S-4/A 1 y04304a4sv4za.htm S-4/A sv4za
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As filed with the Securities and Exchange Commission on May 16, 2011
Registration No. 333-171370
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 4
to
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
 
 
 
     
NATIONSTAR MORTGAGE LLC
  NATIONSTAR CAPITAL CORPORATION
     
(Exact name of registrant as specified in its charter)
  (Exact name of registrant as specified in its charter)
Delaware
  Delaware
(State or other jurisdiction of incorporation or organization)   (State or other jurisdiction of incorporation or organization)
6162
  6162
(Primary standard industrial classification code number)
  (Primary standard industrial classification code number)
75-2921540
(I.R.S. Employer Identification No.)
  27-1996157
(I.R.S. Employer Identification No.)
350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
  350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
  (Address, including zip code, and telephone number,
including area code, of principal executive offices)
 
and the Guarantors identified in Table of Additional Registrant Guarantors below
 
 
 
 
     
Anne Sutherland, Esq. 
  Duane McLaughlin, Esq.
Executive Vice President and General Counsel
  Cleary Gottlieb Steen & Hamilton LLP
Nationstar Mortgage LLC
  One Liberty Plaza
350 Highland Drive
  New York, New York 10006
Lewisville, Texas, 75067
  (212) 225-2000
(469) 549-2000
   
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
  (Copies of all communications, including
communications sent
to agent for service)
     
 
 
 
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
 
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


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Table of Additional Registrant Guarantors
 
                   
Name
   
Jurisdiction
   
I.R.S. Employer ID #
   
Address and Telephone #
Centex Land Vista Ridge Lewisville III
General Partner, LLC
    Delaware     75-2921540     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
Centex Land Vista Ridge Lewisville III, L.P.      Delaware     20-3437712     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
Harwood Service Company LLC     Delaware     75-2925375     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
Harwood Insurance Services, LLC     California     75-2921540     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
Harwood Service Company Of Georgia, LLC     Georgia     73-1643246     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
Harwood Service Company Of New Jersey, LLC     New Jersey     74-3047401     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
Homeselect Settlement Solutions, LLC     Delaware     20-1356314     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
Nationstar 2009 Equity Corporation     Delaware     27-1285662     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
Nationstar Equity Corporation     Nevada     75-2711305     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
Nationstar Industrial Loan Company     Tennessee     75-2786875     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
Nationstar Industrial Loan Corporation     Minnesota     75-2903483     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
NSM Recovery Services Inc.      Delaware     27-3275696     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
NSM Foreclosure Services Inc.      Delaware     27-3916074     350 Highland Drive
Lewisville, Texas 75067
(469) 549-2000
                   


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is neither an offer to sell nor a solicitation of an offer to purchase these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED MAY 16, 2011
 
PROSPECTUS
 
(NATIONSTAR LOGO)
 
Nationstar Mortgage LLC
 
Nationstar Capital Corporation
 
Offer to Exchange any and all of our outstanding unregistered 10.875% Senior Notes due 2015
for $250,000,000 aggregate principal amount of our new 10.875% Senior Notes due 2015
that have been registered under the Securities Act of 1933, as amended

Terms of the Exchange Offer
 
  •  We are offering to exchange any and all of our outstanding 10.875% Senior Notes due 2015 that were issued on March 26, 2010 (the “Old Notes”) for an equal amount of new 10.875% Senior Notes 2015 (the “New Notes”, and together with the Old Notes, the “Notes”).
 
  •  The exchange offer expires at 5:00 p.m., New York City time, on          , 2011 (such date and time, the “Expiration Date”, unless we extend or terminate the exchange offer, in which case the “Expiration Date” will mean the latest date and time to which we extend the exchange offer).
 
  •  Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date.
 
  •  All Old Notes that are validly tendered and not validly withdrawn will be exchanged.
 
  •  The exchange of Old Notes for New Notes generally will not be a taxable exchange for U.S. federal income tax purposes.
 
  •  We will not receive any proceeds from the exchange offer.
 
  •  The terms of the New Notes to be issued in the exchange offer are substantially the same as the terms of the Old Notes, except that the offer of the New Notes is registered under the Securities Act of 1933, as amended (the “Securities Act”), and the New Notes have no transfer restrictions, rights to additional interest or registration rights.
 
  •  The New Notes will be senior unsecured obligations of each of Nationstar Mortgage LLC and Nationstar Capital Corporation, jointly and severally, and will be unconditionally guaranteed, jointly and severally, by each of our existing and future domestic subsidiaries other than non-guarantor subsidiaries as defined by the indenture governing the New Notes. See “Description of the New Notes.”
 
  •  The New Notes will not be listed on any securities exchange. A public market for the New Notes may not develop, which could make selling the New Notes difficult.
 
We are making the exchange offer in reliance on the position of the staff of the SEC as set forth in interpretive letters addressed to third parties in other transactions, including the SEC staff’s no-action letter, Exxon Capital Holdings Corporation, available May 13, 1988. See “Description of the Exchange Offer—Resale of the New Notes.”
 
Each broker-dealer that receives New Notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The letter of transmittal accompanying this prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. Starting on the Expiration Date (as defined herein) and ending on the close of business 90 days after the Expiration Date, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution.”
 
Investing in the New Notes to be issued in the exchange offer involves certain risks. See “Risk Factors” beginning on page 17.
 
We are not making an offer to exchange Notes in any jurisdiction where the offer is not permitted.
 
Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
The date of this prospectus is          , 2011.


 

 
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 EX-10.10
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 EX-23.1
 
 
We have not authorized anyone to give any information or make any representation about the offering that is different from, or in addition to, that contained in this prospectus or the related registration statement. If you are in a jurisdiction where offers to sell, or solicitations of offers to purchase, the securities offered by this document are unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this document does not extend to you. The information contained in this document speaks only as of the date of this document unless the information specifically indicates that another date applies.
 
WHERE YOU CAN FIND MORE INFORMATION
 
We have filed with the SEC a registration statement on Form S-4 to register this exchange offer of the New Notes, which you can access on the SEC’s website at http://www.sec.gov. This prospectus, which forms part of the registration statement, does not contain all of the information included in that registration statement. For further information about us and about the New Notes offered in this prospectus, you should refer to the registration statement and its exhibits. You may read and copy any materials we file with the SEC at the public reference room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. These materials are also available to the public from the SEC’s website at http://www.sec.gov.


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MARKET AND INDUSTRY DATA
 
Certain market and industry data included in this prospectus has been obtained from third party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications, government publications and third party forecasts in conjunction with our assumptions about our markets. We have not independently verified such third party information. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.
 
WEBSITES
 
The information contained on or that can be accessed through any of our websites is not incorporated in, and is not part of, this prospectus or the registration statement.


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PROSPECTUS SUMMARY
 
This prospectus summary contains basic information about our company and the offering. It may not contain all the information that may be important to you. For certain industry terms, investors are referred to the section entitled “Glossary of Industry Terms” beginning on page 86. Investors should carefully read this entire prospectus, including the information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our consolidated financial statements and related notes. Unless otherwise indicated or the context otherwise requires, references in this prospectus to “Nationstar,” the “Company,” “we,” “us” or “our” refer collectively to Nationstar Mortgage LLC and its subsidiaries. With respect to the discussion of the terms of the notes on the cover page, in the section entitled “Prospectus Summary—Summary of the Exchange Offer,” in the section entitled “Prospectus Summary—Summary of the New Notes” and in the section entitled “Description of the New Notes,” references to “we,” “us” or “our” include only Nationstar Mortgage LLC and Nationstar Capital Corporation and not any other subsidiaries of Nationstar Mortgage LLC.
 
Company Overview
 
We are a leading residential mortgage loan servicer and one of the top five non-bank servicers in the United States as measured by aggregate unpaid principal balance of loans serviced. We service mortgage loans in all 50 states and we are licensed as a residential mortgage loan servicer and/or a third-party default specialist in all states that require such licensing. In addition to our core Servicing business, we currently originate primarily conventional agency (Fannie Mae and Freddie Mac, collectively the “government sponsored enterprises” or the “GSEs”) and government (Federal Housing Administration and Department of Veterans Affairs) residential mortgage loans, and we are licensed to originate residential mortgage loans in 49 states. Our headquarters and operations are based in Lewisville, Texas. As of April 30, 2011, we had a total of 2,176 employees.
 
Loan Servicing
 
We are one of the largest independent loan servicers in the United States. Our servicing portfolio consists of mortgage servicing rights acquired from or subserviced for various third parties as well as loans we originate through our integrated origination platform. As of December 31, 2010, our servicing portfolio included over 389,000 loans with an aggregate unpaid principal balance of $64.2 billion. We service mortgage loans in all 50 states, and we are licensed as a residential mortgage loan servicer and/or a third party debt default specialist in all states that require such licensing. Our Servicing Segment produces recurring, fee-based revenues based upon contractually established servicing fees.
 
Servicing fees primarily consist of an amount based on the aggregate unpaid principal balance of the loans serviced and also include ancillary fees such as late fees and insufficient funds fees. In addition, we earn interest income on amounts deposited in collection accounts and amounts held in escrow to pay property taxes and insurance, which we refer to as float income. We also generate incentive fees from owners of the loans that we service for meeting certain loss-mitigation metrics and for arranging successful loss mitigation programs. Moreover, the U.S. federal government pays us incentive fees for loans that we successfully modify within the parameters of the Home Affordable Modification Program, or HAMP. In addition, we leverage our loan servicing business and customer base to provide several complementary services that generate fee-based revenues.
 
We use a flexible, high-touch servicing model that focuses on personal contact with borrowers and is designed to decrease borrower delinquencies and defaults on mortgages and to increase borrower repayment performance with a goal of home ownership preservation. Our operating culture emphasizes individual default specialist accountability for asset performance (what we refer to as credit loss ownership) and loss mitigation practices to improve asset performance and cash flow and to reduce credit losses. Our servicing model and operating culture have proven especially valuable in the current distressed residential market, and we have established an excellent track record servicing credit-sensitive loans.


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We believe that our demonstrated performance in servicing loans for a GSE facilitated our acquisitions of two significant mortgage servicing rights portfolios totaling approximately $25.0 billion since November 2008. These two portfolios were previously serviced by other servicers. These acquisitions helped us grow our servicing portfolio from $12.7 billion on December 31, 2007, to $64.2 billion on December 31, 2010, including approximately $25 billion in unpaid principal balance which we boarded in November and December 2010, when we entered into a subservicing agreement with a GSE.
 
Loan Originations
 
We are also one of the few high-touch servicers in the United States with a loan origination platform. We currently originate primarily prime agency and government conforming residential mortgage loans, and we are licensed to originate residential mortgage loans in 49 states. Our Originations Segment diversifies our offering of mortgage services and further stabilizes our revenue stream. In 2009, we originated $1.5 billion in aggregate principal balance entirely consisting of conventional residential mortgage loans. In 2010, our originations totaled $2.8 billion in aggregate principal balance. We originate loans through our three loan origination channels:
 
  •  Consumer Direct Retail Channel—through which we market refinancing and purchase money mortgage loans directly to selected consumers from our centralized call center;
 
  •  Distributed Retail Channel—through which we market refinancing and purchase money mortgage loans directly to consumers from local branches; and
 
  •  Wholesale Channel—through which we market our refinancing and purchase money mortgage loans to third party mortgage brokers.
 
We originate purchase money loans and refinance existing loans, including loans that we service. Our strategy is to mitigate the credit, market and interest rate risk from loan originations by either selling newly originated loans or placing them in GSE or government securitizations. We typically sell new loans within 30 days of origination, and we do not expect to hold any of the loans that we currently originate on our balance sheet on a long-term basis. At the time of sale, we have the option to retain the mortgage servicing rights on loans we originate.
 
Our origination capability differentiates us from other non-bank, high-touch loan servicers without an integrated origination platform by:
 
  •  providing us with an organic source of new loans to service as existing loans are repaid or otherwise liquidated as originated loans serviced by us typically generate higher returns than comparable mortgage servicing rights that we would acquire from a third party;
 
  •  providing an attractive supplementation to our servicing loss mitigation strategies by allowing us to modify and refinance mortgage loans, including loans that we service;
 
  •  creating a diversified source of revenue; and
 
  •  building brand recognition.
 
Legacy Assets and Other
 
We also have a legacy asset portfolio, which consists primarily of non-prime and nonconforming residential mortgage loans, most of which we originated from April to July 2007. In November 2009, we term-financed our legacy assets with non-recourse debt that requires no additional capital or equity contributions. In conjunction with the transaction, we reclassified our legacy assets to “held for investment” on our consolidated balance sheet, which allowed us to eliminate further mark-to-market accounting exposure on these assets. We continue to service these loans using our high-touch servicing model. Additionally, we consolidated certain securitization trusts where it was determined that we had both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially


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be significant to the VIE, pursuant to new consolidation accounting guidance related to VIEs adopted on January 1, 2010.
 
Industry Overview
 
Loan Servicing
 
According to Inside Mortgage Finance, there were $10.5 trillion in residential mortgage loans outstanding in the United States as of December 31, 2010, and each mortgage loan requires servicing. Loan servicers normally earn a servicing fee of 25 to 50 basis points per annum on the unpaid principal balance of loans serviced, as well as associated ancillary fees, such as late fees. Consequently, a loan servicer can create value for both itself and the owner of the mortgage loan by increasing the number of borrowers that remain current in their repayment obligations. Owners may include a lender, investor or residential mortgage-backed securities trust, in the case of a securitized pool of mortgages.
 
Loan servicing primarily involves the calculation, collection and remittance of principal and interest payments, the administration of mortgage escrow accounts, the collection of insurance claims, the administration of foreclosure procedures, the management of real estate owned and the making of required advances. Loan servicers play a key role in the residential mortgage market by providing loan servicing functions on behalf of the owners of loans including collecting the scheduled principal and interest payments, as well as taxes and insurance; performing customer service functions; and taking active steps to mitigate any potential losses associated with borrower delinquencies and defaults. Typically, a servicer is contractually obligated to service a mortgage loan in accordance with accepted servicing industry practices as well as applicable regulations and statutes. A servicer’s rights and obligations are governed by the pooling and servicing agreement for the underlying loans. A subservicer’s rights and obligations are governed by the subservicing agreement with the third party that owns the related mortgage servicing rights.
 
To the extent a borrower does not make a payment, servicers are generally required to make advances of principal and interest, taxes and insurance and legal fees until such time as the underlying property is liquidated or the servicer determines that additional advances will not be recoverable from future payments, proceeds or other collections on the mortgage loan. In the event of foreclosure, servicers are entitled to reimbursement of advances from the sale proceeds of the related property. Typically, in the event such proceeds are insufficient to reimburse the advances in full, which we refer to as a non-recoverable advance, servicers are entitled to reimbursement of advances from collections on other mortgage loans in the related residential mortgage-backed securities trust. For this reason, advances and the right of reimbursement are typically senior to the claims of holders of securities issued by the residential mortgage-backed securities trusts.
 
Loan Originations
 
According to Inside Mortgage Finance, total residential mortgage originations in the United States were $1.6 trillion in 2010, a decrease of 13% compared to 2009. Of the 2010 originations, approximately 87% were conforming mortgages guaranteed by GSEs, including Fannie Mae and Freddie Mac, or government agencies such as the Federal Housing Administration and the Department of Veterans Affairs. From 2006 to 2010, the annual aggregate principal balance of newly originated mortgage loans that were either insured or guaranteed by government agencies or sold to GSEs or into government securitizations increased from $1.1 trillion to $1.4 trillion, or at a compound annual growth rate, which we refer to as CAGR, of 6%.
 
The United States residential mortgage market consists of a primary mortgage market that links borrowers and lenders and a secondary mortgage market that links lenders and investors. In the primary mortgage market, residential mortgage lenders such as mortgage banking companies, commercial banks, savings institutions, credit unions and other financial institutions originate or provide mortgages to borrowers. Lenders obtain liquidity for originations in a variety of ways, including


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by selling mortgages or mortgage-related securities into the secondary mortgage market. Loan originators that are banks also have access to customer deposits to fund their originations business.
 
The secondary mortgage market consists of institutions engaged in buying and selling mortgages in the form of whole loans (i.e., mortgages that have not been securitized) and mortgage- related securities. Government-sponsored enterprises, such as Fannie Mae and Freddie Mac, and a government agency, Ginnie Mae, participate in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.
 
Industry Trends
 
Loan Servicing
 
In a weak economic and credit environment with elevated delinquencies and defaults, servicing becomes operationally more challenging and more capital intensive as servicers need to add and train staff to manage the increase in delinquent borrowers. In addition, servicers are generally required to make advances on delinquent mortgage loans for principal and interest payments, taxes, insurance, legal fees and property maintenance fees, all of which are typically recovered upon foreclosure or liquidation. According to the Mortgage Bankers Association, delinquent loans and foreclosures have increased from $0.6 trillion at December 2006 to $1.4 trillion at December 31, 2010. Furthermore, Fannie Mae estimates that as of December 31, 2010, it had $764 billion of assets within its own portfolio with characteristics that we believe make them credit-sensitive.
 
The majority of loan servicing in the United States is performed by the nation’s money center banks such as Bank of America, Wells Fargo, JPMorgan Chase and Citibank, which together service approximately 54% of all outstanding mortgage loans on one to four-family residences as of December 31, 2010. These bank-owned servicers mainly service conventional, performing mortgages and are most effective at routine account management of portfolios with low delinquencies that require limited interaction with borrowers. The traditional servicer model was constructed to process simple payments and minimize costs, and functioned well in environments characterized by low delinquencies and defaults. However, in the current environment of rising delinquencies, extensive foreclosures and elevated real estate owned activity, traditional servicers are experiencing higher operating costs, and their performance is declining due to the high level of foreclosures and liquidation processes. According to the Mortgage Bankers Association, from 2007 through 2010, approximately 3.4 million homes were lost to foreclosure and as of September 30, 2010, more than 3.5 million mortgages were in foreclosure or 90+ days delinquent.
 
We believe that there is a growing recognition that the incremental cost of high-touch servicing, with a strong emphasis on asset performance and foreclosure avoidance, is a value added service as the credit loss savings that result are greater than those realized from traditional loan servicing business models. Holders of residential mortgage credit risk are demanding better performance and many are moving the servicing of their loans to specialized servicing companies with expertise and focus on asset performance.
 
The passage of both the Emergency Economic Stabilization Act of 2008 on October 1, 2008, and the U.S. federal government’s Making Home Affordable Plan announced on February 18, 2009, which we refer to as the MHA, and other related government initiatives provided an advantage for servicers with loss mitigation expertise. The MHA provides a financial incentive to servicers to modify qualifying loans in accordance with the plan’s guidelines and requirements.
 
Loan Originations
 
Residential mortgage loans are generally originated through either a direct lending network or a mortgage brokerage network. A direct lending network consists of retail branches, Internet and telephone-based operations. Typical referral sources for a direct lending network include realtors, homebuilders, credit unions, small banks and affinity groups.


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The length of time from the origination or purchase of a mortgage loan to its sale or securitization generally ranges from 10 to 60 days, depending on a variety of factors including loan volume, product type, interest rates and capital market conditions. An important source of capital for the residential mortgage industry is warehouse lending. These facilities provide funding to mortgage loan originators until the loans are sold to investors in the secondary mortgage loan market.
 
The MHA and other similar initiatives, along with low interest rates and a high rate of refinancing activity, provide opportunities for servicers that also conduct originations to leverage their servicing portfolio by refinancing existing loans.
 
Our Strengths
 
We believe the following competitive strengths contribute to our market position and differentiate us from our competition.
 
Attractive Business Model with Strong Cash Flow
 
We have an attractive business model as one of the few high-touch servicers in the United States with an integrated loan origination platform.
 
Our Servicing Segment produces recurring, fee-based revenues based upon contractually established servicing fees, and we are exposed to minimal credit risk with respect to the mortgage loans that we service. We believe that we continue to demonstrate our ability to produce lower delinquency rates on the loans we service, including credit-sensitive loans, compared to our competitors, and we believe that we will continue to acquire mortgage servicing rights at attractive prices from mortgage investors or provide subservicing for third parties that value our servicing capabilities.
 
We believe that our Originations Segment differentiates us from other high-touch servicers without an origination platform by providing us with a more cost-effective alternative to purchasing new mortgage servicing rights as the unpaid principal balance of our existing servicing portfolio decreases over time; diversifying and stabilizing our revenue in a variety of interest rate environments; and building brand recognition.
 
We generate significant cash flow for debt service as a result of the profitability of our Operating Segments. We believe that our focus on asset performance and operational efficiency has enabled us to strengthen our relationships with the GSEs and other third parties and has allowed us to grow our earnings from our Operating Segments.
 
Substantial Liquidity and Access to Multiple Capital and Funding Sources
 
We maintain substantial levels of funding and liquidity through multiple capital and funding sources for our Operating Segments. We have access to multiple funding sources, and we believe that our liquidity sources are sufficient to meet our immediate and future needs. These sources include servicing advance lines to finance our Servicing Segment, warehouse lines to finance our Originations Segment and loans from GSEs to facilitate the acquisition of mortgage servicing rights. As of December 31, 2010, we had a total of $706.0 million of unused capacity under our existing servicing advance facilities and origination warehouse lines. We believe that our strong relationships with liquidity providers and our continued ability to access sufficient capital during the recent economic downturn demonstrate the depth of our liquidity and access to capital. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations.”


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Servicing Platform with Loss Mitigation Focus
 
We believe that, by focusing on personal contact with borrowers, our high-touch servicing approach reduces credit losses and maximizes cash collections for credit-sensitive loans. This highly flexible model allows for customization to meet individual borrower requirements, and is further differentiated by providing personal contact at critical borrower touch points, including via telephone, mail, electronic communications and other personal contact methods. Our approach facilitates strong relationships with borrowers and greater employee accountability for desired performance. We believe that our servicing expertise and focus on optimal outcomes reduces credit impairments and losses to loan investors. We believe that this model presents continued opportunities for growth.
 
Scalable Platform and Established Track Record
 
Establishing a servicing platform requires significant initial capital investments, infrastructure, licensing and expertise to properly service credit-sensitive loans, which creates substantial barriers to entry. We operate a highly scalable platform, with the capacity to add up to a total of approximately $15 billion of unpaid principal balance to our servicing operations within 90 to 120 days with minimal incremental fixed costs. We can service these additional accounts with our existing infrastructure, real estate and technology platform.
 
Additionally, we have used our high-touch servicing model and our mix of proprietary and commercially available technology solutions to establish a track record of superior performance in servicing credit-sensitive loans. The unpaid principal balance of the loans we serviced increased 406% from December 31, 2007 to December 31, 2010, primarily through acquiring mortgage servicing rights and entering into subservicing agreements. We believe these acquisitions and agreements can be attributed to our established track record in servicing credit-sensitive residential mortgage loans, and we believe that our track record, together with our scalable platform, positions us well relative to our competitors to acquire similar portfolios in the future.
 
Culture of Credit Loss Ownership and Accountability
 
Since our inception, our operating culture has emphasized superior operational and financial performance, credit loss ownership (our term for individual default specialist accountability for asset performance), employee development and customer relations. We establish financial and operational goals across all levels of the organization, and compensation for all of our employees is based upon achieving the desired results. As a result, we have a streamlined organizational structure that allows us to react to business needs and changes in an expeditious manner. We hire recent college graduates and teach them our business through a systematic training program. We primarily develop existing employees for management positions. We strongly endorse promotion from within and routinely identify and place senior level staff in our Manager in Training program as a developmental tool to prepare them for supervisory positions. Supervisors typically then rotate through progressively more complex management assignments to improve both their technical and managerial proficiency.
 
We believe that our culture of credit loss ownership and accountability has enabled us to outperform the industry. As of December 15, 2010, according to Loan Performance.com, our 60 or more day delinquency rate for our legacy assets (as a percentage of original balance) was approximately 12%, while the delinquency rate for the ABX 07-2 Mortgage Index was approximately 24%.
 
Stable and Seasoned Management Team
 
Our senior management team is comprised of experienced mortgage industry executives with an average of approximately 26 years in the industry and a track record of generating financial and operational improvements. Several members of our management team have held senior positions at other residential mortgage companies. In addition, our senior management team has remained in place through multiple business cycles and has a demonstrated ability to adapt to changing market conditions. We believe that the experience of our senior management team and its management philosophy are significant contributors to our operating performance.


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Our Strategy
 
Our primary goal is to increase the value of our loans and our clients’ loans by reducing delinquencies and credit losses. This goal is achieved through our culture, processes and expertise. We plan to grow our revenue and operating cash flow by employing the following business strategies:
 
Capitalizing on Industry Opportunities
 
We believe we are well positioned to benefit from the current trends in the residential mortgage industry. The disruption in the mortgage industry has resulted in limited access to funding and capital, lower than anticipated performance of residential portfolios and a strong demand for high-touch servicing. We believe that competitors with significant residential exposure or limited access to capital have shifted their operations to selling residential real estate assets, including mortgage servicing rights. This allows existing strong servicers the opportunity to acquire or subservice additional portfolios at attractive valuations. Additionally, due to a variety of economic factors, residential loan delinquencies and related losses are at historical highs prompting GSEs and other owners of residential mortgage loans to focus on home ownership preservation and servicing for superior credit performance. The heightened focus in these areas has led to a strong demand for high-touch servicers by these owners. Also, we believe that many of the largest loan servicers—who are experiencing unprecedented levels of delinquencies and losses—do not have sufficient internal capacity to perform high-touch servicing in their own portfolios and, as a result, may look to independent high-touch servicers to assist them in servicing their portfolios. As a result, we believe that there will continue to be strong demand for experienced high-touch servicers with a proven ability to improve loan performance. We also believe that there will be significant opportunities to continue to acquire mortgage servicing rights at attractive prices.
 
Maintaining and Growing Our Steady Fee-Based Servicing Portfolio
 
Our servicing business produces recurring, fee-based revenues based upon contractually established servicing fees. We intend to continue to utilize our established and scalable servicing platform to grow our servicing operations organically and through acquisitions. We believe that we will continue to benefit from our strong relationship with GSEs and other third party investors, which we believe will enable us to acquire additional servicing rights at attractive prices and subservicing contracts in order to grow our business. Additionally, we have invested in our loan administration and customer service servicing divisions to accommodate the increased scale and size of our portfolio, which allows us to service newly originated conventional mortgage loans at attractive return levels in a variety of operating and economic environments.
 
Continuing To Expand Our Originations Platform
 
Our Originations Segment diversifies our offering of mortgage services and further stabilizes our revenue stream by providing us with a natural hedge against fluctuations in prevailing interest rates. We have a diversified, multi-channel strategy to continue to build our conventional originations platform in order to organically replace servicing run-off. Through our origination platform, we are also able to create loan servicing assets at valuation levels below where our servicing competitors can purchase comparable mortgage servicing rights. Also, we can recapture loan payoffs in our existing servicing portfolio by providing origination services to our existing borrowers.
 
We believe that there are significant opportunities to originate loans for servicers and other financial institutions lacking origination capacity, and we intend to capitalize on these opportunities by expanding our retail channels. Our expansion efforts will focus primarily on purchase money lending, which is a stable origination source through various interest rate cycles. Unlike certain competitors who are required to utilize third party intermediaries in transactions with the GSEs and Ginnie Mae, we are a direct lender with the capability to sell loans directly to the GSEs and to securitize loans directly


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with Ginnie Mae. We believe that this capability allows us to control the credit quality of the loans we originate, thereby reducing our repurchase risk.
 
Engaging in Opportunistic Acquisitions and New Business Opportunities
 
There are numerous banks, insurance companies and other financial entities that have significant exposure to the residential mortgage sector. Our management, together with our dedicated servicing and origination relationship teams and our sponsor, Fortress Investment Group LLC, or Fortress, have extensive business and corporate expertise, receive numerous requests to review potential acquisition opportunities and continually conduct due diligence to identify potential opportunistic acquisitions. We are currently seeking out opportunities and believe there will continue to be significant opportunities to take advantage of the dislocation in the residential mortgage sector and acquire assets at attractive valuations. We intend to opportunistically grow our business through acquiring mortgage servicing rights, subservicing rights, servicing platforms and originations platforms. We may purchase assets and/or platforms of significant size. We believe there are several assets and platforms currently for sale in our industry and we are currently in the process of pursuing a number of such opportunities.
 
Company History
 
Nationstar Mortgage LLC is a Delaware limited liability company. We were formed in 1994 in Denver, Colorado as Nova Credit Corporation, a Nevada corporation. In 1997, we moved our executive offices and primary operations to Dallas, Texas and changed our name to Centex Credit Corporation. In 2001, Centex Credit Corporation was merged into Centex Home Equity Company, LLC, a Delaware limited liability company (“CHEC”). In 2006, FIF HE Holdings LLC, acquired all of our outstanding membership interests (the “Acquisition”), and we changed our name to Nationstar Mortgage LLC. Nationstar Capital Corporation, a Delaware corporation, is our wholly-owned subsidiary formed solely for the purpose of being a corporate co-issuer of the notes.
 
Fortress Investment Group
 
As of December 31, 2010, FIF HE Holdings LLC, a holding company, is the sole member of Nationstar Mortgage LLC, owning 100% of our outstanding membership interests. FIF HE Holdings LLC, in turn, is primarily owned by certain private equity funds managed by an affiliate of Fortress and company management. Fortress is a leading global investment management firm with approximately $44.6 billion in fee paying assets under management as of December 31, 2010. Fortress is headquartered in New York and has affiliates with offices in Dallas, Frankfurt, London, Los Angeles, New Canaan, Philadelphia, Rome, Singapore, Sydney and Tokyo.
 
Fortress has extensive experience and expertise in the residential mortgage and financial services sectors. Senior management members have managed businesses at many leading financial firms, including BlackRock, Goldman Sachs, Lehman Brothers and UBS. Fortress has a strong track record of investing in the residential mortgage sector, including current or prior investments in: AMRESCO Inc., Conseco Finance Corp., Capstead Mortgage Corp., Italfondiario S.p.A., American General Finance Inc., GreenPoint and Bombardier.
 
Risk Factors
 
Participation in this exchange offer involves substantial risk. You should carefully consider the risk factors set forth in the section entitled “Risk Factors” and the other information contained in this prospectus prior to participating in the exchange offer. See “Risk Factors” beginning on page 17.


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Ownership Structure
 
Set forth below is the ownership structure of Nationstar Mortgage LLC and its subsidiaries as of May 16, 2011.
 
(FLOW CHART)
 
Corporate Information
 
Our executive offices are located at 350 Highland Drive, Lewisville, Texas 75067 and our telephone number is (469) 549-2000.


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Summary of the Exchange Offer
 
Background On March 26, 2010, we issued $250,000,000 aggregate principal amount of Old Notes in an unregistered offering. In connection with that offering, we entered into a registration rights agreement on March 26, 2010 (the “Registration Rights Agreement”) in which we agreed, among other things, to complete this exchange offer. Under the terms of the exchange offer, you are entitled to exchange Old Notes for New Notes evidencing the same indebtedness and with substantially similar terms. You should read the discussion under the heading “Description of the Notes” for further information regarding the New Notes.
 
The Exchange Offer We are offering to exchange, for each $1,000 aggregate principal amount of our Old Notes validly tendered and accepted, $1,000 aggregate principal amount of our New Notes.
 
We will not pay any accrued and unpaid interest on the Old Notes that we acquire in the exchange offer. Instead, interest on the notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including March 26, 2010, the date on which we issued the Old Notes.
 
As of the date of this prospectus, approximately $250,000,000 aggregate principal amount of the Old Notes are outstanding.
 
Denominations of New Notes Tendering holders of Old Notes must tender Old Notes in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. New Notes will be issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof.
 
Expiration Date The exchange offer will expire at 5:00 p.m., New York City time, on          , 2011, unless we extend or terminate the exchange offer in which case the “Expiration Date” will mean the latest date and time to which we extend the exchange offer.
 
Settlement Date The settlement date of the exchange offer will be as soon as practicable after the Expiration Date of the exchange offer.
 
Withdrawal of Tenders Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date.
 
Conditions to the Exchange Offer Our obligation to consummate the exchange offer is subject to certain customary conditions, which we may assert or waive. See “Description of the Exchange Offer—Conditions to the Exchange Offer.”
 
Procedures for Tendering To participate in the exchange offer, you must follow the automatic tender offer program (“ATOP”), procedures established by The Depository Trust Company (“DTC”), for tendering Old Notes held in book-entry form. The ATOP procedures require that the exchange agent receive, prior to the Expiration Date of the exchange offer, a computer-


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generated message known as an “agent’s message” that is transmitted through ATOP and that DTC confirm that:
 
• DTC has received instructions to exchange your Old Notes; and
 
• you agree to be bound by the terms of the letter of transmittal.
 
For more details, please read “Description of the Exchange Offer—Terms of the Exchange Offer” and “Description of the Exchange Offer—Procedures for Tendering.” If you elect to have Old Notes exchanged pursuant to this exchange offer, you must properly tender your Old Notes prior to 5:00 p.m., New York City time, on the Expiration Date. All Old Notes validly tendered and not properly withdrawn will be accepted for exchange. Old Notes may be exchanged only in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof.
 
Consequences of Failure to Exchange If we complete the exchange offer and you do not participate in it, then:
 
• your Old Notes will continue to be subject to the existing restrictions upon their transfer;
 
• we will have no further obligation to provide for the registration under the Securities Act of those Old Notes except under certain limited circumstances; and
 
• the liquidity of the market for your Old Notes could be adversely affected.
 
Taxation The exchange pursuant to the exchange offer generally will not be a taxable event for U.S. federal income tax purposes. See “Certain U.S. Federal Income Tax Considerations” in this prospectus.
 
Use of Proceeds We will not receive any cash proceeds from the issuance of the New Notes in this exchange offer.
 
Exchange Agent Wells Fargo Bank, National Association is the exchange agent for the exchange offer.


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Summary of the New Notes
 
Issuers Nationstar Mortgage LLC, a Delaware limited liability company, and Nationstar Capital Corporation, a Delaware corporation.
 
Securities Offered $250,000,000 aggregate principal amount of 10.875% Senior Notes due April 1, 2015.
 
Maturity Date April 1, 2015.
 
Interest Rate 10.875% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2010. Interest on the New Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including March 26, 2010.
 
Guarantees The New Notes will be guaranteed on an unsecured senior basis by each of our existing and future domestic subsidiaries, other than our securitization and certain finance subsidiaries and subsidiaries that in the future we designate as excluded restricted and unrestricted subsidiaries.
 
Ranking The New Notes and the guarantees will be our and the guarantors’ general unsecured senior indebtedness, respectively, and will:
 
• rank equally in right of payment to all of our and the guarantors’ existing and future indebtedness and other obligations that are not, by their terms, expressly subordinated in right of payment to the notes and the guarantees;
 
• rank senior in right of payment to any of our and the guarantors’ existing and future senior subordinated and subordinated indebtedness and other obligations that are, by their terms, expressly subordinated in right of payment to the notes and the subsidiary guarantees; and
 
• be effectively junior in right of payment to all of our and the guarantors’ existing and future senior secured indebtedness and other obligations to the extent of the value of the assets securing such indebtedness and other obligations.
 
Form and Denomination The New Notes will be issued in fully-registered form. The New Notes will be represented by one or more global notes, deposited with the trustee as custodian for DTC and registered in the name of Cede & Co., DTC’s nominee. Beneficial interests in the global notes will be shown on, and any transfers will be effective only through, records maintained by DTC and its participants.
 
The New Notes will be issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof.
 
Optional Redemption We may redeem the New Notes, in whole or in part, at any time prior to April 1, 2013, at a price equal to 100% of the aggregate principal amount of the New Notes plus the applicable “make whole” premium, as described in “Description of the New Notes—Redemption—Optional Redemption,” plus accrued and unpaid interest, if any, to the applicable redemption date.


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We may redeem the New Notes, in whole or in part, at any time on or after April 1, 2013, at the applicable redemption price specified in “Description of the New Notes—Redemption—Optional Redemption,” plus accrued and unpaid interest, if any, to the applicable redemption date.
 
In addition, we may redeem up to 35% of the aggregate principal amount of the New Notes at any time on or prior to April 1, 2013 with the net cash proceeds from certain equity offerings at the applicable redemption price specified “Description of the New Notes—Redemption—Optional Redemption,” plus accrued and unpaid interest, if any, to the applicable redemption date.
 
Change of Control If certain change-of-control events occur, we must offer to repurchase all of the New Notes at 101% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
 
Asset Sales If we sell assets under certain circumstances, we will be required to make an offer to purchase the New Notes at their face amount, plus accrued and unpaid interest, if any, as of the purchase date.
 
Absence of a Public Market The New Notes are new securities for which there currently is no market and we cannot assure you that any public market for the New Notes will develop or be sustained.
 
Certain Covenants The indenture governing the New Notes will, among other things, limit our ability and the ability of our subsidiaries to:
 
• incur or guarantee additional indebtedness;
 
• incur liens;
 
• pay dividends on or make distributions in respect of our capital stock or make other restricted payments;
 
• make investments;
 
• consolidate, merge, sell or otherwise dispose of certain assets; and
 
• enter into transactions with our affiliates.
 
These covenants are subject to important exceptions, limitations and qualifications as described in “Description of the New Notes—Certain Covenants.”
 
Listing We do not intend to list the New Notes on any securities exchange.
 
Governing Law The New Notes are governed by, and construed in accordance with, the laws of the State of New York, without regard to conflicts of laws principles thereof.
 
Book-Entry Depository DTC.
 
Trustee Wells Fargo Bank, National Association.
 
Risk Factors You should refer to the section entitled “Risk Factors” for a discussion of material risks you should carefully consider before deciding to invest in the New Notes.


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SUMMARY CONSOLIDATED FINANCIAL DATA
 
The following tables summarize consolidated financial information for our business. You should read these tables along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
 
The summary consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the summary consolidated balance sheet data as of December 31, 2009 and 2010 have been derived from our audited financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 31, 2008 has been derived from our audited financial statements, which is not included in this prospectus.
 
                         
    Year Ended December 31,  
    2008     2009     2010  
    (in thousands)  
Statement of Operations Data:
                       
Revenues:
                       
Total fee income
  $ 74,007     $ 100,218     $ 184,084  
Gain (loss) on mortgage loans held for sale
    (86,663 )     (21,349 )     77,344  
                         
Total revenues
    (12,656 )     78,869       261,428  
Total expenses and impairments
    147,777       142,367       220,976  
Other income (expense):
                       
Interest income
    92,060       52,518       98,895  
Interest expense
    (65,548 )     (69,883 )     (116,163 )
Loss on interest rate swaps and caps
    (23,689 )     (14 )     (9,801 )
Fair value changes in ABS securitizations
                (23,297 )
                         
Total other income (expense)
    2,823       (17,379 )     (50,366 )
                         
Net income (loss)
  $  (157,610 )   $  (80,877 )   $ (9,914 )
                         
 
                         
    As of December 31,
    2008   2009   2010
    (in thousands)
Balance Sheet Data:
                       
Cash and cash equivalents
  $ 9,357     $ 41,645     $ 21,223  
Mortgage servicing rights
    110,808       114,605       145,062  
Total assets
      1,122,001        1,280,185       1,947,181  
Unsecured senior notes
                244,061  
Notes payable
    810,041       771,857       709,758  
Nonrecourse debt—Legacy Assets
          177,675       138,662  
ABS nonrecourse debt
                496,692  
Total liabilities
    866,079       1,016,362       1,690,809  
Total members’ equity
    255,922       263,823       256,372  
 
                         
    Year Ended December 31,
    2008   2009   2010
    (in thousands)
Other Data:
                       
Net cash provided by (used in):
                       
Operating activities
  $ 40,212     $  (83,641 )   $ (101,653 )
Investing activities
     (34,643 )     29,983       101,196  
Financing activities
    (37,463 )     85,946       (19,965 )
Adjusted EBITDA (1) (non-GAAP measure)
    23,141       48,644       65,306  
Operating Segments:
                       
Interest expense from unsecured senior notes
                24,628  
Change in fair value of mortgage servicing rights
    11,701       27,915       6,043  
Depreciation and amortization
    1,172       1,542       1,873  
Share-based compensation
    1,633       579       8,999  


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Notes
 
(1) Adjusted EBITDA is a key performance measure used by management in evaluating the performance of our segments. Adjusted EBITDA represents our Operating Segments’ income (loss), and excludes income and expenses that relate to the financing of the unsecured senior notes, depreciable (or amortizable) asset base of the business, income taxes (if any), exit costs from our 2007 restructuring and certain non-cash items. Adjusted EBITDA excludes results from our legacy asset portfolio and certain securitization trusts that were consolidated upon adoption of the new accounting guidance eliminating the concept of QSPE.
 
Adjusted EBITDA provides us with a key measure of our Operating Segments’ performance as it assists us in comparing our Operating Segments’ performance on a consistent basis. Management believes Adjusted EBITDA is useful in assessing the profitability of our core business and uses Adjusted EBITDA in evaluating our operating performance as follows:
 
•  Financing arrangements for our Operating Segments are secured by assets that are allocated to these segments. Interest expense that relate to the financing of the unsecured senior notes is not considered in evaluating our operating performance because this obligation is serviced by the excess earnings from our Operating Segments after the debt obligations that are secured by their assets.
 
•  To monitor operating costs of each Operating Segment excluding the impact from depreciation, amortization and fair value change of the asset base, exit costs from our 2007 restructuring and non-cash operating expense, such as share-based compensation. Operating costs are analyzed to manage costs per our operating plan and to assess staffing level, implementation of technology based solutions, rent and other general and administrative costs.
 
Management does not assess the growth prospect and profitability of our legacy asset portfolio and certain securitization trusts that were consolidated upon adoption of the new accounting guidance, except to the extent to assess cash flows from the assets in the legacy asset portfolio are sufficient to service its debt obligations.
 
We also use Adjusted EBITDA (with additional adjustments) to measure our compliance with covenants such as leverage coverage ratios for our unsecured senior notes.
 
Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under generally accepted accounting principles in the United States (“GAAP”). Some of these limitations are:
 
•  Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
 
•  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
 
•  Adjusted EBITDA does not reflect the cash requirements necessary to service principal payments related to the financing of the business;
 
•  Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our corporate debt;
 
•  although depreciation and amortization and changes in fair value of mortgage servicing rights are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
 
•  other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.


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Because of these and other limitations, Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. Adjusted EBITDA is presented to provide additional information about our operations. Adjusted EBITDA is a non-GAAP measure and should be considered in addition to, but not as a substitute for or superior to, operating income, net income, operating cash flow and other measures of financial performance prepared in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.
 
                         
    Year Ended December 31,  
    2008     2009     2010  
    (in thousands)  
 
Net Income (Loss) to Adjusted EBITDA Reconciliation
                       
Net income (loss)
  $  (157,610 )   $  (80,877 )   $ (9,914 )
Add:
                       
Net (income) loss from Legacy Portfolio and Other
    164,738       97,263       24,806  
                         
Net income (loss) from Operating Segments
    7,128       16,386       14,892  
Adjust for:
                       
Interest expense from unsecured senior notes
                24,628  
Depreciation and amortization
    1,172       1,542       1,873  
Change in fair value of mortgage servicing rights
    11,701       27,915       6,043  
Exit costs(a)
    1,507       2,222        
Share-based compensation
    1,633       579       8,999  
Fair value changes on interest rate swap(b)
                9,801  
Ineffective portion of cash flow hedge
                (930 )
                         
Adjusted EBITDA
  $ 23,141     $ 48,644     $ 65,306  
                         
 
 
(a) Relates to restructuring program initiated in 2007, which included closing several offices and the termination of a portion of our workforce. Restructuring charges for the years ended December 31, 2008 and 2009, are primarily due to reserves on future lease payments.
 
(b) Relates to an interest rate swap agreement which was treated as an economic hedge under ASC 815 since inception to September 30, 2010.


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RISK FACTORS
 
You should carefully consider the risks described below, together with all the other information included in this prospectus, before deciding to participate in the exchange offer and to invest in the New Notes. See also “Cautionary Statement Regarding Forward-Looking Statements” in this prospectus.
 
Risks Related to Our Business and Industry
 
Our foreclosure proceedings in certain states have been delayed due to inquiries by certain state Attorneys General, court administrators, and state and federal governmental agencies, the outcome of which could have a negative effect on our operations or liquidity.
 
Certain state Attorneys General, court administrators and governmental agencies, as well as representatives of the federal government, have issued letters of inquiry to mortgage servicing companies, including us, requesting written responses to questions regarding policies and procedures, especially with respect to notarization and affidavit procedures. These requests or any subsequent administrative, judicial or legislative actions taken by these regulators court administrators or other governmental entities may subject us to fines and other sanctions, including a foreclosure moratorium or suspension. Additionally, because we do business in all fifty states, we may be affected by regulatory actions or court decisions that are taken on the individual state level.
 
In addition to these inquiries, several state Attorneys General have requested that certain mortgage servicers, including us, suspend foreclosure proceedings pending internal review to ensure compliance with applicable law, and we have received requests from four such state Attorneys General. Pursuant to these requests and in light of industry-wide press coverage regarding mortgage foreclosure documentation practices, we, as a precaution, previously delayed foreclosure proceedings in 23 states, so that we may evaluate our foreclosure practices and underlying documentation. While we have resumed these previously delayed proceedings, such inquiries, as well as continued court backlog and emerging court processes may cause an extended delay in the foreclosure process in certain states.
 
Even in states where we have not suspended foreclosure proceedings or where we have lifted or will soon lift any such delayed foreclosures, we have faced, and may continue to face, increased delays and costs in the foreclosure process. For example, we have incurred, and may continue to incur, additional costs related to the re-execution and re-filing of certain documents. We may also be required to take other action in our capacity as a servicer in connection with pending foreclosures. In addition, the current legislative and regulatory climate could lead borrowers to contest foreclosures who would not have contested such foreclosures under ordinary circumstances, and we may incur increased litigation costs if the validity of a foreclosure action is challenged by a borrower. Delays in foreclosure proceedings could also require us to make additional servicing advances and draw on our servicing advance facilities, or delay the recovery of advances, which could materially affect our earnings and liquidity and increase our need for capital.
 
The Dodd-Frank Act could increase our regulatory compliance burden and associated costs, limit our future capital raising strategies, and place restrictions on certain origination and servicing operations.
 
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things: (1) the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation between federal agencies; (2) the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products; (3) the establishment of strengthened capital and prudential standards for banks and bank holding companies; (4) enhanced regulation of financial markets, including derivatives and securitization markets; (5) amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations.


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The exact scope of and applicability of many of these requirements to us are currently unknown, as the regulations to implement the Dodd-Frank Act generally have not yet been finalized. These provisions of Dodd-Frank could increase our regulatory compliance burden and associated costs and place restrictions on certain origination and servicing operations, all of which could in turn adversely affect our business, financial condition or results of operations.
 
The enforcement consent orders by certain federal agencies against the largest servicers related to foreclosure practices could impose additional compliance costs on our servicing business.
 
On April 13, 2011, the four federal agencies overseeing certain aspects of the mortgage market: the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”), the Office of Thrift Supervision (“OTS”), and the Federal Deposit Insurance Corporation (“FDIC”), entered into enforcement consent orders with 14 of the largest mortgage servicers in the United States regarding foreclosure practices. The enforcement actions require the servicers, among other things: (1) to promptly correct deficiencies in residential mortgage loan servicing and foreclosure practices; (2) to make significant modifications in practices for residential mortgage loan servicing and foreclosure processing, including communications with borrowers and limitations on dual-tracking, which occurs when servicers continue to pursue foreclosure during the loan modification process; (3) to ensure that foreclosures are not pursued once a mortgage has been approved for modification and to establish a single point of contact for borrowers throughout the loan modification and foreclosure processes; and (4) to establish robust oversight and controls pertaining to their third-party vendors, including outside legal counsel, that provide default management or foreclosure services. While these enforcement consent orders are considered as not preemptive to the state actions, it remains to be seen how state actions and proceedings will be affected by the federal consents.
 
Although we are not a party to the above enforcement consent orders, we might become subject to the terms of the consent orders if (1) we subservice loans for the servicers that are parties to the enforcement consent orders; (2) the agencies begin to enforce the consent orders by looking downstream to our arrangement with certain mortgage servicers; (3) our investors request that we comply with certain aspects of the consent orders, or (4) we otherwise find it prudent to comply with certain aspects of the consent orders. In addition, the practices set forth in such enforcement consent orders may be adopted by the industry as a whole, forcing us to comply with them in order to follow standard industry practices or required by our servicing agreements. Changes to our servicing practices would increase compliance costs for our servicing business, which could materially and adversely affect our financial condition or results of operations.
 
The continued deterioration of the residential mortgage market may adversely affect our business, financial condition or results of operations.
 
Since mid-2007, adverse economic conditions, including high unemployment, have impacted the residential mortgage market, resulting in unprecedented delinquency, default and foreclosure rates, leading to increased loss severities on all types of residential mortgage loans due to sharp declines in residential real estate values. Falling home prices have resulted in higher loan-to-value ratios and combined loan-to-value ratios, which yield lower recoveries in foreclosure, and result in an increase in loss severities above those that would have been realized had property values remained the same or continued to increase. As loan-to-value ratios increase, borrowers are left with equity in their homes that is not sufficient to permit them to refinance their existing loans. This may also give borrowers an incentive to default on their mortgage loan even if they have the ability to make principal and interest payments, which we refer to as strategic defaults.
 
Adverse economic conditions may also impact our Originations Segment. Declining home prices and increasing loan-to-value ratios may preclude many potential borrowers, including borrowers whose existing loans we service, from refinancing their existing loans. An increase in prevailing interest rates could decrease our origination volume through our Consumer Direct Retail originations channel, our


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largest originations channel by volume from December 31, 2006 to December 31, 2010, because this channel focuses predominantly on refinancing existing mortgage loans.
 
A continued deterioration or a delay in any recovery in the residential mortgage market may reduce the number of mortgages we service or new mortgages that we originate, reduce the profitability of mortgages currently serviced by us or adversely affect our ability to sell mortgage loans originated by us or increase delinquency rates. Any of the foregoing could adversely affect our business, financial condition or results of operations.
 
We may experience serious financial difficulties as some servicers and originators have experienced.
 
Since late 2006, a number of servicers and originators of residential mortgage loans have experienced serious financial difficulties and, in some cases, have gone out of business. These difficulties have resulted, in part, from declining markets for their mortgage loans as well as from claims for repurchases of mortgage loans previously sold under provisions that require repurchase in the event of early payment defaults or for breaches of representations and warranties regarding loan quality and certain other loan characteristics. Higher delinquencies and defaults may contribute to these difficulties by reducing the value of mortgage loan portfolios and requiring originators to sell their portfolios at greater discounts to par. In addition, the cost of servicing an increasingly delinquent mortgage loan portfolio may be rising without a corresponding increase in servicing compensation. The value of many residual interests retained by sellers of mortgage loans in the securitization market has also been declining. Overall origination volumes are down significantly in the current economic environment. According to Inside Mortgage Finance, total U.S. residential mortgage origination volume decreased from $3.0 trillion in 2006 to $1.6 trillion in 2010. Any of the foregoing could adversely affect our business, financial condition or results of operations.
 
Borrowers with adjustable rate mortgage loans are especially exposed to increases in monthly payments and they may not be able to refinance, which could cause delinquency, default and foreclosure and therefore adversely affect our business.
 
As of December 31, 2010, adjustable rate mortgage loans by count made up approximately 14% of our servicing portfolio. Borrowers with adjustable rate mortgage loans are being exposed to increased monthly payments when the related mortgage loan’s interest rate adjusts upward from an initial fixed rate or a low introductory rate, as applicable, to the rate computed in accordance with the applicable index and margin. Borrowers with adjustable rate mortgage loans seeking to refinance their mortgage loans to avoid increased monthly payments as a result of an upwards adjustment of the mortgage loan’s interest rate may no longer be able to find available replacement loans at comparably low interest rates. This increase in borrowers’ monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers with adjustable rate mortgage loans, which may cause delinquency, default and foreclosure.
 
A significant change in delinquencies for the loans we service could adversely affect our financial results.
 
Delinquency rates have a significant impact on our revenues, our expenses and on the valuation of our mortgage servicing rights as follows:
 
  •  Revenue.  An increase in delinquencies will result in lower revenue for loans that we service for GSEs because we only collect servicing fees from government-sponsored enterprises for performing loans. Additionally, while increased delinquencies generate higher ancillary fees, including late fees, these fees are not likely to be recoverable in the event that the related loan is liquidated. In addition, an increase in delinquencies lowers the interest income we receive on cash held in collection and other accounts.


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  •  Expenses.  An increase in delinquencies will result in a higher cost of service due to the increased time and effort required to collect payments from delinquent borrowers. It may also result in an increase in interest expense as a result of an increase in our advancing obligations.
 
  •  Liquidity.  An increase in delinquencies also could negatively impact our liquidity because of an increase in borrowing under our advance facilities.
 
  •  Valuation of mortgage servicing rights.  We base the price we pay for mortgage servicing rights on, among other things, our projections of the cash flows from the related pool of mortgage loans. Our expectation of delinquencies is a significant assumption underlying those cash flow projections. If delinquencies were significantly greater than expected, the estimated fair value of our mortgage servicing rights could be diminished. When the estimated fair value of mortgage servicing rights is reduced, we would suffer a loss, which has a negative impact on our financial results.
 
A further increase in delinquency rates could therefore adversely affect our business, financial condition or results of operations.
 
Decreasing property values have caused an increase in loan-to-value ratios, resulting in borrowers having little or negative equity in their property, which may reduce new loan originations and provide incentive to borrowers to strategically default on their loans.
 
According to CoreLogic, from December 2006 to December 2010, the number of borrowers who owe more on a related mortgage loan than the property is worth, or have negative equity in their property, has increased from 7% to 23%. We believe that borrowers with negative equity in their properties are more likely to strategically default on mortgage loans and that a significant increase in strategic defaults could materially affect our business. Also, with the exception of loans modified under the MHA, we are unable to refinance loans with high loan-to-value ratios. Increased loan-to-value ratios could reduce our ability to originate loans for borrowers with low or negative equity and could adversely affect our business, financial condition or results of operations.
 
The industry in which we operate is highly competitive.
 
We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory and technological changes. In the servicing industry, we face competition in areas such as fees and performance in reducing delinquencies and entering successful modifications. Competition to service mortgage loans comes primarily from large commercial banks and savings institutions. These financial institutions generally have significantly greater resources and access to capital than we do, which gives them the benefit of a lower cost of funds. Additionally, our servicing competitors may decide to modify their servicing model to compete more directly with our servicing model, or our servicing model may generate lower margins as a result of competition or as overall economic conditions improve.
 
In the mortgage loan originations industry, we face competition in such areas as mortgage loan offerings, rates, fees and customer service. Competition to originate mortgage loans comes primarily from large commercial banks and savings institutions. These financial institutions generally have significantly greater resources and access to capital than we do, which gives them the benefit of a lower cost of funds.
 
In addition, technological advances and heightened e-commerce activities have increased consumers’ accessibility to products and services generally. This has intensified competition among banking as well as non-banking companies in offering mortgage loans and loan servicing. We may be unable to compete successfully in our industries and this could adversely affect our business, financial condition and results of operations.


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We might not be able to maintain or grow our business if we can not identify and acquire mortgage servicing rights or enter into additional subservicing agreements on favorable terms.
 
From December 31, 2007 to December 31, 2010, we have grown the aggregate unpaid principal balance of the loans we service from $12.7 billion to $64.2 billion, primarily through acquiring mortgage servicing rights and entering into subservicing agreements. Our servicing portfolio is subject to “run off,” meaning that mortgage loans serviced by us may be repaid at maturity, prepaid prior to maturity, refinanced with a mortgage not serviced by us or liquidated through foreclosure, deed-in-lieu of foreclosure or other liquidation process or repaid through standard amortization of principal. As a result, our ability to maintain the size of our servicing portfolio depends on our ability to originate additional mortgages and to acquire the right to service additional pools of residential mortgages. We may not be able to acquire servicing rights or enter into additional subservicing agreements on terms favorable to us or at all. In determining the purchase price for servicing rights, management makes certain assumptions, many of which are beyond our control, including, among other things:
 
  •  the rates of prepayment and repayment within the underlying pools of mortgage loans;
 
  •  projected rates of delinquencies, defaults and liquidations;
 
  •  future interest rates;
 
  •  our cost to service the loans;
 
  •  ancillary fee income; and
 
  •  amounts of future servicing advances.
 
We may not be able to realize our significant investments in personnel and our technology platform if we cannot identify and acquire mortgage servicing rights or enter into additional subservicing agreements on favorable terms.
 
We have made, and expect to continue to make, significant investments in personnel and our technology platform to allow us to service additional loans. In particular, prior to acquiring a large portfolio of mortgage servicing rights or entering into a large subservicing contract, we invest significant resources in recruiting, training, technology and systems. We may not realize the expected benefits of these investments to the extent we are unable to increase the pool of residential mortgages serviced, or we do not appropriately value the mortgage servicing rights that we do purchase. Any of the foregoing could adversely affect our business, financial condition and results of operations.
 
We may not realize all of the anticipated benefits of potential future acquisitions.
 
Our ability to realize the anticipated benefits of potential future acquisitions of servicing portfolios, originations platforms and/or companies will depend, in part, on our ability to scale-up to appropriately service any such assets, and/or integrate the businesses of such acquired companies with our business. The process of acquiring assets and/or companies may disrupt our business, and may not result in the full benefits expected. The risks associated with acquisitions include, among others:
 
  •  coordinating market functions;
 
  •  unanticipated issues in integrating information, communications and other systems;
 
  •  unanticipated incompatibility of purchasing, logistics, marketing and administration methods;
 
  •  retaining key employees; and
 
  •  the diversion of management’s attention from ongoing business concerns.
 
Moreover, the success of any acquisition will depend upon our ability to effectively integrate the acquired servicing portfolios, origination platforms or businesses. The acquired servicing portfolios, originations platforms or businesses may not contribute to our revenues or earnings to any material


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extent, and cost savings and synergies we expect at the time of an acquisition may not be realized once the acquisition has been completed. If we inappropriately value the assets we acquire or the value of the assets we acquire declines after we acquire them, the resulting charges may negatively affect the carrying value of the assets on our balance sheet and our earnings. Furthermore, if we incur additional indebtedness to finance an acquisition, the acquired business may not be able to generate sufficient cash flow to service that additional indebtedness. Unsuitable or unsuccessful acquisitions could adversely affect our business, financial condition and results of operations.
 
We may be unable to obtain sufficient capital to meet the financing requirements of our business.
 
Our financing strategy includes the use of significant leverage. Accordingly, our ability to finance our operations and repay maturing obligations rests in large part on our ability to borrow money. We are generally required to renew our financing arrangements each year, which exposes us to refinancing and interest rate risks. In addition, a large portion of our outstanding debt, including our MBS Advance Financing Facility, our ABS Advance Financing Facility, our MSR Notes, our $300 Million Warehouse Facility, our $100 Million Warehouse Facility, our $75 Million Warehouse Facility and our GSE ASAP+ Short-Term Financing Facility, matures prior to 2013. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Summary of Other Indebtedness.” Our ability to refinance existing debt and borrow additional funds is affected by a variety of factors including:
 
  •  limitations imposed on us under the notes and other financing agreements that contain restrictive covenants and borrowing conditions that may limit our ability to raise additional debt;
 
  •  the decline in liquidity in the credit markets;
 
  •  prevailing interest rates;
 
  •  the strength of the lenders from whom we borrow;
 
  •  borrowing on advance facilities is limited by the amount of eligible collateral pledged and may be less than the borrowing capacity of the facility; and
 
  •  accounting changes that may impact calculations of covenants in our debt agreements.
 
In the ordinary course of our business, we periodically borrow money or sell newly-originated loans to fund our servicing and origination operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Our ability to fund current operations and meet our service advance obligations depends on our ability to secure these types of financings on acceptable terms and to renew or replace existing financings as they expire. Such financings may not be available with the GSEs or other counterparties on acceptable terms or at all.
 
An event of default, a negative ratings action by a rating agency, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit—similar to the market conditions that we have experienced during the last two years—may increase our cost of funds and make it difficult for us to renew existing credit facilities and obtain new lines of credit. We intend to continue to pursue opportunities to acquire loan servicing portfolios, originations platforms and/or businesses that engage in loan servicing and/or loan originations. Our liquidity and capital resources may be diminished by any such transactions. Additionally, we believe that a significant acquisition may require us to raise additional capital to facilitate such a transaction, which may not be available on acceptable terms or at all.
 
The Basel Committee recently announced the final framework for strengthening capital requirements, known as Basel III, which if implemented by U.S. bank regulatory agencies, will increase the cost of funding on banking institutions that we rely on for financing. Such Basel III requirements could reduce our sources of funding and increase the costs of originating and servicing mortgage loans. If we are unable to obtain sufficient capital on acceptable terms for any of the foregoing reasons, this could adversely affect our business, financial condition or results of operations.


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We may not be able to continue to grow our loan origination volume.
 
Our loan origination business consists of refinancing existing loans and, increasingly, providing purchase money loans to homebuyers. The origination of purchase money mortgage loans is greatly influenced by traditional business clients in the home buying process such as realtors and builders. As a result, our ability to secure relationships with such traditional business clients will influence our ability to grow our purchase money mortgage loan volume and, thus, our loan origination business.
 
As we grow our retail origination business, we may not be able to receive the necessary volume of referrals or compete successfully with other retail branches in the communities. In addition, we may not recover investments made in acquiring or establishing branches or achieve margins acceptable to us. Our wholesale origination business operates largely through third party mortgage brokers who are not contractually obligated to do business with us. Further, our competitors also have relationships with our brokers and actively compete with us in our efforts to expand our broker networks. Accordingly, we may not be successful in maintaining our existing relationships or expanding our broker networks.
 
While we intend to use sales lead aggregators and Internet marketing to reach new borrowers, our Consumer Direct Retail origination platform may not succeed because of the referral-driven nature of our industry. Further, our largest customer base consists of the borrowers whose existing loans we service. Because we primarily service credit-sensitive loans, many of our existing servicing customers may not be able to qualify for conventional mortgage loans with us and/or may pose a higher credit risk than other consumers. Furthermore, our Consumer Direct Retail origination platform focuses predominantly on refinancing existing mortgage loans. This type of origination activity is sensitive to increases in interest rates. If we are unable to continue to grow our loan origination business, this could adversely affect our business, financial condition or results of operations.
 
Our counterparties may terminate our servicing rights and subservicing contracts.
 
The owners of the loans we service and the primary servicers for the loans we subservice, may, under certain circumstances, terminate our mortgage servicing rights or subservicing contracts, respectively.
 
As is standard in the industry, under the terms of our master servicing agreement with GSEs, they have the right to terminate us as servicer of the loans we service on their behalf at any time and also have the right to cause us to sell the mortgage servicing rights to a third party. In addition, some may also have the right to require us to assign the mortgage servicing rights to a subsidiary and to sell our equity interest in the subsidiary to a third party. Under our subservicing contracts, the primary servicers for whom we conduct subservicing activities have the right to terminate our subservicing rights with or without cause, with little notice and little to no compensation. In November and December 2010, through our relationship with the same GSE, we boarded subservicing rights totaling approximately $25 billion in unpaid principal balance. We expect to continue to acquire subservicing rights, which could exacerbate these risks.
 
If we were to have our servicing or subservicing rights terminated on a material portion of our servicing portfolio, this could adversely affect our business, financial condition and results of operations.
 
Federal, state and local laws and regulations may materially adversely affect our business.
 
Federal, state and local governments have recently proposed or enacted numerous laws, regulations and rules related to mortgage loans generally, and foreclosure actions in particular. These laws, regulations and rules may result in delays in the foreclosure process, reduced payments by borrowers, modification of the original terms of mortgage loans, permanent forgiveness of debt and/or increased servicing advances. In some cases, local governments have ordered moratoriums on foreclosure activity, which prevent a servicer or trustee, as applicable, from exercising any remedies


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they might have in respect of liquidating a severely delinquent mortgage loan. Several courts also have taken unprecedented steps to slow the foreclosure process or prevent foreclosure altogether.
 
Due to the highly regulated nature of the residential mortgage industry, we are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our servicing and originations business and the fees we may charge. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits. A material failure to comply with any of these laws or regulations could subject us to lawsuits or governmental action, and this could adversely affect our business, financial condition and results of operations.
 
In addition, there continue to be changes in legislation and licensing in an effort to simplify the consumer mortgage experience, which require technology changes and additional implementation costs for loan originators. We expect legislative changes will continue in the foreseeable future, which may increase our operating expenses.
 
Any of these changes in the law could adversely affect our business, financial condition or results of operations. See “Business—Regulation.”
 
Unlike competitors that are banks, we are subject to state licensing requirements and substantial compliance costs.
 
Because we are not a depository institution, we do not benefit from a federal exemption to state mortgage banking, loan servicing or debt collection licensing and regulatory requirements. We must comply with state licensing requirements in all fifty states and the District of Columbia, and we are sensitive to regulatory changes that may increase our costs through stricter licensing laws, disclosure laws or increased fees or that may impose conditions to licensing that we or our personnel are unable to meet. Future state legislation and changes in regulation may significantly increase the compliance costs on our operations or reduce the amount of ancillary fees, including late fees that we may charge to borrowers. This could make our business cost-prohibitive in the affected state or states and could materially affect our business.
 
Federal and state legislative and agency initiatives in mortgage-backed securities and securitization may adversely affect our business.
 
There are federal and state legislative and agency initiatives that could, once fully implemented, adversely affect our business. For instance, the risk retention requirement under the Dodd-Frank Act requires securitizers to retain a minimum beneficial interest in mortgage-backed securities that they sell through a securitization, absent certain qualified residential mortgage exemptions. Once implemented, the risk retention requirement may result in higher costs of certain origination operations and impose on us additional compliance requirements to meet servicing and origination criteria for qualified residential mortgages. Additionally, the amendments to Regulation AB relating to the registration statement required to be filed by an issuer of asset-backed securities, recently adopted by the SEC pursuant to the Dodd-Frank Act, would increase compliance costs for ABS issuers, which could in turn increase our cost of funding and operations. Lastly, certain proposed federal legislation would permit borrowers in bankruptcy to restructure mortgage loans secured by primary residences. Bankruptcy courts could, if this legislation is enacted, reduce the principal balance of a mortgage loan that is secured by a lien on mortgaged property, reduce the mortgage interest rate, extend the term to maturity or otherwise modify the terms of a bankrupt borrower’s mortgage loan. Any of the foregoing could materially affect our financial condition and results of operations.
 
Our business would be adversely affected if we lost our licenses.
 
Our operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations. In most states in which we operate, a regulatory agency regulates and enforces laws relating to mortgage servicing companies and mortgage origination


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companies such as us. These rules and regulations generally provide for licensing as a mortgage servicing company, mortgage origination company or third party debt default specialist, as applicable, requirements as to the form and content of contracts and other documentation, licensing of our employees and employee hiring background checks, licensing of independent contractors with whom we contract, restrictions on collection practices, disclosure and record-keeping requirements and enforcement of borrowers’ rights. In certain states, we are subject to periodic examination by state regulatory authorities. Some states in which we operate require special licensing or provide extensive regulation of our business.
 
We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable federal, state and local regulations. We may not be able to maintain all requisite licenses and permits, and the failure to satisfy those and other regulatory requirements could result in a default under our servicing agreements and have a material adverse effect on our operations. Those states that currently do not provide extensive regulation of our business may later choose to do so, and if such states so act, we may not be able to obtain or maintain all requisite licenses and permits. The failure to satisfy those and other regulatory requirements could result in a default under our servicing agreements and have a material adverse effect on our operations. Furthermore, the adoption of additional, or the revision of existing, rules and regulations could adversely affect our business, financial condition or results of operations.
 
We may be required to repurchase loans we originated, or will originate, if our loans fail to meet certain criteria or characteristics or under other circumstances.
 
The indentures governing our securitized pools of loans and our contracts with purchasers of our whole loans contain provisions that require us to repurchase the related loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if:
 
  •  our representations and warranties concerning loan quality and loan circumstances are inaccurate, including representations concerning the licensing of a mortgage broker;
 
  •  we fail to secure adequate mortgage insurance within a certain period after closing;
 
  •  a mortgage insurance provider denies coverage; and
 
  •  we fail to comply, at the individual loan level or otherwise, with regulatory requirements in the current dynamic regulatory environment.
 
We believe that, as a result of the current market environment, many purchasers of residential mortgage loans are particularly aware of the conditions under which originators must repurchase loans and would benefit from enforcing any repurchase remedies that they may have. If we are required to repurchase a significant amount of loans that we originate and sell or securitize, this could adversely affect our business, financial condition or results of operations.
 
We may incur litigation costs and related losses if the validity of a foreclosure action is challenged by a borrower or if a court overturns a foreclosure.
 
We may incur costs if we are required to, or if we elect to, execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. We may incur litigation costs if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to a title insurer of the property sold in foreclosure. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans. In addition, if certain documents required for a foreclosure action are missing or defective, we could be obligated to cure the defect or repurchase the loan. A significant increase in litigation costs could adversely affect our liquidity, and our inability to be reimbursed for an advance could adversely affect our business, financial condition or results of operations.


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We are required to follow the guidelines of the GSEs with which we do business, and we are not able to negotiate our fees with these entities for the purchase of our loans. Our competitors may be able to sell their loans to these entities on more favorable terms.
 
Even though we currently originate conventional agency and government conforming loans, because we previously originated non-prime mortgage loans, we believe that we are required to pay a higher fee to access the secondary market for selling our loans to government-sponsored enterprises. We believe that because many of our competitors have always originated conventional loans, they are able to sell newly originated loans on more favorable terms than us. As a result, these competitors are able to earn higher margins than we earn on originated loans, which could materially impact our business.
 
In our transactions with the GSEs, we are required to follow specific guidelines that impact the way we service and originate mortgage loans including:
 
  •  our staffing levels and other servicing practices;
 
  •  the servicing and ancillary fees that we may charge;
 
  •  our modification standards and procedures; and
 
  •  the amount of advances reimbursable.
 
We cannot negotiate these terms with the GSEs and they are subject to change at any time. A significant change in these guidelines that has the effect of decreasing our fees or requires us to expend additional resources in providing mortgage services could decrease our revenues or increase our costs, which could adversely affect our business, financial condition or results of operations.
 
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances.
 
During any period in which a borrower is not making payments, we are required under most of our servicing agreements to advance our own funds to meet contractual principal and interest remittance requirements for investors, pay property taxes and insurance premiums, legal expenses and other protective advances. We also advance funds to maintain, repair and market real estate properties on behalf of investors. As home values change, we may have to reconsider certain of the assumptions underlying our decisions to make advances and, in certain situations, our contractual obligations may require us to make certain advances for which we may not be reimbursed. In addition, in the event a mortgage loan serviced by us defaults or becomes delinquent, the repayment to us of the advance may be delayed until the mortgage loan is repaid or refinanced or a liquidation occurs. A delay in our ability to collect an advance may adversely affect our liquidity, and our inability to be reimbursed for an advance could adversely affect our business, financial condition or results of operations.
 
Changes to government mortgage modification programs may adversely affect future incremental revenues.
 
Under HAMP and similar government programs, a participating servicer may be entitled to receive financial incentives in connection with any modification plans it enters into with eligible borrowers and subsequent “pay for success” fees to the extent that a borrower remains current in any agreed upon loan modification. While we participate in and dedicate numerous resources to HAMP, we may not continue to participate in or realize future revenues from HAMP or any other government mortgage modification program. Changes in legislation regarding HAMP that result in the modification of outstanding mortgage loans, and changes in the requirements necessary to qualify for refinancing mortgage loans may impact the extent to which we participate in and receive financial benefits from such programs, or may increase the expense of participating in such programs. Changes in governmental loan modification programs could also result in an increase to our costs.


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Under the MHA, a participating servicer may receive a financial incentive to modify qualifying loans, in accordance with the plan’s guidelines and requirements. The MHA also allows us to refinance loans with a high loan-to-value ratio of up to 125%. This allows us to refinance loans to existing borrowers who have little or negative equity in their homes. Changes in legislation or regulations regarding the MHA could reduce our volume of refinancing originations to borrowers with little or negative equity in their homes. Changes to HAMP, the MHA and other similar programs could adversely affect our business, financial condition or results of operations.
 
We are highly dependent upon programs administered by GSEs such as Fannie Mae and Freddie Mac to generate revenues through mortgage loan sales to institutional investors. Any changes in existing U.S. government-sponsored mortgage programs could materially and adversely affect our business, financial position, results of operations or cash flows.
 
Our ability to generate revenues through mortgage loan sales to institutional investors depends to a significant degree on programs administered by the GSEs, such as Fannie Mae and Freddie Mac, a government agency, Ginnie Mae, and others that facilitate the issuance of mortgage-backed securities in the secondary market. These GSEs play a critical role in the residential mortgage industry, and we have significant business relationships with many of them. Almost all of the conforming loans that we originate qualify under existing standards for inclusion in guaranteed mortgage securities backed by GSEs. We also derive other material financial benefits from these relationships, including the assumption of credit risk by these GSEs on loans included in such mortgage securities in exchange for our payment of guarantee fees and the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures.
 
Any discontinuation of, or significant reduction in, the operation of these government- sponsored enterprises or any significant adverse change in the level of activity in the secondary mortgage market or the underwriting criteria of these GSEs could adversely affect our business, financial condition or results of operations.
 
The conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. federal government, may adversely affect our business and prospects.
 
Due to increased market concerns about the ability of Fannie Mae and Freddie Mac to withstand future credit losses associated with securities held in their investment portfolios, and on which they provide guarantees, without the direct support of the U.S. federal government, on July 30, 2008, the government passed the Housing and Economic Recovery Act of 2008. On September 7, 2008, the Federal Housing Finance Agency (the “FHFA”), placed Fannie Mae and Freddie Mac into conservatorship and, together with the U.S. Treasury, established a program designed to boost investor confidence in their respective debt and mortgage-backed securities. As the conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the operations of Fannie Mae and Freddie Mac and may (i) take over the assets of and operate Fannie Mae and Freddie Mac with all the powers of the shareholders, the directors and the officers of Fannie Mae and Freddie Mac and conduct all business of Fannie Mae and Freddie Mac; (ii) collect all obligations and money due to Fannie Mae and Freddie Mac; (iii) perform all functions of Fannie Mae and Freddie Mac which are consistent with the conservator’s appointment; (iv) preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and (v) contract for assistance in fulfilling any function, activity, action or duty of the conservator.
 
In addition to the FHFA becoming the conservator of Fannie Mae and Freddie Mac, the U.S. Treasury and the FHFA have entered into preferred stock purchase agreements between the U.S. Treasury and Fannie Mae and Freddie Mac pursuant to which the U.S. Treasury will ensure that each of Fannie Mae and Freddie Mac maintains a positive net worth.


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Although the U.S. Treasury has committed capital to Fannie Mae and Freddie Mac, these actions may not be adequate for their needs. If these actions are inadequate, Fannie Mae and Freddie Mac could continue to suffer losses and could fail to honor their guarantees and other obligations. The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could be considerably limited relative to historical measurements. Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitute agency and government conforming mortgage-backed securities and could have broad adverse market implications. Such market implications could adversely affect our business, financial condition or results of operations.
 
The geographic concentration of our servicing portfolio may result in a higher rate of delinquencies and may affect our financial condition.
 
As of December 31, 2010, approximately 18%, 16% and 5% of the aggregate outstanding loan balance in our servicing portfolio is secured by properties located in California, Florida and Texas, respectively. Some of these states have experienced severe declines in property values and are experiencing a disproportionately high rate of delinquencies and foreclosures relative to other states. To the extent that these states continue to experience weaker economic conditions or greater rates of decline in real estate values than the United States generally, a concentration of the loans we service in those regions may be expected to increase the effect of the risks listed in this “Risk Factors” section. The impact of property value declines may increase in magnitude and it may continue for a long period of time. Additionally, if states in which we have greater concentrations of business were to change their licensing or other regulatory requirements to make our business cost prohibitive, this could require us to stop doing business in those states or increase the cost of doing business in those states and could adversely affect our business, financial condition or results of operations.
 
We use financial models and estimates in determining the fair value of certain assets, such as mortgage servicing rights and investments in debt securities. If our estimates or assumptions prove to be incorrect, we may be required to record impairment charges, which could adversely affect our earnings.
 
We use internal financial models that utilize, wherever possible, market participant data to value certain of our assets, including our mortgage servicing rights, newly originated loans held for sale and investments in debt securities for purposes of financial reporting. These models are complex and use asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of mortgage servicing rights are complex because of the high number of variables that drive cash flows associated with mortgage servicing rights. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. If loan loss levels are higher than anticipated, due to an increase in delinquencies or prepayment speeds, or financial market illiquidity continues beyond our estimate, the value of certain of our assets may decrease. We may be required to record impairment charges, which could impact our ability to satisfy minimum net worth covenants of $175.0 million and borrowing conditions in our debt agreements and adversely affect our business, financial condition or results of operations. Errors in our financial models or changes in assumptions could adversely affect our business, financial condition or results of operations.
 
Our earnings may decrease because of changes in prevailing interest rates.
 
Our profitability is directly affected by changes in prevailing interest rates. The following are the material risks we face related to changes in prevailing interest rates:
 
  •  an increase in prevailing interest rates could generate an increase in delinquency, default and foreclosure rates resulting in an increase in both operating expenses and interest expense and could cause a reduction in the value of our assets;


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  •  a substantial and sustained increase in prevailing interest rates could adversely affect our loan origination volume because refinancing an existing loan would be less attractive for homeowners and qualifying for a loan may be more difficult for consumers;
 
  •  an increase in prevailing interest rates would increase the cost of servicing our outstanding debt, including our ability to finance servicing advances and loan originations;
 
  •  a decrease in prevailing interest rates may require us to record a decrease in the value of our mortgage servicing rights; and
 
  •  a change in prevailing interest rates could impact our earnings from our custodial deposit accounts.
 
Any such change in prevailing interest rates could adversely affect our business, financial condition or results of operations.
 
Our hedging strategies may not be successful in mitigating our risks associated with interest rates.
 
From time to time, we have used various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. The derivative financial instruments that we select may not have the effect of reducing our interest rate risks. In addition, the nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could actually increase our risks and losses. In addition, hedging strategies involve transaction and other costs. Our hedging strategies and the derivatives that we use may not be able to adequately offset the risks of interest rate volatility and our hedging transactions may result in or magnify losses. Furthermore, interest rate derivatives may not be available at all, or at favorable terms, particularly during economic downturns. Any of the foregoing risks could adversely affect our business, financial condition or results of operations.
 
A downgrade in our servicer ratings could have an adverse effect on our business, financial condition or results of operations.
 
Standard & Poor’s and Fitch rate us as a residential loan servicer. Our current favorable ratings from the rating agencies are important to the conduct of our loan servicing business. These ratings may be downgraded in the future. Any such downgrade could adversely affect our business, financial condition or results of operations.
 
We depend on the accuracy and completeness of information about borrowers and counterparties.
 
In deciding whether to extend credit or to enter into other transactions with borrowers and counterparties, we may rely on information furnished to us by or on behalf of borrowers and counterparties, including financial statements and other financial information. We also may rely on representations of borrowers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. We additionally rely on representations from public officials concerning the licensing and good standing of the third party mortgage brokers through whom we do business. While we have a practice of independently verifying the borrower information that we use in deciding whether to extend credit or to agree to a loan modification, including employment, assets, income and credit score, if any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, the mortgage broker, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. We have controls and processes designed to help us identify misrepresented information in our loan origination


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operations. We, however, may not have detected or may not detect all misrepresented information in our loan originations and/or our business clients. Any such misrepresented information could adversely affect our business, financial condition or results of operations.
 
Technology failures could damage our business operations and increase our costs.
 
The financial services industry as a whole is characterized by rapidly changing technologies, and system disruptions and failures caused by fire, power loss, telecommunications failures, unauthorized intrusion, computer viruses and disabling devices, natural disasters and other similar events, may interrupt or delay our ability to provide services to our borrowers. Security breaches, acts of vandalism and developments in computer capabilities could result in a compromise or breach of the technology that we use to protect our borrowers’ personal information and transaction data. Systems failures could cause us to incur significant costs and this could adversely affect our business, financial condition or results of operations.
 
The success and growth of our business will depend upon our ability to adapt to and implement technological changes.
 
Our mortgage loan origination business is currently dependent upon our ability to effectively interface with our brokers, borrowers and other third parties and to efficiently process loan applications and closings. The origination process is becoming more dependent upon technological advancement, such as our continued ability to process applications over the Internet, accept electronic signatures, provide process status updates instantly and other borrower-expected conveniences. Maintaining and improving this new technology and becoming proficient with it may also require significant capital expenditures. As these requirements increase in the future, we will have to fully develop these technological capabilities to remain competitive and any failure to do so could adversely affect our business, financial condition or results of operations.
 
Any failure of our internal security measures or breach of our privacy protections could cause harm to our reputation and subject us to liability.
 
In the ordinary course of our business, we receive and store certain confidential information concerning borrowers. Additionally, we enter into third party relationships to assist with various aspects of our business, some of which require the exchange of confidential borrower information. If a third party were to compromise or breach our security measures or those of the vendors, through electronic, physical or other means, and misappropriate such information, it could cause interruptions in our operations, expose us to significant liabilities, reporting obligations, remediation costs and damage to our reputation. Any of the foregoing risks could adversely affect our business, financial condition or results of operations.
 
Our vendor relationships subject us to a variety of risks.
 
We have significant vendors that, among other things, provide us with financial, technology and other services to support our servicing and originations businesses. With respect to vendors engaged to perform activities required by servicing criteria, we have elected to take responsibility for assessing compliance with the applicable servicing criteria for the applicable vendor and are required to have procedures in place to provide reasonable assurance that the vendor’s activities comply in all material respects with servicing criteria applicable to the vendor. In the event that a vendor’s activities do not comply with the servicing criteria, it could negatively impact our servicing agreements. In addition, if our current vendors were to stop providing services to us on acceptable terms, including as a result of one or more vendor bankruptcies due to poor economic conditions, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition or results of operations.


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The loss of the services of our senior managers could have an adverse effect on our business.
 
The experience of our senior managers is a valuable asset to us. Our management team has an average of approximately 26 years of experience in the residential mortgage origination and servicing industry and has been with us for an average of approximately 10 years. We do not maintain key life insurance policies relating to our senior managers. The loss of the services of our senior managers could adversely affect our business, financial condition or results of operations.
 
Our historical financial statements do not reflect payments for income taxes.
 
Our historical financial statements set forth in this prospectus do not reflect any payments for income taxes. The indenture governing the notes permits us to distribute to our equity holders amounts (based generally on a hypothetical calculation of combined federal, state and local income taxes we would owe if we were taxable as a corporation) to pay their income taxes for so long as we are treated as a disregarded entity or partnership for income tax purposes. If we become taxable as a corporation, the indenture governing the notes generally will permit us to pay our combined tax group’s federal, state and local income taxes. See “Description of the New Notes—Limitation on Restricted Payments.”
 
Our business could suffer if we fail to attract and retain a highly skilled workforce.
 
Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization, in particular skilled managers, loan servicers, debt default specialists, loan officers and underwriters. Trained and experienced personnel are in high demand, and may be in short supply in some areas. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. We may not be able to attract, develop and maintain an adequate skilled workforce necessary to operate our businesses, and labor expenses may increase as a result of a shortage in the supply of qualified personnel. If we are unable to attract and retain such personnel, we may not be able to take advantage of acquisitions and other growth opportunities that may be presented to us and this could materially affect our business, financial condition or results of operations.
 
Legal proceedings and related costs could adversely affect our financial results.
 
We are routinely involved in legal proceedings concerning matters that arise in the ordinary course of our business. The outcome of these proceedings may adversely affect our financial results. In addition, a number of participants in our industry have been the subject of class action lawsuits and regulatory actions by states’ attorneys general. Litigation and other proceedings may require that we pay settlement costs, damages, penalties or other charges, which could adversely affect our financial results. See “Business—Legal Proceedings.”
 
Negative public opinion could damage our reputation and adversely affect our earnings.
 
Reputation risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from media coverage, whether accurate or not. Negative public opinion can adversely affect our ability to attract and retain customers, trading counterparties and employees and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with our customers and communities, this risk will always be present in our organization.


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Fortress indirectly controls our sole equityholder and there may be situations in which the interests of Fortress and the holders of the notes will not be aligned.
 
FIF HE Holdings LLC, a holding company, is our sole member, owning 100% of our outstanding membership interests. FIF HE Holdings LLC, in turn, is owned by certain private equity funds managed by an affiliate of Fortress and our past and present management. As a result, Fortress is able to control our business direction and policies, including mergers, acquisitions and consolidations with third parties and the sale of all or substantially all of our assets. Consequently, circumstances may arise in which the interests of Fortress could be in conflict with your interests as a holder of the notes, and Fortress may pursue transactions that, in their judgment, could enhance their equity investment, even though the transaction might involve risks to holders of the notes.
 
Risks Related to the New Notes
 
Our substantial indebtedness may limit our financial and operating activities and our ability to incur additional debt to fund future needs.
 
As of December 31, 2010, we and our guarantors had approximately $1,690.8 million of total indebtedness and unfunded availability of approximately $706.0 million under our various financing facilities. Our substantial indebtedness and any future indebtedness we incur could:
 
  •  require us to dedicate a substantial portion of cash flow from operations to the payment of principal and interest on indebtedness, including indebtedness we may incur in the future, thereby reducing the funds available for other purposes;
 
  •  make it more difficult for us to satisfy and comply with our obligations with respect to the notes;
 
  •  subject us to increased sensitivity to increases in prevailing interest rates;
 
  •  place us at a competitive disadvantage to competitors with relatively less debt in economic downturns, adverse industry conditions or catastrophic external events; or
 
  •  reduce our flexibility in planning for or responding to changing business, industry and economic conditions.
 
Our substantial obligations could have other important consequences. For example, our failure to comply with the restrictive covenants in the agreements governing our indebtedness, including the indenture governing the notes, which limit our ability to incur liens, to incur debt and to sell assets, could result in an event of default that, if not cured or waived, could harm our business or prospects and could result in our bankruptcy.
 
We may incur more debt, which could exacerbate the risks described above.
 
We and our subsidiaries are able to incur additional indebtedness in the future, subject to the limitations contained in the agreements governing our indebtedness, including the indenture governing the notes. Although these agreements generally restrict us and our restricted subsidiaries from incurring additional indebtedness, these restrictions are subject to important exceptions and qualifications. If we or our subsidiaries incur additional debt, the related risks could be magnified.
 
We may not be able to generate sufficient cash flow to meet our debt service obligations including the notes.
 
Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt obligations including the notes will depend on our current and future financial performance, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we do not generate sufficient cash flow from operations to satisfy our


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debt obligations, including interest payments and the payment of principal at maturity, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Such alternative financing plans may not be available or may not be able to generate timely and sufficient amount of proceeds to satisfy our debt obligations. Additional financing may not be obtained on acceptable terms, or permitted under the terms of our various debt instruments then in effect. Furthermore, our ability to refinance would depend upon the condition of the finance and credit markets. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms or on a timely basis, would materially affect our business, financial condition or results of operations.
 
In addition, we are dependent on the cash flow of and dividends and distributions to us from our subsidiaries in order to service our current indebtedness. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to any indebtedness of ours or to make any funds available therefor, except for those subsidiaries that have guaranteed our obligations under our outstanding indebtedness and that will guarantee our obligations under the notes. The ability of our subsidiaries to pay any dividends and distributions will be subject to, among other things, the terms of any debt instruments of our subsidiaries then in effect as well as applicable law. Our subsidiaries may not be able to generate cash flow sufficient to pay dividends or distributions to us that enable us to pay interest or principal on our existing indebtedness or the notes.
 
We may be unable to repay or repurchase the notes at maturity.
 
At maturity, the entire outstanding principal amount of the notes, together with accrued and unpaid interest, will become due and payable. We may not have the funds to fulfill these obligations or the ability to renegotiate these obligations. If upon the maturity date other arrangements prohibit us from repaying the notes, we could try to obtain waivers of such prohibitions from the lenders and holders under those arrangements, or we could attempt to refinance the borrowings that contain the restrictions. In these circumstances, if we were not able to obtain such waivers or refinance these borrowings, we would be unable to repay the notes.
 
The indenture governing the notes, as well as other agreements governing our debt, include provisions that may restrict our financial and business operations, but may not necessarily restrict our ability to take actions that may impair our ability to repay the notes.
 
The agreements governing our indebtedness, including our servicing advance facilities that relate to servicing loan portfolios, our warehouse facilities that relate to originating mortgage loans, the notes we issued to finance our purchase of a portfolio of mortgage servicing rights and the indenture that will govern the notes, contain negative covenants customary for such financings, such as limiting our ability to sell or dispose of assets, incur additional indebtedness or liens, make certain restricted payments, make certain investments, consummate mergers, consolidations or other business combinations or engage in other lines of business. These restrictions may interfere with our ability to engage in other necessary or desirable business activities, which could materially affect our business, financial condition or results of operations.
 
Our financing facilities also require us to comply with certain financial ratios and covenants, such as maximum leverage ratios, minimum tangible net worth, minimum liquidity and positive earnings covenants. In addition, availability under certain of our financing facilities is limited by borrowing base and minimum collateral conditions. Our ability to comply with these covenants depends on our financial condition and performance and also is subject to events outside our control. Asset write-downs, other non-cash charges and other one-time events also impact our ability to comply with these covenants. In addition, these restrictions may interfere with our ability to obtain financing or to engage in other necessary or desirable business activities, which may have a material effect on our operations. These covenants are subject to important exceptions and qualifications.


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Moreover, if we fail to comply with these covenants and are unable to obtain a waiver or amendment, an event of default would result.
 
Our financing facilities and other debt agreements, including the indenture governing the notes, also contain other events of default customary for such financings. In addition, as a servicer, we are required to observe and perform the covenants and obligations in the agreements under which we service loans. As a servicer, we also have obligations under Regulation AB under the Securities Act. Failure to service in accordance with these requirements may lead to an event of default under our credit facilities. We may not have sufficient liquidity to repay or refinance the notes or borrowings under our credit facilities if such amounts were accelerated upon an event of default. If we are unable to service our debt, this could materially affect our business, financial condition or results of operations.
 
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes.
 
Any default under the agreements covering our indebtedness that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could make us unable to pay the principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain alternative financing necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we would be in default under the terms of the agreements governing such indebtedness, which could also result in an event of default under other financing agreements. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, or we could be forced to apply all available cash flows to repay such indebtedness, and, in any case, we could ultimately be forced into bankruptcy or liquidation.
 
The repayment of the notes will be effectively subordinated to substantially all of our existing and future secured debt and the existing and future secured debt of our subsidiaries.
 
The notes, and each guarantee of the notes, will be unsecured obligations. The notes, and any other unsecured debt securities issued by us, will be effectively junior in right of payment to all secured indebtedness. In the event of our bankruptcy, or the bankruptcy of our subsidiaries or special purpose vehicles, holders of any secured indebtedness of ours or of our subsidiaries will have claims that are prior to the claims of the holders of any debt securities issued by us with respect to the assets securing our other indebtedness. As of December 31, 2010, the aggregate carrying value of our and our subsidiaries’ secured indebtedness was approximately $1,345.1 million.
 
If we defaulted on our obligations under any of our secured debt, our secured lenders could proceed against the collateral granted to them to secure that indebtedness. If any secured indebtedness were to be accelerated, our assets may not be sufficient to repay in full that indebtedness and our other indebtedness, including the notes. In addition, upon any distribution of assets pursuant to any liquidation, insolvency, dissolution, reorganization or similar proceeding, the holders of secured indebtedness will be entitled to receive payment in full from the proceeds of the collateral securing our secured indebtedness before the holders of the notes will be entitled to receive any payment with respect thereto. As a result, the holders of the notes may recover proportionally less than holders of secured indebtedness.


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The notes and related subsidiary guarantees will effectively be subordinated to indebtedness of our existing and future non-guarantor subsidiaries.
 
Not all of our subsidiaries will guarantee the notes. The notes will be effectively subordinated to all indebtedness and other liabilities and commitments, including trade payables, of our existing and future subsidiaries that do not guarantee the notes. Any right of the holders of the notes to participate in the assets of a non-guarantor subsidiary upon any liquidation or reorganization of the subsidiary will be subject to the prior claims of the subsidiary’s creditors.
 
As of the date of this prospectus, Nationstar Home Equity Loan Trust 2009-A; Nationstar Home Equity Loan 2009-A REO LLC; Nationstar Residual, LLC; Nationstar Advance Funding II, LLC; Nationstar Mortgage Advance Receivables Trust 2009-ADV1; Nationstar Mortgage Advance Receivables Trust 2010-ADV1; Nationstar Funding LLC and Nationstar Advance Funding LLC are our non-guarantor subsidiaries. Non-guarantor subsidiaries held approximately 51.2% of our total assets as of December 31, 2010.
 
Unrestricted subsidiaries generally will not be subject to any of the covenants in the indenture and will not guarantee the notes, and we may not be able to rely on the cash flow or assets of those unrestricted subsidiaries to pay our indebtedness.
 
Subject to compliance with the restrictive covenants contained in the indenture governing the notes, we will be permitted to designate certain of our subsidiaries as unrestricted subsidiaries. If we designate a subsidiary guarantor as an unrestricted subsidiary for purposes of the indenture governing the notes, any guarantees of the notes by such subsidiary or any of its subsidiaries will be released under the indenture. As a result, the creditors of the unrestricted subsidiary and its subsidiaries will have a senior claim on the assets of such unrestricted subsidiary and its subsidiaries.
 
Unrestricted subsidiaries will generally not be subject to the covenants under the indenture governing the notes and will not guarantee the notes. Unrestricted subsidiaries may enter into financing arrangements that limit their ability to make loans or other payments to fund payments in respect of the notes. Accordingly, we may not be able to rely on the cash flow or assets of unrestricted subsidiaries to pay any of our indebtedness, including the notes.
 
As of the date of this prospectus there are no unrestricted subsidiaries, and we do not have any plans to designate any of our subsidiaries as unrestricted subsidiaries.
 
Your right to be repaid would be adversely affected if a court determined that any of our subsidiaries made any guarantee for inadequate consideration or with the intent to defraud creditors.
 
Under the federal bankruptcy laws and comparable provisions of state fraudulent transfer laws, any guarantee made by any of our subsidiaries could be voided, or claims under the guarantee made by any of our subsidiaries could be subordinated to all other obligations of any such subsidiary, if the subsidiary, at the time it incurred the obligations under the guarantee:
 
  •  incurred the obligations with the intent to hinder, delay or defraud creditors; or
 
  •  received less than reasonably equivalent value in exchange for incurring those obligations; and
 
  •  was insolvent or rendered insolvent by reason of that incurrence;
 
  •  was engaged in a business or transaction for which the subsidiary’s remaining assets constituted unreasonably small capital; or
 
  •  intended to incur, or believed that it would incur, debts beyond its ability to pay those debts as they mature.


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A legal challenge to the obligations under any guarantee on fraudulent conveyance grounds could focus on any benefits received in exchange for the incurrence of those obligations. A guarantee could be subject to the claim that, since the guarantee was incurred for our benefit and only indirectly for the benefit of the guarantor, the obligations of the applicable guarantor were incurred for less than fair consideration. The liability of each guarantor under the indenture will be limited to the amount that will result in its guarantee not constituting a fraudulent conveyance, but a court may apply an alternative standard to determine the maximum liability of each guarantor. We believe that each of our subsidiaries making a guarantee will receive reasonably equivalent value for incurring the guarantee, but a court may disagree with our conclusion.
 
The measures of insolvency for purposes of the fraudulent transfer laws vary depending on the law applied in the proceeding to determine whether a fraudulent transfer has occurred. Generally, however, an entity would be considered insolvent if:
 
  •  the sum of its debts, including contingent liabilities, is greater than the fair saleable value of all of its assets;
 
  •  the present fair saleable value of its assets is less than the amount that would be required to pay its probable liabilities on its existing debts, including contingent liabilities, as they become absolute and mature; or
 
  •  it cannot pay its debts as they become due.
 
The credit ratings assigned to the notes may not reflect all risks of an investment in the notes.
 
The credit ratings assigned to the notes reflect the rating agencies’ assessments of our ability to make payments on the notes when due. Consequently, actual or anticipated changes in these credit ratings will generally affect the market value of the notes. These credit ratings, however, may not reflect the potential impact of risks related to structure, market or other factors related to the value of the notes.
 
We may not have the ability to raise the funds necessary to finance the change of control offer required by the indenture governing the notes.
 
Upon the occurrence of a “change of control,” as defined in the indenture governing the notes, we must offer to buy back the notes at a price equal to 101% of the principal amount, together with any accrued and unpaid interest and special interest, if any, to the date of the repurchase. Our failure to purchase, or give notice of purchase of, the notes would be a default under the indenture governing the notes. See “Description of New Notes—Repurchase at the Option of Holders—Change of Control.”
 
If a change of control occurs, it is possible that we may not have sufficient assets at the time of the change of control to make the required repurchase of notes or to satisfy all obligations under our other debt instruments, including future debt instruments. In order to satisfy our obligations, we could seek to refinance our indebtedness or obtain a waiver from the other lenders or you as a holder of the notes. We may not be able to obtain a waiver or refinance our indebtedness on terms acceptable to us, if at all. Our failure to repurchase any notes submitted in a change of control offer could constitute an event of default under our other debt documents, even if the change of control offer itself would not cause a default under the indenture governing the notes.
 
The change of control provision in the indenture may not protect you in the event we consummate a highly leveraged transaction, reorganization, restructuring, merger or other similar transaction, unless such transaction constitutes a change of control under the indenture. Such a transaction may not involve a change in voting power or beneficial ownership or, even if it does, may


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not involve a change of the magnitude required under the definition of a change of control triggering event in the indenture to trigger our obligation to repurchase the notes.
 
There is no established trading market for the notes. If an actual trading market does not develop for the notes, you may not be able to resell the notes quickly, for the price that you paid or at all.
 
The notes are a new issue of securities and therefore there is no established trading market for the notes, and an active trading market may not develop. We do not intend to apply for the notes to be listed on any securities exchange or to arrange for any quotation on any automated dealer quotation systems. The initial purchasers have advised us that they intend to make a market in the notes, but they are not obligated to do so. The initial purchasers may discontinue any market making in the notes at any time, at their sole discretion. As a result, there might be very little liquidity of any trading market for the notes.
 
You may not be able to sell your notes at a particular time or at all, or the prices that you receive when you sell them may not be favorable. You may not be able to resell your notes at their fair market value. The liquidity of, and trading market for, the notes may also be adversely affected by, among other things:
 
  •  prevailing interest rates;
 
  •  our operating performance and financial condition;
 
  •  the interest of securities dealers in making a market; and
 
  •  the market for similar securities.
 
Historically, the market for non-investment grade debt has been subject to disruptions that have caused volatility in the prices of securities similar to the notes. It is possible that the market for the notes will be subject to disruptions. Any disruptions may have a negative effect on noteholders, regardless of our prospects and financial performance.
 
The Old Notes were issued with original issue discount for U.S. federal income tax purposes.
 
The Old Notes were issued with OID for U.S. federal income tax purposes because the stated principal amount of the notes exceeded their issue price by more than a de minimis amount.
 
U.S. holders will generally be required to include such OID in gross income on a constant yield to maturity basis in advance of the receipt of cash payment thereof and regardless of such holders’ method of accounting for U.S. federal income tax purposes. See “Certain United States Federal Income Tax Considerations.”
 
Risks Relating to the Exchange Offer
 
The consummation of the exchange offer may not occur.
 
We are not obligated to complete the exchange offer under certain circumstances. See “Description of the Exchange Offer—Conditions to the Exchange Offer.” Even if the exchange offer is completed, it may not be completed on the schedule described in this prospectus. Accordingly, holders participating in the exchange offer may have to wait longer than expected to receive their New Notes,


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during which time those holders of Old Notes will not be able to effect transfers of their Old Notes tendered in the exchange offer.
 
You may be required to deliver prospectuses and comply with other requirements in connection with any resale of the New Notes.
 
If you tender your Old Notes for the purpose of participating in a distribution of the New Notes, you will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the New Notes. In addition, if you are a broker-dealer that receives New Notes for your own account in exchange for Old Notes that you acquired as a result of market-making activities or any other trading activities, you will be required to acknowledge that you will deliver a prospectus in connection with any resale of such New Notes.


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. When used in this discussion, the words “anticipate,” “appears,” “foresee,” “intend,” “should,” “expect,” “estimate,” “project,” “plan,” “may,” “could,” “will,” “are likely” and similar expressions are intended to identify forward-looking statements. These statements involve predictions of our future financial condition, performance, plans and strategies, and are thus dependent on a number of factors including, without limitation, assumptions and data that may be imprecise or incorrect. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. Also see “Risk Factors” included elsewhere in this prospectus regarding the additional factors that have impacted or may impact our performance and financial results. Forward-looking statements are subject to risks and uncertainties including, without limitation:
 
  •  the impact of the ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 on our business activities and practices, costs of operations and overall results of operations;
 
  •  the impact on our servicing practices of enforcement consent orders entered into by 14 of the largest servicers and four federal agencies;
 
  •  the continued deterioration of the residential mortgage market, increase in monthly payments on adjustable rate mortgage loans, adverse economic conditions, decrease in property values or increase in delinquencies and defaults;
 
  •  our ability to compete successfully in the mortgage loan servicing and mortgage loan originations industry;
 
  •  our ability to maintain the size of our servicing portfolio by successfully identifying attractive acquisition opportunities, including mortgage servicing rights, subservicing contracts, servicing platforms and origination platforms;
 
  •  our ability to scale-up appropriately and integrate our acquisitions to realize the anticipated benefits of any such potential future acquisitions;
 
  •  our ability to obtain sufficient capital to meet our financing requirements;
 
  •  our ability to grow our loan origination volume and develop a distributed retail sales channel;
 
  •  the termination of our servicing rights and subservicing contracts;
 
  •  changes to federal, state and local laws and regulations concerning loan servicing, loan origination, loan modification or the licensing of entities that engage in these activities;
 
  •  changes in accounting standards;
 
  •  our ability to meet certain criteria or characteristics under the indentures governing our securitized pools of loans;
 
  •  our ability to follow the specific guidelines of GSEs or a significant change in such guidelines;
 
  •  delays in our ability to collect or be reimbursed for servicing advances;
 
  •  changes to the Home Affordable Modification Program, the Make Home Affordable Plan or other similar government programs;
 
  •  loss of our licenses;


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  •  changes in our business relationships with Fannie Mae, Freddie Mac, Ginnie Mae and others that facilitate the issuance of mortgage-backed securities;
 
  •  changes to the nature of the guarantees of Fannie Mae and Freddie Mac and the market implications of such changes;
 
  •  errors in our financial models or changes in assumptions;
 
  •  requirement to write down the value of certain assets;
 
  •  changes in prevailing interest rates;
 
  •  our ability to successfully mitigate our risks through hedging strategies;
 
  •  changes in our servicer ratings;
 
  •  the accuracy and completeness of information about borrowers and counterparties;
 
  •  our ability to maintain our technology systems and our ability to adapt such systems for future operating environments;
 
  •  failure of our internal security measures or breach of our privacy protections;
 
  •  failure of our vendors to comply with servicing criteria;
 
  •  the loss of the services of our senior managers;
 
  •  changes to our income tax status;
 
  •  failure to attract and retain a highly skilled workforce;
 
  •  increase in legal proceedings and related costs;
 
  •  changes in public opinion concerning mortgage originators or debt default specialists;
 
  •  conflicts of interest with Fortress and the holders of the notes; and
 
  •  other risks described in the “Risk Factors” section of this prospectus beginning on page 17.
 
We caution you not to place undue reliance on these forward-looking statements that speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
The following tables present selected consolidated financial information for our business. You should read these tables along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
 
We have not presented selected consolidated statement of operations and balance sheet data for periods prior to the Acquisition. The entity that we acquired—CHEC—was a consolidated subsidiary of Centex Financial Services (“CFS”), and we did not receive, separate audited or unaudited financials of CHEC in connection with the Acquisition. We only received consolidated financials of CFS. In 2009, CFS was subsequently acquired by a third party. We do not have, nor do we have the right to obtain, financial statements for CHEC prior to the date of the Acquisition. Therefore, because the information is not available to us, it cannot be created without unreasonable effort and expense. We also believe that financial information for the period from April 1, 2006 to July 10, 2006 does not contribute to an investor’s understanding of our historical financial performance and financial condition because, before the Acquisition, CHEC had historically operated as a subprime mortgage lender. After the Acquisition, in the third fiscal quarter of 2007, we transformed the business from a subprime mortgage lender to a mortgage servicer and conforming loan originator. As a result, financial information with respect to the business conducted before the Acquisition would not provide useful information to investors about trends in our financial condition and results of operation.
 
The selected consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the selected consolidated balance sheet data as of December 31, 2009 and 2010 have been derived from our audited financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the year ended December 31, 2007 and the selected consolidated balance sheet data as of December 31, 2008 have been derived from our audited financial statements that are not included in this prospectus. The selected consolidated statement of operations data for the period from July 11, 2006 to December 31, 2006 and the selected consolidated balance sheet data as of December 31, 2006, and 2007 have been derived from our unaudited financial statements, which are not included in this prospectus.
 
                                         
    July 11, 2006
                         
    to December
    Year Ended December 31,  
     31, 2006     2007     2008     2009     2010  
    (in thousands)  
 
Statement of Operations Data:
                                       
Revenues:
                                       
Total fee income
  $ 14,161     $ 46,301     $ 74,007     $ 100,218     $ 184,084  
Gain (loss) on mortgage loans held for sale
    4,476       (94,673 )     (86,663 )     (21,349 )     77,344  
                                         
Total revenues
    18,637       (48,372 )     (12,656 )     78,869       261,428  
Total expenses and impairments
    98,837       259,222       147,777       142,367       220,976  
Other income (expense):
                                       
Interest income
    75,114       163,022       92,060       52,518       98,895  
Interest expense
    (55,172 )     (118,553 )     (65,548 )     (69,883 )     (116,163 )
Loss on interest rate swaps and caps
          (21,353 )     (23,689 )     (14 )     (9,801 )
Fair value changes in ABS securitizations
                            (23,297 )
                                         
Total other income (expense)
    19,942       23,116       2,823       (17,379 )     (50,366 )
                                         
Net income (loss)
  $  (60,258 )   $  (284,478 )   $  (157,610 )   $  (80,877 )   $ (9,914 )
                                         
 


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    As of December 31,
    2006   2007   2008   2009   2010
    (in thousands)
 
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 10,335     $ 41,251     $ 9,357     $ 41,645     $ 21,223  
Mortgage servicing rights
    49,783       82,634       110,808       114,605       145,062  
Total assets
    2,145,007       1,303,221       1,122,001       1,280,185       1,947,181  
Unsecured senior notes
                            244,061  
Notes payable
    1,966,368       967,307       810,041       771,857       709,758  
Nonrecourse debt—Legacy Assets
                      177,675       138,662  
ABS nonrecourse debt
                            496,692  
Total liabilities
    2,005,213       1,041,525       866,079       1,016,362       1,690,809  
Total members’ equity
    139,794       261,696       255,922       263,823       256,372  

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RATIO OF EARNINGS TO FIXED CHARGES
 
The following table sets forth information regarding our ratio of earnings to fixed charges for each of the periods shown. For purposes of calculating this ratio, (i) earnings consist of income (loss) from continuing operations before provision (benefit) for income taxes and fixed charges and (ii) fixed charges consist of interest expense, which includes amortization of deferred finance charges, and imputed interest on our lease obligations. The interest component of rent was determined based on an estimate of a reasonable interest factor at the inception of the leases.
 
                                         
    July 11, 2006
               
    to December
  Year Ended December 31,
     31, 2006   2007   2008   2009   2010
 
Ratio of earnings to fixed charges
    (1)     (1)     (1)     (1)     (1)
 
 
(1) Earnings for the period from July 11, 2006 to December 31, 2006 and for the years ended December 31, 2007, 2008, 2009 and 2010 were inadequate to cover fixed charges. The coverage deficiencies were $60.3 million, $284.5 million, $157.6 million, $80.9 million and $9.9 million, respectively.


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DESCRIPTION OF THE EXCHANGE OFFER
 
Purpose of the Exchange Offer
 
On March 26, 2010, we issued $250,000,000 aggregate principal amount of Old Notes. In connection with that issuance, we entered into a Registration Rights Agreement on March 26, 2010. Pursuant to the Registration Rights Agreement, we agreed that we would use reasonable best efforts to:
 
  •  file a registration statement (“Exchange Offer Registration Statement”) covering an offer to the Holders of Old Notes to exchange all Old Notes for New Notes not later than March 31, 2011;
 
  •  have the Exchange Offer Registration Statement remain effective for 90 days after Expiration Date for use by broker-dealers who acquired the Old Notes directly from us;
 
  •  commence the Exchange Offer as soon as reasonably practicable after the Exchange Offer Registration Statement is declared effective by the SEC; and
 
  •  complete the registered exchange offer not later than 90 days after March 31, 2011.
 
Upon the effectiveness of the registration statement of which this prospectus is a part, we will offer the New Notes in exchange for the Old Notes. We filed a copy of the Registration Rights Agreement as an exhibit to the registration statement.
 
Resale of the New Notes
 
We are making the exchange offer in reliance on the position of the staff of the SEC as set forth in interpretive letters addressed to other parties in other transactions. For further information on the SEC’s position, see Exxon Capital Holdings Corporation, available May 13, 1988, Morgan Stanley & Co. Incorporated, available June 5, 1991 and Shearman & Sterling, available July 2, 1993, and other interpretive letters to similar effect. We have not sought our own interpretive letter, however, and we cannot assure you that the staff would make a similar determination with respect to the exchange offer as it has in interpretive letters to other parties. Based on these interpretations by the staff, we believe that the New Notes issued under the exchange offer may be offered for resale, resold or otherwise transferred by you, without further compliance with the registration and prospectus delivery provisions of the Securities Act, so long as you:
 
  (1)   are acquiring the New Notes in the ordinary course of the business of yourself and any beneficial owner;
 
  (2)   are not participating in, and do not intend to participate in, a distribution of the New Notes within the meaning of the Securities Act and have no arrangement or understanding with any person to participate in a distribution of the New Notes within the meaning of the Securities Act;
 
  (3)   are not a broker-dealer who acquired the Old Notes directly from us; and
 
  (4)   are not an “affiliate” of ours, within the meaning of Rule 405 of the Securities Act.
 
By tendering the Old Notes in exchange for New Notes, you will be required to represent to us that each of the above statements applies to you. If you are participating in or intend to participate in, a distribution of the New Notes, or have any arrangement or understanding with any person to participate in a distribution of the New Notes to be acquired in this exchange offer, you may be deemed to have received restricted securities and may not rely on the applicable interpretations of the staff of the SEC. If you are so deemed, you will have to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction.
 
Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where the Old Notes were acquired by the broker-dealer as a result of market-making activities or


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other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the New Notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. A broker-dealer may use this prospectus, as it may be amended or supplemented from time to time, in connection with resales of New Notes received in exchange for Old Notes which the broker-dealer acquired as a result of market-making or other trading activities. See “Plan of Distribution.”
 
The exchange offer is not being made to, nor will we accept tenders for exchange from, holders of Old Notes in any jurisdiction in which the exchange offer or the acceptance of it would not be in compliance with the securities or blue sky laws of such jurisdiction.
 
Terms of the Exchange Offer
 
Upon the terms and subject to the conditions set forth in this prospectus and the letter of transmittal, we will accept any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. We will issue $1,000 principal amount of New Notes in exchange for each $1,000 principal amount of Old Notes validly tendered and accepted pursuant to the exchange offer.
 
We will not pay any accrued and unpaid interest on the Old Notes that we acquire in the exchange offer. Instead, interest on the New Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including March 26, 2010, the date on which we issued the Old Notes.
 
Tendering holders of Old Notes must tender Old Notes in minimum denominations of $2,000, and integral multiples of $1,000 in excess thereof. New Notes will be issued in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof.
 
The terms of the New Notes are identical in all material respects to the terms of the Old Notes, except that:
 
  (1)   we have registered the New Notes under the Securities Act and therefore these notes will not bear legends restricting their transfer; and
 
  (2)   specified rights under the Registration Rights Agreement, including the provisions providing for payment of additional interest in specified circumstances relating to the exchange offer, will be eliminated for all the Notes.
 
The New Notes will evidence the same debt as the Old Notes. The New Notes will be issued under the same indenture and will be entitled to the same benefits under that indenture as the Old Notes being exchanged. As of the date of this prospectus, approximately $250,000,000 aggregate principal amount of the Old Notes are outstanding. Old Notes accepted for exchange will be retired and cancelled and not reissued.
 
Except as described under “Form, Book-Entry Procedures and Transfer,” we will issue the New Notes in the form of one or more global notes registered in the name of DTC or its nominee, and each beneficial owner’s interest in it will be transferable in book-entry form through DTC.
 
We will conduct the exchange offer in accordance with the applicable requirements of the Securities Act and the Exchange Act, and the rules and regulations of the SEC thereunder.
 
We will be considered to have accepted validly tendered Old Notes if and when we have given oral or written notice to that effect to the exchange agent. The exchange agent will act as agent for the tendering holders for the purposes of receiving the New Notes from us.
 
If we do not accept any tendered Old Notes for exchange because of an invalid tender, the occurrence of the other events described in this prospectus or otherwise, we will return these Old


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Notes, without expense, to the tendering holder as soon as practicable after the Expiration Date of the exchange offer.
 
Holders who tender Old Notes will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes on exchange of Old Notes in connection with the exchange offer. We will pay all charges and expenses, other than certain applicable taxes in certain circumstances, in connection with the exchange offer. See “—Other Fees and Expenses” and “—Transfer Taxes.”
 
If we successfully complete the exchange offer, any Old Notes which holders do not tender or which we do not accept in the exchange offer will remain outstanding and continue to accrue interest. The holders of Old Notes after the exchange offer in general will not have further rights under the Registration Rights Agreement, including registration rights and any rights to additional interest. Holders wishing to transfer the Old Notes would have to rely on exemptions from the registration requirements of the Securities Act.
 
Expiration Date; Extensions; Amendments; Termination
 
For purposes of the exchange offer, the term “Expiration Date” means 5:00 p.m., New York City time, on          , 2011, subject to our right to extend that time and date in our sole discretion, in which case the Expiration Date means the latest time and date to which the exchange offer is extended.
 
We reserve the right, in our sole discretion, by giving oral or written notice to the exchange agent, to:
 
  •  extend the exchange offer;
 
  •  terminate the exchange offer if a condition to our obligation to exchange Old Notes for New Notes is not satisfied or waived on or prior to the Expiration Date; and
 
  •  amend the exchange offer.
 
If the exchange offer is amended in a manner that we determine constitutes a material change, we will extend the exchange offer for a period of two to ten business days, depending upon the significance of the amendment and the manner of disclosure to the holders, if the exchange offer would otherwise have expired during that two to ten business day period.
 
We will notify holders of the Old Notes of any extension, amendment or termination of the exchange offer by press release or other public announcement. We will announce any extension of the Expiration Date no later than 9:00 a.m., New York City time, on the first business day after the previously scheduled Expiration Date. We have no other obligation to publish, advertise or otherwise communicate any information about any extension, amendment or termination.
 
Settlement Date
 
We will deliver the New Notes on the settlement date, which will be as soon as practicable after the Expiration Date of the exchange offer. We will not be obligated to deliver New Notes unless the exchange offer is consummated.
 
Conditions to the Exchange Offer
 
Notwithstanding any other provision of the exchange offer, we will not be required to accept for exchange, or to issue New Notes in exchange for, any Old Notes and may terminate or amend the exchange offer if at any time before the expiration of the exchange offer, we determine (i) that the exchange offer violates applicable law, any applicable interpretation of the staff of the SEC or any order of any governmental agency or court of competent jurisdiction; (ii) an action or proceeding shall have been instituted or threatened in any court or by any governmental agency which might materially


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impair our ability to proceed with the exchange offer or a material adverse development shall have occurred in any existing action or proceeding with respect to us; or (iii) all governmental approvals that we deem necessary for the consummation of the exchange offer have not been obtained.
 
The foregoing conditions are for our sole benefit and may be asserted by us regardless of the circumstances giving rise to any such condition or may be waived by us in whole or in part at any time and from time to time. The failure by us at any time to exercise any of the foregoing rights shall not be deemed a waiver of any of those rights and each of those rights shall be deemed an ongoing right which may be asserted at any time and from time to time. Any determination made by us concerning an event, development or circumstance described or referred to above will be conclusive and binding.
 
If any of the foregoing conditions are not satisfied, we may, at any time on or prior to the Expiration Date:
 
  •  terminate the exchange offer and return all tendered Old Notes to the respective tendering holders;
 
  •  modify, extend or otherwise amend the exchange offer and retain all tendered Old Notes until the Expiration Date, as extended, subject, however, to the withdrawal rights of holders; or
 
  •  to the extent lawful, waive the unsatisfied conditions with respect to the exchange offer and accept all Old Notes tendered and not previously validly withdrawn.
 
In addition, we will not accept for exchange any Old Notes tendered, and no New Notes will be issued in exchange for those Old Notes, if at such time any stop order shall be threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or with respect to the qualification of the indenture governing the New Notes under the Trust Indenture Act of 1939, as amended.
 
Effect of Tender
 
Any tender by a holder, and our subsequent acceptance of that tender, of Old Notes will constitute a binding agreement between that holder and us upon the terms and subject to the conditions of the exchange offer described in this prospectus and in the letter of transmittal. The acceptance of the exchange offer by a tendering holder of Old Notes will constitute the agreement by that holder to deliver good and marketable title to the tendered Old Notes, free and clear of any and all liens, restrictions, charges, pledges, security interests, encumbrances or rights of any kind of third parties.
 
Letter of Transmittal; Representations, Warranties and Covenants of Holders of Old Notes
 
Upon agreement to the terms of the letter of transmittal pursuant to an agent’s message, a holder, or the beneficial holder of Old Notes on behalf of which the holder has tendered, will, subject to that holder’s ability to withdraw its tender, and subject to the terms and conditions of the exchange offer generally, thereby:
 
  (1)   irrevocably sell, assign and transfer to or upon our order or the order of our nominee all right, title and interest in and to, and any and all claims in respect of or arising or having arisen as a result of the holder’s status as a holder of, all Old Notes tendered thereby, such that thereafter the holder shall have no contractual or other rights or claims in law or equity against us or any fiduciary, trustee, fiscal agent or other person connected with the Old Notes arising under, from or in connection with those Old Notes;
 
  (2)  waive any and all rights with respect to the Old Notes tendered thereby, including, without limitation, any existing or past defaults and their consequences in respect of those Old Notes; and


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  (3)  release and discharge us and the trustee for the Old Notes from any and all claims the holder may have, now or in the future, arising out of or related to the Old Notes tendered thereby, including, without limitation, any claims that the holder is entitled to receive additional principal or interest payments with respect to the Old Notes tendered thereby, other than as expressly provided in this prospectus and in the letter of transmittal, or to participate in any redemption or defeasance of the Old Notes tendered thereby.
 
In addition, by tendering Old Notes in the exchange offer, each holder of Old Notes will represent, warrant and agree that:
 
  (1)  it has received and reviewed this prospectus;
 
  (2)  it is the beneficial owner (as defined below) of, or a duly authorized representative of one or more beneficial owners of, the Old Notes tendered thereby, and it has full power and authority to execute the letter of transmittal;
 
  (3)  the Old Notes being tendered thereby were owned as of the date of tender, free and clear of any liens, charges, claims, encumbrances, interests and restrictions of any kind, and we will acquire good, indefeasible and unencumbered title to those Old Notes, free and clear of all liens, charges, claims, encumbrances, interests and restrictions of any kind, when we accept the same;
 
  (4)  it will not sell, pledge, hypothecate or otherwise encumber or transfer any Old Notes tendered thereby from the date of the letter of transmittal, and any purported sale, pledge, hypothecation or other encumbrance or transfer will be void and of no effect;
 
  (5)  in evaluating the exchange offer and in making its decision whether to participate in the exchange offer by tendering its Old Notes, it has made its own independent appraisal of the matters referred to in this prospectus and the letter of transmittal and in any related communications and it is not relying on any statement, representation or warranty, express or implied, made to it by us or the exchange agent, other than those contained in this prospectus, as amended or supplemented through the Expiration Date;
 
  (6)  the execution and delivery of the letter of transmittal shall constitute an undertaking to execute any further documents and give any further assurances that may be required in connection with any of the foregoing, in each case on and subject to the terms and conditions described or referred to in this prospectus;
 
  (7)  the agreement to the terms of the letter of transmittal pursuant to an agent’s message shall, subject to the terms and conditions of the exchange offer, constitute the irrevocable appointment of the exchange agent as its attorney and agent and an irrevocable instruction to that attorney and agent to complete and execute all or any forms of transfer and other documents at the discretion of that attorney and agent in relation to the Old Notes tendered thereby in favor of us or any other person or persons as we may direct and to deliver those forms of transfer and other documents in the attorney’s and agent’s discretion and the certificates and other documents of title relating to the registration of Old Notes and to execute all other documents and to do all other acts and things as may be in the opinion of that attorney or agent necessary or expedient for the purpose of, or in connection with, the acceptance of the exchange offer, and to vest in us or our nominees those Old Notes;
 
  (8)  the terms and conditions of the exchange offer shall be deemed to be incorporated in, and form a part of, the letter of transmittal, which shall be read and construed accordingly;
 
  (9)  it is acquiring the New Notes in the ordinary course of the business of the holder and any beneficial owner;
 
  (10)  it is not participating in, and does not intend to participate in, a distribution of the New Notes within the meaning of the Securities Act and has no arrangement or understanding


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  with any person to participate in a distribution of the New Notes within the meaning of the Securities Act;
 
  (11)  it is not a broker-dealer who acquired the Old Notes directly from us; and
 
  (12)  it is not an “affiliate” of ours, within the meaning of Rule 405 of the Securities Act.
 
The representations, warranties and agreements of a holder tendering Old Notes will be deemed to be repeated and reconfirmed on and as of the Expiration Date and the settlement date. For purposes of this prospectus, the “beneficial owner” of any Old Notes means any holder that exercises investment discretion with respect to those Old Notes.
 
Absence of Dissenters’ Rights
 
Holders of the Old Notes do not have any appraisal or dissenters’ rights in connection with the exchange offer.
 
Acceptance of Old Notes for Exchange and Delivery of New Notes
 
On the settlement date, New Notes to be issued in exchange for Old Notes in the exchange offer, if consummated, will be delivered in book-entry form.
 
We will be deemed to accept validly tendered Old Notes that have not been validly withdrawn as provided in this prospectus when, and if, we give oral or written notice of acceptance to the exchange agent. Subject to the terms and conditions of the exchange offer, delivery of the New Notes will be made by the exchange agent on the settlement date following receipt of that notice. The exchange agent will act as agent for tendering holders of Old Notes for the purpose of receiving Old Notes and transmitting New Notes as of the settlement date. If any tendered Old Notes are not accepted for any reason described in the terms and conditions of the exchange offer, such unaccepted Old Notes will be returned without expense to the tendering holders as promptly as practicable after the expiration or termination of the exchange offer.
 
Procedures for Tendering
 
To participate in the exchange offer, you must properly tender your Old Notes to the exchange agent as described below. We will only issue New Notes in exchange for Old Notes that you timely and properly tender. Therefore, you should allow sufficient time to ensure timely delivery of the Old Notes, and you should follow carefully the instructions on how to tender your Old Notes. It is your responsibility to properly tender your Old Notes. We have the right to waive any defects. However, we are not required to waive defects, and neither we, nor the exchange agent is required to notify you of defects in your tender.
 
If you have any questions or need help in exchanging your Old Notes, please contact the exchange agent at the address or telephone numbers set forth below.
 
All of the Old Notes were issued in book-entry form, and all of the Old Notes are currently represented by global certificates registered in the name of Cede & Co., the nominee of DTC. We have confirmed with DTC that the Old Notes may be tendered using DTC’s automatic tender offer program, or ATOP. The exchange agent will establish an account with DTC for purposes of the exchange offer promptly after the commencement of the exchange offer, and DTC participants may electronically transmit their acceptance of the exchange offer by causing DTC to transfer their Old Notes to the exchange agent using the ATOP procedures. In connection with the transfer, DTC will send an “agent’s message” to the exchange agent. The agent’s message will state that DTC has received instructions from the participant to tender Old Notes and that the participant agrees to be bound by the terms of the letter of transmittal.


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By using the ATOP procedures to exchange Old Notes, you will not be required to deliver a letter of transmittal to the exchange agent. However, you will be bound by its terms just as if you had signed it.
 
Determinations Under the Exchange Offer.  We will determine in our sole discretion all questions as to the validity, form, eligibility, time of receipt, acceptance of tendered Old Notes and withdrawal of tendered Old Notes. Our determination will be final and binding. We reserve the absolute right to reject any Old Notes not properly tendered or any Old Notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defect, irregularities or conditions of tender as to particular Old Notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, all defects or irregularities in connection with tenders of Old Notes must be cured within such time as we shall determine. Although we intend to notify holders of defects or irregularities with respect to tenders of Old Notes, neither we, the exchange agent nor any other person will incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed made until such defects or irregularities have been cured or waived. Any Old Notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned to the tendering holder as soon as practicable after the Expiration Date of the exchange.
 
When We Will Issue New Notes.  In all cases, we will issue New Notes for Old Notes that we have accepted for exchange under the exchange offer only after the exchange agent receives, prior to 5:00 p.m., New York City time, on the Expiration Date:
 
  •  a book-entry confirmation of such number of Old Notes into the exchange agent’s account at DTC; and
 
  •  a properly transmitted agent’s message.
 
Return of Old Notes Not Accepted or Exchanged.  If we do not accept any tendered Old Notes for exchange or if Old Notes are submitted for a greater principal amount than the holder desires to exchange, the unaccepted or non-exchanged Old Notes will be returned without expense to their tendering holder. Such non-exchanged Old Notes will be credited to an account maintained with DTC. These actions will occur as promptly as practicable after the expiration or termination of the exchange offer.
 
Participating Broker-Dealers.  Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where those Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of those New Notes. See “Plan of Distribution.”
 
Withdrawal of Tenders
 
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
 
For a withdrawal to be effective, you must comply with the appropriate ATOP procedures. Any notice of withdrawal must specify the name and number of the account at DTC to be credited with withdrawn Old Notes and otherwise comply with the ATOP procedures.
 
We will determine all questions as to the validity, form, eligibility and time of receipt of a notice of withdrawal. Our determination shall be final and binding on all parties. We will deem any Old Notes so withdrawn not to have been validly tendered for exchange for purposes of the exchange offer.
 
Any Old Notes that have been tendered for exchange but that are not exchanged for any reason will be credited to an account maintained with DTC for the Old Notes. This return or crediting will take place as soon as practicable after withdrawal, rejection of tender, expiration or termination of the exchange offer. You may retender properly withdrawn Old Notes by following the procedures described


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under “—Procedures for Tendering” above at any time on or prior to the Expiration Date of the exchange offer.
 
Exchange Agent
 
Wells Fargo Bank, National Association has been appointed as the exchange agent for the exchange offer. All correspondence in connection with the exchange offer should be sent or delivered by each holder of Old Notes, or a beneficial owner’s commercial bank, broker, dealer, trust company or other nominee, to the exchange agent at:
 
By Regular Mail or Overnight Courier:

Wells Fargo Bank, National Association
Corporate Trust Operations
MAC N9303-121
Sixth & Marquette Avenue
Minneapolis, MN 55479

By facsimile: (612)-667-6282

For Information or Confirmation by Telephone: (800) 344-5128
 
Questions concerning tender procedures and requests for additional copies of this prospectus or the letter of transmittal should be directed to the exchange agent at the address, telephone numbers or fax number listed above. Holders of Old Notes may also contact their commercial bank, broker, dealer, trust company or other nominee for assistance concerning the exchange offer. We will pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses.
 
Announcements
 
We may make any announcement required pursuant to the terms of this prospectus or required by the Exchange Act or the rules promulgated thereunder through a reasonable press release or other public announcement in our sole discretion; provided, that, if any such announcement is made by issuing a press release to Business Wire, such announcement shall be reasonable and sufficient.
 
Other Fees and Expenses
 
We will bear the expenses of soliciting tenders of the Old Notes. The principal solicitation is being made by mail. Additional solicitations may, however, be made by e-mail, facsimile transmission, telephone or in person by the exchange agent as well as our officers and other employees and those of our affiliates.
 
We have not retained any dealer-manager in connection with this exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. However, we will pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses.
 
Tendering holders of Old Notes will not be required to pay any fee or commission to the exchange agent. If, however, a tendering holder handles the transaction through its commercial bank, broker, dealer, trust company or other institution, that holder may be required to pay brokerage fees or commissions.
 
Transfer Taxes
 
Holders who tender their Old Notes for exchange will not be obligated to pay any transfer taxes in connection with that tender or exchange, except that holders who instruct us to register New Notes in the name of, or request that Old Notes not tendered or not accepted in the exchange offer be


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returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax on those Old Notes.
 
Consequences of Failure to Exchange
 
Holders of Old Notes who do not exchange their Old Notes for New Notes under this exchange offer will remain subject to the restrictions on transfer applicable in the Old Notes (i) as set forth in the legend printed on the Old Notes as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws and (ii) otherwise as set forth in the prospectus distributed in connection with the private offering of the Old Notes.
 
Any Old Notes not tendered by their holders in exchange for New Notes in this exchange offer will not retain any rights under the Registration Rights Agreement (except in certain limited circumstances). See “—Resale Registration Statement; Additional Interest.”
 
In general, you may not offer or sell the Old Notes unless they are registered under the Securities Act, or if the offer or sale is exempt from the registration requirements of the Securities Act and applicable state securities laws. We do not intend to register resales of the Old Notes under the Securities Act. Based on interpretations of the SEC staff, New Notes issued pursuant to this exchange offer may be offered for resale, resold or otherwise transferred by their holders (other than any such holder that is our “affiliate” within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holders acquired the New Notes in the ordinary course of the business of the holder and any beneficial owner and the holders are not engaged in, have no arrangement with any person to participate in, and do not intend to engage in, any public distribution of the New Notes to be acquired in this exchange offer. Any holder who tenders in this exchange offer and is engaged in, has an arrangement with any person to participate in, or intends to engage in, any public distribution of the New Notes (i) may not rely on the applicable interpretations of the SEC and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.
 
Resale Registration Statement; Additional Interest
 
Under the Registration Rights Agreement, we have agreed that if:
 
  (1)   any change in law or applicable interpretations of the staff of the SEC do not permit us to effect the exchange offer;
 
  (2)   for any other reason the Exchange Offer Registration Statement is not filed by March 31, 2011 or the exchange offer is not completed within 90 days after March 31, 2011;
 
  (3)   any holder of the Notes notifies us that:
 
  (a)   it is prohibited by law or SEC policy from participating in the exchange offer; or
 
  (b)   it may not resell the New Notes acquired by it in the exchange offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales; or
 
  (c)   it is a broker-dealer (“Participating Broker-Dealer”) receiving New Notes in the exchange offer and owns Notes acquired directly from us or an affiliate of ours;
 
then we will use our reasonable best efforts, at our cost, to (a) file as promptly as practicable a registration statement (the “Shelf Registration Statement”) covering resales of the Notes; (b) cause the Shelf Registration Statement to be declared effective under the Securities Act and (c) use our reasonable best efforts to keep the Shelf Registration Statement effective for a period of one year after the Expiration Date, or such earlier date on which (a) such Notes covered by the Shelf Registration


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Statement have been sold, or (b)(i) the Notes are freely transferable by holders that are not our affiliates in accordance with Rule 144 (or any similar provision then in force) under the Securities Act or otherwise where no conditions of Rule 144 are then applicable (other than the holding period requirement in paragraph (d)(1)(ii) of Rule 144 so long as such holding period requirement is satisfied), (ii) the restrictive legend has been removed from the Notes, and (iii) the Notes do not bear a restricted CUSIP number. We will, in the event a Shelf Registration Statement is filed, among other things, provide to each holder for whom such Shelf Registration Statement was filed copies of the prospectus which is a part of the Shelf Registration Statement, notify each such holder when the Shelf Registration Statement has become effective and take certain other actions as are required to permit unrestricted resales of the Notes. A holder selling Old Notes or New Notes pursuant to the Shelf Registration Statement generally would be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, and will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement which are applicable to such holder (including certain indemnification obligations).
 
The Registration Rights Agreement further provides that in the event that either (i) the Exchange Offer is not completed prior to June 30, 2011, (ii) the Shelf Registration Statement, if required under Registration Rights Agreement, has not become effective on or prior to June 30, 2011 or (iii) the Shelf Registration Statement, if required, ceases to be effective or this prospectus ceases to be usable for more than 30 days (whether or not consecutive) in any 12-month period, the interest rate on the Old Notes will be increased by (x) 0.25% per annum for the first 90-day period immediately following and (y) an additional 0.25% per annum with respect to each subsequent 90 day period thereafter, in each case until the Exchange Offer is completed or the Shelf Registration Statement, if required, becomes effective or is no longer required or this prospectus becomes usable, up to a maximum increase of 0.50% per annum.
 
Other
 
Participation in this exchange offer is voluntary, and you should carefully consider whether to participate. You are urged to consult your financial and tax advisors in making your own decision as to what action to take.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. See “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in the forward looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this prospectus. Except where the context otherwise requires, the terms “we,” “us,” or “our” refer to the business of Nationstar Mortgage LLC and its consolidated subsidiaries.
 
General
 
Our Business
 
We are a leading residential mortgage loan servicer and one of the largest non-bank residential mortgage servicers in the United States as measured by aggregate unpaid principal balance of loans serviced. We service mortgage loans in all 50 states, and we are licensed as a residential mortgage loan servicer and/or a third-party default specialist in all states that require such licensing. In addition to our core Servicing business, we currently originate primarily conventional agency (Fannie Mae and Freddie Mac) and government (Federal Housing Administration, Department of Veterans Affairs) residential mortgage loans, and we are licensed to originate residential mortgage loans in 49 states. Our headquarters and operations are based in Lewisville, Texas. As of April 30, 2011, we had a total of 2,176 employees.
 
We also have a legacy asset portfolio, which consists primarily of non-prime and nonconforming residential mortgage loans, most of which we originated from April to July 2007. In November 2009, we engaged in a transaction through which we term-financed our legacy assets with a non-recourse loan that requires no additional capital or equity contributions. Additionally, we consolidated certain securitization trusts where it was determined that we had both the power to direct the activities that most significantly impact the variable interest entities’ (VIE) economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, pursuant to new consolidation accounting guidance related to VIEs adopted on January 1, 2010.
 
The analysis of our financial condition and results of operations as discussed herein is primarily focused on the combined results of our two Operating Segments: Servicing and Originations.
 
Managing Business Performance
 
Management is focused on four key initiatives to manage our Operating Segments: (i) effective management of our servicing portfolio; (ii) growing our servicing portfolio through the acquisition of servicing rights or entering into subservicing contracts; (iii) origination and sale or securitization of conventional agency and government conforming residential mortgage loans and retention of mortgage servicing rights; and (iv) origination and sale or securitization of conventional agency and government conforming residential mortgage loans and retention of mortgage servicing rights. We also focus on access to diverse and multiple liquidity sources to finance (i) our obligations to pay advances as required by our servicing agreements and (ii) our loan originations.
 
We service loans by purchasing the right to service the loans, which is referred to as a “mortgage servicing right,” from the owner of the mortgage loan or pool of mortgage loans, or retaining the mortgage servicing right related to the loans that we originate and sell. Additionally, we enter into subservicing contracts with primary servicers that own mortgage servicing rights, pursuant to which we agree to service the loan on behalf of the primary servicer for a fee. The aggregate unpaid principal balance of our servicing portfolio as of December 31, 2010, 2009 and 2008 was $64.2 billion, $33.7 billion and $21.3 billion, respectively.


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Servicing fee income is primarily based on the aggregate unpaid principal balance of loans serviced and varies by loan type. Other factors that impact servicing fee income include delinquency rates, delinquency status and prepayment speeds.
 
Delinquency rates on the loans we service impact the contractual servicing and ancillary fees we receive, and the costs to service. Delinquent loans cost more to service than performing loans due to the additional resources and servicing advances required. We monitor our delinquency levels through our staffing models, our business plans and other macroeconomic factors.
 
Apart from the cost of financing our advances, the largest cost in our servicing organization is staffing cost, which is primarily impacted by delinquency levels and the size of our portfolio. Other operating costs in our Servicing Segment include technology, occupancy and general and administrative costs. Management continually monitors these costs to improve efficiency by streamlining workflows and implementing technology based solutions.
 
We provide services complementary to our servicing business by leveraging our servicing expertise for our current clients for either a base and/or incentive fee. We also own a non-controlling interest in NREIS, an ancillary real estate services and vendor management company that directly and indirectly provides title agency settlement or valuation services for loan originations and default management.
 
We intend to continue building our conventional originations platform. Through our originations platform, we are able to create mortgage servicing assets at a reasonable cost and partially replenish our servicing portfolio organically.
 
Prevailing interest rates are one of the key factors that impact origination volume. Housing market trends also impact origination volume with a strong housing market leading to higher loan origination volume, and a weak housing market leading to lower loan origination volume. Management continually evaluates interest rate movements and trends to assess the impact on loan applications and volume, as well as their corresponding impact on revenue and costs.
 
In evaluating revenue per loan originated, management focuses on various revenue sources, including: loan origination points and fees; and overall gain or loss on the sale or securitization of the loan. These components are compared to established revenue targets and operating plans.
 
In addition to the cost of financing our originations, our Originations Segment operating costs include staffing costs, sales commissions, technology, rent and other general and administrative costs. Management continually monitors costs through comparisons to operating plans.
 
Market Considerations
 
Revenues from our Operating Segments primarily consist of (i) servicing fee income based generally on the size of our servicing portfolio and (ii) gain on mortgage loans held for sale based generally on the origination volume. Maintaining and growing our revenues depends on our ability to acquire additional mortgage servicing rights, enter into additional subservicing agreements and expand our originations platform.
 
Servicing
 
Current trends in the mortgage servicing industry include high delinquencies, a significant increase in loan modifications and the need for more loss mitigation and high-touch servicing expertise.
 
Overall, all segments of the residential mortgage sector, including conventional and non-prime, have experienced increased delinquency levels and higher credit losses due to stress in the real estate market and economic environment. Residential loan delinquencies and related losses are at historical highs, prompting GSEs and other owners of mortgage loans to focus on home ownership preservation and superior credit performance.


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The increase in delinquencies has placed significant pressure on the operating capacity of servicers that are not staffed at appropriate levels for delinquent borrowers and also led owners of mortgage loans to search for servicers with experience in loss mitigation. This trend has led to increased demand for experienced high-touch servicers and provides us opportunities to acquire additional mortgage servicing rights and enter into additional subservicing contracts.
 
These trends may also be impacted by the ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the negotiations involving the 50 State Attorney Generals, certain federal regulators and servicers, the enforcement consent orders entered into by 14 of the largest servicers and four federal agencies, potential changes to federal, state and local laws and regulations concerning loan servicing, loan origination, loan modification or the licensing of entities that engage in these activities, and the initiative of the Federal Housing Finance Agency to align the servicing requirements related to delinquent mortgages and to modify the servicing compensation related to Fannie Mae and Freddie Mac loans.
 
However, we cannot predict how many, if any, mortgage servicing rights will be available for sale or subservicing opportunities will be available in the future; if we will be able to acquire mortgage servicing rights from third parties and enter into additional subservicing contracts, including any transactions facilitated by GSEs; or whether these mortgage servicing rights will be available at acceptable prices or on acceptable terms.
 
Originations
 
Today’s U.S. residential loan originations sector primarily offers conventional agency and government conforming mortgage loans. Non-prime and alternative lending programs and products represent only a small fraction of total originations. This has led to a consolidation in mortgage lenders in both the retail and wholesale channels and has resulted in less competition. We believe that the consolidation of the lending community has led to a market share opportunity for us.
 
Origination volume is impacted by changes in interest rates and the housing market. Depressed home prices and increased loan-to-value ratios may preclude many potential borrowers, including borrowers whose existing loans we service, from refinancing their existing loans. An increase in prevailing interest rates could decrease our origination volume through our Consumer Direct Retail originations channel, our largest originations channel by volume, because this channel focuses predominantly on refinancing existing mortgage loans.
 
In addition, there continue to be changes in legislation and licensing in an effort to simplify the consumer mortgage experience, which require technology changes and additional implementation costs for loan originators. We expect legislative changes will continue in the foreseeable future, which may increase our operating expenses.
 
Critical Accounting Policies
 
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified two policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to: (a) fair value measurements; and (b) sale of mortgage loans. We believe that the judgment, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Management currently views its fair value measurements, which include the valuation of mortgage loans held for sale, the valuation of mortgage loans held for investment, subject to ABS nonrecourse debt, investment in debt securities-available-for sale, the valuation of mortgage servicing rights, the


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valuation of derivative instruments, the valuation of ABS nonrecourse debt and sale of mortgage loans to be our critical accounting policies.
 
Fair Value Measurements
 
Mortgage Loans Held for Sale
 
Through September 30, 2009, we recorded mortgage loans held for sale at the lower of amortized cost or fair value on an aggregate basis grouped by delinquency status. Effective October 1, 2009, we elected to measure newly originated conventional residential mortgage loans held for sale at fair value, as permitted under current accounting guidance. We estimate fair value by evaluating a variety of market indicators including recent trades and outstanding commitments, calculated on an aggregate basis.
 
Mortgage Loans Held for Investment, subject to ABS nonrecourse debt
 
We determine the fair value on loans held for investment, subject to ABS nonrecourse debt using internally developed valuation models. These valuation models estimate the exit price we expect to receive in the loan’s principal market. Although we utilize and give priority to observable market inputs such as interest rates and market spreads within these models, we typically are required to utilize internal inputs, such as prepayment speeds, credit losses, and discount rates. These internal inputs require the use of our judgment and can have a significant impact on the determination of the loan’s fair value.
 
Investment in Debt Securities
 
Investment in debt securities consists of beneficial interests we retain in securitization transactions accounted for as a sale under current accounting guidance. These securities are classified as available-for-sale securities, and are therefore carried at their market value with the net unrealized gains or losses reported in the comprehensive income (loss) component of members’ equity. We base our valuation of debt securities on observable market prices when available; however, due to illiquidity in the markets, observable market prices were not available on these debt securities at December 31, 2010 and 2009. When observable market prices are not available, we base valuations on internally developed discounted cash flow models that use a market-based discount rate. The valuation considers recent market transactions, experience with similar securities, current business conditions and analysis of the underlying collateral, as available. In order to estimate cash flows, we utilize a variety of assumptions, including assumptions for prepayments, cumulative losses, and other variables.
 
We evaluate investment in debt securities for impairment each quarter, and investment in debt securities is considered to be impaired when the fair value of the investment is less than its cost. The impairment is separated into impairments related to credit losses, which are recorded in current period operations, and impairments related to all other factors, which are recorded in other comprehensive income/loss.
 
Mortgage Servicing Rights
 
We recognize mortgage servicing rights related to all existing residential mortgage loans transferred to a third party in a transfer that meets the requirements for sale accounting. Additionally, we may acquire the rights to service residential mortgage loans through the purchase of these rights from third parties. We apply fair value accounting to these mortgage servicing rights, with all changes in fair value recorded as a charge or credit to servicing fee income in the consolidated statement of operations. We estimate the fair value of our mortgage servicing rights using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds and discount rates.


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We use internal financial models that use, wherever possible, market participant data to value our mortgage servicing rights. These models are complex and use asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of mortgage servicing rights are complex because of the high number of variables that drive cash flows associated with mortgage servicing rights. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. On a periodic basis, a portion of our mortgage servicing rights is reviewed by an outside valuation expert.
 
Derivative Financial Instruments
 
We utilize certain derivative instruments in the ordinary course of our business to manage our exposure to changes in interest rates. These derivative instruments include forward sales of mortgage-backed securities, forward loan sale commitments and interest rate swaps and caps. We also issue interest rate lock commitments to borrowers in connection with single family mortgage loan originations. We recognize all derivative instruments on our consolidated statement of financial position at fair value. The estimated fair values of forward sales of mortgage-backed securities, forward sale commitments and interest rate swaps and caps are based on quoted market values and are recorded as other assets or derivative financial instruments liabilities in the consolidated balance sheet. The initial and subsequent changes in value on forward sales of mortgage-backed securities are a component of loss on mortgage loans held for sale in the consolidated statement of operations. The estimated fair values of interest rate lock commitments are based on quoted market values and are recorded in other assets in the consolidated balance sheet. The initial and subsequent changes in value of interest rate lock commitments are a component of gain on mortgage loans held for sale in the consolidated statement of operations.
 
ABS Nonrecourse Debt
 
Effective January 1, 2010, new accounting guidance related to VIEs eliminated the concept of a QSPE, and all existing SPEs are now subject to the new consolidation guidance. Upon adoption of this new accounting guidance, we identified certain securitization trusts where we, through our affiliates, continued to hold beneficial interests in these trusts. These retained beneficial interests obligate us to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant. In addition, as Master Servicer on the related mortgage loans, we retain the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE. When it is determined that we have both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, the assets and liabilities of these VIEs are included in our consolidated financial statements. Upon consolidation of these VIEs, we derecognized all previously recognized beneficial interests obtained as part of the securitization, including any retained investment in debt securities, mortgage servicing rights, and any remaining residual interests. In addition, we recognized the securitized mortgage loans as mortgage loans held for investment, subject to ABS nonrecourse debt, and the related asset-backed certificates acquired by third parties as ABS nonrecourse debt on our consolidated balance sheet.
 
We estimate the fair value of ABS nonrecourse debt based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments.
 
Sale of Mortgage Loans
 
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered by us. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from us, (2) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) we do not


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maintain effective control over the transferred assets through either (a) an agreement that entitles and obligates us to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return specific assets. Loan securitizations structured as sales as well as whole loan sales are accounted for as sales of mortgage loans and the resulting gains or losses on such sales, net of any accrual for standard representations and warranties, are reported in operating results as a component of loss on mortgage loans held for sale in the consolidated statement of operations during the period in which the securitization closes or the sale occurs.
 
Recent Developments
 
On March 31, 2011, we purchased a 22% interest in ANC Acquisition LLC (“ANC”) for $6.6 million. ANC is the indirect parent company of National Real Estate Information Services (NREIS), a real estate services company. We will account for our non-controlling interest in ANC using the equity method.
 
On May 16, 2011, Nationstar Mortgage Holdings Inc. (“Holdco”) filed a registration statement on Form S-1 with the Securities and Exchange Commission in connection with its initial public offering. Pursuant to a restructuring to be consummated prior to the completion of the offering, Holdco would acquire indirect ownership of 100% of our outstanding equity interests.
 
Results of Operations
 
Consolidated Results
 
The following table summarizes our consolidated operating results for the periods indicated (in thousands):
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Revenues:
                       
Total fee income
  $ 184,084     $ 100,218     $ 74,007  
Gain (loss) on mortgage loans held for sale
    77,344       (21,349 )     (86,663 )
                         
Total revenues
    261,428       78,869       (12,656 )
Total expenses and impairments
    220,976       142,367       147,777  
Other income (expense):
                       
Interest income
    98,895       52,518       92,060  
Interest expense
    (116,163 )     (69,883 )     (65,548 )
Loss on interest rate swaps and caps
    (9,801 )     (14 )     (23,689 )
Fair value changes in ABS securitizations
    (23,297 )            
                         
Total other income (expense)
    (50,366 )     (17,379 )     2,823  
                         
Net loss
  $ (9,914 )   $ (80,877 )   $ (157,610 )
                         
 
We provide further discussion of our results of operations for each of our reportable segments in the “Segment Results” section below. Certain income and expenses not allocated to our reportable segments are presented in the Legacy Portfolio and Other as discussed in Note 22- Business Segment Reporting, in the accompanying Notes to Consolidated Financial Statements included in this prospectus.
 
Comparison of Consolidated Results for the Years Ended December 31, 2010 and 2009
 
Revenues increased $182.5 million from $78.9 million for the year ended December 31, 2009 to $261.4 million for the year ended December 31, 2010, primarily due to the significant increase in our total fee income and an increase in our gain (loss) on mortgage loans held for sale. The increase in our total fee income was primarily a result of (1) our higher average servicing portfolio balance of $38.7 billion for the year ended December 31, 2010, compared to $25.8 billion for the year ended


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December 31, 2009, and (2) an increase in portfolio level performance-based fees and fees earned for loss mitigation activities. The increase in the gain on loans held for sale was a result of the $1.3 billion, or 88.7%, increase in the amount of loans originated during 2010 as well as the elimination of lower of cost or market adjustments related to our legacy asset portfolio.
 
Expenses and impairments increased $78.6 million from $142.4 million for the year ended December 31, 2009 to $221.0 million for the year ended December 31, 2010, primarily due to the increase in compensation expenses related to increased staffing levels in order to accommodate our larger servicing portfolio and originations as well as other related increases in general and administrative expenses. Our 2010 operating results include an additional $12.1 million in share-based compensation expense from a revised compensation plan executed for certain members of our executive team. Additionally, expenses and impairments increased from the consolidation of certain VIEs from January 1, 2010, and from expenses associated with the settlement of certain claims.
 
Other expense increased $33.0 million from $17.4 million for the year ended December 31, 2009 to $50.4 million for the year ended December 31, 2010, primarily due to the effects of the consolidation of certain VIEs and the losses on our outstanding interest rate swap positions during 2010.
 
Comparison of Consolidated Results for the Years Ended December 31, 2009 and 2008
 
Revenues increased $91.6 million from $(12.7) million for the year ended December 31, 2008 to $78.9 million for the year ended December 31, 2009, primarily due to (1) the increase in fee income as a result of the 57.7% increase in our servicing portfolio year over year and (2) the reduction in the loss on mortgage loans held for sale.
 
The decrease in loss was caused by the increase in our loans originated during 2009 compared to 2008 and the reduction in the lower of cost or market adjustments recorded in 2009 compared to 2008.
 
Expenses and impairments decreased $5.4 million from $147.8 million for the year ended December 31, 2008 to $142.4 million for the year ended December 31, 2009, primarily due to the reduction in the other-than-temporary impairments recognized on available for sale securities during 2009, partially offset by the increase in all other expense categories due to the increases in our loan originations and loan servicing portfolio.
 
Other income (expense) increased $20.2 million from $2.8 million for the year ended December 31, 2008 to $(17.4) million for the year ended December 31, 2009, primarily due to a decrease in interest income and an increase in interest expense as a result of larger advance balances caused by our increased servicing portfolio, offset by a reduction in loss on interest rate swaps and caps.
 
Segment Results
 
Our primary business strategy is to generate recurring, stable income from managing and growing our servicing portfolio and our originations. We operate through two business segments: Servicing and Originations, which we refer to collectively as our Operating Segments. We report the activity not related to either operating segment in the Legacy Portfolio and Other. The Legacy Portfolio and Other includes primarily all sub-prime mortgage loans (i) originated in the latter portion of 2006 and during 2007 or (ii) acquired from Centex Home Equity Company, LLC (CHEC), and VIEs which were consolidated pursuant to the January 1, 2010 adoption of new consolidation guidance related to VIEs.
 
The accounting policies of each reportable segment are the same as those of the consolidated financial statements except for (i) expenses for consolidated back-office operations and general overhead expenses such as executive administration and accounting and (ii) revenues generated on inter-segment services performed. Expenses are allocated to individual segments based on the estimated value of the services performed, including estimated utilization or square footage and


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corporate personnel, as well as the equity invested in each segment. Revenues generated or inter-segment services performed are valued based on similar services provided to external parties.
 
Servicing Segment
 
The Servicing Segment provides loan servicing on our servicing portfolio, including the collection of principal and interest payments and the generation of ancillary fees related to the servicing of mortgage loans.
 
The following table summarizes our operating results from our Servicing Segment for the periods indicated (in thousands).
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Revenues:
                       
Servicing fee income
  $ 175,569     $ 91,266     $ 69,235  
Other fee income
    7,273       8,867       5,366  
                         
Total fee income
    182,842       100,133       74,601  
Gain (loss) on mortgage loans held for sale
                 
                         
Total revenues
    182,842       100,133       74,601  
Expenses and impairments:
                       
Salaries, wages, and benefits
    78,269       56,726       41,755  
General and administrative
    24,664       10,669       9,878  
Occupancy
    4,350       3,502       3,404  
                         
Total expenses and impairments
    107,283       70,897       55,037  
Other income (expense):
                       
Interest income
    263       4,143       10,872  
Interest expense
    (51,791 )     (25,877 )     (15,718 )
Loss on interest rate swaps and caps
    (9,801 )            
                         
Total other income (expense)
    (61,329 )     (21,734 )     (4,846 )
                         
Net income from Servicing Segment
  $ 14,230     $ 7,502     $ 14,718  
                         
 
Increase in aggregate unpaid principal balance of our servicing portfolio primarily governs the increase in revenues, expenses and other income (expense) of our Servicing Segment.
 
The table below provides detail of the characteristics and key performance metrics of our servicing portfolio as of or for the year ended.
 
                         
    Year Ended December 31,  
    2010     2009     2008  
    (dollars in millions, except for average loan amount)  
 
Unpaid principal balance (by investor):
                       
Special Servicing
  $ 4,893     $ 1,554     $ 1,218  
Government-sponsored enterprises
    52,194       24,235       10,709  
ABS
    7,089       7,875       9,415  
                         
Total unpaid principal balance
  $ 64,176     $ 33,664     $ 21,342  
                         
Loan count—servicing
    389,172       230,615       159,336  
Average Servicing Portfolio
  $ 38,653     $ 25,799     $ 12,775  
Average loan amount
  $ 164,904     $ 145,977     $ 133,943  
Average coupon
    5.74 %     6.76 %     7.49 %
Average FICO
    631       644       588  
60+ delinquent (% of loans)(1)
    17.0 %     19.9 %     13.1 %
Total prepayment speed (12 month CPR)
    13.3 %     16.3 %     16.2 %


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(1) Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan.
 
Revenues
 
For the years ended December 31, 2010 and 2009
 
Total revenues were $182.8 million for the year ended December 31, 2010 compared to $100.1 million for the year ended December 31, 2009, an increase of $82.7 million, or 82.6%, primarily due to the net effect of the following:
 
  •  Servicing fee income increased $84.3 million period over period primarily from:
 
  (a)  Increase of $34.8 million due to higher average unpaid principal balance of $38.7 billion in 2010 compared to $25.8 billion in 2009. The increase in our servicing portfolio was primarily driven by an increase in average unpaid principal balance for loans serviced for government-sponsored enterprises and other subservicing contracts for third party investors of $31.2 billion in 2010 compared to $17.2 billion in 2009. This increase was partially offset by a decrease in average unpaid principal balance for our asset-backed securitizations portfolio, which decreased to $7.4 billion in 2010 compared to $8.6 billion in 2009.
 
  (b)  Increase of $8.9 million due to increased loss mitigation and performance-based incentive fees earned from a GSE.
 
  (c)  Increase of $17.9 million due to higher fees earned from HAMP and from modification fees earned on non-HAMP modifications. As a high-touch servicer, we use modifications as a key loss mitigation tool. Under HAMP, subject to a program participation cap, we, as a servicer, will receive an initial incentive payment of up to $1,500 for each loan modified in accordance with HAMP subject to the condition that the borrower successfully completes a trial modification period. With this program, the servicer must forego any late fees and may not charge any other fees. In addition, provided that a HAMP modification does not become 90 days or more delinquent, we will receive an additional incentive fee of up to $1,000. Initial redefault rates have been favorable, averaging 10% to 20%. The HAMP program has an expiration date of December 31, 2012 and is only applicable to first lien mortgages that were originated on or before January 1, 2009. For non-HAMP modifications, we generally do not waive late fees, and we charge a modification fee. These amounts are collected at the time of the modification.
 
  (d)  Increase of $21.9 million from change in fair value on mortgage servicing rights which was recognized in servicing fee income. The fair value of our mortgage servicing rights (MSRs) is based upon the present value of the expected future cash flows related to servicing these loans. The revenue components of the cash flows are servicing fees, interest earned on custodial accounts, and other ancillary income. The expense components include operating costs related to servicing the loans and interest expenses on servicing advances. The expected future cash flows are primarily impacted by prepayment estimates, delinquencies, and market discount rates. Generally, the value of MSRs increases when interest rates increase and decreases when interest rates decline due to the effect those changes in interest rates have on prepayment estimates. Other factors affecting the MSR value includes the estimated effects of loan modifications on expected cash flows. Such modifications tend to positively impact cash flows by extending the expected life of the affected MSR and potentially producing additional revenue opportunities depending on the type of modification. In valuing the MSRs, we believe our assumptions are consistent with the assumptions other major market participants use. These assumptions include a level of future modification activity that we believe major market participants would use in their valuation of MSRs. Internally, we have modification goals that exceed the assumptions utilized in our valuation model. Nevertheless, were we to utilize an assumption of a level of


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  future modifications consistent with our internal goals to our MSR valuation, we do not believe the resulting increase in value would be material.
 
  (e)  Increase of $1.0 million due to an increase in ancillary and late fees arising from growth in the servicing portfolio. Late fees are recognized as revenue at collection.
 
  •  Other fee income decreased $1.6 million for the year ended December 31, 2010 due to lower lender-placed insurance commissions and lower REO sales commissions resulting from a decline in REO sales managed by our internal REO sales group.
 
For the Years Ended December 31, 2009 and 2008
 
Total revenues were $100.1 million for the year ended December 31, 2009 compared to $74.6 million for the year ended December 31, 2008, an increase of $25.5 million, or 34.2%, primarily due to the net effect of the following:
 
  •  Servicing fee income increased $22.1 million year over year primarily from:
 
  (a)  Increase of $20.8 million due to higher average unpaid principal balance of $25.8 billion in 2009 compared to $12.8 billion in 2008. The increase in our servicing portfolio was primarily driven by an increase in average unpaid principal balance for loans serviced for GSEs and other subservicing contracts for third party investors in 2009 compared to 2008. This increase was partially offset by a decrease in average unpaid principal balance for our asset-backed securitizations portfolio, which decreased in 2009 compared to 2008.
 
  (b)  Increase of $7.7 million due to increased loss mitigation and performance-based incentive fees earned from a GSE.
 
  (c)  Increase of $3.3 million due to higher modification fees earned from HAMP and from modification fees earned on non-HAMP modifications.
 
  (d)  Increase of $7.0 million due to increased collection of late fees, primarily due to higher average unpaid principal balance of our servicing portfolio. Late fees are recognized as revenue at collection.
 
  (e)  Decrease of $16.2 million from change in fair value on mortgage servicing rights which was recognized in servicing fee income.
 
  •  Other fee income increased $3.5 million for the year ended December 31, 2009 from higher lender-placed insurance commissions, which is primarily due to higher delinquency rates in 2009 compared to 2008.
 
Expenses and Impairments
 
For the Years Ended December 31, 2010 and 2009
 
Expenses and impairments were $107.3 million for the year ended December 31, 2010 compared to $70.9 million for the year ended December 31, 2009, an increase of $36.4 million, or 51.3%, primarily due to an increase of $21.6 million in salaries, wages and benefits expense resulting from an increase in headcount from 910 in 2009 to 1,178 in 2010 and $4.9 million in additional share-based compensation from a revised compensation plan for certain of our executives. Additionally, we recognized an increase of $14.8 million in general and administrative and occupancy expenses associated with increased headcount, growth in the servicing portfolio and increases in reserves for non-recoverable advances.
 
For the Years Ended December 31, 2009 and 2008
 
Expenses and impairments were $70.9 million for the year ended December 31, 2009 compared to $55.0 million for the year ended December 31, 2008, an increase of $15.9 million, or 28.9%, primarily due to the increase of $14.9 million in salaries, wages and benefits expense resulting from an increase in headcount from 570 in 2008 to 910 in 2009.


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Other Income (Expense)
 
For the Years Ended December 31, 2010 and 2009
 
Total other income (expense) was $(61.3) million for the year ended December 31, 2010 compared to $(21.7) million for the year ended December 31, 2009, an increase in expense, net of income, of $39.6 million, or 182.5%, primarily due to the net effect of the following:
 
  •  Interest income decreased $3.8 million due to lower average index rates received on custodial cash deposits associated with mortgage loans serviced combined with lower average outstanding custodial cash deposit balances.
 
  •  Interest expense increased $25.9 million primarily due to higher average outstanding debt of $638.6 million in 2010 compared to $313.3 million in 2009, offset by lower interest rates due to declines in the base LIBOR and decreases in the overall index margin on outstanding servicer advance facilities. Additionally, in 2010, we have included the balances related to our outstanding corporate note and senior unsecured debt balances, and the related interest expense thereon, as a component of our Servicing Segment. As a result of the weakening housing market, we continued to carry approximately $530.9 million in residential mortgage loans that we were unable to securitize as mortgage loans held for sale on our balance sheet throughout most of 2009. During this time period, we allocated a portion of our outstanding corporate note balance to Legacy Portfolio and Other to account for the increased capacity and financing costs we incurred while these loans were retained on our balance sheet. For the year ended December 31, 2010, we recorded $21.7 million in interest expense related to our outstanding corporate and 10.875% senior notes.
 
  •  Loss on interest rate swaps and caps was $9.8 million for the year ended December 31, 2010, with no corresponding gain or loss recognized for the year ended December 31, 2009. The loss for the period was a result of a decline in fair value recognized during the period on outstanding interest rate swaps designed to economically hedge the interest rate risk associated with our 2009-ADV1 Servicer Advance Facility. This facility was not executed until the end of the fourth quarter of 2009, so we did not recognize any corresponding fair value adjustments during the year ended December 31, 2009.
 
For the Years Ended December 31, 2009 and 2008
 
Total other income (expense), which for the most part consisted of interest expense, was $(21.7) million for the year ended December 31, 2009 compared to $(4.8) million for the year ended December 31, 2008, an increase in expense, net of income, of $16.9 million, or 352.1%, primarily due to the net effect of the following:
 
  •  Increase of $7.7 million from additional amortization of deferred financing costs resulting from refinancing or renewal of our advance financing facilities.
 
  •  Increase of $6.7 million from decline in interest income earned on custodial cash deposits associated with mortgage loans serviced primarily due to lower average deposits and index rates.
 
  •  Increase of $1.4 million from compensating interest due to increased average unpaid principal balance.
 
  •  Increase of $1.1 million from higher average outstanding debt of $313.3 million in 2009 compared to $259.1 million in 2008, offset by lower interest rates due to declines in the base LIBOR.


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Originations Segment
 
The Originations Segment involves the origination, packaging, and sale of GSE mortgage loans into the secondary markets via whole loan sales or securitizations.
 
The following table summarizes our operating results from our Originations Segment for the periods indicated (in thousands).
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Revenues:
                       
Servicing fee income
  $     $     $  
Other fee income
    7,042       1,156       589  
                         
Total fee income
    7,042       1,156       589  
Gain on mortgage loans held for sale
    77,498       54,437       21,985  
                         
Total revenues
    84,540       55,593       22,574  
Expenses and impairments:
                       
Salaries, wages, and benefits
    57,852       31,497       18,357  
General and administrative
    26,761       14,586       10,864  
Occupancy
    2,307       1,449       1,574  
                         
Total expenses and impairments
    86,920       47,532       30,795  
Other income (expense):
                       
Interest income
    11,848       4,261       1,920  
Interest expense
    (8,806 )     (3,438 )     (1,289 )
                         
Total other income (expense)
    3,042       823       631  
                         
Net income (loss) from Originations Segment
  $ 662     $ 8,884     $ (7,590 )
                         
 
Increase in origination volume primarily governs the increase in revenues, expenses and other income (expense) of our Originations Segment. The table below provides detail of the loan characteristics of loans originated for the periods presented.
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Origination Volume (in millions):
                       
Retail
  $ 1,608     $ 1,093     $ 538  
Wholesale
    1,184       386       4  
                         
Total Originations
  $ 2,792     $ 1,479     $ 542  
                         
 
Revenues
 
For the Years Ended December 31, 2010 and 2009
 
Total revenues were $84.5 million for the year ended December 31, 2010 compared to $55.6 million for the year ended December 31, 2009, an increase of $28.9 million, or 52.0%, primarily due to the net effect of the following:
 
  •  Other fee income increased $5.8 million primarily due to our election to measure newly originated conventional residential mortgage loans held for sale at fair value, effective October 1, 2009. Subsequent to this election, any collected points and fees related to originated mortgage loans held for sale are included in other fee income. Prior to this election, points and fees were recorded as deferred origination income and recognized over the life of the mortgage loan as an adjustment to our interest income yield or, when the related loan was sold to a third-party purchaser, included as a component of gain on mortgage loans held for sale.


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  •  Gain on mortgage loans held for sale increased $23.1 million primarily from:
 
  (a)  Increase of $22.4 million from improved margins and larger volume of originations, which increased from $1.5 billion for the year ended December 31, 2009 to $2.8 billion in originations for the year December 31, 2010.
 
  (b)  Increase of $17.9 million from capitalized mortgage servicing rights due to the larger volume of originations and subsequent retention of servicing rights.
 
  (c)  Decrease of $0.7 million from change in unrealized gains/(losses) on derivative financial instruments. These include interest rate lock commitments and forward sales of mortgage-backed securities.
 
  (d)  Decrease of $20.2 million from recognition of points and fees earned on mortgage loans held for sale for the year ended December 31, 2009. Effective October 1, 2009, all points and fees are recognized at origination upon the election to apply fair value accounting to newly-originated loans and are recognized as a component of other fee income.
 
For the Years Ended December 31, 2009 and 2008
 
Total revenues were $55.6 million for the year ended December 31, 2009 compared to $22.6 million for the year ended December 31, 2008, an increase of $33.0 million, or 146.0%, primarily due to the net effect of the following:
 
  •  Gain on mortgage loans held for sale increased $32.4 million primarily from:
 
  (a)  Increase of $24.8 million from larger volume of originations, which increased from $0.5 billion in 2008 to $1.5 billion in 2009.
 
  (b)  Increase of $3.8 million from capitalized mortgage servicing rights due to larger volume of origination and subsequent retention of servicing rights.
 
  (c)  Increase of $3.8 million from change in unrealized gains/(losses) on derivative financial instruments. These include interest rate lock commitments and forward sales of mortgage-backed securities.
 
Expenses and Impairments
 
For the Years Ended December 31, 2010 and 2009
 
Expenses and impairments were $86.9 million for the year ended December 31, 2010 compared to $47.5 million for the year ended December 31, 2009, an increase of $39.4 million, or 82.9%, primarily due to the net effect of the following:
 
  •  Increase of $26.4 million in salaries, wages and benefits expense from increase in headcount of 452 in 2009 to 688 in 2010 and increases in performance based compensation. Additionally, we recognized $3.6 million in share-based compensation expense from a revised compensation plan for certain of our executives.
 
  •  Increase of $13.1 million in general and administrative and occupancy expense primarily due to increase in overhead expenses from the larger volume of originations in 2010 and expenses associated with the settlement of certain claims.


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For the Years Ended December 31, 2009 and 2008
 
Expenses and impairments were $47.5 million for the year ended December 31, 2009 compared to $30.8 million for the year ended December 31, 2008, an increase of $16.7 million, or 54.2%, primarily due to the net effect of the following:
 
  •  Increase of $13.1 million in salaries, wages and benefits expense from increase in headcount of 311 in 2008 to 452 in 2009 and increases in performance based compensation.
 
  •  Increase of $3.7 million in general and administrative expense primarily due to increase in overhead expenses from larger volume of origination in 2009.
 
Other Income (Expense)
 
For the Years Ended December 31, 2010 and 2009
 
Total other income (expense) was $3.0 million for the year ended December 31, 2010 compared to $0.8 million for the year ended December 31, 2009, an increase in income, net of expense, of $2.2 million, or 275.0%, primarily due to the net effect of the following:
 
  •  Interest income increased $7.5 million from interest earned from originated loans prior to sale or securitization. The increase is primarily due to the increase in the volume of originations. Loans are typically sold within 30 days of origination.
 
  •  Interest expense increased $5.4 million primarily due to an increase in origination volume in 2010 and associated financing required to originate these loans combined with a slight increase in outstanding average days in warehouse on newly originated loans.
 
For the Years Ended December 31, 2009 and 2008
 
Total other income (expense) was $0.8 million for the year ended December 31, 2009 compared to $0.6 million for the year ended December 31, 2008, an increase in income, net of expense, of $0.2 million, or 33.3%, primarily due to the net effect of the following:
 
  •  Interest income increased $2.4 million primarily due to interest earned from originated loans prior to sale or securitization. Loans are typically sold within 30 days of origination.
 
  •  Interest expense increased $2.1 million primarily due to interest expense from warehouse facilities that finance the origination of loans.
 
Legacy Portfolio and Other
 
Through December 2009, our legacy asset portfolio consisted primarily of non-prime and nonconforming residential mortgage loans that we primarily originated from April to July 2007. Revenues and expenses are primarily a result of mortgage loans transferred to securitization trusts that were structured as secured borrowings, resulting in carrying the securitized loans as mortgage loans held for investment on our consolidated balance sheets and recognizing the asset-backed certificates as nonrecourse debt. Prior to September 2009, these residential mortgage loans were classified as mortgage loans held for sale on our consolidated balance sheet and carried at the lower of cost or fair value and financed through a combination of our existing warehouse facilities and our corporate note. These loans were transferred on October 1, 2009, from mortgage loans held for sale to a held-for-investment classification at fair value on the transfer date. Subsequent to the transfer date, we completed the securitization of the mortgage loans, which was structured as a secured borrowing. This structure resulted in carrying the securitized loans as mortgages on our consolidated balance sheet and recognizing the asset-backed certificates acquired by third parties as nonrecourse debt.
 
Effective January 1, 2010, new accounting guidance eliminated the concept of a QSPE. Consequently, all existing securitization trusts are considered VIEs and are now subject to the new consolidation guidance. Upon consolidation of certain of these VIEs, we recognized the securitized


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mortgage loans related to these securitization trusts as mortgage loans held for investment, subject to ABS nonrecourse debt (see Note 3 to our consolidated financial statements). Additionally, we elected the fair value option provided for by ASC 825-10. Assets and liabilities related to these VIEs are included in Legacy Portfolio and Other in our segmented results.
 
The following table summarizes our operating results from Legacy Portfolio and Other for the periods indicated (in thousands).
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Revenues:
                       
Servicing fee income
  $ 820     $     $  
Other fee income
    2,643              
                         
Total fee income
    3,463              
Gain (loss) on mortgage loans held for sale
          (75,786 )     (108,648 )
                         
Total revenues
    3,463       (75,786 )     (108,648 )
Expenses and impairments:
                       
Salaries, wages, and benefits
    13,148       3,537       2,854  
General and administrative
    7,488       5,239       1,452  
Loss on mortgage loans held for investment and foreclosed real estate
    3,503       7,512       2,567  
Occupancy
    2,788       1,912       1,043  
Loss on available-for-sale securities-other-than-temporary
          6,809       55,212  
                         
Total expenses and impairments
    26,927       25,009       63,128  
Other income (expense):
                       
Interest income
    77,521       44,114       79,268  
Interest expense
    (55,566 )     (40,568 )     (48,541 )
Gain (loss) on interest rate swaps and caps
          (14 )     (23,689 )
Fair value changes in ABS securitizations
    (23,297 )            
                         
Total other income (expense)
    (1,342 )     3,532       7,038  
                         
Net loss from Legacy Portfolio & Other
  $ (24,806 )   $ (97,263 )   $ (164,738 )
                         
 
The table below provides detail of the characteristics of our Legacy Portfolio and other for the dates indicated (in thousands):
 
                         
    Year Ended December 31,  
    2010(1)     2009     2008  
 
Legacy Portfolio and Other Performance:
                       
Performing—UPB
  $ 1,037,201     $ 345,516     $ 627,368  
Nonperforming (90+ Delinquency)—UPB
    337,779       141,602       100,452  
Real Estate Owned—Estimated Fair Value
    27,337       10,262       21,822  
                         
Total Legacy Portfolio and Other—UPB
  $ 1,402,317     $ 497,380     $ 749,642  
                         
 
 
(1) Amounts include one previously off-balance sheet securitization which was consolidated upon adoption of ASC 810 related to consolidation of certain VIEs.
 
For the Years Ended December 31, 2010 and 2009
 
Total revenues were $3.5 million for the year ended December 31, 2010, compared to $(75.8) million for the year ended December 31, 2009. This increase was primarily a result of a change in classification on mortgage loans held for sale discussed above, with no gain on mortgage loans held


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for sale recorded for the year ended December 31, 2010, compared to a loss of $75.8 million recorded for the year ended December 31, 2009.
 
Expenses and impairments were $26.9 million for the year ended December 31, 2010 compared to $25.0 million for the year ended December 31, 2009, an increase of $1.9 million, or 7.6%, primarily due to an increase in headcount and allocated expenses for corporate support functions and executive oversight. Additionally, we recognized $3.6 million in additional share-based compensation expense from a revised compensation plan for certain of our executives. These expense increases were offset by the net impact of the adoption of new accounting guidance on the consolidation of certain securitization trusts which resulted in a $4.0 million reduction in charges from losses realized on mortgage loans held for investment and foreclosed real estate and a decrease of $6.8 million in other-than-temporary impairments recognized on our investment in debt securities-available-for-sale.
 
Total other income (expense) was $(1.3) million for the year ended December 31, 2010 compared to $3.5 million for the year ended December 31, 2009, a decrease of $4.8 million, or 137.1%. The decrease was primarily due to an increase in our net interest income, offset by fair value changes in our ABS securitizations. Interest income, net of interest expense, increased to $21.9 million for the year ended December 31, 2010 as compared to $3.5 million for the year ended December 31, 2009. The increase in interest income, net was due to the consolidation of certain securitization trusts upon the adoption of new accounting guidance related to VIEs. Fair value changes in ABS securitizations included a loss of $23.3 million for the year ended December 31, 2010, with no corresponding amount for the year ended December 31, 2009, due to the election of the fair value option on consolidated VIEs.
 
For the years ended December 31, 2009 and 2008
 
Total revenues were $(75.8) million for the year ended December 31, 2009, compared to $(108.6) million for the year ended December 31, 2008, an increase of $32.8 million, or 30.2%. This increase was a result of lower mark-to-market adjustments on our outstanding legacy portfolio. We accounted for the excess of cost over fair value of these loans as a valuation allowance with changes in the valuation allowance included in loss on mortgage loans held for sale. For the year ended December 31, 2009, the change in the outstanding valuation allowance resulted in net income of $8.8 million, compared to a net loss of $42.6 million for the year ended December 31, 2008. These amounts were partially offset by higher realized losses on existing portfolio rewrites and liquidations on our existing legacy portfolio and real estate owned of $80.3 million for the year ended December 31, 2009, compared to a loss of $56.3 million for the year ended December 31, 2008.
 
Expenses and impairments were $25.0 million for the year ended December 31, 2009, compared to $63.1 million for the year ended December 31, 2008, a decrease of $38.1 million, or 60.4%, primarily due to a decrease of $48.4 million in other-than-temporary impairments recognized on our investment in debt securities-available-for-sale attributable to lower overall outstanding carrying balances on outstanding debt securities, offset by an increase in unallocated corporate expenses and an increase in losses realized on loans held for investment and foreclosed real estate.
 
The deterioration of the housing market and related illiquidity in the capital markets resulted in an overall decrease in the credit quality of the residential mortgage loans that collateralize our retained investment in debt securities. As a result of these weakening conditions, in 2008 we determined that we would not be able to fully recover all of our recorded investment in these related debt securities, and recorded an other-than-temporary impairment of $55.2 million, compared to $6.8 million in impairments for the year ended December 31, 2009. The decrease in our recognized impairments was primarily a result of our lower overall total outstanding investment in these debt securities.
 
During late 2008 and 2009, increased foreclosure activities resulted in an increase in real estate owned, coupled with the continuing deterioration of the housing market, our real estate owned losses increased. Our increased loss severities were also impacted by management initiatives enacted in 2009


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to liquidate existing foreclosed real estate in advance of continued deterioration in certain housing markets.
 
We estimate the fair value of the real estate owned at the time that a loan is transferred to the real estate owned classification. Real estate owned is recorded at estimated fair value less costs to sell at the date of foreclosure. Fair value is estimated using the most recently obtained appraised value or broker price opinion, as applicable, adjusted, as necessary, to reflect expected price concessions based on historical experience. Upon foreclosure, we obtain a third party appraisal and a third party broker price opinion. Subsequently, we obtain updated broker price opinions every 90 days for our real estate owned. We review recent real estate owned sales activity on a quarterly basis to ensure that the resulting overall net sales proceeds received are consistent with our estimated fair value. Any subsequent declines in fair value are credited to a valuation allowance and charged to operations as incurred.
 
Total other income was $3.5 million for the year ended December 31, 2009 compared to $7.0 million for the year ended December 31, 2008, a decrease of $3.5 million, or 50.0%. The decrease was primarily due to a decrease in net interest income year over year of approximately $27.3 million, offset by a decrease in loss on interest rate swaps and caps. The decrease in interest income, net was attributable to an overall decrease in our total outstanding performing legacy portfolio assets to $345.5 million as of December 31, 2009, compared to $627.4 million as of December 31, 2008. In addition, our weighted average interest rates on our outstanding legacy portfolio assets decreased to 7.58% for the year ended December 31, 2009 compared to 9.11% for the year ended December 31, 2008. Loss on interest rate swaps and caps decreased to $0.0 million for the year ended December 31, 2009 as compared to $23.7 million for the year ended December 31, 2008. Prior to 2009, we entered into interest rate swap agreements to economically hedge the interest payments on the warehouse debt and securitization of our mortgage loans held for sale. The $23.7 million decrease in loss on interest rate swaps and caps was due to our unwinding of outstanding interest rate swap positions during 2008.


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Analysis of Items on Consolidated Balance Sheet
 
The following table presents our consolidated balance sheets as of December 31, 2010 and 2009 (in thousands).
 
                 
    December 31,
    December 31,
 
    2010     2009  
 
Assets
               
Cash and cash equivalents
  $ 21,223     $ 41,645  
Restricted cash
    91,125       52,795  
Accounts receivable
    439,071       509,974  
Mortgage loans held for sale
    371,160       203,131  
Mortgage loans held for investment, subject to nonrecourse debt—Legacy Assets
    266,840       301,910  
Mortgage loans held for investment, subject to ABS nonrecourse debt
    538,440        
Investment in debt securities—available-for-sale
          2,486  
Receivables from affiliates
    8,993       12,574  
Mortgage servicing rights
    145,062       114,605  
Property and equipment, net
    8,394       6,575  
Real estate owned, net (includes $17,509 and $0, respectively, of real estate owned, subject to ABS nonrecourse debt)
    27,337       10,262  
Other assets
    29,536       24,228  
                 
Total assets
  $ 1,947,181     $ 1,280,185  
                 
Liabilities and members’ equity
               
Notes payable
  $ 709,758     $ 771,857  
Unsecured senior notes
    244,061        
Payables and accrued liabilities
    75,054       66,830  
Derivative financial instruments
    7,801        
Derivative financial instruments, subject to ABS nonrecourse debt
    18,781        
Nonrecourse debt—Legacy Assets
    138,662       177,675  
ABS nonrecourse debt
    496,692        
                 
Total liabilities
    1,690,809       1,016,362  
Total members’ equity
    256,372       263,823  
                 
Total liabilities and members’ equity
  $ 1,947,181     $ 1,280,185  
                 
 
Comparison of Consolidated Balance Sheet Items—December 31, 2010 to December 31, 2009
 
Assets
 
Restricted cash consists of custodial accounts related to collections on certain mortgage loans and mortgage loan advances that have been pledged to debt counterparties under various Master Repurchase Agreements. Restricted cash was $91.1 million at December 31, 2010, an increase of $38.3 million from December 31, 2009, primarily a result of the increase in custodial deposits from mortgage loan advances. These custodial deposits are held in trust until they are remitted to the bond investors to pay down the asset-backed certificates.
 
Accounts receivable consists primarily of accrued interest receivable on mortgage loans and securitizations, collateral deposits on surety bonds, and advances made to nonconsolidated securitization trusts, as required under various servicing agreements related to delinquent loans, which are ultimately paid back to us from the securitization trusts. Accounts receivable was $439.1 million at December 31, 2010, a decrease of $70.9 million from December 31, 2009. The decrease in accounts receivable was primarily a result of decreases in outstanding delinquency and corporate and escrow advances of $57.6 million and $41.6 million, respectively. During the period, the GSEs began to repurchase loans from securitization trusts that we service for them that are 120 days or more past


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due. In conjunction with these repurchases, principal and interest advances that we had made as servicer for these loans were repaid. As such, our accounts receivable balance decreased significantly during the period as well as our corresponding borrowings under our MBS Advance Funding facility that we utilize to fund such advances.
 
Mortgage loans held for sale are carried at fair value, as permitted under ASC 825, Financial Instruments. We estimate fair value by evaluating a variety of market indicators including recent trades and outstanding commitments. Mortgage loans held for sale was $371.2 million at December 31, 2010, an increase of $168.1 million over December 31, 2009, a result of higher origination volume during the 2010 period.
 
Mortgage loans held for investment, subject to nonrecourse debt—legacy assets consist of nonconforming or subprime mortgage loans securitized which serve as collateral for the nonrecourse debt. These loans were transferred on October 1, 2009, from mortgage loans held for sale at fair value on the transfer date, as determined by the present value of expected future cash flows, with no valuation allowance recorded. Any decreases in expected cash flows subsequent to the transfer are recognized as a valuation allowance. Mortgage loans held for investment, subject to nonrecourse debt—legacy assets was $266.8 million at December 31, 2010, a decrease of $35.1 million from December 31, 2009, a result of principal collections and liquidations on the outstanding mortgage loans.
 
Mortgage loans held for investment, subject to ABS nonrecourse debt consist of mortgage loans that were recognized upon the adoption of new accounting guidance related to VIEs effective January 1, 2010. To more accurately represent the future economic performance of the securitization collateral and related debt balances, we elected the fair value option provided for by ASC 825-10 Financial Instruments-Overall. This option was applied to all eligible items within the VIE, including mortgage loans held for investment, subject to ABS nonrecourse debt, and the related ABS nonrecourse debt.
 
Investment in debt securities—available-for-sale consists of beneficial interests we retain in securitization transactions accounted for as a sale under the guidance of ASC 860. Effective January 1, 2010, new accounting guidance for VIEs eliminated the concept of a QSPE and all existing securitization trusts are considered VIEs and are now subject to the new consolidation guidance. Upon consolidation of these VIEs, Nationstar derecognized all previously recognized beneficial interests, including retained investment in debt securities, obtained as part of the securitization (see Note 3 to our consolidated financial statements).
 
Receivables from affiliates consist of periodic transactions with Nationstar Regular Holdings, Ltd., a subsidiary of FIF HE Holdings LLC. These transactions typically involve the monthly payment of principal and interest advances that are required to be remitted to securitization trusts as required under various Pooling and Servicing Agreements. These amounts are later repaid to us when principal and interest advances are recovered from the respective borrowers. Receivables from affiliates were $9.0 million at December 31, 2010, a decrease of $3.6 million from December 31, 2009, as a result of increased recoveries on outstanding principal and interest advances.
 
Mortgage servicing rights consist of servicing assets related to all existing residential mortgage loans transferred to a third party in a transfer that meets the requirements for sale accounting, or through the acquisition of the right to service residential mortgage loans that do not relate to our assets. Mortgage servicing rights were $145.1 million at December 31, 2010, an increase of $30.5 million over December 31, 2009. The increase was primarily a result of the capitalization of newly created mortgage servicing rights of $26.3 million, combined with the purchase of $17.8 million in mortgage servicing rights, offset by the de-recognition of previously recognized mortgage servicing rights on the consolidation of certain securitization trusts for the adoption of new accounting guidance related to VIEs of $7.6 million, and the change in fair value of mortgage servicing rights.


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Property and equipment, net increased by approximately $1.8 million, primarily as a result of expenditures related to newly opened retail branches and increased hardware acquisitions to support servicing expansion.
 
Real estate owned, net represents property we acquired as a result of foreclosures on delinquent mortgage loans. Real estate owned, net is recorded at estimated fair value, less costs to sell, at the date of foreclosure. Any subsequent operating activity and declines in value are charged to earnings. Real estate owned, net was $27.3 million at December 31, 2010, an increase of $17.0 million over December 31, 2009. This increase was primarily a result of the adoption of the new accounting guidance related to VIEs, resulting in the recognition of $17.5 million in real estate owned properties from a consolidated VIE.
 
Other assets consist of principally deferred financing costs, derivative financial instruments, and prepaid expenses. Other assets were $29.5 million at December 31, 2010, an increase of $5.3 million over December 31, 2009. This increase was primarily a result of an increase in deferred financing costs from our March 2010 offering and other higher prepaid expenses.
 
Liabilities and Members’ Equity
 
At December 31, 2010, total liabilities were $1.7 billion, a $0.7 billion increase from December 31, 2009. The increase in total liabilities was primarily a result of the adoption of new accounting guidance related to VIEs, resulting in the recognition of $0.5 billion in asset-backed certificates from a consolidated VIE combined with a March 2010 offering of Senior Unsecured Notes of $244 million.
 
Included in our payables and accrued liabilities caption on our balance sheet is our reserve for repurchases and indemnifications amounting to $7.3 million and $3.6 million at December 31, 2010 and 2009, respectively. This liability represents our (i) estimate of losses to be incurred on the repurchase of certain loans that we previously sold and (ii) an estimate of losses to be incurred for indemnification of losses incurred by purchasers or insurers with respect to loans that we sold . Certain sale contracts include provisions requiring us to repurchase a loan or indemnify the purchaser or insurer for losses if a borrower fails to make certain initial loan payments due to the acquirer or if the accompanying mortgage loan fails to meet certain customary representations and warranties. These representations and warranties are made to the loan purchasers or insurers about various characteristics of the loans, such as manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided and typically are in place for the life of the loan. Although the representations and warranties are in place for the life of the loan, we believe that most repurchase requests occur within the first five years of the loan. In the event of a breach of the representations and warranties, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. In addition, an investor may request that we refund a portion of the premium paid on the sale of mortgage loans if a loan is prepaid within a certain amount of time from the date of sale. We record a provision for estimated repurchases, loss indemnification and premium recapture on loans sold, which is charged to gain (loss) on mortgage loans held for sale.


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Following is a table detailing repurchase and loss indemnification requests initiated by year for each of the years presented, as well as the status of those requests, and a table detailing loan sales by year:
 
                                                 
    2008     2009     2010  
    Count     $     Count     $     Count     $  
    $ amounts in millions  
 
Repurchases & indemnifications
    1     $ 0.1       19     $ 3.3       6     $ 1.2  
Claim pending(1)
                            13       2.5  
Held for further review(2)
                1       0.2       10       2.3  
Rescinded
    2       0.2       8       1.1       24       4.8  
                                                 
Total
    3     $ 0.3       28     $ 4.6       53     $ 10.8  
                                                 
Rescission Rate(3)
            66.7 %             25.0 %             80.0 %
 
 
(1) Claim pending status represents loans that have completed the review process where we have generally agreed with the claimant’s breach assertions and are pending final execution.
 
(2) Held for further review status represents loans where we have not yet completed the review process or have disagreed with the claimant’s breach assertions pending response from the claimant.
 
(3) Rescission rate is calculated as the ratio of rescissions to resolved request (ie, rescissions and repurchases & modifications).
 
                                                                 
    2008   2009   2010   Total
    Count   $   Count   $   Count   $   Count   $
    $ amounts in billions        
 
Loan sales
    3,412     $ 0.5       5,344     $ 1.0       13,090     $ 2.6       21,846     $ 4.1  
 
During 2010, the reserve for repurchases and indemnifications increased by approximately $3.7 million. This increase was principally due to the significant increase in loan sales during 2010 over the 2009 period. We increase the reserve by applying an estimated loss factor to the principal balance of loan sales. Secondarily, the reserve was increased based on outstanding claims received, and 2010 represented the first year that we have received make whole requests that we considered to be probable and estimable. We have observed an increase in repurchase requests in each of the last two years. We believe that because of the increase in our originations during 2009 and 2010, we expect that repurchase requests are likely to increase. Should home values continue to decrease, our realized losses from loan repurchases and indemnifications may increase as well. As such, our reserve for repurchases may be required to increase beyond our current expectations. While the ultimate amount of repurchases and premium recapture is an estimate, we consider the liability to be adequate at each balance sheet date.
 
At December 31, 2010, outstanding members’ equity was $256.4 million, a $7.4 million decrease from December 31, 2009. The decrease in members’ equity was primarily driven by an $9.9 million net loss for the year ended December 31, 2010, a cumulative effect adjustment from the adoption of new accounting guidance related to VIEs resulting in a cumulative effect decrease in our beginning members’ units of $8.1 million, offset by $9.5 million in share-based compensation (net of taxes) during the period and $1.1 million in the change in value of a cash flow hedge.
 
Recent Accounting Developments
 
On January 1, 2010, we adopted new Financial Accounting Standards Board (FASB) accounting guidance on transfers of financial assets and consolidation of VIEs. This new accounting guidance revises sale accounting criteria for transfers of financial assets, including elimination of the concept of and accounting for qualifying special purpose entities (QSPEs), and significantly changes the criteria for


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consolidation of a VIE. The adoption of this new accounting guidance resulted in the consolidation of certain VIEs that previously were QSPEs that were not recorded on our Consolidated Balance Sheet prior to January 1, 2010. We recorded an $8.1 million charge to members’ equity on January 1, 2010 for the cumulative effect of the adoption of this new accounting guidance, which resulted principally from the derecognition of the retained interests in the securitizations. Initial recording of these assets and liabilities on our Consolidated Balance Sheet had no impact at the date of adoption on consolidated results of operations.
 
Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (Update No. 2010-06). Update No. 2010-06 requires additional disclosures about fair value measurements, including separate disclosures of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers. Additionally, the reconciliation for fair value measurements using significant unobservable inputs (Level 3) should present separately information about purchases, sales, issuances, and settlements. Update No. 2010-06 also clarifies previous disclosure requirements, including the requirement that entities provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for both Level 2 and Level 3 measurements. The new disclosures and clarifications of existing disclosures required under Update No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, and was adopted for the interim reporting period ending March 31, 2010, except for the disclosures about purchases, sales, issuances, and settlement in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
 
Accounting Standards Update No. 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset (Update No. 2010-18). Update No. 2010-18 clarifies the accounting treatment for modifications of loans that are accounted for within a pool under Subtopic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality (Subtopic 310-30), requiring an entity to continue to include modified loans in the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors. The amendments in this update were effective for Nationstar for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The adoption of Update No. 2010-18 did not have a material impact on our financial condition, liquidity or results of operations.
 
Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Update No. 2010-20). Update No. 2010-20 is intended to provide users of financial statements with greater transparency regarding a company’s allowance for credit losses and the credit quality of its financing receivables. It is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The additional disclosure requirements for this amendment are effective for Nationstar for annual reporting periods ending on or after December 15, 2011. The adoption of Update No. 2010-20 will not have a material impact on Nationstar’s financial condition, liquidity or results of operations.
 
Accounting Standards Update No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (Update No. 2011-02). Update No. 2011-02 is intended to reduce the diversity in identifying troubled debt restructurings (TDRs), primarily by clarifying certain factors around concessions and financial difficulty. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that: 1) the restructuring constitutes a concession; and 2) the debtor is experiencing financial difficulties. The clarifications will generally result in more restructurings being considered troubled. The amendments in this update will be effective for interim and annual periods beginning after June 15, 2011, with retrospective application to the


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beginning of the annual period of adoption. The adoption of Update No. 2011-02 will not have a material impact on Nationstar’s financial condition, liquidity or results of operations.
 
Liquidity and Capital Resources
 
Liquidity measures our ability to meet potential cash requirements, including the funding of servicing advances, paying operating expenses, origination of loans and repayment of borrowings. Our cash balance decreased from $41.6 million as of December 31, 2009 to $21.2 million as of December 31, 2010, primarily due to greater cash outflows from our financing activities to repay our outstanding debt facilities.
 
We shifted our strategy after 2007 to leverage our industry-leading servicing capabilities and capitalize on the opportunities to grow our origination platform, which has led to the strengthening of our liquidity position. As a part of our shift in strategy, we ceased originating non-prime loans in 2007, and new originations have been focused on loans that are eligible to be sold to GSEs. For the years ended December 31, 2010 and 2009, substantially all originated loans have either been sold or are pending sale. Additionally, we grew our servicing portfolio from $33.7 billion as of December 31, 2009 to $64.2 billion as of December 31, 2010.
 
As part of the normal course of our business, we borrow money to fund servicing advances and loan originations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell the loans or place them in government securitizations and repay the borrowings under the warehouse lines. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances and to fund our loan originations on a short-term basis. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire.
 
In March 2010, we completed the offering of $250 million of 10.875% senior notes, which were issued with an issue discount of $7.0 million for net cash proceeds of $243.0 million, with a maturity date of April 2015. These unsecured senior notes pay interest biannually at an interest rate of 10.875%. Cash proceeds from this offering were used to pay down outstanding balances on our existing debt facilities.
 
At this time, we see no material negative trends that we believe would affect our access to long-term borrowings, short-term borrowings or bank credit lines sufficient to maintain our current operations, or would likely cause us to cease to be in compliance with any applicable covenants in our indebtedness or that would inhibit our ability to fund operations and capital commitments for the next 12 months.
 
Our primary sources of funds for liquidity include: (i) lines of credit and other secured borrowings; (ii) servicing fees and ancillary fees; (iii) payments received from sale or securitization of loans; and (iv) payments received from mortgage loans held for sale.
 
Our primary uses of funds for liquidity include: (i) funding of servicing advances; (ii) origination of loans; (iii) payment of interest expenses; (iv) payment of operating expenses; and (v) repayment of borrowings.
 
Our servicing agreements impose on us various rights and obligations that affect our liquidity. Among the most significant of these obligations is the requirement that we advance our own funds to meet contractual principal and interest payments for certain investors and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speed affect the size of servicing advance balances.
 
We intend to continue to seek opportunities to acquire loan servicing portfolios, originations platforms and/or businesses that engage in loan servicing and/or loan originations. We cannot predict the extent to which our liquidity and capital resources will be diminished by any such transactions.


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Additionally, we believe that a significant acquisition may require us to raise additional capital to facilitate such a transaction. We would likely finance acquisitions through a combination of corporate debt issuances, asset-backed acquisition financing and/or cash from operations.
 
Operating Activities
 
Our operating activities used ($101.7) million and ($83.6) million of cash flow for the years ended December 31, 2010 and 2009, respectively. The decrease of $18.1 million was primarily due to the net effect of the following:
 
  •  Increase of $1,613.9 million attributable to increased proceeds received from sale of loans, offset by decrease in cash attributable to $1,311.1 million increase in origination volume.
 
  •  Decrease in principal payments/prepayments received and other changes in mortgages loans held for sale of $437.7 million.
 
  •  Increase of $130.4 million primarily due to decreased delinquency advances to investors to cover scheduled payments of principal and interest that are required to be remitted to securitization trusts.
 
  •  Increase of $71.0 million attributable to decrease in net loss period over period, primarily a result of increased revenues from our higher servicing portfolio and increased volume in loan originations.
 
Our operating activities provided (used) $(83.6) million and $40.2 million of cash flow for the years ended December 31, 2009 and 2008, respectively. The decrease in operating cash flow from 2008 to 2009 was primarily due to $934.6 million higher volume of originations in 2009, offset by $493.5 million increase from proceeds received from sale of loans and $268.9 million increase in principal payments received from loans.
 
Investing Activities
 
Our investing activities provided (used) $101.2 million, $30.0 million and $(34.6) million of cash flow for the years ended December 31, 2010, 2009 and 2008, respectively. The increase in cash flows from investing activities from 2009 to 2010 was primarily a result of an increase in cash proceeds from sales of real estate owned and principal payments received and other changes on mortgage loans held for investment, subject to ABS nonrecourse debt. The increase in cash flow from investing activities from 2008 to 2009 was primarily due to the absence of interest rate swap settlements in 2009 compared to $51.6 million of settlements in 2008 and a $17.8 million decrease in cash used for the purchase of mortgage servicing rights, net of liabilities, offset by no principal payments received from debt securities in 2009 compared to $8.4 million in 2008.
 
Financing Activities
 
Our financing activities provided (used) $(20.0) million, $85.9 million and $(37.5) million of cash flow for the years ended December 31, 2010, 2009 and 2008, respectively. The increase in cash outflow from financing activities from 2009 to 2010 was primarily a result of repayment of ABS and Legacy Asset nonrecourse debt. We also did not receive any capital contributions from our existing members in 2010, compared to $20.7 million in capital contributions received in 2009. In 2009, we issued non-recourse debt, which provided $191.3 million in cash. The increase in cash flow from financing activities from 2008 to 2009 was primarily due to the non-recourse debt, net issued in 2009 related to the secured financing of our legacy assets.


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Contractual Obligations
 
The table below sets forth our contractual obligations, excluding our Legacy Asset Securitized Debt and ABS nonrecourse debt, as of December 31, 2010 (in thousands):
 
                                         
          2012
    2014
    After
       
    2011     to 2013     to 2015     2015     Total  
 
Senior Unsecured Notes
  $     $     $ 250,000           $ 250,000  
Interest expense from Senior Unsecured Notes
    27,188       54,375       33,985             115,548  
MBS Advance Financing Facility
    114,562                         114,562  
ABS Advance Financing Facility
    236,808                         236,808  
MSR Notes
    5,552       10,181                   15,733  
$300 Million Warehouse Facility (1)
    209,477                           209,477  
$100 Million Warehouse Facility
    39,014                         39,014  
$75 Million Warehouse Facility
    43,059                         43,059  
GSE ASAP+ Short-Term Financing Facility
    51,105                         51,105  
Operating leases
    7,015       13,299       7,972       1,243       29,529  
                                         
    $ 733,780     $ 77,855     $ 291,957     $ 1,243     $ 1,104,835  
                                         
 
 
Notes
 
(1) Amended in February 2011 to expire in February 2012.
 
In addition to the above contractual obligations, we have also been involved with several securitizations of asset-backed securities, which were structured as secured borrowings. These structures resulted in us carrying the securitized loans as mortgages on our consolidated balance sheet and recognizing the asset-backed certificates acquired by third parties as nonrecourse debt. The timing of the principal payments on this nonrecourse debt is dependent on the payments received on the underlying mortgage loans and liquidation of real estate owned. The outstanding principal balance on our Nonrecourse Debt—Legacy Assets and ABS nonrecourse debt was $161.2 million and $1,037.9 million respectively, as of December 31, 2010.
 
Summary of Other Indebtedness
 
Senior Unsecured Notes
 
In March 2010, we completed the offering of $250 million of unsecured senior notes, which were issued with an issue discount of $7.0 million for net cash proceeds of $243.0 million, with a maturity date of April 2015. These unsecured senior notes pay interest biannually at an interest rate of 10.875%.
 
The indenture for our unsecured senior notes contains various covenants and restrictions that will limit us and our restricted subsidiaries’ ability to incur additional indebtedness, pay dividends, make certain investments, create liens, designate subsidiaries as unrestricted subsidiaries, consolidate, merge or sell substantially all the assets, or enter into certain transactions with affiliates.
 
Consolidated EBITDA, as defined in the indenture governing the unsecured senior notes, is the key financial covenant measure that monitors our ability to undertake investing and financing functions, such as making investments/acquisitions, paying dividends, and incurring additional indebtedness.
 
The ratios included in the indenture for the unsecured senior notes are incurrence based compared to the customary ratio covenants that are often found in credit agreements that require a company to maintain a certain ratio.


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The consolidated leverage ratio as defined in the indenture is equal to Corporate Indebtedness, as defined in the indenture, divided by Consolidated EBITDA, and limits our activities as discussed above, if the ratio is equal to or greater than 4.5.
 
Consolidated EBITDA is computed as follows (in thousands):
 
         
    Twelve Months Ended
 
    December 31, 2010  
 
Net income (loss)
  $ (9,914 )
Adjust for:
       
Impact from consolidation of securitization trusts(1)
    (8,933 )
Interest expense from Corporate Indebtedness(2)
    24,628  
Depreciation and amortization
    2,117  
Change in fair value of mortgage servicing rights(3)
    6,458  
Exit costs
    2,287  
Share-based compensation
    12,856  
Fair value changes on interest rate swap
    9,801  
Ineffective portion of cash flow hedge
    (930 )
(Gain) loss from asset sales and other than temporary impairment of assets
    6,084  
Amortization/write-off of deferred financing cost for debt obligations in existence prior to issuance of unsecured senior notes
    15,944  
Servicing resulting from transfers of financial assets
    (26,253 )
Other
    6  
         
Consolidated EBITDA
  $ 34,151  
         
 
 
(1) Represents impact to net income from the consolidation of certain securitization trusts. Net income, as defined in the Indenture, is based on generally accepted accounting principles in effect as of December 31, 2009, and does not include the impact of the consolidation of identified VIEs where we have both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
 
(2) Includes interest expense from the unsecured senior notes and an unsecured line of credit that was paid down with the proceeds from the unsecured senior notes.
 
(3) Represents change in fair value of mortgage servicing rights after deconsolidation of the securitization trusts as discussed in note (1) above.
 
Servicing
 
Our Servicing Segment’s debt consists of our Senior Unsecured Notes, our MBS Advance Financing Facility, our ABS Advance Financing Facility and our MSR Notes. As of December 31, 2010, the two separate advance financing facilities had $625.0 million of committed capacity to fund the Servicing Segment. In addition, we had a $200 million advance facility that had not been drawn upon, and $15.7 million of notes outstanding that we had entered into to purchase a portfolio of mortgage servicing rights.
 
MBS Advance Financing Facility
 
Our MBS Advance Financing Facility is used to finance our obligations to pay advances as required by our servicing agreements. These agreements may require us to advance certain payments to the owners of the mortgage loans we service, including: principal and interest, or P&I advances, taxes and insurance, or T&I advances, or legal fees, maintenance and preservation costs, or corporate advances. See “Industry—Servicing Industry Overview.”
 
In September 2009, we entered into our MBS Advance Financing Facility with a government- sponsored enterprise which currently has a total facility size of $275.0 million. Our MBS Advance


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Financing Facility is secured by certain servicing advance receivables and is subject to margin calls in the event that the value of our collateral decreases. We draw on the facility periodically throughout the month, as necessary, to satisfy our advancing obligations under our servicing agreements, and we repay the facility when advances are recovered through liquidations, prepayments and reimbursement of advances from modifications.
 
Our MBS Advance Facility requires us to comply with various customary operating covenants and performance tests on the underlying receivables related to payment rates and minimum balance. The interest rate is based on LIBOR plus a margin of 2.50%. The maturity date of this facility is December 2011. As of December 31, 2010, we were in compliance with all covenants and performance tests under our MBS Advance Financing Facility and had an aggregate principal amount of $114.6 million outstanding.
 
ABS Advance Financing Facility
 
In November 2007, we entered into our ABS Advance Financing Facility with a financial services company. In December 2009, we entered into an amendment to our ABS Advance Financing Facility, which, as amended, has a total facility size of $350.0 million. The transaction was a securitization of the servicing advance receivables that entailed the issuance and sale of $174.0 million in term notes and $176.0 million in variable funding notes. Our ABS Advance Financing Facility is a non-recourse obligation that is secured by certain servicing advance receivables. We draw on the facility periodically throughout the month, as necessary, to satisfy our advancing obligations under our servicing agreements, and we repay the facility when advances are recovered through liquidations, prepayments and reimbursement of advances after modifications. The balance of the $174.0 million term notes stays constant, while the variable funding notes fluctuate with our financing needs.
 
Our ABS Advance Facility requires us to comply with various customary operating covenants and performance tests on the underlying receivables related to payment rates and minimum balance. The interest rate is based on LIBOR, subject to an interest rate swap, and had a weighted average cost of 4.82% during the year ended December 31, 2010. Upon an event of default, the notes issued by the servicing advance facilities may be declared immediately due and payable. The stated maturity date of this facility is December 2013, twenty-four months after the repayment date of December 2011. As of December 31, 2010, we were in compliance with all covenants and performance tests under our ABS Advance Financing Facility and had an aggregate principal amount of $236.8 million outstanding.
 
In December 2010, we executed the 2010-ABS Advance Financing Facility with a financial institution. This facility has the capacity to purchase up to $200 million of advance receivables. This facility is a non-recourse obligation that will be secured by certain servicing advance receivables. The interest rate is based on LIBOR plus a margin of 3.00%. The maturity date of this facility with the financial institution is July 2011, which may be extended if we elect to pledge any additional advances to this facility. We have yet to draw on this facility as of December 31, 2010.
 
MSR Notes
 
In October 2009, we entered into our MSR Notes, with an aggregate principal amount of $22.2 million, to a GSE to finance our acquisition of certain mortgage servicing rights. Our MSR Notes are secured by all of our rights, title and interest in the mortgage servicing rights that we acquired in the transaction.
 
Our MSR Notes require us to comply with various customary operating covenants and specific covenants including maintaining a disaster recovery plan, maintaining priority of the lender’s lien, and certain covenants related to the collateral and limitations on the creation of liens on the collateral or assigned servicing compensation. The interest rate is based on LIBOR plus a margin of 2.50%. The maturity date of our MSR Notes is October 2013. As of December 31, 2010, we had an aggregate principal amount of $15.7 million outstanding.


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Originations
 
As of December 31, 2010 we maintained four separate financing facilities with $525 million of committed capacity to fund the Originations Segment: our $300 Million Warehouse Facility, our $100 Million Warehouse Facility, our $75 Million Warehouse Facility and our GSE ASAP+ Short-Term Financing Facility.
 
$300 Million Warehouse Facility
 
Our $300 Million Warehouse Facility is used to finance our loan originations on a short-term basis. In the ordinary course, we originate mortgage loans on a near-daily basis, and we use a combination of our four warehouse facilities and cash to fund the loans. We agree to transfer to our counterparty certain mortgage loans against the transfer of funds by the counterparty, with a simultaneous agreement by the counterparty to transfer the loans back to us at a date certain, or on demand by us, against the transfer of funds from us. We typically renegotiate our warehouse facilities on an annual basis. See “Industry—Industry Overview.”
 
In July 2006, we entered into our $300 Million Warehouse Facility with a financial services company. In January 2010, we amended our $300 Million Warehouse Facility, which, as amended, has a total facility size of $300.0 million. We sell our newly originated mortgage loans to our counterparty to finance the origination of our mortgage loans and typically repurchase the loan within 30 days of origination when we sell the loan to a GSE or into a government securitization.
 
Our $300 Million Warehouse Facility requires us to comply with various customary operating covenants and specific covenants including maintaining a minimum tangible net worth of $150.0 million, limitations on transactions with affiliates, maintenance of liquidity of $20 million and the maintenance of additional funding through warehouse loans. The interest rate is based on LIBOR plus a margin of 2.00%, with a minimum interest rate of 4.00%. The termination date of this facility is February 2011. As of December 31, 2010, we were in compliance with all covenants and performance tests under our $300 Million Warehouse Facility and had an aggregate principal amount of $209.5 million outstanding.
 
In February 2011, we amended our $300 Million Warehouse Facility, which as amended, is set to expire in February 2012, has an interest rate based on LIBOR plus a margin of 3.25% and requires us to maintain a minimum tangible net worth of not less than $175 million.
 
$100 Million Warehouse Facility
 
In October 2009, we entered into our $100 Million Warehouse Facility with a financial services company with a total facility size of $50.0 million. In October 2010, this facility was increased to $100.0 million. We sell our newly originated mortgage loans to our counterparty to finance the origination of our mortgage loans and typically repurchase the loan within 30 days of origination when we sell the loan to a GSE or into a government securitization.
 
Our $100 Million Warehouse Facility requires us to comply with various customary operating covenants and specific covenants including maintaining additional warehouse facilities, restrictions on the assignment of purchased loans, limits on transactions with affiliates and certain financial covenants, including maintaining a minimum tangible net worth of $150.0 million. The interest rate is based on LIBOR plus a margin of 3.50%. The termination date of this facility is December 2011. As of December 31, 2010, we were in compliance with all covenants and performance tests under our $100 Million Warehouse Facility and had an aggregate principal amount of $39.0 million outstanding.
 
$75 Million Warehouse Facility
 
In February 2010, we entered into our Warehouse Facility with a financial services company, with a total facility size of $50.0 million. In October 2010, this facility was increased to $75.0 million. We sell our newly originated mortgage loans to our counterparty to finance the origination of our mortgage


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loans and typically repurchase the mortgage loan within 30 days of origination when we sell the mortgage loan to a GSE or into a government securitization.
 
Our $75 Million Warehouse Facility requires us to comply with various customary operating covenants and specific covenants including financial covenants regarding our liquidity ratio of liabilities and warehouse credit to net worth and operating income, maintenance of a minimum tangible net worth of $150.0 million, maintenance of additional warehouse facilities and limitations on entering into warehouse facilities with more favorable terms (with respect to the lender) than this facility without also applying those more favorable terms to this facility. The interest rate is based on LIBOR plus a spread ranging from 2.75% to 3.25%. The termination date of this facility is October 2011. As of December 31, 2010, we were in compliance with all covenants and performance tests under this facility and had an aggregate principal amount of $43.1 million outstanding.
 
$50 Million Warehouse Facility
 
In March 2011, we executed a Master Repurchase Agreement with a financial institution, under which we may enter into transactions, for an aggregate amount of $50.0 million, in which we agree to transfer to the same financial institution certain mortgage loans and certain securities against the transfer of funds by the same financial institution, with a simultaneous agreement by the same financial institution to transfer such mortgage loans and securities to us at a date certain, or on our demand, against the transfer of funds to us. The interest rate is based on LIBOR plus a spread of 1.45% to 3.95%, which varies based on the underlying transferred collateral. The maturity date of this Master Purchase Agreement is March 2012.
 
GSE ASAP+ Short-Term Financing Facility
 
During 2009, we began executing a series of As Soon As Pooled Plus, or ASAP+, agreements with a GSE with a total commitment of $75.0 million. Pursuant to these agreements, we agree to transfer to the GSE certain mortgage loans against the transfer of funds by the government-sponsored enterprise, with a simultaneous agreement by the counterparty to transfer the loans back to us at a date certain, or on demand by us, against the transfer of funds from us. The interest rate is based on LIBOR plus a margin of 1.50%. These agreements typically have a maturity of up to 45 days. As of December 31, 2010, we had an aggregate principal amount of $51.1 million outstanding.
 
Legacy Assets and Other
 
Legacy Asset Term-Funded Notes
 
In November 2009, we completed the securitization of mortgage assets and issued approximately $222.4 million of our Legacy Asset Term-Funded Notes. The interest rate is 7.50%, subject to an available funds cap. In conjunction with the securitization, we reclassified our legacy assets as “held for investment” on our consolidated balance sheet and recognize the Legacy Asset Term-Funded Notes as non-recourse debt. We pay the principal and interest on these notes using the cash flows from the underlying legacy assets, which serve as collateral for the debt. As of December 31, 2010, the aggregate unpaid principal balance of the legacy assets that secure our Legacy Asset Term-Funded Notes was $430.0 million. Monthly cash flows generated from the legacy assets are used to service the debt, which has a final legal maturity of October 2039. As of December 31, 2010, our Legacy Asset Term-Funded Notes had a par amount and carrying value, net of financing costs and unamortized discount of $161.2 million and $138.7 million, respectively.
 
ABS Nonrecourse Debt
 
Effective January 1, 2010, new accounting guidance eliminated the concept of a QSPE, and all existing securitization trusts are considered VIEs and are now subject to new consolidation guidance provided in ASC 810. Upon consolidation of these VIEs, Nationstar derecognized all previously recognized beneficial interests obtained as part of the securitization. In addition, Nationstar recognized


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the securitized mortgage loans as mortgage loans held for investment, subject to ABS nonrecourse debt, and the related asset-backed certificates acquired by third parties as ABS nonrecourse debt on Nationstar’s consolidated balance sheet. Additionally, Nationstar elected the fair value option provided for by ASC 825-10. The principal and interest on these notes are paid using the cash flows from the underlying mortgage loans, which serve as collateral for the debt. The interest rate paid on the outstanding securities is based on LIBOR plus a spread ranging from 0.13% to 2.00%, which is subject to an interest rate cap. The total outstanding principal balance on the underlying mortgage loans servicing as collateral for the debt was approximately $1,025.3 million at December 31, 2010. The timing of the principal payments on this ABS nonrecourse debt is dependent on the payments received on the underlying mortgage loans. The outstanding principal balance on the outstanding notes related to these consolidated securitization trusts was $1,037.9 million at December 31, 2010.
 
Variable Interest Entities
 
We have been the transferor in connection with a number of securitizations or asset-backed financing arrangements, from which we have continuing involvement with the underlying transferred financial assets. We aggregate these securitizations or asset-backed financing arrangements into two groups: (i) securitizations of residential mortgage loans and (ii) transfers accounted for as secured borrowings.
 
Effective January 1, 2010, new accounting guidance related to VIEs eliminated the concept of a QSPE and all existing SPEs are now subject to the new consolidation guidance. Upon adoption of this new accounting guidance, we identified certain securitization trusts where we, through our affiliates, continued to hold beneficial interests in these trusts. These retained beneficial interests obligate us to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant. In addition, as Master Servicer on the related mortgage loans, we retain the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE. When it is determined that we have both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, the assets and liabilities of these VIEs are included in our consolidated financial statements. Upon consolidation of these VIEs, we derecognized all previously recognized beneficial interests obtained as part of the securitization, including any retained investment in debt securities, mortgage servicing rights, and any remaining residual interests. In addition, we recognized the securitized mortgage loans as mortgage loans held for investment, subject to ABS nonrecourse debt, and the related asset-backed certificates acquired by third parties as ABS nonrecourse debt on our consolidated balance sheet.
 
We also maintained various agreements with SPEs, under which we transfer mortgage loans and/or advances on residential mortgage loans in exchange for cash. These SPEs issue debt supported by collections on the transferred mortgage loans and/or advances. These transfers do not qualify for sale treatment because we continue to retain control over the transferred assets. As a result, we account for these transfers as financings and continue to carry the transferred assets and recognize the related liabilities on our consolidated balance sheet. Collections on the mortgage loans and/or advances pledged to the SPEs are used to repay principal and interest and to pay the expenses of the entity. The holders of these beneficial interests issued by these SPEs do not have recourse to us and can only look to the assets of the SPEs themselves for satisfaction of the debt.
 
SPEs created for the purpose of issuing debt supported by collections on loans that have been transferred to it are considered VIEs. VIEs for which we are the primary beneficiary and have the power to direct the activities that directly impact the economic performance are consolidated into our consolidated financial statements.


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A summary of the assets and liabilities of our transactions with VIEs included in our consolidated financial statements as of December 31, 2010 is presented in the following table (in thousands).
 
                         
          Transfers
       
    Securitization
    Accounted for as
       
    Trusts     Secured Borrowings     Total  
 
Assets
                       
Restricted cash
  $ 1,472     $ 32,075     $ 33,547  
Accounts receivable
    2,392       286,808       289,200  
Mortgage loans held for investment, subject to nonrecourse debt
          261,305       261,305  
Mortgage loans held for investment, subject to ABS nonrecourse debt
    538,440             538,440  
Real estate owned
    17,509       9,505       27,014  
                         
Total Assets
  $ 559,813     $ 589,693     $ 1,149,506  
                         
Liabilities
                       
Notes payable
  $     $ 236,808     $ 236,808  
Payables and accrued liabilities
    95       1,173       1,268  
Outstanding servicer advances(1)
    32,284             32,284  
Derivative financial instruments
          7,801       7,801  
Derivative financial instruments, subject to ABS nonrecourse debt
    18,781             18,781  
Nonrecourse debt—Legacy Assets
          138,662       138,662  
ABS nonrecourse debt
    497,289             497,289  
                         
Total Liabilities
  $ 548,449     $ 384,444     $ 932,893  
                         
 
 
(1) Outstanding servicer advances consists of principal and interest advances paid by Nationstar to cover scheduled payments and interest that have not been timely paid by borrowers. These outstanding servicer advances are eliminated upon the consolidation of the securitization trusts.
 
Off Balance Sheet Arrangements
 
A summary of the outstanding collateral and certificate balances for securitization trusts, including any retained beneficial interests and mortgage servicing rights, that were not consolidated by us for the years ending December 31, 2010 and 2009 is presented in the following table (in thousands).
 
                 
    December 31,
  December 31,
    2010(1)   2009(2)
 
Total collateral balance
  $ 4,038,978     $ 3,240,879  
Total certificate balance
    4,026,844       3,262,995  
Total beneficial interests held at fair value
          2,486  
Total mortgage servicing rights at fair value
    26,419       20,505  
 
 
(1) Unconsolidated securitization trusts as of December 31, 2010 consist of VIE’s where we lack (i) the power to direct the activities that most significantly impact the VIE’s economic performance or (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
 
(2) Unconsolidated securitization trusts as of December 31, 2009 consists of those qualifying for sale treatment under ASC 860.


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Derivatives
 
We record all derivative transactions at fair value on our consolidated balance sheets. We use these derivatives primarily to manage our interest rate risk and price risk associated with interest rate lock commitments, which we refer to as IRLCs. We actively manage the risk profiles of our IRLCs and mortgage loans held for sale on a daily basis. To manage the price risk associated with IRLCs, we enter into forward sales of mortgage-backed securities in an amount equal to the portion of the IRLC we expected to close, assuming no change in interest rates.
 
In addition, to manage the interest rate risk associated with mortgage loans held for sale, we enter into forward sales of mortgage-backed securities to deliver mortgage loan inventory to investors.
 
We also entered into interest rate cap agreements to hedge the interest payments on our ABS Servicing Facility and our MBS Servicing Facility. These interest rate cap agreements generally require an upfront payment and receive cash flow only when a variable rate based on LIBOR exceeds a defined interest rate. As of December 31, 2010, these interest rate cap agreements were out of the money and, unless there is a significant change to LIBOR, we do not anticipate a material effect to our consolidated financial statements.
 
To hedge the aggregate risk of interest rate fluctuations with respect to our outstanding borrowings, we have entered into swap agreements whereby we receive floating rate payments in exchange for fixed rate payments, effectively converting our outstanding borrowings to fixed rate debt.
 
As part of our January 1, 2010 adoption of new accounting guidance related to VIEs, we were required to consolidate certain VIEs related to previous asset-backed securitizations that were treated as sales under GAAP. Accordingly, we recognized all assets and liabilities held by these securitization trusts in our consolidated balance sheet. As a form of credit enhancement to the senior noteholders, these securitization trusts contained embedded interest rate swap agreements to hedge the required interest payments on the underlying asset-backed certificates. These interest rate swap agreements generally require the securitization trust to pay a variable interest rate and receive a fixed interest rate based on LIBOR.


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GLOSSARY OF INDUSTRY TERMS
 
Adjustable Rate Mortgage.  A mortgage loan where the interest rate on the loan adjusts periodically based on a specified index and margin agreed to at the time the loan is originated.
 
Agency and Government Conforming Loan.  A mortgage loan that meets all requirements (loan type, maximum amount, loan-to-value ratio and credit quality) for purchase by Fannie Mae, Freddie Mac or FHA.
 
Compensating Interest.  Money paid to the owner of a mortgage loan or pool of mortgage loans on a monthly basis (typically by the servicer from its own funds) to compensate the owner of the mortgage loan for interest shortfalls caused by intra-month prepayments.
 
Consumer Direct Retail Origination.  A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers.
 
Conventional Mortgage Loans.  A mortgage loan that is not guaranteed or insured by the FHA, the VA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs.
 
Corporate Advance.  A servicing advance to pay costs and expenses incurred in foreclosing upon, preserving and selling real estate owned, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing the mortgage loans.
 
Credit-Sensitive Loan.  A mortgage loan with certain characteristics such as low borrower credit quality, relaxed original underwriting standards and high loan-to-value ratio, which we believe indicates that the mortgage loan presents an elevated credit risk.
 
Delinquent Loan.  A mortgage loan that is 30 or more days past due from its scheduled due date.
 
Department of Veterans Affairs (VA).  The United States Department of Veterans Affairs is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers.
 
Distributed Retail Originations.  A type of mortgage loan origination pursuant to which a lender markets primarily purchase money mortgage loans directly to consumers from local branches.
 
Fannie Mae.  The Federal National Mortgage Association, a federally chartered association that buys mortgage loans from lenders and resells them as securities in the secondary mortgage market.
 
Federal Housing Administration (FHA).  The Federal Housing Administration is a U.S. federal government agency within the Department of Housing and Urban Development. It provides mortgage insurance on loans made by FHA-approved lenders in compliance with FHA guidelines throughout the United States.
 
Float Income.  Interest income earned by a servicer on (i) funds collected from borrowers during the period of time between receipt of the funds and the remittance of the funds to investors and (ii) funds collected from borrowers for the payment of taxes and insurance, where applicable.
 
Freddie Mac.  The Federal Home Loan Mortgage Corporation, a federally chartered corporation that buys mortgage loans from lenders and resells them as securities in the secondary mortgage market.
 
Ginnie Mae.  The Government National Mortgage Association, a wholly-owned U.S. federal government corporation that is an agency of the Department of Housing and Urban Development. The main focus of Ginnie Mae is to ensure liquidity for U.S. federal government-insured mortgages including those insured by the FHA. Ginnie Mae guarantees to investors who purchase mortgage- backed securities the timely payment of principal and interest. Ginnie Mae securities are the only mortgage-backed securities to carry the full faith and credit guarantee of the U.S. federal government.
 
GSE.  Financing corporations established by the United States Congress, including Fannie Mae, Freddie Mac and the Federal Home Loan Banks.


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High-Touch Servicing.  A servicing model that is designed to increase borrower repayment performance with a view towards home ownership preservation, and to decrease borrower delinquencies and defaults on mortgage portfolios. This model emphasizes a focus on loss mitigation and frequent interactions with borrowers—via telephone, mail, electronic communications and other personal contact methods.
 
Home Affordable Modification Program (HAMP).  A U.S. federal government program designed to help eligible homeowners avoid foreclosure through mortgage loan modifications. Participating servicers may be entitled to receive financial incentives in connection with loan modifications they enter into with eligible borrowers and subsequent “pay for success” fees to the extent that a borrower remains current in any agreed upon loan modification.
 
Independent Loan Servicer.  A loan servicer that is not affiliated with a depository institution.
 
Loan Modification.  Temporary or permanent modifications, including re-modifications, to the terms and conditions of a borrower’s original mortgage loan. Loan modifications are usually made to loans that are in default, or in imminent danger of defaulting.
 
Loan-to-Value Ratio (LTV).  The unpaid principal balance of a mortgage loan as a percentage of the total appraised value of the property that secures the loan. LTV is one of the key risk factors that originators assess when qualifying borrowers for a mortgage loan. A loan with a low LTV is seen as less of a credit risk than a loan with a high LTV. An LTV over 100% indicates that the unpaid principal balance of the mortgage loan exceeds the value of the property.
 
Loss Mitigation.  The range of servicing activities designed by a servicer to minimize the losses suffered by the owner of a mortgage loan in connection with a borrower default. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.
 
Making Home Affordable Plan (MHA).  Also known as the President of the United States’ Homeowner Affordability and Stability Plan. A U.S. federal government program designed to help eligible homeowners avoid foreclosure and keep their homes by refinancing their existing mortgages. MHA loans are available to eligible homeowners with loan-to-value ratios of up to 125%.
 
Mortgage Servicing Right.  The right to service a loan or pool of loans and to receive a servicing fee. Mortgage servicing rights may be bought and sold, resulting in the transfer of loan servicing obligations.
 
Non-Conforming Mortgage Loan.  A mortgage loan that does not meet the standards of eligibility for purchase or securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
 
Non-Recoverable Advance.  A servicing advance made by a servicer, which will not ultimately be recoverable by the servicer from funds received upon liquidation of the underlying property of the mortgage loan.
 
Origination.  The process through which a lender provides a mortgage loan to a borrower.
 
P&I Advance.  A servicing advance to cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to ensure the cash flows paid to holders of securities issued by the residential mortgage-backed securities trust.
 
Prepayment Speed.  The rate at which mortgage prepayments occur or are projected to occur. The statistic is calculated on an annualized basis and expressed as a percentage of the outstanding principal balance.
 
Primary Servicer.  The servicer that owns the right to service a mortgage loan or pool of mortgage loans. This differs from a subservicer, which has a contractual right with the primary servicer to service a mortgage loan or pool of mortgage loans in exchange for a subservicing fee.
 
Conventional Mortgage Loan.  Generally, a high-quality mortgage loan that meets the underwriting standards set by Fannie Mae, Freddie Mac and Ginnie Mae and is eligible for purchase or securitization in the secondary mortgage market. Conventional mortgage loans generally have lower


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default risk and are made to borrowers with good credit records and a monthly income at least three to four times greater than their monthly housing expenses (mortgage payments plus taxes and other debt payments). Mortgages not classified as conventional mortgages are generally called either non-prime or Alt-A.
 
Real Estate Owned.  Property acquired by the servicer on behalf of the owner of a mortgage loan or pool of mortgage loans, usually through foreclosure or a deed-in-lieu of foreclosure on a defaulted loan. The servicer or a third party real estate management firm is responsible for selling the real estate owned. Net proceeds of the sale are returned to the owner of the related loan or loans. In most cases, the sale of real estate owned does not generate enough to pay off the balance of the loan underlying the real estate owned, causing a loss to the owner of the related mortgage loan.
 
Residential Mortgage-Backed Security.  A fixed income security backed by pools of residential mortgages.
 
Servicing.  The performance of contractually specified administrative functions with respect to a mortgage loan or pool of mortgage loans. Duties of a servicer typically include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic reports and managing insurance. A servicer is generally compensated with a specific fee outlined in the contract established prior to the commencement of the servicing activities.
 
Servicing Advance.  In the course of servicing loans, servicers are required to make servicing advances that are reimbursable from collections on the related mortgage loan. There are typically three types of servicing advances: P&I Advances, T&I Advances and Corporate Advances. Servicing advances are reimbursed to the servicer if and when the borrower makes a payment on the underlying mortgage loan or upon liquidation of the underlying mortgage loan. The types of servicing advances that a servicer must make are set forth in its servicing agreement with the owner of the mortgage loan or pool of mortgage loans.
 
Servicing Advance Facility.  A secured financing facility backed by a pool of mortgage servicing advance receivables made by a servicer to the owner of a mortgage loan or pool of mortgage loans.
 
Special Servicers.  Special servicers are responsible for enhancing recoveries on delinquent loans and real estate owned assets. Loans are transferred to a special servicer based on predetermined delinquency or other performance measures.
 
Subservicing.  Subservicing is the process of outsourcing the duties of the primary servicer to a third party servicer. The third party servicer performs the servicing responsibilities for a fee and is typically not responsible for making servicing advances.
 
T&I Advance.  A servicing advance to pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including but not limited to property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers in order for the lien holder to maintain their interest in the property.
 
Unpaid Principal Balance.  The amount of principal outstanding on a mortgage loan or a pool of mortgage loans. Unpaid principal balance is used as a means of estimating future revenue stream for a servicer.
 
Warehouse Facility.  A type of facility used to finance mortgage loan originations. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of funds by the counterparty, with a simultaneous agreement by the counterparty to transfer the loans back to the originator at a date certain, or on demand, against the transfer of funds from the originator.
 
Wholesale Origination.  A type of mortgage loan origination pursuant to which a lender acquires refinancing and purchase money mortgage loans from third party mortgage brokers or correspondent lenders.


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INDUSTRY
 
We conduct our business in the residential mortgage industry in the United States. We participate in two distinct, but related, sectors of the mortgage industry: residential mortgage loan servicing and residential mortgage loan originations.
 
Servicing Industry Overview
 
According to Inside Mortgage Finance, there were $10.5 trillion in residential mortgage loans outstanding in the United States as of December 31, 2010, and each mortgage loan must be serviced by a loan servicer. Loan servicers who own mortgage servicing rights normally earn a servicing fee of 25 to 50 basis points per annum on the unpaid principal balance of loans serviced, as well as associated ancillary fees, such as late fees. Consequently, a loan servicer can create value for both itself and the owner of the mortgage loan by increasing the number of borrowers that remain current in their repayment obligations. Owners may include a lender, investor or residential mortgage-backed securities trust, in the case of a securitized pool of mortgages.
 
Loan servicing primarily involves the calculation, collection and remittance of principal and interest payments, the administration of mortgage escrow accounts, the collection of insurance claims, the administration of foreclosure procedures, the management of real estate owned and the making of required advances.
 
In a weak economic and credit environment with elevated delinquencies and defaults, servicing becomes operationally more challenging and more capital intensive as servicers need to add and train staff to manage the increase in delinquent borrowers. In addition, servicers are generally required to make advances on delinquent mortgage loans for principal and interest payments, taxes, insurance, legal fees and property maintenance fees, all of which are typically recovered upon foreclosure or liquidation. According to the Mortgage Bankers Association, delinquent loans and foreclosures have increased from $0.6 trillion at December 2006 to $1.4 trillion in December 31, 2010. Furthermore, Fannie Mae estimates that as of December 31, 2010, it had $764 billion of assets within its own portfolio with characteristics that we believe make them credit-sensitive.
 
Mortgage Servicing Functions
 
Loan servicers play a key role in the residential mortgage market by providing loan servicing functions on behalf of the owners of mortgage loans including collecting the scheduled principal and interest payments, taxes and insurance, performing customer service functions and taking active steps to mitigate any potential losses associated with borrower delinquencies and defaults. Typically, a servicer is contractually obligated to service a mortgage loan in accordance with accepted servicing industry practices as well as applicable regulations and statutes. A servicer’s rights and obligations are governed by the pooling and servicing agreement for the underlying loans. A subservicer’s rights and obligations are governed by the subservicing agreement with the third party that owns the related mortgage servicing rights.
 
To the extent a borrower does not make a payment, servicers are generally required to make advances of principal and interest, taxes and insurance and legal fees until such time as the underlying property is liquidated or the servicer determines that additional advances will not be recoverable from future payments, proceeds or other collections on the mortgage loan. In the event of a foreclosure, servicers are entitled to reimbursement of advances from the sale proceeds of the related property and, typically, in the event of non-recoverable advances, from collections on other mortgage loans in the related residential mortgage-backed securities trusts they service.
 
Collection efforts attempt to maximize early contact with borrowers who are late or newly delinquent, with more focused attention on borrowers of lower credit quality. In addition, servicers are responsible for closely managing their collection calls and letter campaigns which are tailored to specific loan products.


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Loan Servicing Landscape
 
The majority of loan servicing in the United States is performed by the nation’s money center banks such as Bank of America, Wells Fargo, JPMorgan Chase and Citibank, which together service approximately 54% of all outstanding mortgage loans on one to four-family residences as of December 31, 2010. These bank-owned servicers mainly service conventional, performing mortgages and are most effective at routine account management of portfolios with low delinquencies that require limited interaction with the borrowers. The traditional servicer model was constructed to process simple payments and minimize costs, and functioned well in environments characterized by low delinquencies and defaults. However, in the current environment of rising delinquencies, extensive foreclosures and elevated real estate owned activity, traditional servicers are experiencing higher operating costs, and their performance metrics are declining due to the elevated level of foreclosures and liquidation processes. According to the Mortgage Bankers Association, from 2007 through 2010, approximately 3.4 million homes were lost to foreclosure and as of September 30, 2010, more than 3.5 million mortgages were in foreclosure or 90+ days delinquent. Given this environment, there is a demonstrated need for high-touch servicers of credit-sensitive assets, resulting in significant growth opportunities for us and other independent high-touch loan servicers.
 
Servicer Compensation
 
Loan servicers primarily service loans on which they own the mortgage servicing right, which is referred to as primary servicing. Alternatively, loan servicers may enter into a subservicing agreement with the entity that owns the mortgage servicing right pursuant to which the servicer agrees to service the loan on the owner’s behalf. Loan servicers earn servicing fees pursuant to these mortgage servicing rights and subservicing contracts, and these fees represent the largest source of revenue from loan servicing operations. By purchasing the mortgage servicing right, the loan servicer is generally entitled to receive 25 to 50 basis points annually on the average unpaid principal balance of the loans serviced. Under subservicing arrangements, where the loan servicer does not pay for the mortgage servicing right and is not required to make advancing obligations and is only required to make intra-month advancing obligations, the servicer generally receives a per loan fee that generally equates to between 5 and 45 basis points annually on the unpaid principal balance. The servicing and subservicing fees are typically supplemented by incentive fees and ancillary fees. Incentive fees include modification initiation and success fees from the HAMP program and modification or collateral workout related incentives from various pool owners and GSEs. Ancillary fees include late fees, insufficient funds fees, convenience fees and interest income earned on loan payments that have been collected but have not yet been remitted to the owner of the mortgage loan, or float. Loan servicers have additional opportunities to provide value-added services to the owners of the loans they service. These value-added adjacent services can include obtaining broker price opinions for valuation of underlying properties, trustee services, real estate owned preservation services and other revenues related to real estate owned sales.
 
Advances
 
In the course of servicing delinquent loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan, or in the event of a non-recoverable advance, from collections on other mortgage loans in the related residential mortgage-backed securities trust.
 
There are generally three types of advances: P&I Advances, T&I Advances and Corporate Advances.
 
P&I Advances:  Advances to cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to smooth the cash flows paid to holders of securities issued by the residential mortgage-backed securities trust.


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T&I Advances:  Advances to pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including, but not limited to, property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers.
 
Corporate Advances:  Advances to pay costs and expenses incurred in foreclosing upon, preserving and selling real estate owned, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing mortgage loans.
 
A servicer may decide to stop making P&I Advances prior to liquidation of the mortgage loan if the servicer deems future P&I Advances to be non-recoverable. In this circumstance, T&I Advances and Corporate Advances will likely continue in order to preserve existing value of the mortgage loan and complete the foreclosure and real estate owned sale process.
 
Servicers of GSE Securities are reimbursed by the GSE for their advances upon completion of the foreclosure sale at which point the mortgage loan is repurchased out of the MBS by the GSE. Servicers of GSE Securities are not responsible for managing real estate owned. Conversely, servicers of non-agency MBS are obligated under the servicing agreement to make advances through liquidation of the related real estate owned.
 
Subservicing is distinct from MSR servicing as a subservicer recovers advances in the month following the advance disbursement, and not upon sale of the related property. As a result of more timely recovery of advances, subservicing generally requires much less capital than MSR servicing.
 
Advances are a non-interest bearing asset. Non-bank servicers typically utilize securitizations (i.e., match funded liabilities) to finance their advances. The securitizations are generally non-recourse to the servicer, and the advances are financed at a discount to par accounting for the non-interest bearing nature of the asset. Advance rates for securitizations generally range between 70% to 85% depending upon the rating and structure.
 
Industry Dynamics
 
We believe a number of factors associated with the dislocation in the mortgage industry have led to a supply and demand imbalance in the residential servicing market, creating an exceptional market opportunity for non-bank servicers. These factors include:
 
Elevated delinquencies, defaults, foreclosures and real estate owned:
 
According to the Mortgage Bankers Association, delinquent loans and foreclosures have increased from $0.6 trillion at December 2006 to $1.4 trillion at December 31, 2010. The Mortgage Bankers Association forecasts that delinquent loans and loans in foreclosure peaked in early 2010 and will stay elevated for quite some time. Moody’s Analytics projects that home prices will decline further in 2011 and begin to recover in 2012. We believe further home price declines will continue to drive increased levels of delinquency and foreclosure as more borrowers owe more on their homes than their homes are worth. In a period of elevated mortgage delinquencies and defaults, servicing becomes operationally more challenging as servicers need to dedicate more resources to manage the increase in delinquent borrowers. In the current environment of rising delinquencies, extensive foreclosures, expected further home price declines, and elevated real estate owned activity, we believe traditional bank servicers will continue to recognize the importance of high touch servicing—strong emphasis on


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superior asset performance and loss mitigation expertise—and seek to partner with servicers who they believe can be more effective at reducing credit losses.
 
(COMPANY LOGO)
Source: Mortgage Bankers Association, HOPE NOW, CoreLogic, Calculated Risk
 
Regulatory and legislative factors:
 
As a result of the severe dislocation in the U.S. housing market and the related fallout, regulatory and legislative attention on the mortgage industry has increased. Numerous legislative and regulatory actions have been proposed, including (i) the capital requirements associated with the implementation of Basel III that will result in increased capital requirements for depository institutions that own mortgage servicing rights; (ii) the QRM provision and others contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act; (iii) the negotiations involving the 50 state Attorneys General, certain federal regulators and servicers that we believe will increase costs disproportionately towards the largest traditional bank-owned servicers; (iv) the enforcement consent orders entered into by 14 of the largest mortgage servicers and four federal agencies; (v) the initiative of the Federal Housing Finance Agency to align the servicing requirements related to delinquent mortgages and to modify the servicing compensation related to Fannie Mae and Freddie Mac loans; and (vi) the anticipated changes to servicer compensation. We believe these factors will continue to increase compliance costs for the largest servicers and will cause many to divest servicing rights and/or outsource significant segments of their mortgage operations. Additionally, we believe there are a limited number of non-bank servicers uniquely positioned to capitalize upon these opportunities and provide the expected level of service. We believe these factors will continue to drive a bifurcation within the servicing market between front-end and back-end servicing compensation.
 
Reform of government sponsored enterprises:
 
On September 7, 2008, the Federal Housing Finance Agency, or the FHFA, placed Fannie Mae and Freddie Mac into conservatorship and, together with the U.S. Treasury, established a program designed to boost investor confidence in their respective debt and mortgage-backed securities. The U.S. government has expressed interest in reforming and significantly reducing the participation of the GSEs in the residential mortgage market. As a result of their conservatorship and the anticipation of their eventual reduced participation in the market, we believe the GSEs will continue to facilitate servicing transfers to strong, proven servicers of credit sensitive loans with a track record of improving asset performance and mitigating credit losses. We expect these transfers to accelerate as market forces continue to erode portfolio performance. Due to our history of strong asset performance and our long-standing relationships with the GSEs, we believe that we are among a very limited number of servicers uniquely positioned to acquire additional GSE-controlled servicing.
 
In addition to the market opportunities that we have identified and we believe will continue to present themselves, numerous government programs and initiatives continue to provide advantages for


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servicers with loss mitigation expertise. We expect that servicers that are flexible and adept at implementing government hardship assistance programs will be rewarded with higher incentive fees and more servicing transfers from the GSEs. In contrast, we expect that servicers not meeting the GSEs’ performance benchmarks will be penalized with compensatory fees and potential servicing revocations. We believe these trends favor servicers such as us that have a track record of improving asset performance on the loan they service.
 
(TABLE)
 
Opportunities under HAMP
 
In response to the rising level of foreclosures, the United States Department of the Treasury announced the implementation of HAMP in February 2009, which is designed to keep borrowers in their homes. HAMP provides financial incentives to loan servicers and borrowers to successfully modify qualifying residential mortgages. Under the program, servicers receive an up-front fee of $1,000 for each completed modification and an additional $500 if the loan is current, but in risk of imminent default, at the time the borrower enters the HAMP trial period. Servicers also receive “Pay-for-Success” payments of as much as $1,000 each year for up to three years. These fees accrue monthly and are paid annually on the anniversary of the month in which the trial period plan was executed. The annual incentives are predicated on the borrower remaining in good standing (i.e., the borrower must not be more than 2 months delinquent at any time during the year).
 
Originations Industry Overview
 
According to Inside Mortgage Finance, total residential mortgage originations in the United States were $1.6 trillion in 2010, a decrease of 13% compared to 2009. Of the 2010 originations, approximately 87% were conforming mortgages guaranteed by GSEs, including Fannie Mae and Freddie Mac, or government agencies, such as the Federal Housing Administration and the Veterans’ Administration. From 2006 to 2010, the annual aggregate principal balance of newly originated mortgage loans that were either insured or guaranteed by government agencies or sold to GSEs or into government securitizations increased from $1.1 trillion to $1.4 trillion, or at a CAGR of 6%.
 
The United States residential mortgage market consists of a primary mortgage market that links borrowers and lenders and a secondary mortgage market that links lenders and investors. In the primary mortgage market, residential mortgage lenders such as mortgage banking companies, commercial banks, savings institutions, credit unions and other financial institutions originate or provide mortgages to borrowers. Lenders obtain the funds they lend to mortgage borrowers in a variety of ways, including by selling mortgages or mortgage-related securities into the secondary mortgage market. The secondary mortgage market consists of institutions engaged in buying and selling mortgages in the form of whole loans (i.e., mortgages that have not been securitized) and mortgage-related securities. Government- sponsored enterprises, such as Fannie Mae and Freddie Mac, and a government agency, Ginnie Mae, participate in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.


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Loan Origination Process
 
Residential mortgage loans are generally originated through either a direct retail lending network or a mortgage brokerage network.
 
A direct retail lending network consists of distributed retail branches which are individual branch locations and/or a centralized retail platform. A centralized retail platform is a telephone based platform with multiple loan officers in one location. Typical referral sources for a direct retail lending network include realtors, homebuilders, credit unions, banks, the Internet and refinances from existing servicing portfolios. In a direct lending retail network, the lender controls all loan origination processes, including: sourcing the borrower, taking the application and setting the interest rate, ordering the appraisal, underwriting and processing the loan and closing and funding the loan.
 
Loans sourced by mortgage brokers are funded by the lender and generally closed in the lender’s name. When originating loans through mortgage brokers, the mortgage broker’s role is to identify the applicant, assist in completing the loan application, gather necessary information and documents and serve as the liaison to the borrower through the lending process. The lender reviews and underwrites the application submitted by the mortgage broker, approves or denies the application, sets the interest rate and other terms of the loan and, upon acceptance by the borrower and satisfaction of all conditions required by the lender, funds the loan. Because mortgage brokers conduct their own marketing, employ their own personnel to complete the loan applications and maintain contact with the borrowers, mortgage brokers represent an efficient loan origination channel.
 
The length of time from the origination or purchase of a mortgage loan to its sale or securitization generally ranges from 10 to 60 days, depending on a variety of factors including loan volume, product type, interest rates and capital market conditions. An important source of capital for the residential mortgage industry is warehouse lending. These facilities provide funding to mortgage loan originators until the loans are sold to investors in the secondary mortgage loan market.
 
Types of Mortgage Loans
 
Mortgage loans generally fall into one of the following five categories: prime conforming mortgage loans, prime non-conforming mortgage loans, government mortgage loans, non-prime mortgage loans and prime second-lien mortgage loans.
 
Prime Conforming Mortgage Loans:  These are prime credit quality first-lien mortgage loans secured by single-family residences that meet or “conform” to the underwriting standards established by Fannie Mae or Freddie Mac for inclusion in their guaranteed mortgage securities programs.
 
Prime Non-Conforming Mortgage Loans:  These are prime credit quality first-lien mortgage loans secured by single-family residences that either (1) do not conform to the underwriting standards established by Fannie Mae or Freddie Mac, because they have original principal amounts exceeding Fannie Mae and Freddie Mac limits, which are commonly referred to as jumbo mortgage loans, or (2) have alternative documentation requirements and property or credit-related features (e.g., higher loan-to-value or debt-to-income ratios) but are otherwise considered prime credit quality due to other compensating factors.
 
Government Mortgage Loans:  These are first-lien mortgage loans secured by single-family residences that are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs and securitized into Ginnie Mae securities.
 
Non-prime Mortgage Loans:  These are first-lien and certain junior lien mortgage loans secured by single-family residences, made to individuals with credit profiles that do not qualify for a prime loan, have credit-related features that fall outside the parameters of prime mortgage loans or have performance characteristics that otherwise expose us to comparatively higher risk of loss.


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Prime Second-Lien Mortgage Loans:  These are open- and closed-end mortgage loans secured by a second or more junior lien on single-family residences, which include home equity mortgage loans.
 
Due to the significant stress in the residential mortgage industry experienced over the last few years, underwriting standards have improved. Some of these improvements include the elimination or significant reduction of mortgage affordability products such as no income verification loans, limited or no documentation loans, option adjustable rate mortgage loans, and non-owner occupied loans. Also, underwriting standards now include higher minimum credit scores and lower maximum loan-to-value ratios than were acceptable under past lending practices. These improvements in underwriting standards should lead to improved performance.
 


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BUSINESS
 
Overview
 
We are a leading residential mortgage loan servicer and one of the top five non-bank servicers in the United States as measured by aggregate unpaid principal balance of loans serviced. We service mortgage loans in all 50 states and we are licensed as a residential mortgage loan servicer and/or a third-party default specialist in all states that require such licensing. In addition to our core Servicing business, we currently originate primarily conventional agency (Fannie Mae and Freddie Mac) and government (Federal Housing Administration, Department of Veterans Affairs) residential mortgage loans, and we are licensed to originate residential mortgage loans in 49 states. Our headquarters and operations are based in Lewisville, Texas. As of April 30, 2011, we had a total of 2,176 employees.
 
Loan Servicing
 
We are one of the largest independent loan servicers in the United States. Our servicing portfolio consists of mortgage servicing rights acquired from or subserviced for various third parties as well as loans we originate through our integrated origination platform. As of December 31, 2010, our servicing portfolio included over 389,000 loans with an aggregate unpaid principal balance of $64.2 billion. We service mortgage loans in all 50 states, and we are licensed as a residential mortgage loan servicer and/or a third party debt default specialist in all states that require such licensing. Our Servicing Segment produces recurring, fee-based revenues based upon contractually established servicing fees.
 
Servicing fees primarily consist of an amount based on the aggregate unpaid principal balance of the loans serviced or a per-loan fee amount and also include ancillary fees such as late fees. In addition, we earn interest income on amounts deposited in collection accounts and amounts held in escrow to pay property taxes and insurance, which we refer to as float income. We also generate incentive fees from owners of the loans that we service for meeting certain loss-mitigation metrics and for arranging successful loss mitigation programs. Moreover, the U.S. federal government pays us incentive fees for loans that we successfully modify within the parameters of the Home Affordable Modification Program, or HAMP. In addition, we leverage our loan servicing business and customer base to provide several complementary services that generate fee-based revenues.
 
We use a flexible, high-touch servicing model that focuses on personal contact with borrowers and is designed to decrease borrower delinquencies and defaults on mortgages and to increase borrower repayment performance with a goal of home ownership preservation. Our operating culture emphasizes individual default specialist accountability for asset performance (what we refer to as credit loss ownership) and loss mitigation practices to improve asset performance and cash flow and to reduce credit losses. Our servicing model and operating culture have proven especially valuable in the current distressed residential market, and we have established an excellent track record servicing credit-sensitive loans.
 
We believe that our demonstrated performance in servicing loans for a GSE facilitated our acquisitions of two significant mortgage servicing rights portfolios totaling approximately $25.0 billion since November 2008. These two portfolios were previously serviced by other servicers. These acquisitions helped us grow our servicing portfolio from $12.7 billion on December 31, 2007, to $64.2 billion on December 31, 2010, including approximately $25 billion in unpaid principal balance which we boarded in November and December 2010, when we entered into a subservicing agreement with a GSE. We expect this relationship to generate additional portfolio servicing opportunities in the future.
 
Loan Originations
 
We are also one of the few high-touch servicers in the United States with a loan origination platform. We currently originate primarily conventional agency and government conforming residential mortgage loans, and we are licensed to originate residential mortgage loans in 49 states. Our Originations Segment diversifies our offering of mortgage services and further stabilizes our revenue


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stream. In 2009, we originated $1.5 billion in aggregate principal balance entirely consisting of conventional residential mortgage loans. During the year ended December 31, 2010, our originations totaled $2.8 billion in aggregate principal balance. We originate loans through our three loan origination channels:
 
  •  Consumer Direct Retail Channel—through which we market refinancing and purchase money mortgage loans directly to selected consumers from our centralized call center;
 
  •  Distributed Retail Channel—through which we market refinancing and purchase money mortgage loans directly to consumers from local branches; and
 
  •  Wholesale Channel—through which we market our refinancing and purchase money mortgage loans to third party mortgage brokers.
 
We originate purchase money loans and refinance existing loans, including loans that we service. Our strategy is to mitigate the credit, market and interest rate risk from loan originations by either selling newly originated loans or placing them in GSE or government securitizations. We typically sell new loans within 30 days of origination, and we do not expect to hold any of the loans that we currently originate on our balance sheet on a long-term basis. At the time of sale, we have the option to retain the mortgage servicing rights on loans we originate.
 
Our origination capability differentiates us from other non-bank, high-touch loan servicers without an integrated origination platform by:
 
  •  providing us with an organic source of new loans to service as existing loans are repaid or otherwise liquidated as originated loans serviced by us typically generate higher returns than comparable mortgage servicing rights that we would acquire from a third party;
 
  •  providing an attractive supplementation to our servicing loss mitigation strategies by allowing us to modify and refinance mortgage loans, including loans that we service;
 
  •  creating a diversified source of revenue; and
 
  •  building brand recognition.
 
Legacy Assets and Other
 
We also have a legacy asset portfolio, which consists primarily of non-prime and nonconforming residential mortgage loans, most of which we originated from April to July 2007. In November 2009, we term-financed our legacy assets with a non-recourse loan that requires no additional capital or equity contributions. In conjunction with the transaction, we reclassified our legacy assets to “held for investment” on our consolidated balance sheet, which allowed us to eliminate further mark-to-market accounting exposure on these assets. We continue to service these loans using our high-touch servicing model. Additionally, we consolidated certain securitization trusts where it was determined that we had both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, pursuant to new consolidation accounting guidance related to VIEs adopted on January 1, 2010.
 
History and Operating Structure
 
We are a Delaware limited liability company. We were formed in 1994 in Denver, Colorado as Nova Credit Corporation, a Nevada corporation. In 1997, we moved our executive offices and primary operations to Dallas, Texas and, in the same year, we changed our name to Centex Credit Corporation. In 2001, Centex Credit Corporation was merged into Centex Home Equity Company, LLC, a Delaware limited liability company. In 2006, FIF HE Holdings LLC, acquired all of our outstanding membership interests and we changed our name to Nationstar Mortgage, LLC. Nationstar Capital Corporation, a


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Delaware corporation, is our wholly-owned subsidiary formed solely for the purpose of being a corporate co-issuer of the notes.
 
Competitive Strengths
 
We believe the following competitive strengths contribute to our market position and differentiate us from our competition.
 
Attractive Business Model with Strong Cash Flow
 
We have an attractive business model as one of the few high-touch servicers in the United States with an integrated loan origination platform.
 
Our Servicing Segment produces recurring, fee-based revenues based upon contractually established servicing fees, and we are exposed to minimal credit risk with respect to the mortgage loans that we service. We believe that we continue to demonstrate our ability to produce lower delinquency rates on the loans we service, including credit-sensitive loans, compared to our competitors, and we believe that we will continue to acquire mortgage servicing rights at attractive prices from mortgage investors or provide subservicing for third parties that value our servicing capabilities.
 
We believe that our Originations Segment differentiates us from other high-touch servicers without an origination platform by providing us with a more cost-effective alternative to purchasing new mortgage servicing rights as the unpaid principal balance of our existing servicing portfolio decreases over time; diversifying and stabilizing our revenue in a variety of interest rate environments; and building brand recognition.
 
We generate significant cash flow for debt service as a result of the profitability of our Operating Segments. We believe that our focus on asset performance and operational efficiency has enabled us to strengthen our relationships with the GSEs and other third parties and has allowed us to grow our earnings from our Operating Segments.
 
Substantial Liquidity and Access to Multiple Capital and Funding Sources
 
We maintain substantial levels of funding and liquidity through multiple capital and funding sources for our Operating Segments. We have access to multiple funding sources, and we believe that our liquidity sources are sufficient to meet our immediate and future needs. These sources include servicing advance lines to finance our Servicing Segment, warehouse lines to finance our Originations Segment and loans from GSEs to facilitate the acquisition of mortgage servicing rights. As of December 31, 2010, we had a total of $706.0 million of unused capacity under our existing servicing advance facilities and origination warehouse lines. We believe that our strong relationships with liquidity providers and our continued ability to access sufficient capital during the recent economic downturn demonstrate the depth of our liquidity and access to capital. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations.”
 
Servicing Platform with Loss Mitigation Focus
 
We believe that, by focusing on personal contact with borrowers, our high-touch servicing approach reduces credit losses and maximizes cash collections for credit-sensitive loans. This highly flexible model allows for customization to meet individual borrower requirements, and is further differentiated by providing personal contact at critical borrower touch points, including via telephone, mail, electronic communications and other personal contact methods. Our approach facilitates strong relationships with borrowers and greater employee accountability for desired performance. We believe


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that our servicing expertise and focus on optimal outcomes reduces credit impairments and losses to loan investors. We believe that this model presents continued opportunities for growth.
 
Scalable Platform and Established Track Record
 
Establishing a servicing platform requires significant initial capital investments, infrastructure, licensing and expertise to properly service credit-sensitive loans, which creates substantial barriers to entry. We operate a highly scalable platform, with the capacity to add up to a total of approximately $15 billion of unpaid principal balance to our servicing operations within 90 to 120 days with minimal incremental fixed costs. We can service these additional accounts with our existing infrastructure, real estate and technology platform.
 
Additionally, we have used our high-touch servicing model and our mix of proprietary and commercially available technology solutions to establish a track record of superior performance in servicing credit-sensitive loans. The unpaid principal balance of the loans we serviced increased 406% from December 31, 2007 to December 31, 2010, primarily through acquiring mortgage servicing rights and entering into subservicing agreements. We believe these acquisitions and agreements can be attributed to our established track record in servicing credit-sensitive residential mortgage loans, and we believe that our track record, together with our scalable platform, positions us well relative to our competitors to acquire similar portfolios in the future.
 
Culture of Credit Loss Ownership and Accountability
 
Since our inception, our operating culture has emphasized superior operational and financial performance, credit loss ownership (our term for individual default specialist accountability for asset performance), employee development and customer relations. We establish financial and operational goals across all levels of the organization and compensation for all of our employees is based upon achieving the desired results. As a result, we have a streamlined organizational structure that allows us to react to business needs and changes in an expeditious manner. We hire recent college graduates and teach them our business through a systematic training program. We primarily develop existing employees for management positions. We strongly endorse promotion from within and routinely identify and place senior level staff in our Manager in Training program as a developmental tool to prepare them for supervisory positions. Supervisors typically then rotate through progressively more complex management assignments to improve both their technical and managerial proficiency.
 
We believe that our culture of credit loss ownership and accountability has enabled us to outperform the industry. As of December 15, 2010, according to Loan Performance.com, our 60 or more day delinquency rate for our legacy assets (as a percentage of original balance) was approximately 12% while the delinquency rate for the ABX 07-2 Mortgage Index was approximately 24%.
 
Stable and Seasoned Management Team
 
Our senior management team is comprised of experienced mortgage industry executives with an average of approximately 26 years in the industry and a track record of generating financial and operational improvements. Several members of our management team have held senior positions at other residential mortgage companies. In addition, our senior management team has remained in place through multiple business cycles and has a demonstrated ability to adapt to changing market conditions. We believe that the experience of our senior management team and its management philosophy are significant contributors to our operating performance.


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Our Strategy
 
Our primary goal is to increase the value of our loans and our clients’ loans by reducing delinquencies and credit losses. This goal is achieved through our culture, processes and expertise. We plan to grow our revenue and operating cash flow by employing the following business strategies:
 
Capitalizing on Industry Opportunities
 
We believe we are well positioned to benefit from the current trends in the residential mortgage industry. The disruption in the mortgage industry has resulted in limited access to funding and capital, lower than anticipated performance of residential portfolios and a strong demand for high-touch servicing. We believe that competitors with significant residential exposure or limited access to capital have shifted their operations to selling residential real estate assets, including mortgage servicing rights. This allows existing strong servicers the opportunity to acquire or subservice additional portfolios at attractive valuations. Additionally, due to a variety of economic factors, residential loan delinquencies and related losses are at historical highs prompting GSEs and other owners of residential mortgage loans to focus on home ownership preservation and servicing for superior credit performance. The heightened focus in these areas has led to a strong demand for high-touch servicers by these owners. Also, we believe that many of the largest loan servicers—who are experiencing unprecedented levels of delinquencies and losses—do not have sufficient internal capacity to perform high-touch servicing in their own portfolios and, as a result, may look to independent high-touch servicers to assist them in servicing their portfolios. As a result, we believe that there will continue to be strong demand for experienced high-touch servicers with a proven ability to improve loan performance. We also believe that there will be significant opportunities to continue to acquire mortgage servicing rights at attractive prices.
 
Maintaining and Growing Our Steady Fee-Based Servicing Portfolio
 
Our servicing business produces recurring, fee-based revenues based upon contractually established servicing fees. We intend to continue to utilize our established and scalable servicing platform to grow our servicing operations organically and through acquisitions. We believe that we will continue to benefit from our strong relationship with GSEs and other third party investors, which we believe will enable us to acquire additional servicing rights at attractive prices and subservicing contracts in order to grow our business. Additionally, we have invested in our loan administration and customer service servicing divisions to accommodate the increased scale and size of our portfolio, which allows us to service newly originated conventional mortgage loans at attractive return levels in a variety of operating and economic environments.
 
Continuing To Expand Our Originations Platform
 
Our Originations Segment diversifies our offering of mortgage services and further stabilizes our revenue stream by providing us with a natural hedge against fluctuations in prevailing interest rates. We have a diversified, multi-channel strategy to continue to build our conventional originations platform in order to organically replace servicing run-off. Through our origination platform, we are also able to create loan servicing assets at valuation levels below where our servicing competitors can purchase comparable mortgage servicing rights. Also, we can recapture loan payoffs in our existing servicing portfolio by providing origination services to our existing borrowers.
 
We believe that there are significant opportunities to originate loans for servicers and other financial institutions lacking origination capacity, and we intend to capitalize on these opportunities by expanding our retail channels. Our expansion efforts will focus primarily on purchase money lending, which is a stable origination source through various interest rate cycles. Unlike certain competitors who are required to utilize third party intermediaries in transactions with the GSEs and Ginnie Mae, we are a direct lender with the capability to sell loans directly to the government-sponsored enterprises and to securitize loans directly with Ginnie Mae. We believe that this capability allows us to control the credit quality of the loans we originate, thereby reducing our repurchase risk.


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Engaging in Opportunistic Acquisitions and New Business Opportunities
 
There are numerous banks, insurance companies and other financial entities that have significant exposure to the residential mortgage sector. Our management, together with our dedicated servicing and origination relationship teams and our sponsor, Fortress Investment Group LLC, or Fortress, have extensive business and corporate expertise, receive numerous requests to review potential acquisition opportunities and continually conduct due diligence to identify potential opportunistic acquisitions. We are currently seeking out opportunities and believe there will continue to be significant opportunities to take advantage of the dislocation in the residential mortgage sector and acquire assets at attractive valuations. We intend to opportunistically grow our business through acquiring mortgage servicing rights, subservicing rights, servicing platforms and originations platforms. We may purchase assets and/or platforms of significant size. We believe there are several assets and platforms currently for sale in our industry and we are currently in the process of pursuing a number of such opportunities.
 
Our Operations
 
We are a leading residential mortgage company specializing in residential mortgage loan servicing and conventional residential mortgage loan originations. Our business primarily consists of two Operating Segments: Servicing and Originations.
 
Servicing
 
We are one of the largest independent loan servicers in the United States. As of December 31, 2010, our servicing portfolio included over 389,000 loans with an aggregate unpaid principal balance of $64.2 billion. The servicing portfolio consists of loans originated by our integrated origination platform as well as mortgage servicing rights either acquired or subserviced from various third parties. We service these loans using a high-touch servicing model designed to increase borrower repayment performance and home ownership preservation and decrease borrower delinquencies and defaults. The unpaid principal balance of the loans we serviced increased 406% from December 31, 2007 to December 31, 2010, primarily through acquiring mortgage servicing rights and entering into subservicing agreements. As set forth in the chart below, revenues from our Servicing Segment were $74.6 million, $100.1 million and $182.8 million for 2008, 2009 and 2010.
 
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    Year Ended December 31,  
    2008     2009     2010  
Servicing Portfolio (dollars in millions):
                       
Unpaid principal balance (by investor):
                       
Special Servicing
  $ 1,218     $ 1,554     $ 4,893  
Government-sponsored enterprises
    10,709       24,235       52,194  
ABS
    9,415       7,875       7,089