) (In millions) Agency Invested: Claim pending (1) $ 17$ 1$ 18$ 19 $ - $ 19 Appealed (2) 6 6 12 43 5 48 Open to review (3) 10 3 13 74 5 79 Agency requests 33 10 43 136 10 146 Private Invested: Claim pending (1) 9 - 9 9 - 9 Appealed (2) 15 2 17 16 2 18 Open to review (3) 15 2 17 16 2 18 Private requests 39 4 43 41 4 45 Total $ 72$ 14$ 86$ 177$ 14$ 191



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(1) Claim pending status represents loans that have completed the review process

where we have agreed with the representation and warranty breach and are

pending final execution. (2) Appealed status represents loans that have completed the review process



where we have disagreed with the representation and warranty breach and are

pending response from the claimant. Based on claims received and appealed

during the twelve months ended June 30, 2014 that have been resolved, we

were successful in refuting approximately 90% of claims appealed. (3) Open to review status represents loans where we have not completed our

review process. We appealed approximately 65% of claims received and

reviewed during the twelve months ended June 30, 2014. (4) Investors may make repurchase demands based on unresolved mortgage insurance

rescission notices. In these cases, the total unresolved requests balance

includes certain loans that are currently subject to both an outstanding

repurchase demand and an unresolved mortgage insurance rescission notice.

Counterparty 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 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 June 30, 2014, there were no significant concentrations of credit risk with any individual counterparty or group of counterparties with respect to our derivative transactions. 56 --------------------------------------------------------------------------------



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LIQUIDITY AND CAPITAL RESOURCES

Our sources of liquidity include: unrestricted Cash and cash equivalents; proceeds from the sale or securitization of mortgage loans; secured borrowings, including mortgage warehouse and servicing advance facilities; cash flows from operations; the unsecured debt markets; asset sales; and equity capital (including retained earnings). We manage our liquidity and capital structure to fund growth in assets, 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 maximum liquidity requirements during the period, fluctuations in assets and liability levels due to changes in business operations, upcoming debt maturities, levels of interest rates and working capital needs. We also assess market conditions and capacity for debt issuance in various markets we access to fund our business needs. Our primary operating funding needs for our continuing operations 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 strategic vision for PHH is a more capital-light, fee-based business with greater scale, operational efficiency and capital efficiency. To help achieve this vision, we completed the sale of our Fleet Management Services business in the third quarter of 2014 which we expect to generate net cash proceeds of $821 million, subject to certain post closing adjustments and the final determination of income taxes. This additional cash will provide us with the financial flexibility to return significant capital to shareholders, accelerate the reduction of our unsecured debt, re-engineer our Mortgage business and pursue opportunities to improve profitability through increased scale. In July 2014, we gave notice to the trustee of our intention to redeem the outstanding principal of the Senior Notes due 2016 on August 7, 2014. We anticipate this transaction will require approximately $200 million in cash. We will be further reducing our unsecured debt upon the retirement of our 2014 Convertible notes at maturity in September 2014. These actions are consistent with our objectives for unsecured debt for a stand-alone mortgage business, namely: Lowering our debt to our target levels of $750 million to $1.0 billion; Reducing our cost of debt; and Extending the maturity ladder of our unsecured debt.



After completing the repayment of the Senior Notes due 2016 and the 2014 Convertible Notes, our next unsecured debt maturity will be in 2017.

In connection with our efforts to migrate to a less capital-intensive, fee-for-service business model, during the first half of 2014, we executed a new funding structure for our mortgage servicing advances, and we executed two MSR funding arrangements with counterparties in which we will sell a portion of our newly-created servicing rights that are eligible for sale, subject to mutually acceptable pricing, while we continue to subservice the underlying loans. We have also continued to evaluate our capacity needs to fund mortgage loans. During the first half of 2014, at our election, we reduced the capacity for certain facilities in response to the current mortgage environment and to reduce expenses associated with the facilities. In July 2014, upon the closing of the sale of the Fleet business, we voluntarily terminated our unsecured Revolving Credit Facility that had $300 million of available commitments prior to termination. In recent periods, we have not drawn upon the Revolving Credit Facility, as we have substantially utilized our asset-backed funding arrangements and our excess cash to fund our business. After the completion of the sale, our access to the public debt markets and our ability to obtain unsecured revolving credit borrowing capacity 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. See "Part II-Item 1A. Risk Factors-Risks Related to Our Company-We may be limited in our ability to obtain or renew financing on economically viable terms or at all, due to our senior unsecured long-term debt ratings being below investment grade and due to a lack of history of operating as a stand-alone mortgage business . " in this Form 10-Q for more information. 57

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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 $40 million for 2014, in comparison to $32 million for 2013. Cash Flows Our total unrestricted cash position as of June 30, 2014 is $964 million, which includes $73 million of cash available in Variable interest entities and excludes $274 million included in held for sale that will be transferred with our Fleet business. In the third quarter of 2014, we expect cash to increase by an estimated $821 million, subject to certain post-closing adjustments and the final determination of income taxes, from net proceeds from the sale of the Fleet business, net of the payment of taxes and transaction-related costs. We expect to have approximately $1.7 billion of unrestricted cash available for operations after the completion of the transaction. We will continue to maintain an excess unrestricted cash position to fund certain known or expected payments, to fund our working capital needs and to maintain cash reserves for contingencies. The following is a summary of certain key items that we considered in our analysis of cash requirements as of June 30, 2014:



A minimum of $250 million for the repayment of Convertible notes that are due in the third quarter of 2014;

$125 million to $175 million for identified contingencies, including amounts related to mortgage loan repurchases and legal and regulatory matters;

$50 million to $75 million cash reserves for mortgage-related interest rate risk management activities; and

$100 million to $125 million minimum for working capital needs. After consideration of these total requirements of $525 million to $625 million and after the receipt the net proceeds from the Fleet transaction, we expect to have over $1.0 billion of excess cash available for operations. See "-Overview-Executive Summary" for a discussion of our plans with respect to this excess cash amount.



The following table summarizes the changes in Cash and cash equivalents and includes the activities of our continuing and discontinued operations:

Six Months Ended June 30, 2014 2013 Change (In millions) Cash provided by (used in): Operating activities $ 526$ 1,249$ (723) Investing activities (709) (771) 62 Financing activities 176 (260) 436 Effect of changes in exchange rates on Cash and cash equivalents - (3)



3

Net (decrease) increase in Cash and cash equivalents $ (7)$ 215$ (222) 58

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Table of Contents 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. In addition to depreciation and amortization, the operating results of our businesses are impacted by the following significant non-cash activities. Our Mortgage Production business segment is impacted by the capitalization of mortgage servicing rights. Our Mortgage Servicing business segment is impacted by the change in fair value of mortgage servicing rights. Our Fleet business, which is presented as a discontinued operation, was impacted by depreciation on operating leases. During the six months ended June 30, 2014, cash provided by our operating activities was $526 million. This is primarily reflective of positive cash flows from the Fleet business and our Mortgage Servicing segment that were partially offset by the use of cash in our Mortgage Production segment. As discussed in "-Overview-Executive Summary", we expect our Mortgage Production segment to be cash consumptive during 2014, reflective of the challenging mortgage environment and the current pricing levels and mix of closings of our private label agreements. The net cash used in operating activities of our Mortgage Production segment also included the impact of a $90 million increase in Mortgage loans held for sale in our Condensed Consolidated Balance Sheets between June 30, 2014 and December 31, 2013, which was the result of timing differences between origination and sale as of the end of each period. During the six months ended June 30, 2013, cash provided by our operating activities was $1.2 billion. This was primarily due to $769 million of net cash provided by the volume of mortgage loan sales in our Mortgage Production segment and $132 million of net cash received from counterparties related to cash collateral associated with loan related derivatives. Cash provided by operating activities was further driven by positive cash flows from our Mortgage Servicing segment and the Fleet business. Investing Activities Our cash flows from investing activities are primarily attributable to our discontinued operations of the Fleet business, and include cash outflows for purchases of vehicle inventory, net of cash inflows for sales of vehicles, as well as changes in the funding requirements of restricted cash, cash equivalents and investments for all of our businesses. During the six months ended June 30, 2014, cash used in our investing activities was $709 million, which primarily consisted of $649 million in net cash outflows from the purchase and sale of vehicles and an $87 million net increase in Restricted cash primarily due to a $19 million increase related to a new servicing advance facility and a $59 million increase due to the overcollateralization for fleet securitizations. During the six months ended June 30, 2013, cash used in our investing activities was $771 million, which primarily consisted of $770 million in net cash outflows from the purchase and sale of vehicles and $19 million of cash paid on derivative agreements related to our Mortgage servicing rights, partially offset by a $33 million net decrease in Restricted cash, cash equivalents and investments primarily due to $79 million of Restricted cash that was settled related to the reinsurance agreement that was terminated in the second quarter of 2013 that was partially offset by $49 million increase in restricted cash used in vehicle management asset-backed funding facilities. Financing Activities Our cash flows from financing activities include proceeds from and payments on borrowings under our asset-backed debt. 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 the asset-backed debt facilities vary daily based on our current funding needs for eligible collateral and our decisions regarding the use of excess available cash to fund assets. As of the end of each quarter, our financing activities and Condensed Consolidated Balance Sheets reflect our efforts to maximize secured borrowings against the available asset base, increasing the ending cash balance. Within each quarter, excess available cash is utilized to fund assets rather than using the asset-backed borrowing arrangements, given the relative borrowing costs and returns on invested cash. 59

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Our cash flows from financing activities also include proceeds from and payments on borrowings under our vehicle management asset-backed debt, which was used to fund our discontinued operations related to the Fleet business. We transferred the subsidiaries that issued vehicle management asset-backed debt to Element in the third quarter of 2014 in connection with the completion of the sale of the Fleet business. During the six months ended June 30, 2014, cash provided by our financing activities was $176 million which primarily related to $190 million of net proceeds from secured borrowings, $56 million of which related to the Fleet business. The remaining $134 million of net proceeds from secured borrowings was comprised of a $74 million increase resulting from the increased funding requirements for Mortgage loans held for sale and a $60 million increase related to the issuance of asset-backed notes secured by servicing advance receivables. During the six months ended June 30, 2013, cash used in our financing activities was $260 million which related to $210 million of net payments on secured borrowings resulting primarily from the decreased funding requirements for Mortgage loans held for sale described in operating activities and $35 million of distributions to noncontrolling interests. Debt



The following table summarizes our Debt as of June 30, 2014:

Balance Collateral(1) (In millions) Mortgage warehouse facilities $ 783 $ 819 Servicing advance facility 126 184 Unsecured debt 1,258 - Total $ 2,167 $ 1,003



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

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Table of Contents Mortgage Asset-Backed Debt Mortgage asset-backed debt primarily represents 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. 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. Mortgage asset-backed funding arrangements consisted of the following as of June 30, 2014: Total Available Maturity Balance Capacity Capacity(1) Date (In millions) Debt: Committed facilities: Credit Suisse First Boston Mortgage Capital LLC $ 324$ 575$ 251 06/29/15(2) Fannie Mae - 500 500 12/13/14 Wells Fargo Bank 139 350 211 02/03/15 Bank of America 169 414 245 10/09/14 Royal Bank of Scotland plc 151 250 99 06/19/15 Committed repurchase facilities 783 2,089 1,306 Uncommitted facilities: Fannie Mae - 2,500 2,500 n/a Royal Bank of Scotland plc - 250 250 n/a Uncommitted repurchase facilities - 2,750 2,750 Servicing advance facility 126 155 29 03/15/17 Total $ 909$ 4,994$ 4,085 Off-Balance Sheet Gestation Facilities: JP Morgan Chase $ 92$ 250$ 158 10/31/14



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(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 maturity date of this facility may be extended at CSFB's option on a

rolling 364-day term until the stated expiration date of June 17, 2016.

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Table of Contents Unsecured Debt Unsecured debt is utilized to fund our short-term working capital needs, to fund our MSRs, to supplement asset-backed facilities, and to provide for a portion of the operating needs of our business. As of and during the six months ended June 30, 2014, there were no amounts outstanding under the Revolving credit facilities. Unsecured borrowing arrangements consisted of the following as of June 30, 2014: Maximum Balance Maximum Available Maturity Balance at Maturity Capacity Capacity Date (In millions) 4% notes due in 2014 $ 250 $ 250 n/a n/a 09/01/14 6% notes due in 2017 213 250 n/a n/a 06/15/17 Convertible notes 463 500 9.25% notes due in 2016(1) 170 170 n/a n/a 03/01/16 7.375% notes due in 2019 275 275 n/a n/a 09/01/19 6.375% notes due in 2021 350 350 n/a n/a 08/15/21 Term notes 795 795 Revolving credit facility(2) - - $ 300$ 300 08/02/15 Other - - 5 5 09/30/14 Unsecured Credit facilities - - $ 305$ 305 Total $ 1,258$ 1,295



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(1) On July 7, 2014, we gave notice to the trustee of our intent to redeem the

$170 million Senior Notes due 2016 as further discussed in Note 17,

"Subsequent Events".

(2) On July 7, 2014, we voluntarily terminated the Amended and Restated Credit

Agreement as further described in Note 17, "Subsequent Events". The Convertible notes due 2014 met the requirements for conversion as of March 1, 2014, and holders of the notes may convert all or any portion of the notes, at their option. As of June 30, 2014, no note holders have converted. As of June 30, 2014, the ending share price did not reach the conversion price. The 2014 notes currently may only be settled in cash upon conversion because we have not sought shareholder approval, as required by the New York Stock Exchange, to allow for the issuance of shares of common stock or securities convertible into common stock that will, or will upon issuance, equal or exceed 20% of outstanding shares. The Convertible notes due 2017 met the requirements for conversion as of June 30, 2014, and holders of the notes may convert all or any portion of the notes, at their option. As of June 30, 2014, the if-converted value exceeded the principal amount of the notes by $199 million. Upon conversion, the principal amount of the converted notes would be payable in cash, and we would pay or deliver the conversion premium (at our election) in: (i) cash; (ii) shares of Common stock; or (iii) a combination of cash and shares of Common stock. As of July 29, 2014, our credit ratings on our senior unsecured debt were as follows: Senior Short-Term Debt Debt Moody's Investors Service Ba3 NP Standard & Poors B+ B Fitch BB- B On June 4, 2014, following the announcement that we entered into a definitive agreement to sell our Fleet business, Fitch downgraded our senior unsecured rating to BB- from BB and revised our Ratings Watch to Negative. After the completion of the sale, on July 8, 2014, Fitch affirmed our senior unsecured rating of BB- and removed the ratings from Rating Watch Negative and assigned a Negative Rating Outlook. 62

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On July 7, 2014, Moody's downgraded our senior unsecured rating to Ba3 from Ba2 and revised our Ratings Watch to Stable Outlook following the completion of the sale of the Fleet business.



On July 8, 2014, Standard and Poors downgraded our senior unsecured rating to B+ from BB- and revised our Ratings Watch to Stable Outlook following the completion of the sale of the Fleet business.

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. 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. See further discussion at "Part II-Item 1A. Risk Factors-Risks Related to our Company-We may be limited in our ability to obtain or renew financing on economically viable terms or at all, due to our senior unsecured long-term debt ratings being below investment grade and due to a lack of history of operating as a stand-alone mortgage business . " in this Form 10-Q. Debt Covenants Certain debt arrangements require the maintenance of certain financial ratios and contain other affirmative and negative covenants, termination events, and other restrictions, including, but not limited to, covenants relating to material adverse changes, consolidated net worth, liquidity, profitability, and available 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 us or our counterparty to terminate the arrangement upon the occurrence of certain events.



As of June 30, 2014, we were in compliance with all financial covenants related to its debt arrangements.

In June and July 2014, all of our mortgage warehouse facilities were amended in order to facilitate the sale of the Fleet business as discussed in Note 2, "Discontinued Operations" in the accompanying Notes to Condensed Consolidated Financial Statements. Upon the completion of the disposal of the Fleet business, among other covenants, certain mortgage repurchase facilities require that we maintain: (i) on the last day of each fiscal quarter, net worth of at least $1.0 billion; (ii) a ratio of indebtedness to tangible net worth no greater than 5.75 to 1; and (iii) a minimum of $1.0 billion in committed mortgage warehouse financing capacity excluding any mortgage warehouse capacity provided by GSEs and certain mortgage gestation facilities. 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. Under certain of our financing, servicing, hedging and related agreements and instruments, the lenders or trustees have the right to notify us 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, we believe we would have various periods in which to cure certain of such events of default. If we do 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 our other agreements and instruments. 63 --------------------------------------------------------------------------------



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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have not been any significant changes to the critical accounting policies and estimates described under "Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our 2013 Form 10-K.



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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


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