1. Summary of Significant Accounting Policies

Nature of Operations

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

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

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

Basis of Consolidation

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

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

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

The Company has evaluated the materiality of this error on its prior period financial statements from a quantitative and qualitative perspective. Management has concluded that the error was not material to any prior annual or interim period or the trend of financial results; therefore, amendments to previously filed reports are not required. The Company has corrected the error for all prior periods presented by revising the Condensed Consolidated Financial Statements appearing herein. Periods not presented herein will be revised, as applicable, in future filings. The impact of this revision to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Changes in Equity was a reduction to Total equity of $32 million, $37 million and $33 million as of December 31, 2015, September 30, 2016 and December 31, 2016, respectively, with an offsetting increase to amounts presented as a Redeemable noncontrolling interest within Mezzanine equity. The reduction to Total equity included a decrease to amounts reported as Additional paid-in capital of $2 million, $1 million and $2 million as of December 31, 2015, September 30, 2016 and December 31, 2016, respectively. There was no effect to reported totals for assets, liabilities, cash flows or net loss. Refer to Note 13, 'Variable Interest Entities' for further information.

Unaudited Interim Financial Information

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

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

Use of Estimates

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

Accounting Pronouncements Adopted During the Period

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

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


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


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

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

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

Recently Issued Accounting Pronouncements Not Yet Adopted

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

Effective for the First Quarter of 2018

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

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

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

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