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. In February 2018, the Company announced a proposed Merger with Ocwen Financial Corporation. Refer to Note 20, 'Subsequent Events' for additional information.

In February 2017, the Company announced its intention to operate as a smaller business that is focused solely on subservicing and portfolio retention services. Refer to Note 2, 'Exit Costs' for additional information.

To enact that strategic shift for the Mortgage Servicing segment, during 2017, the Company completed the sale of a substantial portion of its capitalized Mortgage servicing rights ("MSRs") as discussed in Note 4, 'Servicing Activities'. The Company's Mortgage Servicing segment is now focused on subservicing activities, and has exposure to concentration risk and client retention risk with respect to its subservicing agreements. As of December 31, 2017, 58% and 19% of the subservicing portfolio (by units) related to significant client relationships with New Residential Mortgage, LLC ("New Residential") and Pingora Loan Servicing, LLC, respectively. A substantial portion of the Company's subservicing agreements allow the owners of the servicing to terminate the subservicing agreement without cause with respect to some or all of the subserviced loans and, in some cases, without payment of any termination fee. The Company expects to transfer approximately 115,000, or 18%, subservicing units off of our platform between May 2018 and April 2019, based upon receipt in February 2018 of formal notices and verbal indications from two of our largest subservicing clients. Approximately 65,000 of these units are subject to a portfolio defense agreement and will no longer be solicitable upon transfer to a new servicer.

The Company's future mortgage loan originations of the Company's Mortgage Production segment will be sourced solely through portfolio retention services, which is limited to a small group of key clients primarily associated with our significant subservicing client relationships, and the portfolio defense agreements cease upon the termination of the related client subservicing relationship, or as units transfer out of our subservicing portfolio to a new servicer. During the year ended December 31, 2017, total originations from portfolio retention represented 6% of the Company's total mortgage loan originations. In November 2016, the Company announced its intentions to exit the private label services ("PLS") business, and during February 2017, announced it entered into agreements to sell certain assets of PHH Home Loans and its subsidiaries, including its mortgage origination and processing centers. During the year ended December 31, 2017, the PLS business and Real Estate channel represented 66% and 28% of the Company's total mortgage loan originations, respectively. During 2017, the Company executed on its strategy towards exiting the PLS origination business, including negotiating the contractual exits of its client agreements. In addition, the Company took steps that will result in the exit of its Real Estate channel through the sale of certain assets of PHH Home Loans and its subsidiaries that was completed in December 2017. Refer to Note 17, 'Variable Interest Entities' for additional information. As of December 31, 2017, both the PLS business and Real Estate channel are winding down their operations, and will be reported as discontinued operations during 2018 when run-off activity is substantially complete.

Basis of Presentation

The Consolidated Financial Statements include the accounts and transactions of PHH and its subsidiaries, as well as entities in which the Company directly or indirectly has a controlling interest and variable interest entities of which the Company is the primary beneficiary. PHH Home Loans, LLC and its subsidiaries ("PHH Home Loans") are consolidated within the Consolidated Financial Statements and the ownership interest of Realogy Services Venture Partner LLC, a subsidiary of Realogy Holdings Corp. ("Realogy") is presented as a noncontrolling interest. As of December 31, 2017, Realogy's ownership interests are classified as a liability and presented within Mandatorily redeemable noncontrolling interest in the Consolidated Balance Sheets, and, as of December 31, 2016, classified as Mezzanine equity and presented within Redeemable noncontrolling interest. Refer to Note 17, 'Variable Interest Entities' for additional information on the classification differences of Realogy's ownership interest in PHH Home Loans between periods. Intercompany balances and transactions have been eliminated from the Consolidated Financial Statements. Unless otherwise noted, and except for share and per share data, dollar amounts presented within these Notes to Consolidated Financial Statements are in millions.

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 for periods between February 1, 2015 and September 30, 2017. 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 continued to allocate Realogy its portion of income or loss and distributions for each period.

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 Consolidated Financial Statements appearing herein. Periods not presented herein will be revised, as applicable, in future filings. The impact of this revision to the Consolidated Balance Sheets and Consolidated Statements of Changes in Equity appearing herein was a reduction to Total equity of $32 million and $33 million as of December 31, 2015 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 and $2 million as of December 31, 2015 and December 31, 2016, respectively. There was no effect to reported totals for assets, liabilities, cash flows or net loss. Refer to Note 17, 'Variable Interest Entities' for further information.

Use of Estimates

The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions include, but are not limited to, those related to the valuation of mortgage servicing rights, mortgage loans held for sale and other financial instruments, the estimation of liabilities for commitments and contingencies, mortgage loan repurchases and indemnifications and the determination of certain income tax assets and liabilities and associated valuation allowances. Actual results could differ from those estimates.

Acquisition

Speedy Title & Appraisal Review Services, LLC. On December 31, 2017, the Company acquired an additional 50.1% interest in Speedy Title & Appraisal Review Services, LLC (“STARS”), increasing its ownership interest from 49.9% to 100%. This acquisition was performed pursuant to the terms of the Limited Liability Agreement, as amended, between the Company and CoreLogic Holdings II, Inc, in order to effect the wind-down of STARS in connection with the exit of the private label services business, and for the Company to absorb the remaining operations of STARS in support of its servicing platform. This transaction is accounted for as a business combination achieved in stages. Prior to the acquisition, STARS was operated as a joint venture and accounted for as an equity method investment within Other assets in our Consolidated Balance Sheets.

As of December 31, 2017, the provisional estimate of fair value of our equity interest in STARS immediately before the acquisition was $6 million. The fair value of our previously held equity interest was measured using the assumed liquidation value of their balance sheets, and there was no adjustment for the remeasurement of the investment immediately prior to the acquisition. Upon acquisition at December 31, 2017, the Company recorded identifiable assets and liabilities consisting of $14 million of cash and $7 million of Accounts payable and accrued liabilities within the Consolidated Balance Sheets, and a $1 million pre-tax gain was recognized within Other income in the Consolidated Statements of Operations. The fair value estimates related to this acquisition represent the Company's best estimate of fair value and are expected to be finalized over a period of up to six months from the acquisition date.

The following table presents the revenue and earnings of the combined entity for the year ended December 31, 2017, as though the acquisition had occurred as of January 1, 2017:



	Year Ended December 31, 2017
	As Reported			Adjustment	Pro-forma results
	(In millions)
Net Revenues	$	456		1	$	457
Loss before income taxes	(273		)	—	(273		)

Accounting Pronouncements Adopted During the Period

Derivatives and Hedging. 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.

Share-based Payments. 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 $3 million of income tax expense during the year ended December 31, 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 year ended December 31, 2017. The amount of tax withholding for both the years ended December 31, 2016 and 2015 was $1 million. 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.

Consolidation. 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

Effective for the First Quarter of 2018

Revenue Recognition. 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. In addition, these updates enhance the disclosure requirements around revenue recognition and related cash flows. 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". 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. For the year end December 31, 2017, the total revenue associated with in-scope revenue streams was approximately $75 million, significantly all of which relates to revenue associated with the private label channel that will not be a recurring revenue stream after we complete the exit of this business in the first quarter of 2018. In addition, the in-scope revenue streams include amounts associated with certain contracts that are substantially complete as of December 31, 2017, and therefore will not have an impact on the adoption.

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 Company will adopt this standard using a modified retrospective approach in the first quarter of 2018 with a cumulative effect adjustment to retained earnings.

Share-based payments. 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.

Retirement Benefits. 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.

Other Income. In February 2017, the FASB issued ASU 2017-05, "Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets." This update defines what constitutes an “in substance nonfinancial asset”, requires that all entities account for the derecognition of a business in accordance with ASC 810 and clarifies that an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations. This update may be applied retrospectively to all prior periods presented or through a cumulative adjustment in the year of adoption, and is effective for interim and annual periods beginning after December 15, 2017. The Company has determined the scope of this update includes the sale of real estate owned, and the Company is continuing to evaluate the impact of adopting this guidance.

Business Combinations. In January 2017, the FASB issued ASU 2017-01, "Clarifying the Definition of a Business." This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. This update is effective for the first interim and annual periods beginning after December 15, 2017, with early adoption permitted. At adoption, this update will be applied prospectively. The Company does not expect the adoption of this update to have a significant impact on its financial statements since it only impacts future transactions and whether or not they meet the definition of a business.

Statement of Cash Flows. In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments." This update addresses a number of specific cash flow issues and is intended to reduce diversity in practice in how entities present and classify certain cash receipts and cash payments in the statement of cash flows. This update is effective for the first interim and annual periods beginning after December 15, 2017, with early adoption permitted. At adoption, this update will be applied retrospectively. For issues that are impracticable to apply retrospectively, the amendments may be applied prospectively from the earliest date practicable. The Company does not expect the adoption of this update to have a significant impact on its financial statements.

In November 2016, the FASB issued ASU 2016-18, "Restricted Cash." This update requires restricted cash to be included in the beginning and end-of-period total amounts shown on the statement of cash flows, and also requires certain disclosures for significant balances of restricted cash. This update is effective for the first interim and annual periods beginning after December 15, 2017, with early adoption permitted. At adoption, this update will be applied retrospectively. The adoption of this update will require changes to prior period amounts; however, the Company does not expect the adoption to have a significant impact on its financial statements or disclosures.

Financial Instruments. In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This update revises an entity's accounting related to the classification and measurement of investments in equity securities (except those accounted for under the equity method of accounting or those that result in consolidation of the investee), changes the presentation of certain fair value changes relating to instrument specific credit risk for financial liabilities and amends certain disclosure requirements associated with the fair value of financial instruments. This update is effective for the first interim and annual periods beginning after December 15, 2017 with early adoption permitted for certain provisions of the update. The Company does not expect the adoption of this update to have a significant impact on its financial statements or disclosures.

Effective for the First Quarter of 2019

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

While the Company is currently evaluating the effect that this guidance will have on its financial statements, it will result in the recognition of certain operating leases as right-of-use assets and lease liabilities in the Consolidated Balance Sheets. The Company’s current minimum commitments under noncancelable operating leases are described in Note 13, 'Commitments and Contingencies'.

Comprehensive Income. In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("Tax Act"). This update is effective for the first interim and annual periods beginning after December 15, 2018, with early adoption permitted. At adoption, this update will be applied in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federate corporate income tax rate in the Tax Act is recognized. The Company is currently evaluating the impact of adopting this new standard.

Effective for the First Quarter of 2020

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

Revenue Recognition

Mortgage Production. Mortgage Production includes the origination and sale of residential mortgage loans, which are originated through various channels, including relationships with financial institutions, real estate brokerage firms, and corporate clients. Revenues from Mortgage Production include:

•

Origination and other loan fees. Origination and other loan fees consist of fee income earned on all loan originations, including loans closed to be sold and fee-based closings. Fee income consists of amounts earned related to application and underwriting fees, fees on canceled loans and amounts earned from financial institutions related to brokered loan fees and related to origination assistance fees resulting from private label mortgage outsourcing activities. Fees associated with the origination and acquisition of mortgage loans are recognized as earned.


•	Gain on loans held for sale. Gain on loans held for sale, net includes the realized and unrealized gains and losses on sales of mortgage loans, as well as the changes in fair value of all loan-related derivatives, including interest rate lock commitments and freestanding loan-related derivatives.

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Interest income. Interest income is recognized on loans held for sale for the period from loan funding to sale, which is typically within 30 days. Loans are placed on non-accrual status when any portion of the principal or interest is 90 days past due or earlier if factors indicate that the ultimate collectability of the principal or interest is not probable. Interest received from loans on non-accrual status is recorded as income when collected. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible.

Mortgage Servicing. Mortgage Servicing involves the servicing of residential mortgage loans on behalf of an investor. Revenues from Mortgage Servicing include:

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Loan servicing income—Owned Capitalized servicing portfolio. Loan servicing income from the capitalized servicing portfolio represents recurring servicing and other ancillary fees earned for servicing mortgage loans owned by investors. Servicing fees received for servicing mortgage loans owned by investors are based on a stipulated percentage of the outstanding monthly principal balance on such loans, or the difference between the weighted-average yield received on the mortgage loans and the amount paid to the investor, less guaranty fees and interest on curtailments. Loan servicing income is receivable only out of interest collected from mortgagors and is recorded as income when collected. Late charges and other miscellaneous fees collected from mortgagors are also recorded as income when collected.

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Loan servicing income—Subserviced portfolio. Loan servicing income related to the subserviced portfolio includes fee income related to loans that are subserviced for clients that own the underlying servicing rights. Contractual subservicing fees are generally based on a stated amount per loan and vary depending on the delinquency status of the loan and the terms of each subservicing agreement. Fees related to the subserviced portfolio are accrued in the period the services are performed. In addition, certain contracts allow for the Company to receive Late charges and other miscellaneous fees collected from mortgagors which are recorded as income when collected.

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Interest income. The Company has a fiduciary responsibility for servicing accounts related to customer escrow funds and custodial funds due to investors aggregating $2.3 billion and $3.4 billion as of December 31, 2017 and 2016, respectively. These funds are maintained in segregated bank accounts, and these amounts are not included in the assets and liabilities presented in the Consolidated Balance Sheets. The Company receives certain benefits from these deposits, as allowable under federal and state laws and regulations, or as agreed to under certain subservicing agreements. Interest income is recorded as earned and included in the Consolidated Statements of Operations within Net interest expense.

Sales of Financial Assets

Originated mortgage loans are principally sold directly to, or pursuant to programs sponsored by, government-sponsored entities and other investors. Additionally, the Company may enter into certain transactions to sell certain MSRs.

Each type of loan sale agreement is evaluated for sales treatment through a review that includes both an accounting and a legal analysis to determine whether or not the transferred assets have been isolated from the transferor, the extent of the continuing involvement and the existence of any protection provisions. Each MSR sale agreement is evaluated for sales treatment through a review that includes an analysis of the approvals required by the investor and the purchaser, as well as a review of any seller financing or interim servicing provisions. MSR sales are further evaluated to determine that both title to the MSRs and substantially all risks and rewards have been transferred to the purchaser prior to recognizing a transfer of MSRs as a sale. During 2017, the Company completed multiple sales of MSRs to New Residential and determined that New Residential did not acquire 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.

To the extent the transfer of loan or MSR assets qualifies as a sale, the asset is derecognized and the gain or loss is recorded on the sale date. In the event the transfer of assets does not qualify as a sale, the transfer would be treated as a secured borrowing. For MSR sale agreements where the Company has continuing involvement through an ongoing subservicing arrangement, to the extent the transfer of MSRs qualifies as a sale, any loss is recorded on the sale date and any gain amount is recognized over the life of the subservicing agreement.

Income Taxes

Current tax expense represents the amount of taxes currently payable to or receivable from a taxing authority plus amounts accrued for income tax contingencies (including tax, penalty and interest). Deferred tax expense generally represents the net change in the deferred tax asset or liability balance during the year plus any change in the valuation allowance, excluding any changes in amounts recorded in Additional paid-in capital or Accumulated other comprehensive income (loss) in the Consolidated Balance Sheets.

Deferred income taxes are determined using the balance sheet method. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes using the current enacted tax rates. Deferred tax assets and liabilities are regularly reviewed to assess their potential realization and to establish a valuation allowance when it is “more likely than not” that some portion will not be realized.

The Company is subject to the income tax laws of the various jurisdictions in which it operates, including U.S. federal, state and local jurisdictions. A consolidated federal income tax return is filed. Depending upon the jurisdiction, the Company files consolidated or separate legal entity state income tax returns.

Cash and Cash Equivalents

Cash and cash equivalents include marketable securities with original maturities of three months or less.

Restricted Cash

Restricted cash includes amounts specifically designated to repay debt, provide additional collateral to support certain obligations with Fannie Mae, to provide over-collateralization within warehouse facilities and the servicing advance facility, to support letters of credit, and to collect and hold for use in pending mortgage closings.

Mortgage Loans Held for Sale

Mortgage loans held for sale represent loans originated or purchased and held until sold to secondary market investors. Mortgage loans are typically warehoused for a period after origination or purchase before sale into the secondary market. Servicing rights may be retained upon sale of mortgage loans in the secondary market. Mortgage loans held for sale are measured at fair value on a recurring basis and are recognized in Gain on loans held for sale, net in the Consolidated Statements of Operations.

Accounts Receivable, net

Accounts receivable includes amounts related to document and liability holdbacks of Mortgage servicing right sales, government insured foreclosure and real estate owned that is expected to be recovered from the guarantor and other general corporate receivables. As of December 31, 2017, the recorded allowance for uncollectible accounts receivable was $7 million, and as of December 31, 2016, the amount was not significant.

Servicing Advances, net

The Company is required under most of its mortgage servicing agreements to advance funds to meet contractual principal and interest payments to investors and to pay tax, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Advances are recovered either from the borrower in subsequent payments, from liquidation proceeds or from insurance claims following foreclosure or liquidation. Under certain of the Company's subservicing agreements, the subservicing client must pre-fund advances on the loans, or reimburse the Company for those advances on a monthly or other periodic basis. The Company is exposed to losses only to the extent that the respective servicing guidelines are not followed and records a reserve against the advances when it is probable that the servicing advance will be uncollectable. As of December 31, 2017 and 2016, the recorded reserve for uncollectible servicing advances was $8 million and $5 million, respectively. In certain circumstances, the Company may be required to remit funds on a non-recoverable basis, which are expensed as incurred.

Mortgage Servicing Rights

A mortgage servicing right is the right to receive a portion of the interest coupon and fees collected from the mortgagor for performing specified mortgage servicing activities. Mortgage servicing activities consist of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses such as taxes and insurance and otherwise administering the mortgage loan servicing portfolio. Mortgage servicing rights are created through either the direct purchase of servicing from a third party or through the sale of an originated mortgage loan with servicing retained. The Company’s MSRs consist of mortgage servicing rights sold that have been accounted for as a secured borrowing, and mortgage servicing rights owned where the Company owns the right to a receive a portion of the interest and fees. The servicing rights relate to a single class of residential mortgage loans, which are measured at fair value on a recurring basis.

The initial value of capitalized mortgage servicing rights is recorded as an addition to Mortgage servicing rights owned in the Consolidated Balance Sheets and within Gain on loans held for sale, net in the Consolidated Statements of Operations. Subsequent measurements including the market-related fair value adjustments and actual prepayments of the underlying mortgage loan and receipts of recurring cash flows are recorded in Loan servicing income, net in the Consolidated Statements of Operations.

Property and Equipment

Property and equipment (including leasehold improvements) are recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization expense are computed utilizing the straight-line method over the following estimated useful lives:



Capitalized software	3 to 5 years
Furniture, fixtures and equipment	3 to 7 years
Capital leases	Lesser of the remaining lease term or 5 years
Leasehold improvements	Lesser of the remaining lease term or 20 years

Internal software development costs are capitalized during the application development stage. The costs capitalized relate to external direct costs of materials and services and employee costs related to the time spent on the project during the capitalization period. Capitalized software is evaluated for impairment annually or when changing circumstances indicate that amounts capitalized may be impaired. Impaired items are written down to their estimated fair values at the date of evaluation.

Mortgage Loans in Foreclosure and Real Estate Owned

Mortgage loans in foreclosure and Real estate owned include loans that have been repurchased for breaches in representation and warranty obligations. As loans are repurchased, the Company reduces the estimated losses related to repurchase and indemnification obligations and records reserves for on-balance sheet loans in foreclosure and adjustments to value for real estate owned based on the expected amount which will likely not be recoverable from guarantors, insurers or investors.

Mortgage loans in foreclosure represent the unpaid principal balance of mortgage loans for which foreclosure proceedings have been initiated, plus recoverable advances made on those loans. These amounts are recorded net of an allowance for probable losses on such mortgage loans and related advances.

Real estate owned, which are acquired from mortgagors in default, plus recoverable advances made on those loans, are recorded at the lower of: (i) the adjusted carrying amount at the time the property is acquired; or (ii) fair value based upon the estimated net realizable value of the underlying collateral less the estimated costs to sell.

Derivative Instruments

Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates. As a matter of policy, derivatives are not used for speculative purposes. Derivative instruments are measured at fair value on a recurring basis and are included in Other assets or Other liabilities in the Consolidated Balance Sheets. The Company does not have any derivative instruments designated as hedging instruments.

Subservicing Advance Liabilities

Under the terms of certain subservicing arrangements, the subservicing counterparty is required to fund servicing advances for their respective portfolios of subserviced loans. A subservicing advance liability is recorded for cash received from the counterparty to fund advances, and is repaid to the counterparty upon the collection of the mortgage servicing advance receivables.

Mortgage Servicing Rights Secured Liability

The Company has accounted for certain MSR sales as a secured borrowing. Under this accounting treatment, the MSRs transferred to New Residential remain on the 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, and the changes in fair value offset each other.

Changes in fair value of Mortgage servicing rights secured liability are recorded in Loan servicing income, net in the Consolidated Statements of Operations, 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. The implied interest cost on the MSRs secured liability is recorded in Net interest expense in the Consolidated Statements of Operations which offsets the estimated yield on the MSR asset, both of which represent non-cash amounts. The Company records interest expense using the effective interest method based on the expected cash flows from the MSRs through the expected life of the underlying loans, which offsets the estimated yield on the MSR asset. Proceeds from the sale of these MSRs are included in financing activities in the Consolidated Statements of Cash Flows. Refer to Note 4, 'Servicing Activities' and Note 16, 'Fair Value Measurements' for additional information.

Loan Repurchase and Indemnification Liability

The Company has established a Loan repurchase and indemnification liability for various representation and warranties that are provided in connection with its capacity as a loan originator and servicer. The liability for probable losses includes estimates associated with: (i) losses for loans where a repurchase or indemnification obligation could exist from breaches of representation and warranties, (ii) losses for specific non-performing loans where the Company believes it will be required to indemnify the investor and (iii) losses for government loans that may not be reimbursed pursuant to mortgage insurance programs.

The Company estimates its obligation for representations and warranties using a model that incorporates historical repurchase and indemnification experience and servicing portfolio performance. The model considers borrower performance, estimated future repurchase and indemnification requests, success rates in appealing repurchase requests (or the ability to cure the origination defects) and projected loss severity rates based upon current loss rates for similar loans. The liability related to specific non-performing loans is based on a loan-level analysis which considers the delinquency status of the loan and projected loss severity rates. To estimate the liability related to losses for loans that may not be reimbursed pursuant to mortgage insurance programs, the Company considers government loans currently in foreclosure, historical origination defect rates and projected loss severity rates.

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

Subsequent Events

Subsequent events are evaluated through the date of filing with the Securities and Exchange Commission.