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Registered number: 4467291

CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES

HALF YEAR FINANCIAL REPORT

FOR THE SIX MONTHS ENDED JUNE 30, 2016

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TABLE OF CONTENTS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS ..................................................................................... 3

MANAGEMENT REPORT................................................................................................................................................ 6

CONSOLIDATED FINANCIAL STATEMENTS OF CARRINGTON HOLDING COMPANY (UNAUDITED) ............................ 25

INDEPENDENT ACCOUNTANT’S REVIEW REPORT ...................................................................................................... 26

• CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) ................................................ 27

• CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ................................................................. 28

• CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ DEFICIT (UNAUDITED) ................................... 29

• CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)................................................................. 30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ......................................................................... 31

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Statements made in this Half Year Report that are not statements of historical fact are forward-looking

statements. In addition, from time to time, we and our representatives may make statements that are forward-

looking. All forward-looking statements involve risks and uncertainties. This section provides you with cautionary

statements identifying important factors that could cause our actual results to differ materially from those

contained in forward-looking statements made in this Half Year Report or otherwise made by us or on our behalf.

You can identify these forward-looking statements by the use of forward-looking words such as “outlook,”

“believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,”

“predicts,” “intends,” “plans,” “estimates,” “anticipates,” “target,” “projects,” “contemplates” or the negative

version of those words or other comparable words. Any forward-looking statements contained in this Half Year

Report are based upon our historical performance and on our current plans, estimates and expectations in light of

information currently available to us. The Company’s forward-looking statements speak only as of the time that

they are made and may not necessarily reflect the Company’s outlook at any other point in time. Except as

required by law or regulation, the Company undertakes no obligation to update any forward-looking statements,

whether as a result of new information, future events, or for any other reason. Such forward-looking statements

are subject to various risks and uncertainties and assumptions relating to our operations, financial results,

financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important

factors that could cause our actual results to differ materially from those indicated in these statements. We

believe that these factors include, but are not limited to:

• our ability to maintain or grow the size of our servicing portfolio and realize our significant investments in

personnel and our technology platform by successfully identifying attractive acquisition opportunities,

including mortgage servicing rights (“MSRs”), subservicing contracts, servicing and lending operating

divisions;

• our ability to grow the size of our servicing portfolio, including through MSR acquisitions, due to inquiries

or restrictions by certain state and federal regulators of a number of bank and non-bank servicers in the

industry, or receipt of any required approvals from government entities and government sponsored

enterprises (“Government Agencies” or “GSE’s”);

• changes to our capitalization and capital ratio requirements;

• increased legal proceedings, regulatory examinations or investigations and related costs, including, but

not limited to, any adverse judgments, findings, settlements or orders resulting from such actions;

• the potential future deterioration of the residential mortgage market, adverse economic conditions,

decrease in property values and increase in delinquencies and defaults;

• our ability to efficiently originate and service loans under specific Government Agency Guidelines and

other programs administered by government entities, or significant changes in such guidelines;

• our ability to compete successfully in the mortgage lending industry;

• the delay in our foreclosure proceedings due to inquiries by certain state Attorneys General, court

administrators and state and federal government agencies;

• our ability to scale-up appropriately to service and realize the anticipated benefits of prior and future

mortgage servicing rights acquisitions;

• our ability to obtain sufficient capital to meet our financing requirements;

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• the decision by one or more of our lenders providing warehouse facilities used to fund single family

residential mortgage loans and early buy outs of delinquent Government Loans to exit the market or

reduce its exposure;

• our ability to maintain the financial covenants required by our lenders and regulators;

• our ability to grow our loan origination volume;

• the termination of any of our servicing rights or 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;

• the suspension or loss of any of our licenses or Government Agency approvals;

• delays in our ability to collect or be reimbursed for servicing advances;

• changes in our business relationships with Ginnie Mae, Freddie Mac (“FHLMC”), and others that facilitate

the issuance of RMBS;

• changes to the nature of the guarantees of FHA, VA, and USDA and the market implications of such

changes;

• errors in our financial models or changes in assumptions;

• requirements to write down the value of certain assets;

• changes in prevailing interest rates;

• our ability to successfully mitigate our market risks through hedging strategies;

• changes to 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 any of our senior managers;

• changes to our income tax status;

• failure of our asset manager to maintain current investors or attract new investors;

• damage to our brand and reputation, and certain actions of our employees and agents;

• transfer of property ownership risks under property management contracts;

• failure to attract and retain a highly skilled work force;

• changes in accounting standards;

• the impact on our servicing practices of enforcement consent orders and agreements entered into by

certain federal and state agencies against the largest mortgage servicers.

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These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary

statements that are included in this Half Year Report. The forward-looking statements made in this Half Year

Report relate only to events as of the date on which the statements are made. We do not undertake any

obligation to publicly update or review any forward-looking statement except as required by law, whether as a

result of new information, future developments or otherwise.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be

incorrect, our actual results may vary materially from what we may have expressed or implied by these forward-

looking statements. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us

to predict those events or how they may affect us. You should specifically consider the principal risks and

uncertainties identified in this Half Year Report that could cause actual results to differ from what we have

expressed or implied by these forward-looking statements. Accordingly, we caution you that any such forward-

looking statements are subject to various risks and uncertainties.

6

MANAGEMENT REPORT

Carrington Holding Company, LLC (the “Company”) presents its Half Year Financial Report and the unaudited

consolidated financial statements of the Company and its subsidiaries for the six months ended June 30, 2016 and

2015. This Half Year Financial Report should be read in conjunction with the Company’s Annual Report for the

year ended December 31, 2015, filed with the Irish Stock Exchange at http://www.ise.ie.

Principal activities

The Company is a holding company whose primary businesses include asset management, mortgages, real estate

transactions, and real estate logistics. The mortgages business is comprised of three operating units: mortgage

servicing, mortgage lending, and resolution services. Collectively, the businesses are vertically and horizontally

integrated and provide a broad range of real estate services that encompass nearly all aspects of single family

residential real estate transactions in the United States. Consequently, the Company is uniquely positioned to

execute on various opportunities throughout the full lifecycle of residential real estate based upon market

conditions. The Company has been managing assets since 2004, servicing mortgage loans since 2007, originating

mortgage loans since 2010, and providing real estate services since 2008. The Company is headquartered in Old

Greenwich, Connecticut and Aliso Viejo, California. As of June 30, 2016, the Company had approximately 4,700

fulltime employees and independent agents across 99 offices.

The Company is one of only a few non-bank financial services companies focused on the U.S. residential mortgage

and real estate markets whose affiliated businesses support and enhance each other. The asset management

operating division sources revenue opportunities for the benefit of one or more affiliated operating divisions. It

benefits from expertise provided by other operating divisions in management of capital for re-performing or

distressed debt. The Company’s mortgage servicing operating unit generates revenue for its mortgage lending

operating unit by providing a sustainable source of refinance opportunities to its customers. The mortgage

lending operating unit generates a steady source of new loans to expand or replenish the servicing portfolio as

loans liquidate. The Company’s real estate transactions and real estate logistics operating divisions are supported

in part by the mortgages and asset management operating divisions.

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Business and Financial Review

Set forth below is a description of the financial performance of the consolidated Company and its operating

divisions for the six months ended June 30, 2016 and 2015.

Period-end Results

The following table presents condensed statement of operations for the periods indicated.

2016 2015 Adjusted [1]

$ change % change

Revenue 223,401$ 156,274$ 67,127$ 43 %

Operating expense 210,405 162,965 47,440 29

Income/(loss) from operations 12,996 (6,691) 19,687 294

Other income (expense):

Interest income 8,904 4,635 4,269 92

Interest expense (21,128) (13,996) (7,132) (51)

Change in fair value of mortgage servicing rights [1] 916 7,892 (6,976) (88)

Change in fair value of long-term debt (25,184) (15,455) (9,729) (63)

Loss before income taxes (23,496)$ (23,615)$ 119$ 1 %

For the Six Months Ended June 30,

($ in thousands)

[1]

Refer to the narrative below titled Accounting Change.

Comparison of Consolidated Results for the Six Months Ended June 30, 2016 and 2015

Revenues for the six months ended June 30, 2016 were $223.4 million, an increase of $67.1 million, or 43 percent,

from $156.3 million for the six months ended June 30, 2015. The increase was primarily due to higher revenue

from its mortgages operating division.

Operating expenses for the six months ended June 30, 2016 were $210.4 million, an increase of $47.4 million, or

29 percent, from $163.0 million for the six months ended June 30, 2015. The increase was primarily driven by

expansion of the servicing portfolio and mortgage lending platform that resulted in higher compensation and

benefits expenses related to increased staffing levels, loan servicing, origination activities, marketing, occupancy,

and general and administrative expenses.

Interest income was $8.9 million for the six months ended June 30, 2016, an increase of $4.3 million, or 92

percent, from $4.6 million for the six months ended June 30, 2015 as a result of higher mortgage loan

originations.

Interest expense was $21.1 million for the six months ended June 30, 2016, an increase of $7.1 million, or 51

percent, from $14.0 million for the six months ended June 30, 2015. The increase was primarily due to additional

borrowings on our warehouse lines related to higher loan originations and a rate increase on our long-term debt.

The change in fair value of our mortgage servicing rights was $0.9 million for the six months ended June 30, 2016,

a decrease of $7.0 million or 88%, from $7.9 million for the six months ended June 30, 2015. The decrease in fair

value was primarily due to changes in valuation assumptions reflective of current market conditions.

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The change in fair value of long-term debt was $25.2 million for the six months ended June 30, 2016, compared to

$15.5 million for the six months ended June 30, 2015. The increase in the fair value of long-term debt for the six

months ended June 30, 2016 and 2015 resulted in expense for the periods.

Consolidated securitization trust (the “Trust”) income offset expense for the six months ended June 30, 2016 and

2015. The trust activity is excluded in the table above and presented separately in the Consolidated Statements

of Operations.

Accounting Change

The Company made a voluntary election to change the reporting of its MSR asset to improve transparency,

comparability, and standardize loss assumptions for the year ended December 31, 2015. The Company previously

reported reserves for mortgage servicing claims as a liability in the accompanying consolidated balance sheet,

separate from its MSR; however, the Company concluded it was preferable to include the liability for mortgage

servicing claims within its MSR. The voluntary change was applied retroactively, and prior periods have been

conformed to the current presentation. The change in accounting principle did not result in any impact to net

income or members’ deficit, but did result in changes to certain financial statement line items in the consolidated

statements of financial condition, operations, and cash flows. Refer to Note 4 in the accompanying consolidated

financial statements for further information regarding amounts adjusted from the accounting change.

Operating Division Results

Our business is divided into four operating divisions: asset management, mortgages, (inclusive of the mortgage

lending, mortgage servicing, and resolution services operating units), real estate transactions, and real estate

logistics. Certain shared service functions such as human resources, finance and accounting, information

technology, legal, risk management, and executive administration are included in corporate support.

Asset Management Operating Division

The Company’s asset management operating division conducts business as Carrington Capital Management, LLC

(“CCM”). CCM provides alternative asset management services focused on investments in the United States real

estate, mortgage, and fixed income markets. CCM offers investment strategies that utilize its experience in

assessing and evaluating property value, as well as its established infrastructure in advising on the management

and disposition of delinquent and defaulted mortgage loans.

The asset management operating division has been managing capital invested in the residential mortgage market

since 2004 and has developed several scalable investment strategies and vehicles by leveraging the expertise of

its management team and the capabilities of its other operating divisions. The investment vehicles and strategies

include utilization of managed accounts or funds formed to aggregate and invest capital into residential mortgage

loans and other investments in the United States housing market. CCM is a registered investment advisor with

the SEC. As of June 30, 2016, CCM had offices in Old Greenwich, Connecticut; Aliso Viejo, California; Brentwood,

Tennessee; and Oceanside, California.

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As of June 30, 2016, CCM had approximately $102.6 million of discretionary fund assets on which the Company

earns advisory fees. In addition, CCM oversees assets of $3.5 billion inclusive of $2.9 billion of securitized

mortgage trust assets and $0.8 billion of separately managed non-discretionary capital. CCM also manages

acquisitions of mortgage servicing rights (“MSRs”) and sales of excess servicing rights (“ESRs”) for the Company’s

affiliated mortgages operating division. MSRs acquired and ESRs sold during the six months ended June 30, 2016

were $3.0 billion and $1.7 billion of unpaid principal balance (“UPB”), respectively. Our affiliated operating

divisions including mortgages, real estate transactions, and real estate logistics provide integrated life of loan

management services for invested capital.

The following table summarizes the operating results from the asset management operating division for the

periods indicated.

2016 2015 $ change % change

Revenue 4,337$ 4,387$ (50)$ (1) %

Operating expense 3,034 3,631 (597) (16)

Income from operations 1,303 756 547 72


Interest income (expense), net 181 189 (8) (4)

Asset Management Operating Division Income 1,484$ 945$ 539$ 57 %


($ in thousands)

Comparison of Asset Management Operating Division Results for the Six Months Ended June 30, 2016 and 2015

Revenues for the six months ended June 30, 2016 were $4.3 million, a nominal decrease, or 1 percent, from $4.3

million for the six months ended June 30, 2015.

Operating expenses for the six months ended June 30, 2016 were $3.0 million, a decrease of $0.6 million, or 16

percent, from $3.6 million for the six months ended June 30, 2015.

Mortgages Operating Division

The Company’s mortgages operating division is comprised of two companies that provide mortgage servicing,

lending, and collections services, Carrington Mortgage Services, LLC (“CMS”) and Carrington Resolution Services,

LLC (“CRS”). Carrington Mortgage Services is comprised of both the Company’s mortgage servicing (“MSD”) and

mortgage lending operating units (“MLD”).

Mortgage Servicing Operating Unit

The Company’s mortgage servicing operating unit is a fully-integrated mortgage servicing company with

capabilities to service agency and non-agency loans that are both performing and non-performing. Agency loans

are guaranteed or insured by Government Agencies that include the Federal Housing Administration (“FHA”),

United States Department of Veterans Affairs (“VA”), or United States Department of Agriculture (“USDA”). Non-

agency loans are loans primarily originated to investor guidelines. The Company services loans for large financial

institutions including banks, Government Agencies, and private investors.

The mortgage servicing operating unit seeks to enable borrowers to maintain homeownership through loss

mitigation and foreclosure prevention efforts while also seeking to maximize return on assets for its investors.

The Company also services Government Agency loans originated for sale through its mortgage lending operating

unit and subserviced loans for other investors. For the six months ended June 30, 2016, the Company acquired

mortgage servicing rights of approximately $3.0 billion.

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The Company is licensed to service loans in all 50 states and is ranked as a top ten FHA servicer based on loan

count. CMS was rated by Fitch Ratings in December 2015 as a United States residential primary servicer for

subprime product at ‘RPS3’, Outlook Stable, and as a special servicer at ‘RSS3’, Outlook Stable.

As of June 30, 2016, the mortgage servicing operating unit serviced approximately 347,000 residential mortgage

loans with aggregate unpaid principal balance (“UPB”) of approximately $43.9 billion. CMS is a Ginnie Mae

approved issuer and Freddie Mac approved seller/servicer. As of June 30, 2016, MSD had primary offices located

in Anaheim, California; Westfield, Indiana; and Plano, Texas.

The following table indicates the servicing portfolio stratification by source and loan amount as of the periods

indicated.

UPB UPB $ change

Acquired government agency loans 23,732,721$ 54 % 25,842,207$ 58 % (2,109,486)$ (8) %

Originated government loans 7,740,785 18 5,512,231 12 2,228,554 40

Securitized non-prime loans 5,420,271 12 5,746,056 13 (325,785) (6)

Subserviced loans 4,239,233 10 6,466,173 14 (2,226,940) (34)

Other acquired and originated loans 2,744,948 6 1,282,053 3 1,462,895 114

Total Loan Amount $ 43,877,958 100 % $ 44,848,720 100 % $ (970,762) (2) %

% change

($ in thousands)

At December 31, 2015At June 30, 2016

% of Total% of Total

The following table presents key loan characteristics and performance metrics of our servicing portfolio as of the

periods indicated.

At June 30, At December 31,

2016 2015 change % change

Loan count - servicing 347,401 351,163 (3,762) (1) %

Ending unpaid principal balance $ 43,877,958 $ 44,848,720 (970,762)$ (2) %

Average unpaid principal balance $ 126 $ 128 (2)$ (2) %

Average original loan amount $ 144 $ 144 -$ - %

Average coupon 5.06% 5.11% (0.05) (0) %

Average FICO credit score 663 664 (1) (0) %

60+ day delinquent (1) 2.34% 2.29% 0.05 0 %

Bankruptcy (1) 2.99% 2.56% 0.43 17 %

Foreclosure (1) 6.44% 6.73% (0.29) (4) %

REO (1) 0.57% 0.41% 0.16 39 %

(1) % based on loan count.

($ in thousands)

The mortgages operating unit provides loan servicing, special servicing and subservicing for Company and investor

owned loans. Revenue is primarily comprised of servicing fees, but also includes loan modification incentive fees,

repool gains, late fees, insufficient fund fees, and other ancillary income collected during the normal course of

business.

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Mortgage servicing revenue consists of certain select items (excluding intercompany transactions between

affiliated operating divisions) presented in the following table as of the periods indicated:

2016 2015

Servicing fees $ 36,358 $ 34,374

Modification re-pool gains 43,510 12,954

Late charges 10,658 7,493

Modification fees 2,203 2,310

Servicing claims provision (3,449) (4,219)

Other fees 1,583 1,313

Total Servicing Revenue $ 90,863 $ 54,225


($ in thousands)

When a non-agency mortgage loan becomes delinquent and during the period of delinquency and/or default, the

Company does not collect a servicing fee until that mortgage loan becomes current or the underlying property is

foreclosed upon and sold or otherwise liquidated. These uncollected servicing fees are not recorded as servicing

revenue until collected. Uncollected servicing fees for delinquent loans and foreclosed real estate totaled

approximately $25.2 million and $27.5 million at June 30, 2016 and 2015, respectively.

As part of its loss mitigation efforts on government loans, the Company has the right, but not the obligation, to

repurchase loans that are more than 90 days delinquent. Subsequent to loan repurchase, the Company may be

able to cure, modify, or re-pool loans that have made a specified number of consecutive payments. As of the six

months ended June 30, 2016 and 2015, the Company modified loan amounts in the aggregate of $364.7 million

and $198.2 million, and repooled loans in the aggregate of $664.6 million and $40.5 million, respectively.

The following table summarizes the operating results from our mortgage servicing operating unit for the periods

indicated.

2016 2015 Adjusted [1]

$ change % change

Revenue 98,869$ 61,648$ 37,221$ 60 %


Income from operations 43,604 19,678 23,926 122


Interest income (expense), net (1,728) (2,564) 836 33

Change in fair value of mortgage servicing rights [1] 916 7,892 (6,976) (88)

Mortgage Servicing Operating Unit Income 42,792$ 25,006$ 17,786$ 71 %

($ in thousands)


[1]

Refer to the above narrative titled Accounting Change.

Comparison of Mortgage Servicing Operating Unit Results for the Six Months Ended June 30, 2016 and 2015

Revenues for the six months ended June 30, 2016 were $98.9 million, an increase of $37.2 million, or 60 percent,

from $61.6 million for the six months ended June 30, 2015. This increase was primarily driven by increased gains

on sales of repooled loans and higher servicing fee income as a result of our portfolio growth.

Operating expenses for the six months ended June 30, 2016 were $55.3 million, an increase of $13.3 million, or 32

percent, from $42.0 million for the six months ended June 30, 2015. This increase was primarily due to higher

loan servicing costs and compensation and benefits expenses related to increased staffing levels due to portfolio

growth and modification efforts.

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Net interest expense was $1.7 million for the six months ended June 30, 2016, a decrease of $0.8 million, or 33

percent as compared with $2.6 million for the six months ended June 30, 2015.

The change in fair value of our mortgage servicing rights was $0.9 million, as compared to $7.9 million for the six

months ended June 30, 2015. The decrease in fair value from the prior year was primarily due to changes in

valuation assumptions reflective of current market conditions.

Carrington Resolution Services Operating Unit

CRS is a specialized debt resolution provider focusing on the management and collection of charged-off debt for

servicers, including MSD, and other financial institutions. CRS develops and implements individualized settlement

and repayment plans based on each consumer's specific circumstances.

As of June 30, 2016, CRS's portfolio consisted of approximately 1,200 accounts with UPB of approximately $149.0

million. Due to improvement in the residential real estate market and resulting revenue decline, the Company

will continue to provide services for its existing customers but will not seek to acquire new business in the near

term. The change in activity is not expected to have a material impact on the Company.

Mortgage Lending Operating Unit

The Company’s mortgage lending operating unit is part of the mortgage services operating division. MLD is a

residential wholesale and retail loan originator, licensed to originate loans in 45 states, the U.S. Virgin Islands,

District of Columbia, and Puerto Rico. CMS is an approved Ginnie Mae issuer and Freddie Mac approved

seller/servicer. MLD originates primarily government-insured and conventional agency residential mortgage

loans through multiple lending channels. The Company is one of a limited number of non-bank originators with

fully integrated servicing and real estate services operating divisions.

The following table provides detail of the origination channels used to originate mortgage loans for the periods

indicated.

2016 2015 $ Change

Wholesale 772,639$ 31 % 682,261$ 43 % 90,378$ 13 %

Retail 1,750,019 69 912,824 57 837,195 92

Total 2,522,658$ 100 % 1,595,085$ 100 % 927,573$ 58 %

Purchase 518,703$ 21 % 483,195$ 30 % 35,508$ 7 %

Refinance 2,003,955 79 1,111,890 70 892,065 80

Total 2,522,658$ 100 % 1,595,085$ 100 % 927,573$ 58 %

Government 2,433,849$ 96 % 1,536,372$ 96 % 897,477$ 58 %

Conventional 88,809 4 58,713 4 30,096 51

Total 2,522,658$ 100 % 1,595,085$ 100 % 927,573$ 58 %

Average Originated FICO 673 660 13 2 %


($ in thousands)

% of Total % of Total % Change

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For the six months ended June 30, 2016, the mortgage lending operating unit originated $2.5 billion in loan

volume, an increase of approximately $0.9 billion, or 58 percent, versus $1.6 billion for the six months ended June

30, 2015. The mix of origination volume from purchase versus refinance transactions was 21 percent versus 79

percent for the six months ended June 30, 2016 compared to 30 percent and 70 percent purchase versus

refinance transactions for the six months ended June 30, 2015. The increase in refinance origination volume was

driven by refinance activity from MSR acquisitions, the government’s reduction in FHA mortgage insurance

premiums, and the favorable interest rate environment.

MLD’s origination volume is primarily originated by its wholesale and retail channels. For the six months ended

June 30, 2016 and 2015, the channel mix was 31 percent wholesale and 69 percent retail versus 43 percent

wholesale and 57 percent retail, respectively. The increase in retail channel volume was a result of significant

growth in origination activity related to refinance activity driven by MSR acquisitions conducted by the Company.

In 2014, MLD lowered its minimum credit requirements for borrowers to a FICO score of 550 consistent with

Government Agency (FHA, VA and USDA) guidelines. The Company believes it is uniquely qualified to serve this

market, a strategy called “Serving the Underserved.” MLD has the infrastructure to support this unique market,

including a team of qualified underwriters specifically trained in manual underwriting. Further, these loans will

generally be retained and serviced by the Company’s mortgage servicing operating unit which has the experience

in high-touch servicing needed to successfully service this type of portfolio.

MLD’s wholesale channel utilizes a vast network of independent mortgage brokers to source loans. MLD’s retail

channel is comprised of 40 branch offices located in 18 states with a highly trained and qualified sales force. All

loans are underwritten through a centralized operations team that includes 100 percent pre-funding audits and

incorporates call-recording for compliance and quality assurance.

As of June 30, 2016, the mortgage lending operating unit’s headquarters were located in Anaheim, California, with

fulfillment centers in Anaheim, California; Plano, Texas; Westfield, Indiana; Windsor, Connecticut; and

Jacksonville, Florida.

The following table summarizes the operating results from our mortgage lending operating unit for the periods

indicated.


Revenue 84,808$ 59,551$ 25,257$ 42 %


Income from operations 5,218 6,794 (1,576) (23)

Other (expense):

Interest income (expense), net (1,418) (399) (1,019) (255)

Mortgage Lending Operating Division Income 3,800$ 6,395$ (2,595)$ (41) %


($ in thousands)

Carrington Mortgage UK Limited is a residential mortgage protection broker with offices in Glenrothes,

Stonehaven, Fraserburgh, Anstruther, Kirkintilloch, Paisley, Dumbarton, Edinburgh and Norwich.

Comparison of Mortgage Lending Operating Unit Results for the Six Months Ended June 30, 2016 and 2015

Mortgage lending revenues for the six months ended June 30, 2016 were $84.8 million, an increase of $25.3

million or 42 percent from $59.6 million for the six months ended June 30, 2015. This increase was driven

primarily by higher origination volume of $2.5 billion for the six months ended June 30, 2016, an increase of $0.9

billion or 58 percent from $1.6 billion for the six months ended June 30, 2015.

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Operating expenses for the six months ended June 30, 2016 were $79.6 million, an increase of $26.8 million, or 51

percent from $52.8 million for the six months ended June 30, 2015. This increase was primarily due to higher

compensation and benefits expense related to increased staffing levels, occupancy, marketing, origination costs

and other general and administrative expenses associated with expansion of the lending platform.

Interest income, net of expense, resulted in net expense of $1.4 million, an increase in expense of $1.0 million for

the six months ended June 30, 2016, from an expense of $0.4 million for the six months ended June 30, 2015.

This decrease was primarily due to a lower spread on the loans held for sale due to the interest rate environment.

Real Estate Transactions Operating Division

The Company’s real estate transactions operating division is comprised of our brokerage, settlement, and

portfolio services operating units and is an integrated provider of residential services to the institutional and retail

markets. Collectively, the three operating units, including real estate brokerage services, real estate settlement

services and portfolio services provide a single source for clients, who are interested in purchasing or selling single

family residential real estate properties. The synergies between these businesses and the Company’s affiliate

operating divisions, including mortgage services and real estate logistics assist retail clients in simplifying the

home purchase and sale process, and aid institutional investors in efficiently managing their residential portfolios.

Carrington Real Estate Brokerage Services Operating Unit

Carrington Real Estate Services, LLC and its subsidiaries (“CRES”) offer a full service real estate brokerage

operation that utilizes its company owned network of licensed real estate brokers and sales associates to manage

the sale or purchase of residential real estate properties. CRES offers residential brokerage services in 23 states

and the District of Columbia and has 48 branch locations. As of June 30, 2016, CRES had approximately 2,000

independent sales associates. CRES was founded in 2008 during the height of the distressed real estate market

and quickly became a leader specializing in the disposition of Real Estate Owned (“REO”) assets having

represented over 59,000 closing sides since inception. Recognizing the beginning of an improvement in the

residential real estate market in 2011, CRES transitioned its real estate businesses to create a balanced portfolio

of properties sourced from both institutional relationships and independent sales associates. In addition, the real

estate brokerage services operating unit has a network called the Carrington Property Network (“CPN”),

comprised of brokerage companies capable of performing purchase and sale transitions in geographic locations

that CRES does not operate in. For the six months ended June 30, 2016, CRES had approximately $1.1 billion in

total property sales, of which $374.0 million or 35 percent was derived from our institutional clients, $622.6

million or 58 percent was generated by our network of independent sales associates and $79.5 million or 7

percent from CPN.

15

Carrington Settlement Services Operating Unit

The Company’s settlement services business is comprised of a title agency, Carrington Title Services, LLC, and an

escrow company, Carrington Escrow, Inc. These companies assist with the closing of real estate transactions by

providing full-service title and settlement (i.e. closing and escrow) services to borrowers and real estate

companies, inclusive of the Company’s affiliates: real estate brokerage, CRES, MSD, and MLD. Since 2014, the

settlement services business has diversified significantly with a majority of the business in refinance and the

remainder equally divided between purchase, title and settlement business. The escrow, title, and settlement

services business leverages its advanced technology and diverse product menu to provide cost efficient and

service driven solutions for clients. In addition, they provide non-insurance products including property abstract

reports in all states, and services to examine and prepare property summaries for foreclosure attorneys to help

expedite the default process for the Company’s mortgage servicing operating unit and third party customers. For

the six months ended June 30, 2016, the settlement services operating unit assisted in approximately 30,200

transactions and recorded revenue of approximately $9.0 million.

Carrington Portfolio Services Operating Unit

The portfolio services business is comprised of Carrington Foreclosure Services, LLC and Carrington Document

Services, LLC. This group of businesses provides a variety of services to the Carrington family of companies,

including our mortgages operating division as well as third party clients. These services include foreclosure

trustee services in California, Nevada, Texas and Arizona and document preparation services. By having these

businesses under one-roof, the Company seeks to provide more efficient and expedited services to customers.

For the six months ended June 30, 2016, the portfolio services business assisted on approximately 6,500 new

transactions and recorded revenue of approximately $1.8 million.

Comparison of Real Estate Transactions Operating Division Results for the Six Months ended June 30, 2016 and

2015


Revenue 21,397$ 16,464$ 4,933$ 30 %


Income from operations 7,689 4,618 3,071 67

Other expense:

Interest income (expense), net - - - -

Real Estate Transactions Operating

Division Income 7,689$ 4,618$ 3,071$ 67 %

($ in thousands)


The real estate transactions operating division revenue was $21.4 million for the six months ended June 30, 2016,

an increase of $4.9 million or 30 percent from $16.5 million for the six months ended June 30, 2015. The increase

was primarily due to significant growth in the settlement services operating unit attributable to higher refinance

production sourced from our mortgage lending operating unit as well as from new third party clients.

Operating expenses in the real estate transactions operating division were $13.7 million, for the six months ended

June 30, 2016, an increase of $1.9 million, or 16 percent, from $11.8 million for the six months ended June 30,

2015. The increase was primarily driven by higher compensation and benefit expense resulting from growth in

personnel in connection with the growth in production in the settlement services operating unit.

16

Real Estate Logistics Operating Division

The real estate logistics operating division is comprised of affiliated companies that provide resolution strategies,

property management, and field services to holders of single family residential properties. The real estate logistics

businesses include Carrington Property Services, LLC (“CPS”), Carrington Home Solutions, L.P. (“CHS”), Carrington

Development Company, LLC (“CDC”), and Azure Home, LLC (“Azure”).

Carrington Property Services Operating Unit

CPS is a property asset management company currently managing approximately 4,000 properties. CPS provides

a comprehensive set of property management and marketing services that can be customized to meet the specific

needs of its customers. Unlike traditional property management companies, which focus exclusively on the

disposition of REO assets, CPS is uniquely qualified to work with customers across the entire default lifecycle –

providing information and analytics at both the pre and post-foreclosure stage of the process to help customers

determine optimal asset resolution. CPS offers a broad array of specialized capabilities designed to help holders

of single family residential real estate properties manage their assets. These services include:

• Property assessment/inspections;

• Property valuations;

• Property resolution services, including cash-for-keys, short sale, deed-in-lieu, deed-for lease and tenant-

in-place strategies;

• Marketing;

• Disposition; and

• Rental management.

CPS customers include mortgage servicers (including CMS), financial institutions, Government Agencies, and

holders of residential real estate portfolios. These customers engage CPS to manage the disposition of their

assets in the loan-default life cycle through a variety of strategies to help them maximize resolution proceeds.

CPS managed approximately 2,300 and 1,500 properties for disposition as of June 30, 2016 and 2015,

respectively.

CPS developed proprietary technology and a rental management sub-operating unit to provide property

management services to clients with single family portfolios. The CPS client base includes Government Sponsored

Entities and servicers. In the first half of 2016, the rental management portfolio declined consistent with

collateral value improvement in the residential real estate market. As of June 30, 2016, CPS had approximately

1,700 rental properties under management.

In December 2015, Morningstar Credit Ratings, LLC (“Morningstar”) announced that CPS had earned a ranking of

‘MOR RV 1’ (‘Exceeds Prudent Standards’) in an assessment of CPS’ operational infrastructure and client-driven

performance as a residential REO asset manager and residential single family rental property manager.

Morningstar also assigned CPS a forecast of ‘Stable’. Morningstar re-affirmed the “MOR RV 1’ rating and forecast

of ‘Stable’ in August 2016.

17

Carrington Home Solutions Operating Unit

CHS offers a range of property preservation, maintenance, and repair services to lenders, mortgage servicers

(including CMS), and asset managers, as well as institutional clients, private real estate investors, real estate

agents and retail home owners. The range of products and services include:

• Vacant property registration;

• Utility management;

• Inspection services;

• Preservation services;

• Property maintenance; and

• Property repairs and rehabilitation.

CHS offers nationwide coverage through its network of experienced professionals who seek to provide prompt,

responsive, reliable, and quality services to preserve and enhance property values. In addition, CHS has a

dedicated field staff, including licensed contractors and trade professionals. As of June 30, 2016, CHS was

providing services on approximately 7,300 properties throughout the United States.

Azure Home specializes in luxury residential real estate market services that include brokerage services for

acquisition, disposition and rental of properties through ongoing residential care and maintenance.

Real estate logistics opportunities for CPS and CHS are sourced in part by the Company’s mortgage services and

asset management operating divisions. For the six months ended June 30, 2016, 75 percent of the gross revenues

of our real estate logistics operating division came from referrals from the mortgage servicing operating unit and

asset management operating division.

Comparison of Real Estate Logistics Operating Division Results for the Six Months ended June 30, 2016 and 2015

The following table summarizes the operating results from our real estate logistics operating division for the

periods indicated.


Revenue 13,990$ 14,224$ (234)$ (2) %


Income from operations 2,769 4,541 (1,772) (39)

Other expense:

Interest income (expense), net (1) (4) 3 -

Real Estate Logistics Operating Division Income 2,768$ 4,537$ (1,769)$ (39) %


($ in thousands)

The real estate logistics operating division revenue was $14.0 million for the six months ended June 30, 2016, a

decline of $0.2 million or 2% from $14.2 million for the six months ended June 30, 2015. The decline was primarily

due to lower revenues in the property services operating unit due to a decline in the rental management

portfolio.

18

Operating expenses in the real estate logistics operating division were $11.2 million, an increase of $1.5 million or

16% from $9.7 million for the six months ended June 30, 2015. The increase was related to higher staffing levels

and expansion of the home solutions operating unit related to new preservation services, which was partially

offset by lower personnel expenses in the property services operating unit.

Corporate Support

Our corporate support consists of centralized services including human resources, finance and accounting,

information technology, legal, risk management and executive administration that provide support services to all

of our operating divisions.

Operating expenses within the corporate support functions increased by 10% to $47.6 million for the six months

ended June 30, 2016 from $43.1 million for the six months ended June 30, 2015.

Liquidity

Cash and cash equivalents consisted of the following at the dates indicated.

June 30, 2016 December 31, 2015

Operating cash 13,614$ 17,347$

Clearing accounts 212,224 140,354

225,838$ 157,701$

($ in thousands)

The Company’s cash flows from operating, investing, and financing activities were as follows for the periods

indicated.


Operating activities (34,644)$ 25,491$ (60,135)$ (236) %

Less trust related activity 15,982 18,132 (2,150) (12)

Operating activities excluding trust (50,626)$ 7,359$ (57,985)$ (788) %

Investing activities 146,230$ 119,717$ 26,513$ 22 %

Less trust related activity 135,697 114,969 20,728 18

Investing activities excluding trust 10,533$ 4,748$ 5,785$ 122 %

Financing activities (43,449)$ (68,161)$ 24,712$ 36 %

Less trust related activity (151,679) (133,101) (18,578) (14)

Financing activities excluding trust 108,230$ 64,940$ 43,290$ 67 %

($ in thousands)


Operating activities - net cash used by operating activities, excluding Trust activity, was $50.6 million for the six

months ended June 30, 2016, as compared to net cash provided by operating activities of $7.4 million in the same

period from the prior year. The $58.0 million decrease in cash used for operating activities, excluding Trust

activity, during the six months ended June 30, 2016, was primarily due to an increase in originated loans and early

buyout of delinquent Ginnie Mae loans as compared to the prior period (see Financing activities below).

19

Investing activities - net cash provided by investing activities, excluding Trust activity, was $10.5 million for the six

months ended June 30, 2016, as compared to net cash provided by investing activities of $4.7 million for the same

period in the prior year. The $5.8 million increase in net cash provided by investing activities, excluding Trust

activity, during the six months ended June 30, 2016, was primarily due to receipt of an inducement payment of

acquired mortgage servicing rights, the sale of excess servicing rights, and a decrease in restricted cash balances.

Financing activities - net cash provided by financing activities, excluding Trust activity, was $108.2 million for the

six months ended June 30, 2016, as compared to $64.9 million of net cash provided by financing activities for the

six months ended June 30, 2015. The $43.3 million increase in cash provided by financing activities during the six

months ended June 30, 2016 was primarily due to an increase in the borrowings due to a higher amount of loans

originated than sold, increases in borrowing of early buy out of Ginnie Mae delinquent loans, and a reduction in

the servicing advance facility borrowings as compared to the prior period.

Trust related activity had no net effect on the cash flows for the six months ended June 30, 2016 and 2015.

Financing Facilities

We maintain financing facilities that support our mortgage servicing and lending businesses in their daily

operations.

Warehouse Facilities

Our mortgage lending operating unit maintained origination and FHA buyout warehouse lines of credit with

aggregate line limits of $751.1 million and advance limits ranging from 70 percent to 98 percent. At June 30,

2016, the outstanding balance across the six lines was $563.6 million.

Maximum June 30, 2016 December 31, 2015

Agreement I Warehouse $ 155,000 $ 84,878 $ 189,214

Agreement II [2] Warehouse/FHA Buyout 350,000 349,997 199,140

Agreement III [1] Warehouse 110,000 57,853 –

Agreement IV FHA buyout 110,000 49,006 38,455

Agreement V Warehouse 6,100 6,100 6,100

Agreement VI Warehouse/Buyout 20,000 15,748 8,366

$ 751,100 $ 563,582 $ 441,275

Balance Outstanding At

($ in thousands)

[1]

In April 2016, a new line was issued with a maturity date of April 2017 [2]

In June 2016, the Company received a temporary line limit increase to $350 million through July 6, 2016 from $325 million to accommodate elevated

levels of production.

Servicing Advance Facilities

At June 30, 2016, the Company had two servicing advance facilities with a total committed amount of $95.0

million, and an outstanding balance of approximately $46.8 million. The weighted average advance rate of the

two facilities at June 30, 2016 was 73 percent. These facilities include customary covenants, of which the

Company was in compliance with such covenants at June 30, 2016.

The facilities are subject to a margin call if the principal balance exceeds the underlying value of the collateral for

the line. At June 30, 2016, the fair value of the collateral exceeded the unpaid principal balance.

20

Future Developments

The Company’s four operating divisions provide a comprehensive platform for revenue generation throughout the

lifecycle of residential real estate transactions. Because of the synergies among the operating divisions, the

Company is able to perform in various market cycles.

The Company expects to drive future growth in the following ways:

• increase lending activities;

• expand residential mortgage servicing;

• grow the asset management business;

• diversify the real estate transactions and logistics operating divisions; and

• meet evolving needs of the residential mortgage and United States housing industries.

Management believes that the Company’s integrated approach, together with the strength, diversity and

independence of each of the Company’s operating divisions, positions it to take advantage of the developments in

the United States housing market and the major structural changes occurring across the mortgage industry.

Significant Events

On January 1, 2016, the Company entered into a mortgage servicing rights purchase and sale agreement with a

government agency, pursuant to which the Company has agreed to purchase mortgage servicing rights related to

United States residential mortgage loans originated through Ginnie Mae loan programs with approximately $2.1

billion in unpaid principal balance. Prior to the closing date, CMS had been subservicing approximately 20,000 of

these loans for Ginnie Mae under a Master Sub-servicer Agreement. The purchase price of approximately $16.6

million, subject to certain adjustments set forth in the purchase agreement, was financed by an unrelated third

party, who contemporaneously acquired the excess servicing strip from CMS. Pursuant to certain excess servicing

strip sale agreements, CMS sold to the third party the right to receive the excess cash flow generated from the

servicing fee after receipt of a fixed basic servicing fee per mortgage loan for $16.6 million. This transaction,

managed by the Company’s asset management operating division, was settled in January 2016.

On January 29, 2016, the Company entered into a mortgage servicing rights purchase and sale agreement and a

related servicing agreement with a financial institution, pursuant to which the Company has agreed to acquire

mortgage servicing rights of approximately $907.6 million in unpaid principal balance of United States residential

mortgage loans originated through Ginnie Mae loan programs due to the delinquent status of the related

mortgage loans, for which the Company received an inducement payment of approximately $12.6 million. Prior

to the closing date, CMS was sub-servicing approximately 5,000 of these loans for a third-party financial

institution. This transaction, managed by the Company’s asset management operating division, was settled in

February 2016.

On January 29, 2016, the Company completed a sale of the excess servicing rights of a pool of GNMA loans of

approximately $1.2 billion in unpaid principal balance to an unrelated third party for approximately $8.7 million.

This transaction was managed by the Company’s asset management operating division.

On February 18, 2016, the Company renewed one of its warehouse facilities with a maturity date of February 17,

2017.

21

On April 1, 2016, the Company completed a sale of the excess servicing rights of a pool of GNMA loans of

approximately $492.6 million of UPB to an unrelated third party for approximately $4.8 million. This transaction

was managed by the Company’s asset management operating division.

On April 27, 2016, the Company secured an additional warehouse facility to fund single family residential

mortgage loans with a credit limit of $110 million maturing in April 2017.

Principal Risks and Uncertainties

The Company believes that the principal risks and uncertainties affecting the Company that could adversely

impact the business, financial condition and results of operations for the remaining six month period ending

December 31, 2016 include, but are not limited to:

• The residential real estate market is cyclical and we may be negatively impacted by downturns in this

market and general economic conditions. For example, the lack of financing for homebuyers in the

United States residential real estate market at favorable rates and on favorable terms could have a

material adverse effect on the Company’s financial performance and results of operations. In addition,

adverse economic and market conditions may adversely affect the Company’s liquidity position, which

could adversely affect its business operations in the future.

• The Company’s liquidity and financing strategy includes the use of significant leverage. Accordingly, the

Company’s ability to finance its operations and repay maturing obligations rests in large part on its ability

to borrow money. The Company is generally required to renew its financing arrangements each year,

which exposes it to refinancing risks. A variety of factors, including, (i) a counterparty’s decision to reduce

its position or exit the market, (ii) an event of default, including, but not limited to, failure to meet certain

financial covenants, (iii) an adverse action by a regulatory authority, (iv) an increase in prevailing interest

rates, or (v) a general deterioration in the economy that constricts the availability of credit may increase

the Company’s cost of funds and make it difficult for it to renew existing credit facilities or obtain new

lines of credit, which could have a material adverse effect on the liquidity, financial position and results of

operations of the Company.

• The Company is a highly leveraged company. This high level of debt could adversely affect its operating

flexibility and put it at a competitive disadvantage. As of June 30, 2016, the Company had approximately

$1.0 billion aggregate principal amount of total debt outstanding on a consolidated basis, of which the fair

market value was $1.0 billion. As a result of the level of indebtedness, the Company also has substantial

negative members’ equity.

• Extensive regulation of the Company’s businesses affects our activities and creates the potential for

significant liabilities and penalties. The current regulatory environment and the possibility of increased

regulatory focus or legislative or regulatory changes could adversely affect the Company’s business. In

addition, legal proceedings, state or federal governmental examinations or enforcement actions and

related costs could have a material adverse effect on the liquidity, financial position and results of

operations of the Company.

• Technology failures could damage the business operations and increase costs, which could adversely

affect the Company’s business, financial condition and results of operations. Any failure of the Company’s

internal security measures or breach of its privacy protections could cause harm to the businesses’

reputation and subject the Company to liability, any of which could adversely affect the Company’s

business, financial condition and results of operations.

22

• The Company’s business model and the execution of its business strategies is highly dependent upon the

efforts, skills, reputations and business contacts of its founder, Mr. Bruce M. Rose, who through his

ownership controls the Company, as well as the members of its senior management team and other key

employees. Accordingly, the Company’s success depends on the continued service of these individuals,

who are not obligated to remain employed with the Company.

• The Company is a holding company with no material operating assets, other than interests in its

subsidiaries. All of the Company’s revenue and cash flow is generated through its subsidiaries. As a

result, the Company is dependent on dividends and other distributions from those subsidiaries to

generate the funds necessary to meet its financial obligations, including the payment of principal and

interest on its outstanding debt.

• The Company received a Subpoena in February 2015 and a Civil Investigative Demand in August 2014

from certain state regulators to produce documents and information in connection with the Company’s

lender placed insurance practices, also known as “force-placed insurance,” including the sale of the

Company’s insurance agency business in November 2012. Although the Company believes that it has

meritorious legal and factual defenses to these matters, the ultimate outcomes with respect to these

regulatory inquiries remain uncertain. As such, there are no assurances that regulatory inquiries such as

those referenced above will not result in enforcement actions, fines or penalties which could have a

material adverse effect on the liquidity, financial position and results of operations of the Company.

• An inherent risk to the mortgage servicing industry, the Company’s servicing portfolio is subject to “run

off,” meaning that mortgage loans serviced by it may be prepaid prior to maturity, refinanced with a

mortgage not serviced by the Company or liquidated through foreclosure, deed-in-lieu of foreclosure or

other liquidation process or repaid through standard amortization of principal. As a result, the Company’s

ability to maintain and grow the size of its servicing portfolio depends on the Company’s ability to

originate additional mortgages or to acquire the right to service additional pools of residential mortgages.

The Company may not be able to acquire mortgage servicing rights or enter into additional servicing and

subservicing agreements on terms favorable to the Company or at all, which could adversely affect the

Company’s business, financial condition and results of operations.

• The residential real estate market is directly affected by changes in prevailing interest rates. An increase

in interest rates could, among other risks, adversely affect (i) CMS’ loan origination volume because

refinancing an existing loan may be less attractive for homeowners and qualifying for a purchase money

loan may be more difficult for consumers and (ii) CMS’ ability to finance servicing advances and loan

originations. Conversely, a decrease in interest rates may, among other risks, increase prepayment

speeds which may lead to (ii) a decrease in servicing fees due to the prepayment of loans prior to maturity

and (ii) a decrease in the value of our MSRs.

As the value of MSRs tend to be inversely correlated to mortgage production volume, the Company has

opted to not hedge its MSR value with additional financial instruments or derivatives. In addition, the

Company does not maintain a macro hedge against adverse long term interest rate volatility or adverse

moves. The Company hedges it loan originations for the limited period between locking interest rates for

the benefit of borrowers and the point when the resulting loan is sold or delivered by utilizing forward

sales strategies. No assurances may be given that the Company’s hedging strategies will be effective,

particularly when short term market volatility is at its highest. These strategies rely on assumptions and

projections regarding pull-through rates, timelines and general market factors. If our assumptions and

projections prove to be incorrect, we may incur losses which could have a material adverse effect on the

liquidity, financial position and results of operations of the Company.

23

• CMS is an approved Ginnie Mae and Freddie Mac lender and servicer. This status as an approved lender

and/or servicer is important, particularly because (i) CMS’ ability to remain as an eligible servicer under

several of its servicing agreements depends on it being an approved servicer with Ginnie Mae or Freddie

Mac and (ii) the Company’s ability to grow its business depends in large part on CMS’ ability to originate

mortgages and acquire servicing rights. The Ginnie Mae Mortgage-Backed Securities Guide provides

numerous eligibility requirements for maintaining Ginnie Mae Issuer Status. CMS’ failure to maintain

approved lender and/or servicer status or receipt of any suspension or termination notices from any

Government Agencies, including for any failure to maintain required financial covenants and performance

measures, with Ginnie Mae or Freddie Mac, could result in the Company being terminated as servicer

under existing servicing agreements and subservicing agreements, prevent the Company from obtaining

future servicing business, prevent the Company from originating Government Agency loan products, and

adversely impact the ability to finance the Company’s operations. As of June 30, 2016, CMS has not

serviced Freddie Mac loans.

• All Ginnie Mae lender/servicers approved on or before December 31, 2014, like CMS, are required to

meet certain financial requirements including net worth and liquid asset criteria for single-family issuers

beginning December 31, 2015. These Ginnie Mae financial requirements are generally substantially

higher than those of other Government Agencies. As of June 30, 2016, CMS was in compliance with

Ginnie Mae’s financial requirements, however, in the future, CMS’ failure to maintain Ginnie Mae’s

financial requirements could prevent the Company from originating Ginnie Mae loan products, and

adversely impact the ability to finance the Company’s operations.

• CMS originates primarily government-insured and conventional agency residential mortgage loans, and as

such is highly dependent upon programs administered by Government Agencies and other programs

administered by governmental entities to generate revenues through mortgage loan sales to institutional

investors. Any changes in existing United States government-sponsored mortgage programs or CMS’

ability to maintain its Governmental Agency approved status as a lender and/or servicer could materially

and adversely affect the Company’s business, liquidity, financial position and results of operations.

• CMS’ counterparties may terminate its servicing and subservicing contracts, which could adversely affect

the Company’ business, financial condition and results of operations. In addition, a downgrade in CMS’

servicer ratings could have an adverse effect on the Company’s business, financial condition and results of

operations.

• CMS has received an inducement payment in connection with the acquisition of certain mortgage

servicing rights related to delinquent mortgage loans originated through Ginnie Mae loan programs. Due

to the delinquent status of the related mortgage loans, it is not expected that CMS will be able to collect

enough mortgage servicing fees on a monthly basis to cover the cost of servicing the mortgage loans.

Increases in the cost to service the related mortgage loans not covered by the inducement payment,

payments received in connection with the redelivery of loans to Ginnie Mae securities, or other ancillary

payments and recoverable expenses would be borne by CMS and could have a material adverse effect on

the liquidity, financial position and results of operations of the Company.

• The Company operates in highly competitive mortgage lending, real estate and asset management

industries that could become even more competitive as a result of economic, legislative, regulatory and

technological changes. The Company may be unable to compete successfully and this could adversely

affect the Company’s business, financial condition and results of operations.

24

Statement of Management’s Responsibilities

Statement of Management’s responsibilities in respect of the Management Report and the Consolidated

Financial Statements

Management of the Company is responsible for the preparation and fair presentation of the consolidated

financial statements in accordance with accounting principles generally accepted in the United States of America

(“US GAAP”); this includes the design, implementation, and maintenance of internal control relevant to the

preparation and fair presentation of financial statements that are free from material misstatement, whether due

to fraud or error.

Responsibility statement in accordance with the Transparency Regulations

Bruce M. Rose, Chief Executive Officer, and Peter Salce, President and Chief Financial Officer, being the persons

responsible within the Company, confirm that to the best of their knowledge and belief:

• the consolidated financial statements, prepared in accordance with US GAAP, give a true and fair view of

the assets, liabilities, financial position and profit or loss of the Group; and

• the Management Report includes a fair review of the important events that have occurred during the first

six months of 2016 and their impact upon the consolidated financial statements, together with a

description of the principal risks and uncertainties that it faces for the remaining six month period ending

December 31, 2016.

25


CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016 (unaudited) and December 31, 2015

26

INDEPENDENT ACCOUNTANT’S REVIEW REPORT To the Members of

Carrington Holding Company, LLC

We have reviewed the accompanying consolidated statement of financial condition of Carrington Holding Company, LLC, a

Delaware limited liability company, and subsidiaries (the “Company”) as of June 30, 2016, the related consolidated

statements of operations and cash flows for the six month periods ended June 30, 2016 and 2015, and the related

consolidated statement of changes in members’ deficit for the six months ended June 30, 2016. A review includes primarily

applying analytical procedures to management’s financial data and making inquiries of company management. A review is

substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial

statements as a whole. Accordingly, we do not express such an opinion.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with

accounting principles generally accepted in the United States of America; this includes the design, implementation, and

maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free

from material misstatement whether due to error or fraud.

Accountant’s Responsibility

Our responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and

Review Services promulgated by the Accounting and Review Services Committee of the American Institute of Certified Public

Accountants. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether

we are aware of material modifications that should be made to the financial statements for them to be in accordance with

accounting standards generally accepted in the United States of America. We believe that the results of our procedures

provide a reasonable basis for our conclusions.

Accountant’s Conclusion

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated

financial statements as of June 30, 2016 and for the six month periods ended June 30, 2016 and 2015 in order for them to be

in conformity with accounting principles generally accepted in the United States of America.

Emphasis of Matters

The Company utilizes a high degree of leverage to fund its business activities. The Company's indirect wholly owned

subsidiary, Carrington Mortgage Services, LLC has required financing lines, arranged with third parties, to fund advances from

servicing pools of non-agency residential loan securitizations and to fund its mortgage loan origination activities. As more

fully described in Note 6 of the accompanying interim consolidated financial statements, the Company's servicer advance

financing arrangements and a majority of its loan origination warehouse lines of credit become due in 2016 and 2017.

Mortgage financing activity is cyclical and can be adversely affected during periods of reduced availability of credit and/or

limited money supply. Management expects to renew such financings in the ordinary course, however there can be no

assurance that the Company will be able to renew the financing arrangements at similar (or more favorable) terms, if at all.

As more fully discussed in Note 4 of the accompanying interim consolidated financial statements, the Company changed its

method of presenting mortgage servicing rights and related reserves which has been applied retrospectively to all periods

presented.

Our review report is not modified with respect to the matters described in the paragraphs above.

/s/ SQUAR MILNER LLP

Newport Beach, California

August 24, 2016

27

CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands)

(Unaudited)

Cash and cas h equiva lents $ 225,838 $ 157,701

Restri cted cash 21,714 12,624

Trust assets (s ecuritized mortgage col latera l ):

Res identia l mortgage loans , at estimated fa ir va lue 2,791,130 2,979,278

Rea l estate owned, a t net rea l i zable va lue 74,800 75,675

Tota l trust as sets 2,865,930 3,054,953

Mortgage loa ns held for sa le, at es timated fa i r va lue 588,893 459,922

Servicer advances 65,413 77,201

Mortgage servicing rights , at estimated fa i r va lue [1] 106,075 111,274

Property, furniture and equipment, net 24,079 22,787

Prepaid expenses and other ass ets 40,198 44,732

Tota l ass ets 3,938,140$ 3,941,194$

Liabilities

Nonrecourse trust l i abi l i ties (securi ti zed mortgage borrowings), at es timated

' fa ir va lue $ 2,865,930 3,054,953$

Warehouse l ines of credi t 563,582 441,275

Servicing advances l ines of credi t 46,821 63,182

Servicing l i abi l i ties 236,908 167,443

Accounts payable and accrued l iabi l i ties 57,412 59,128

Res erves for losses on loans sold 6,253 3,826

Accrued compensation 18,935 19,425

Accrued interes t payable 9,361 8,097

Notes paya ble 4,192 1,908

Other l iabi l i ties 8,464 3,357

Long-term debt, at es tima ted fa i r va lue 390,568 365,384

Tota l l i abi l i ties 4,208,426 4,187,978

Commitments and Contingencies (Note 7)

Members’ Deficit

Control l ing interests (270,286) (246,784)

Tota l members ’ defi ci t (270,286) (246,784)

Tota l l i abi l i ties and members ’ defi ci t $ 3,938,140 3,941,194$

June 30, 2016

ASSETS

LIABILITIES AND MEMBERS’ DEFICIT

December 31, 2015

[1] Refer to Note 4 – Mortgage Servicing Rights for further information regarding amounts adjusted from accounting change.

See accompanying notes to consolidated financial statements

28

CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS


2015

As Adjusted [1]

(Unaudited)

REVENUES

Mortgage banking $ 92,188 $ 65,621

Mortgage servicing 90,863 54,225

Rea l es tate services 26,917 22,362

Commiss ions 8,541 9,225

Management fees 3,267 4,480

Other 1,625 361

Tota l revenues 223,401 156,274

OPERATING EXPENSES

Compens ation and benefi ts 146,415 111,605

General and administrative 59,962 48,534

Depreciation 4,022 2,752

Other 6 74

Tota l expenses 210,405 162,965

INCOME/(LOSS) FROM OPERATIONS 12,996 (6,691)

OTHER INCOME (EXPENSE)

Interest income 8,904 4,635

Interest expens e (21,128) (13,996)

Change in fai r va lue of mortgage s ervicing rights [1]

916 7,892

Change in fai r va lue of long-term debt (25,184) (15,455)

Other income (expense), net (36,492) (16,924)

TRUST INCOME (EXPENSE)

Interest income 59,057 67,884

Interest expens e (59,057) (67,884)

Los s on s a le of REO (19,366) (19,665)

Benefi t/(Provis ion) for REO loss es 1,252 (67)

Change in fai r va lue of securi ti zed res identia l mortgage

loans and non-recourse trust l iabi l i ties , net 18,114 19,732

Trust income (expens e), net - -

NET LOSS BEFORE INCOME TAXES (23,496) (23,615)

INCOME TAX EXPENSE 6 11

NET LOSS $ (23,502) $ (23,626)


2016

[1]

Refer to Note 4 – Mortgage Servicing Rights for further information regarding amounts adjusted from accounting change.


29

CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ DEFICIT

June 30, 2016 (unaudited) and December 31, 2015


Managing

Member

Non Managing

Members

Total

Controlling

Interests

MEMBERS’ (DEFICIT)/INTEREST – December 31, 2015 (250,024)$ 3,240$ $ (246,784)Net Loss (21,248) (2,254) (23,502)

MEMBERS’ (DEFICIT)/INTEREST – June 30, 2016 (unaudited) (271,272)$ 986$ (270,286)$

Controlling Interests


30

CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS


2015

As Adjusted [1]

(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss $ (23,502) $ (23,626)

Adjus tments to reconci le net loss to net cas h provided by/(used in) operating activi ties :

Depreciation 4,022 2,752

Change in fa i r va lue of long-term debt 25,184 15,455

Change in fa i r va lue of res identia l mortgage loans and nonrecourse trus t l iabi l i ties , net

– securi ti zed trusts (18,114) (19,732)

Loss on sa le of rea l estate owned – s ecuri ti zed trus ts 19,366 19,664

(Benefi t)/Provis ion for losses on rea l estate owned – s ecuri ti zed trus ts (1,252) 67

Accretion of interest income and expense on res identia l mortgage loans and non-

recourse trust l iabi l i ties , net – securi ti zed trusts 15,982 18,133

Originations and purchases of mortgage loans held for sa le (3,180,530) (1,661,747)

Proceeds from s a les of, and principa l payments from, mortgage loans held for sa le 3,059,792 1,585,975

Mark to market ga in on mortgage loans held for sa le (8,232) (2,882)

Unreal ized (ga in) los s on IRLC and hedging instruments 1,902 (2,943)

Provis ion for losses on loans s old 2,595 812

Loss on sa le of fi xed assets 1 70

Net change in operating ass ets and l iabi l i ties :

Due to/from affi l iates (1,843) (1,445)

Servicer advances 11,788 19,765

Mortgage s ervicing rights [1] (19,738) (72,323)

Other as sets 6,376 (3,306)

Accounts payable and accrued l iabi l i ties 2,094 64,562

Servicing l iabi l i ties 69,465 86,240

Net cash (used in) provided by operating activities (34,644) 25,491

CASH FLOWS FROM INVESTING ACTIVITIES

Change in restricted cash (9,090) (6,965)

Purchases of property, furni ture and equipment (5,314) (7,658)

Principa l reductions on res identia l mortgage loans – securi tized trusts 105,520 88,946

Proceeds from s a le of rea l estate owned – securi ti zed trusts 30,177 26,023

Cas h received from acquis i tion of mortgage s ervicing rights 13,185 10,000

Cas h received from stand-a lone s a le of excess servicing rights 11,752 9,311

Redemptions of equi ty method investments - 60

Net cash provided by investing activities 146,230 119,717

CASH FLOWS FROM FINANCING ACTIVITIES

Net repayments of servicing advances l ines of credi t (16,361) (8,045)

Repayment of securi tized mortgage borrowings – s ecuri ti zed trusts (151,679) (133,101)

Net proceeds from credi t faci l i ties on mortgage loans held for sa le 122,307 73,087

Proceeds from (repayments of) notes payable 2,284 (102)

Net cash used in financing activities (43,449) (68,161)

NET INCREASE IN CASH AND CASH EQUIVALENTS 68,137 77,047

CASH AND CASH EQUIVALENTS – beginning of period 157,701 97,435

CASH AND CASH EQUIVALENTS – end of period $ 225,838 $ 174,482

CASH PAID FOR INTEREST $ 17,672 $ 5,856

CASH PAID FOR INCOME TAXES $ 13 $ 9

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS

Trans fer of res identia l mortgage loans to rea l estate owned – securi ti zed trusts $ 47,416 $ 55,146

For the six months ended June 30,

2016

[1]

Refer to Note 4 – Mortgage Servicing Rights for further information regarding amounts adjusted from accounting change.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2016 (unaudited)


31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Business Summary

Carrington Holding Company, LLC (collectively, with its consolidated subsidiaries “the Company” or “CHC”) was

formed as a Delaware limited liability company on December 4, 2007 and incorporated under Delaware law. The

Company is a holding company whose primary businesses include asset management, mortgages, real estate

transactions, and real estate logistics. Collectively, the businesses are vertically and horizontally integrated and

provide a broad range of real estate services that encompass nearly all aspects of single family residential real

estate transactions in the United States. The Company has been managing assets since 2004, servicing mortgage

loans since 2007, originating mortgage loans since 2010, and providing real estate services since 2008. The

Company is headquartered in Old Greenwich, Connecticut and Aliso Viejo, California. As of June 30, 2016, the

Company had approximately 4,700 fulltime employees and independent agents across 99 offices.

Entity Operating Division [1]

Carrington Capital Management, LLC (“CCM”) Asset Management

Carrington Mortgage Services, LLC (“CMS”) Mortgages

Carrington Resolution Services, LLC (“CRS”) Mortgages

Carrington Mortgage UK Limited (“Carrington UK”) Mortgages

Carrington Real Estate Services, LLC (“CRES”) Real Estate Transactions

Carrington Italia s.r.l. (“Italia”) Real Estate Transactions

Carrington Title Services, LLC (“CTS”) Real Estate Transactions

Carrington Escrow Inc. (“CEI”) Real Estate Transactions

Carrington Foreclosure Services, LLC (“CFS”) Real Estate Transactions

Carrington Document Services, LLC (“CDC”) Real Estate Transactions

Real Estate Logistics, LLC (“REL”) Real Estate Logistics

Carrington Property Services, LLC (“CPS”) Real Estate Logistics

Carrington Home Solutions, LP (“CHS”) Real Estate Logistics

Carrington Development Company, LLC (“CDC”) Real Estate Logistics

Azure Home, LLC (“Azure”) Real Estate Logistics

[1] See Note 8 for more information on the Company’s operating divisions

A description of each of CHC’s operating divisions is included below.

• Asset Management Operating Division provides alternative asset management services focused on

investments in the United States real estate, mortgage, and fixed income markets. CCM is registered with

the Securities and Exchange Commission as an investment advisor subject to the provisions of the

Investment Advisors Act of 1940.

• Mortgages Operating Division is a fully-integrated mortgage company with capabilities to originate and

service performing and non-performing loans. CMS is a residential wholesale and retail loan originator,

licensed to originate loans in 45 states, the U.S. Virgin Islands, District of Columbia, and Puerto Rico. CMS

is an approved Ginnie Mae issuer and Freddie Mac approved seller/servicer.




32

NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued)

Business Summary – (continued)

• Real Estate Transactions Operating Division provides real estate brokerage, escrow, document

processing, and settlement services operations. The Company also provides rental services for luxury

villas and vacation homes in Italy.

• Real Estate Logistics Operating Division comprises several wholly owned subsidiaries including CPS, a

residential real estate asset manager and property management business and CHS, a licensed contractor

providing property preservation and repair services.

Basis of Presentation

The accompanying unaudited consolidated financial statements of CHC have been prepared in accordance with

accounting principles generally accepted in the United States of America (“GAAP”) for interim financial

information. In the opinion of management, all adjustments, consisting of normal recurring adjustments

considered necessary for a fair presentation of the consolidated financial position and consolidated operations for

the periods presented, have been included. Operating results for the six months ended June 30, 2016 are not

necessarily indicative of the results that may be expected for the year ending December 31, 2016. These interim

period consolidated financial statements should be read in conjunction with the Company’s audited consolidated

financial statements, which are included in the Company’s Annual Report for the year ended December 31, 2015,

filed with Irish Stock Exchange at http://www.ise.ie/.

All significant inter-company accounts and transactions have been eliminated in consolidation. Certain amounts

reported in prior periods have been reclassified to conform to the current period presentation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make

estimates and assumptions based on available information. These estimates and assumptions affect the reported

amounts of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities.

Actual results could be different from these estimates. The most significant items affected by such estimates and

assumptions include the valuation of securitized trust assets and trust liabilities, long-term debt, mortgage

servicing rights, the fair value measurement of financial instruments, mortgage banking interest rate lock

commitments and hedging instruments, and the estimation of reserves for losses on loans sold, and other

contingent items. Actual results could differ from those estimates and assumptions and may have a material

effect on the consolidated financial statements.

As of June 30, 2016 and for the six months then ended, there have been no new or updated significant accounting

policies.




33


Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”). The new guidance requires

organization to measure all expected credit losses for financial instruments held at the reporting date based on

historical experience, current conditions and reasonable and supportable forecasts. The update eliminates the

probable initial recognition threshold in current GAAP and, instead, reflects an entity’s current estimate of all

expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only

considered past events and current conditions in measuring the incurred loss. ASU 2016-13 is effective for fiscal

years, and interim periods within those fiscal years, beginning after December 14, 2019. The Company is currently

assessing the impact the adoption of this guidance will have on the Company's financial position or results of

operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Among other things, in

the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the

exception of short-term leases at the commencement date: 1) A lease liability, which is a lessee’s obligation to

make lease payments arising from a lease, measured on a discounted basis; and 2) A right-of-use asset, which is

an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under

the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align

where necessary, lessor accounting with the lessee accounting model and ASU 2014-09, Revenue from Contracts

with Customers. The new guidance is effective for fiscal years beginning after December 15, 2019, including

interim periods within those fiscal years. Early application is permitted for all public business entities and all

nonpublic business entities upon issuance. The Company is currently evaluating the impact of adopting this

guidance on its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) (“ASU 2016-

01”): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance makes targeted

improvements to existing U.S. GAAP by: 1) requiring equity investments (except those accounted for under the

equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value

with changes in fair value recognized in net income; 2) requiring public business entities to use the exit price

notion when measuring the fair value of financial instruments for disclosure purposes; 3) requiring separate

presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e.,

securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements;

4) eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for

organizations that are not public business entities; 5) eliminating the requirement for public business entities to

disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed

for financial instruments measured at amortized cost on the balance sheet; and 6) requiring a reporting

organization to present separately in other comprehensive income the portion of the total change in the fair value

of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when

the organization has elected to measure the liability at fair value in accordance with the fair value option for

financial instruments. The new guidance is effective fiscal years beginning after December 15, 2017, including

interim periods within those fiscal years. The new guidance permits early adoption of the “own credit” provision.

The Company is currently evaluating the impact of adopting this guidance on its consolidated financial

statements.




34


Recently Issued Accounting Pronouncements Not Yet Adopted – (continued)

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation

Analysis (“ASU 2015-02”). ASU 2015-02 is intended to improve targeted areas of consolidation guidance for legal

entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized

debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to

reducing the number of consolidation models from four to two, the new standard simplifies the FASB ASC and

improves current GAAP by 1) placing more emphasis on risk of loss when determining a controlling financial

interest; 2) reducing the frequency of the application of related-party guidance when determining a controlling

financial interest in a VIE; and 3) changing consolidation conclusions for public and private companies in several

industries that typically make use of limited partnerships or VIEs. For partnerships where the limited partners do

not have control through veto or kick out or other substantive rights, and the entity is a VIE, then the investment

managers evaluates consolidation based on control and economics. This new ASU allows for the management fee

to be disregarded if it is “at market”. In this case, these managers will have the control element but will not

participate significantly in the economics and therefore will not consolidate. The amendments are effective for

annual periods ending after December 15, 2016, and interim periods within annual periods beginning after

December 15, 2016. Early application is permitted, including adoption in an interim period. This ASU may be

applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect

adjustment to retained earnings as of the beginning of the first year restated. The Company will be required to

adopt this ASU beginning with the first quarter of 2017. The adoption of this ASU is not expected to have a

material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (“ASU

2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is

substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote

disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting

organization will continue to operate as a going concern, except in limited circumstances. Financial reporting

under this presumption is commonly referred to as the going concern basis of accounting. The going concern

basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and

classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate

whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide

related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and

definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly

provided by organizations in the financial statement footnotes. The amendments are effective for annual periods

ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016.

Early application is permitted for annual or interim reporting periods for which the financial statements have not

previously been issued. The Company will be required to adopt this ASU beginning with the first quarter of 2017.

The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial

statements.




35


Recently Issued Accounting Pronouncements Not Yet Adopted – (continued)

In August 2014, the FASB issued ASU No. 2014-13 – Measuring the Financial Assets and the Financial Liabilities of

a Consolidated Collateralized Financing Entity which amends current guidance within Topic 810 (Consolidation)

(“ASU 2014-13”). When a reporting entity elects the measurement alternative included in this ASU for a

consolidated collateralized financing entity, the reporting entity should measure both the financial assets and the

financial liabilities of that collateralized financing entity in its consolidated financial statements using the more

observable of the fair value of the financial assets and the fair value of the financial liabilities. A collateralized

financing entity is a VIE with no more than nominal equity that holds financial assets and issues beneficial

interests in those financial assets; the beneficial interests have contractual recourse only to the related assets of

the collateralized financing entity and are classified as financial liabilities. The amendments in this ASU are

effective for public business entities for annual periods, and interim periods, beginning after December 15, 2015.

For entities other than public business entities, the amendments in this ASU are effective for annual periods

ending after December 15, 2016, and interim periods beginning after December 15, 2016. Early adoption is

permitted as of the beginning of an annual period. The adoption of this ASU is not expected to impact the

financial statements of the Company because the Company already utilizes the approach in this ASU to account

for its consolidated collateralized financing entities.

In May 2014, the FASB issued ASU No. 2014-09 – Revenue from Contracts with Customers (“ASU 2014-09”), which

outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with

customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of

promised goods or services to customers in an amount that reflects the consideration to which the entity expects

to be entitled in exchange for those goods or services. ASU 2014-09 applies to all contracts with customers except

those that are within the scope of other topics in the ASC. The transition options include full retrospective or

modified retrospective approaches and becomes effective for annual reporting periods beginning after December

15, 2018, as amended by ASU 2015-14. The Company is currently evaluating the impact of adopting this guidance

on its consolidated financial statements.




36

NOTE 2 - FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

The application of fair value measurements may be on a recurring or non-recurring basis depending on the

accounting principles applicable to the specific asset or liability or whether management has elected to carry the

item at its estimated fair value. FASB ASC 820-10 establishes a fair value hierarchy which requires an entity to

maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

ASC 820-10 describes three levels of inputs that may be used to measure fair value:

• Level 1: Observable inputs such as quoted prices (unadjusted) for identical assets or liabilities in active

markets that the entity has the ability to access as of the measurement date.

• Level 2: Significant observable inputs, other than Level 1 prices for similar assets or liabilities; quoted

prices in markets that are not active; or other inputs that are observable or can be corroborated by

observable market data.

• Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the

assumptions that market participants would use in pricing an asset or liability.

Categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair

value measurement.

Recurring Fair Value Measurements

Assets and liabilities measured at estimated fair value on a recurring basis include MSRs, LHFS, residential

mortgage loans within securitized residential mortgage collateral (“RMC”), securitized mortgage borrowings

(“SMB”), long-term debt, and interest rate lock commitments and hedging instruments. Transfers between fair

value classifications occur when there are changes in pricing observability levels. Transfers of financial

instruments among the levels occur at the beginning of the reporting period. There were no material transfers

between the Company’s Level 2 or Level 3 classified instruments during the six months ended June 30, 2016 and

2015.




37

NOTE 2 - FAIR VALUE MEASUREMENTS – (continued)

Recurring Fair Value Measurements – (continued)

The following tables present the Company’s financial assets and liabilities measured at estimated fair value on a

recurring basis, including financial instruments for which the Company has elected the fair value option as of the

dates indicated:

Carrying Value Level 1 Level 2 Level 3

Assets

Mortgage loans held for sale - LHFS $ 588,893 $ - $ 528,955 $ 59,938

IRLC and hedging assets 5,476 - - 5,476

Mortgage servicing rights 106,075 - - 106,075

Trust assets – RMC 2,791,130 - - 2,791,130

Total assets at estimated fair value $ 3,491,574 $ - $ 528,955 $ 2,962,619

Liabilities

IRLC and hedging liabilities $ 6,404 $ - $ 6,404 $ -

Long-term debt 390,568 - - 390,568

Trust liabilities – SMB 2,865,930 - - 2,865,930

Total liabilities at estimated fair value $ 3,262,902 $ - $ 6,404 $ 3,256,498

Carrying Value Level 1 Level 2 Level 3

Assets

Mortgage loans held for sale - LHFS $ 459,922 $ - $ 413,375 $ 46,547

IRLC and hedging assets 4,112 - - 4,112

Mortgage servicing rights 111,274 - - 111,274

Trust assets – RMC 2,979,278 - - 2,979,278

Total assets at estimated fair value $ 3,554,586 $ - $ 413,375 $ 3,141,211

Liabilities

IRLC and hedging liabilities $ 1,227 $ - $ 1,227 $ -

Long-term debt 365,384 - - 365,384

Trust liabilities – SMB 3,054,953 - - 3,054,953

Total liabilities at estimated fair value $ 3,421,564 $ - $ 1,227 $ 3,420,337


As of June 30, 2016


As of December 31, 2015

As of June 30, 2016, approximately 89 percent of assets and 78 percent of liabilities were measured at estimated

fair value on a recurring basis. The fair value amounts have been estimated by management using available

market information and appropriate valuation methodologies. However, considerable judgment is required to

interpret market data to develop the estimates of fair value in both inactive and orderly markets. Accordingly, the

estimates presented are not necessarily indicative of the amounts that could be realized in a current market

exchange. The use of different market assumptions and/or estimation methodologies could have a material

effect on the estimated fair value amounts.




38



The following is a description of the measurement techniques for financial instruments measured at estimated

fair value on a recurring basis.

Mortgage loans held for sale, carried at estimated fair value – The fair value of loans held for sale is based on

commitments outstanding from investors as well as what secondary markets are currently offering for portfolios

with similar characteristics. Therefore, loans held for sale subject to recurring fair value adjustments are classified

as Level 2. The fair value includes the servicing value of the loans. The Company recognizes interest income

separately from other changes in fair value. The unpaid principal balances of the Company’s LHFS classified as

Level 2 at June 30, 2016 and December 31, 2015 were approximately $496.2 million and $390.7 million,

respectively. The Company has the right but not the obligation to repurchase loans from Ginnie Mae guaranteed

securitizations when loans become more than ninety days delinquent. The Company repurchased certain Ginnie

Mae delinquent loans in connection with loan modifications and loss mitigation activity as part of the Company’s

servicing obligations. These loans are classified as LHFS carried at fair value. Modified loans or loans that become

re-performing may be delivered or sold into new Government guaranteed securitizations if the borrower has

made a specified number of payments. In addition, these loans are insured or guaranteed by the Federal Housing

Administration (“FHA”), Veteran’s Administration (“VA”) or United States Department of Agriculture (“USDA”),

collectively referred to as “Government Loans”. The fair value of these loans is estimated based on the net

recovery value incorporating the insured or guaranteed claim amount and are classified as Level 3 and included in

LHFS. The unpaid principal balance of the Company’s repurchased loans at June 30, 2016 and December 31, 2015

was approximately $65.1 million and $49.8 million, respectively.

Interest Rate Lock Commitments and Hedging Instruments, carried at estimated fair value – The Company’s

interest rate lock commitments and hedging assets and liabilities are carried at estimated fair value and are

accounted for as free standing derivative financial instruments. The Company extends commitments to

prospective residential mortgage borrowers referred to as interest rate lock commitments (“IRLCs”). The

commitments are carried at fair value inclusive of the servicing value which is based on observable market data.

The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be

exercised and the loan will be funded. The Company applies an anticipated loan funding probability based on its

own experience to determine the value of the IRLCs, which results in the classification of these instruments as

Level 3. Additional hedging assets and liabilities, typically TBA MBS securities, are used to hedge fair value

changes, driven by changes in interest rates, on the Company’s mortgage assets. The Company hedges the period

from the interest rate lock, inclusive of the anticipated loan funding probability, to the date of the loan sale. The

estimated fair value is based on current market prices for similar instruments. There is significant secondary

market activity for hedge contracts and pricing is readily available for similar assets, and accordingly the Company

classifies its hedging instrument assets and liabilities as Level 2. At June 30, 2016 and December 31, 2015, there

were approximately $624.3 million and $559.8 million, respectively, of IRLCs notional outstanding. At June 30,

2016 and December 31, 2015, there was approximately $821.1 million and $713.4 million, respectively, of TBA

MBS notional value outstanding. The changes in fair value for these instruments are recorded in current earnings

as a component of Mortgage Banking revenue in the accompanying consolidated statements of operations.




39



Mortgage Servicing Rights, carried at estimated fair value – The Company acquires MSRs from unrelated third

parties and retains servicing on its originated mortgage loans and has elected the fair value option for the carrying

basis of these servicing rights. The MSR valuation is based on the Company’s internal discounted cash flow model

and assessed for reasonableness to third party providers valuations that calculate the expected net servicing

income for the portfolio based on key factors such as prepayment speeds, discount rates, and servicing costs.

Because of the significance of unobservable inputs, these servicing rights are classified as Level 3. Additional

disclosure regarding valuation methodology and the estimated fair value of the Company’s MSRs is set forth in

Note 4.

Residential mortgage loans within securitized trusts (RMC) – Fair value measurements of the residential mortgage

loans within securitized trust assets are based on the Company’s internal models used to compute the net present

value of future expected cash flows, with observable market assumptions, where available. The Company’s

assumptions include its expectations of inputs that other market participants would use in pricing these assets.

These assumptions include judgment about the underlying collateral, prepayment speeds, estimated future credit

losses, forward interest rates, investor yield requirements and certain other factors. As of June 30, 2016,

residential mortgage loans within securitized trusts had an unpaid principal balance of approximately $3.5 billion

compared to an estimated fair value of $2.8 billion. The aggregate unpaid principal balance exceeded the

estimated fair value by $0.7 billion at June 30, 2016. As of December 31, 2015, residential mortgage loans had an

outstanding principal balance of approximately $3.6 billion compared to an estimated fair value of $3.0 billion.

The aggregate unpaid principal balance exceeded the fair value by $0.6 billion at December 31, 2015. The

aggregate unpaid principal balances of loans 90 days or more past due were approximately $1.0 billion and $1.1

billion at June 30, 2016 and December 31, 2015, respectively.

Securitized mortgage borrowings (SMB) – Securitized mortgage borrowings consist of individual tranches of bonds

issued by securitization trusts and are backed by nonconforming mortgage loans. Fair value measurements

include the Company’s judgments about the underlying collateral and assumptions such as prepayment speeds,

estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. As of

June 30, 2016, securitized mortgage borrowings within securitized trusts had an outstanding principal balance of

approximately $3.7 billion and estimated fair value of $2.9 billion. The aggregate unpaid principal balance

exceeded the estimated fair value by $0.8 billion at June 30, 2016. As of December 31, 2015, securitized

mortgage borrowings had an unpaid principal balance of approximately $3.8 billion and estimated fair value of

$3.1 billion. The aggregate unpaid principal balance exceeded the fair value by estimated $0.7 billion at

December 31, 2015.




40



Long-term debt, carried at estimated fair value – The Company elected the fair value option on its Extendible PIK

Step-Up Notes (the “Step-Up Notes”), see Note 6. These Step-Up Notes are valued by management based on an

internal discounted cash flow model that incorporates yields derived from comparable instruments, and considers

the Company’s own credit risk. The Company’s assessment of the significance of a particular input to the fair

value measurement in its entirety requires judgment and considers factors specific to each investment. The

Company’s internal valuation is validated to a valuation prepared by an unrelated, independent third party expert.

As of June 30, 2016, Step-Up Notes had an unpaid principal balance of approximately $534.1 million compared to

an estimated fair value of $390.6 million. The aggregate unpaid principal balance exceeded the fair value by

approximately $143.5 million at June 30, 2016. As of December 31, 2015, Step-Up Notes had an unpaid principal

balance of approximately $534.1 million compared to an estimated fair value of $365.4 million. The aggregate

unpaid principal balance exceeded the fair value by approximately $168.7 million at December 31, 2015.




41



The following tables present the activity of the assets and liabilities reported at fair value on a recurring basis for

the six months ended June 30, 2016 and 2015 using significant unobservable inputs (Level 3):

MSRs LT Debt RMC SMB IRLCs LHFS

Fair Value, December 31, 2015 $ 111,274 $ (365,384) $ 2,979,278 $ (3,054,953) $ 4,112 $ 46,547

Transfers into Level 3 - - - - - -

Transfers out of Level 3 - - (47,416) - - -

Total gains (losses) in earnings:

Interest income - - 59,057 - - -

Interest expense - - - (59,057) - -

Change in fair value 916 (25,184) (65,995) 84,109 - (1,904)

Total gains (losses) in earnings 916 (25,184) (6,938) 25,052 - (1,904)

Purchases, issuances, settlements

and other:

Purchases, net (13,185) - - - - -

Issuances, net 18,822 - - - 1,364 657,872

Settlements, net (11,752) - (133,794) 163,971 - (642,577)

Fair Value, June 30, 2016 $ 106,075 $ (390,568) $ 2,791,130 $ (2,865,930) $ 5,476 $ 59,938

MSRs LT Debt RMC SMB IRLCs LHFS

Fair Value, December 31, 2014 $ 34,933 $ (373,854) $ 3,159,818 $ (3,220,594) $ 1,470 $ 40,643

Transfers into Level 3 - - - - - -

Transfers out of Level 3 - - (55,146) - - -

Total gains (losses) in earnings:

Interest income - - 67,884 - - -

Interest expense - - - (67,884) - -

Change in fair value 7,892 (15,455) 1,727 18,005 - 562

Total gains (losses) in earnings 7,892 (15,455) 69,611 (49,879) - 562

Purchases, issuances, settlements

and other:

Purchases, net (10,000) - - - - 66,703

Issuances, net 15,927 - - - 652 -

Settlements, net (9,311) - (115,694) 141,717 - (87,849)

Fair Value, June 30, 2015 $ 39,441 $ (389,309) $ 3,058,589 $ (3,128,756) $ 2,122 $ 20,059

Level 3 Recurring Fair Value Measurements

For the Six Months Ended June 30, 2015

Level 3 Recurring Fair Value Measurements





42



The following table presents the changes in recurring fair value measurements included in net earnings or in the

consolidated statements of operations for the six months ended June 30, 2016 and 2015:

Interest

Income (1)

Interest

Expense (1)

Net Trust

Assets

Long-Term

Debt

Other

Income

Gain/(loss)

on Sale of

Loans, Net

Total

Residential mortgage loans within

securitized mortgage collateral 59,057$ -$ 18,114$ -$ -$ -$ 77,171$

Securitized mortgage borrowings - (59,057) - - - - (59,057)

Mortgage servicing rights - - - - 916 - 916

Long-term debt - - - (25,184) - - (25,184)

Loans held for sale - - - - - 8,232 8,232

IRLCs and hedging Instruments - - - - - (1,902) (1,902)

Total 59,057$ (59,057)$ 18,114$ (25,184)$ 916$ 6,330$ 176$

Interest

Income (1)

Interest

Expense (1)

Net Trust

Assets

Long-Term

Debt

Other

Income

Gain on Sale

of Loans, NetTotal

Residential mortgage loans within

securitized mortgage collateral 67,884$ -$ 19,732$ -$ -$ -$ 87,616$

Securitized mortgage borrowings - (67,884) - - - - (67,884)

Mortgage servicing rights - - - - 7,892 - 7,892

Long-term debt - - - (15,455) - - (15,455)

Loans held for sale - - - - - 2,882 2,882

IRLCs and hedging Instruments - - - - - 2,943 2,943

Total 67,884$ (67,884)$ 19,732$ (15,455)$ 7,892$ 5,825$ 17,994$

Change in Fair Value of


Change in Fair Value Included in Net Income (Loss) for the Six Months Ended June 30, 2016

Change in Fair Value of


Change in Fair Value Included in Net Income (Loss) for the Six Months Ended June 30, 2015

[1]

Amounts primarily represent accretion to recognize interest income and interest expense using effective yields based on estimated fair values for trust

assets and trust liabilities.

Nonrecurring Fair Value Measurements

The Company is required to measure certain assets and liabilities at estimated fair value from time to time. These

fair value measurements typically result from the application of specific accounting pronouncements under GAAP.

The fair value measurements are considered nonrecurring fair value measurements under FASB ASC 820-10.

The following table presents the fair value of assets measured for impairment on a non-recurring basis and the

related losses for the periods indicated:

Level June 30, 2016 December 31, 2015 2016 2015

REO 2 $ 74,800 $ 75,675 $ 19,366 $ 19,664

Nonrecurring Fair Value Measurements at

Total Losses





43


Nonrecurring Fair Value Measurements – (continued)

Real estate owned (“REO”) – consists of residential real estate acquired in satisfaction of loans within the

Company’s consolidated non-recourse securitizations. Upon foreclosure, REO loans are adjusted to the estimated

fair value of the residential real estate less estimated selling and holding costs or net realizable value (“NRV”).

REOs which have been measured at or subsequent to foreclosure, are subject to nonrecurring fair value

measurement disclosure requirements and included in the nonrecurring fair value measurement tables.

Estimated fair values of REO are generally based on observable market inputs, and considered Level 2

measurements.

Valuation Techniques and Unobservable Inputs

Quantitative information about the valuation techniques and unobservable inputs is required to be disclosed for

certain recurring and non-recurring fair value measurements.

The following tables present quantitative information about the valuation techniques and unobservable inputs

applied to Level 3 fair value measurements for financial instruments measured at fair value on a recurring and

nonrecurring basis as of the periods indicated:

Estimated Valuation Unobservable Range of

Fair Value Technique [1] Input Inputs

Financial Instrument –

Backed by Real Estate:

RMC $ 2,791,130 DCF [2] Yield 3.65% – 4.65% 4.01%

SMB 2,865,930 DCF [2] Prepayment rate 5.64% –12.35% 8.63%

Default rates 3.00% – 7.70% 6.27%

Financial Instrument – Other:

MSRs 106,075 DCF [2] Discount rate 6.00% – 17.75% 11.97%

Weighted

average

prepayment rate 4.00% – 50.66% 11.15%

LHFS 59,938 Market Pricing Forward sales 92.11% 92.11%

IRLCs 5,476 Market Pricing Pull-through rate 57.80% – 100.00% 80.16%

Long-term debt 390,568 DCF [2] Discount rate 13.97% 13.97%

At June 30, 2016

Weighted

Average

(1)There were no changes in the techniques used for valuing Level 3 instruments.

(2) Discounted cash flow.




44


Valuation Techniques and Unobservable Inputs – (continued)

Estimated Valuation Unobservable Range of

Fair Value Technique [1] Input Inputs

Financial Instrument –

Backed by Real Estate:

RMC $ 2,979,278 DCF [2] Yield 3.65% – 4.65% 4.01%

SMB 3,054,953 DCF [2] Prepayment rate 3.18% –10.02% 7.59%

Default rates 1.95% – 6.65% 5.64%

Financial Instrument – Other:

MSRs 111,274 DCF [2] Discount rate 6.00% – 17.00% 11.97%

Weighted

average

prepayment rate 4.08% – 50.53% 14.44%

LHFS 46,547 Market Pricing Forward sales 93.51% 93.51%

IRLCs 4,112 Market Pricing Pull-through rate 64.51% – 100.00% 85.75%

Long-term debt 365,384 DCF [2] Discount rate 14.60% 14.60%

At December 31, 2015

Weighted

Average

[1]

There were no changes in the techniques used for valuing Level 3 instruments. [2]

Discounted cash flow.

For assets backed by real estate, a significant increase in yield, prepayment rate, and default rates would result in

a significantly lower estimated fair value. For other assets and liabilities, a significant increase in discount rate and

prepayment rate would result in a significantly lower estimated fair value. A significant increase in forward sales

price and pull-through rate would result in a significantly higher estimated fair value. The Company believes that

the imprecision of an estimate could be significant.

Interest Rate Lock Commitments and Hedging Instruments

The following table includes information pertaining to the Company’s interest rate lock commitments and hedging

instrument assets and liabilities, for the periods indicated:

At June 30, 2016At December 31,

2015 2016 2015

IRLCs 624,300$ 559,800$ $ 1,364 $ 651

TBA MBS 821,100$ 713,400$ $ (19,024) $ (476)

Notional Balances [1]

Total Gains (Losses) [2] [3]


[1]

Approximate [2]

Amounts included in Mortgage Banking revenue within the accompanying consolidated statements of operations. [3]

Amounts include realized and unrealized gains (losses).




45


Disclosure about the Fair Value of Other Financial Instruments

The table below is a summary of fair values estimated for other financial instruments, which are not carried at fair

value. The carrying amounts for such other financial instruments are recorded at historical cost in the

consolidated statements of financial condition under the indicated captions. Assets and liabilities that are not

financial instruments are not included in this disclosure, such as property, furniture and equipment and other

liabilities. The total of the fair value calculations presented does not represent, and should not be construed to

represent, the underlying value of the Company as of the periods indicated:

Level Carrying Value Fair Value LevelCarrying

ValueFair Value

Assets

Cash and cash equivalents 1 $ 225,838 $ 225,838 1 $ 157,701 $ 157,701

Restricted cash 1 21,714 21,714 1 12,624 12,624

Servicer advances 3 65,413 65,413 3 77,201 77,201

Investments in affiliated partnerships 3 52 52 3 52 52

Total $ 313,017 $ 313,017 $ 247,578 $ 247,578

Liabilities

Servicing advances lines of credit 2 $ 46,821 $ 46,821 2 $ 63,182 $ 63,182

Warehouse lines of credit 2 563,582 563,582 2 441,275 441,275

Notes payable 3 4,192 4,192 3 1,908 1,908

Total $ 614,595 $ 614,595 $ 506,365 $ 506,365

At June 30, 2016 At December 31, 2015

Valuation techniques used for other financial instruments included above are as follows:

Cash and Cash Equivalents and Restricted Cash – The carrying amounts of cash and cash equivalents and time

deposits in financial institutions approximate fair value due to the short-term nature of these instruments.

Servicer Advances – The Company reports advances on loans serviced for others at their net realizable value which

generally approximates fair value because advances have no stated maturity, and generally are realized within a

relatively short period of time and do not bear interest.

Short-Term Secured Liabilities (servicing advance lines of credit, warehouse lines of credit) – Short-term financial

liabilities are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the

relatively short time between the origination of the instrument and its expected realization. In addition, the

liquidity of underlying collateral provides for comparability of pricing of similar instruments.

Notes Payable – Notes payable are carried at amortized cost. Fair value reflects estimated contractual cash flows

discounted using rates that would be offered for new notes using the Company’s estimated incremental

borrowing rate.




46

NOTE 3 - MORTGAGE BANKING

The Company originates single family residential mortgage loans and sells these loans in the secondary market.

The amount of net revenue on mortgage banking activities is a function of mortgage loans originated for sale and

the fair values of these loans, interest rate lock commitments and related hedging instruments.

Mortgage Loans Held for Sale

The following table represents the fair value of mortgage loans held for sale by type of loan as of the periods

indicated:

UPB Fair Value UPB Fair Value

Government [1] $ 540,265 $ 567,232 $ 428,851 $ 447,779

Conventional 20,999 21,661 11,675 12,143

$ 561,264 $ 588,893 $ 440,526 $ 459,922


[1]

Includes all government-insured or guaranteed loans including FHA, VA and USDA.

Originations and Gain on Sale

The following table represents the initial principal balance of mortgage loans originated by type of loan for the

periods indicated:

Amount % Amount

Government [1] $ 2,433,849 96 % $ 1,536,372 96 %

Conventional 88,809 4 58,713 4

$ 2,522,658 100 % $ 1,595,085 100 %

%


2016 2015

[1]

Includes all government-insured or guaranteed loans including FHA, VA and USDA.

Net gain on sale revenue on mortgage banking activities includes mark to market pricing adjustments on loan

commitments and forward sales contracts, and initial capitalized value of mortgage servicing rights.

The following table presents the components of mortgage banking net revenue for the periods indicated:

2016 2015

Gain on sale of mortgage loans, net $ 104,211 $ 63,376

Mark to market gains on LHFS 8,232 2,882

Repurchase provision for sold loans (2,595) (812)

Realized losses from IRLC and hedging instruments (15,758) (2,768)

Unrealized gains (losses) from IRLC and hedging instruments (1,902) 2,943

Net revenue $ 92,188 $ 65,621





47

NOTE 3 - MORTGAGE BANKING – (continued)

Delinquent Loans

The Company had the following Government Loans included within its loans held for sale portfolio that were

classified as delinquent or non-accrual loans as of the periods indicated:

At June 30,

2016

At December 31,

2015

Current through 89 days delinquent $ 535,988 $ 420,178

90 or more days delinquent 52,905 39,744

Mortgage loans held for sale $ 588,893 $ 459,922

Reserves for Losses on Loans Sold

The activity related to the reserves for estimated losses obligation on originated and previously sold mortgage

loans is as follows as of the periods indicated:

At June 30,

2016

At December 31,

2015

Balance, beginning of period $ 3,826 $ 4,111

Provisions 2,595 2,874

Charge offs (168) (3,159)

Balance, end of period $ 6,253 $ 3,826

NOTE 4 - MORTGAGE SERVICING RIGHTS

MSRs arise from contractual agreements between the Company and investors (or their agents) in mortgage

securities and mortgage loans from loans originated and sold by the Company or acquired from other investors.

Under these contracts, the Company performs loan servicing functions in exchange for fees and other

remuneration. The servicing functions typically performed include, among other responsibilities, collecting and

remitting loan payments, responding to borrower inquiries, accounting for principal and interest, holding

custodial (impound) funds for payment of property taxes and insurance premiums, counseling delinquent

mortgagors, and supervising foreclosures and property dispositions. MSRs are carried at fair value.

Income earned by the Company on its MSR is derived primarily from contractually specified mortgage servicing

fees and late fees, net of curtailment cost, interest earned on funds held pending remittance (or “float”), as well

as the gain on sale of re-pooled loans. Servicing fees are collected from the monthly payments made by the

mortgagors or in some instances when the underlying real estate is foreclosed upon and liquidated.




48

NOTE 4 - MORTGAGE SERVICING RIGHTS – (continued)

The precise market value of MSRs cannot be readily determined because these assets are not actively traded in

stand-alone markets. Considerable judgment is required to determine the fair values of these assets and the

exercise of such judgment can significantly impact the Company’s financial condition and results of operations.

Accordingly, management exercises extensive and active oversight of this process. The Company’s MSR valuation

process combines the use of a discounted cash flow model and analysis of current market data to arrive at an

estimate of fair value at the balance sheet date. The cash flow and prepayment assumptions are based on current

market factors and are consistent with assumptions and inputs used by market participants valuing similar MSRs.

The significant assumptions used in the valuation of MSRs include voluntary prepayment speeds, cost to service

the underlying mortgage loans, forward interest rates and discount rates. The current market data utilized in the

MSR valuation process and in the assessment of the reasonableness of the MSR valuation are based on the fair

valuation analysis performed by management and qualified independent third-party experts.

Mortgage Servicing Rights and Servicing Liabilities at the dates indicated are as follows:

At June 30,

2016

At December 31,

2015

Mortgage servicing assets $ 124,703 $ 116,532

Mortgage servicing liabilities (18,628) (5,258)

Mortgage servicing rights, net $ 106,075 $ 111,274

The Company categorizes its MSRs into two classes of servicing assets – agency and non-agency – based on the

underwriting guidelines used to originate the underlying loan. MSRs related to agency loans generally represent

loans that were sold into Government securities that are guaranteed or insured by FHA, VA and USDA. MSRs

related to non-agency loans are primarily comprised of loans underwritten to private investor guidelines.

Mortgage loans that are sold, in which servicing is retained by the Company, are reported as mortgage servicing

rights in the consolidated statement of financial condition after sale. The UPB of the loans underlying the

Company’s owned MSR portfolio as of June 30, 2016 and December 31, 2015 was approximately $39.1 billion and

$38.6 billion, respectively. The following table presents the UPB of these loans based on loan type at the dates

indicated:

At June 30,

2016

At December 31,

2015

Agency $ 31,473,506 $ 32,821,908

Non-Agency 7,603,867 5,746,056

Total $ 39,077,373 $ 38,567,964




49


The Company is an active market participant and acquires pools of bulk MSR assets either autonomously or with a

capital partner. The Company finances certain of its MSR purchases through the sale of the right to receive

certain excess cash flows. The excess servicing represents the right to receive a specified percentage of the excess

cash flow generated from the loans after receipt of a fixed base servicing fee per loan. The base servicing fee is

intended to cover the costs to service the loan plus a reasonable profit margin. All other servicing fees are

referred to as excess servicing. As the base mortgage servicing rights holder, the Company is also entitled to the

ancillary income and continues to provide servicing and advancing functions. The excess cash flows are referred

to as excess servicing rights (“ESR” or “ESRs”).

The following table summarizes MSR activity for the periods indicated:

2015

2016 As Adjusted [1]

Balance at beginning of period 111,274$ $ 34,933

Additions from securitizations 18,822 15,927

Acquired mortgage servicing assets (liabilities) (13,185) (10,000)

Net additions 5,637 5,927

Sale of excess servicing rights (11,752) (9,311)

Changes in fair value:

Collection or realization of cash flows (9,866) (7,989)

Changes in valuation model inputs or assumptions [1] 10,782 15,881

Total changes in fair value 916 7,892

Balance, end of period 106,075$ 39,441$


[1]

Refer to the narrative below titled Accounting Change.

The Company evaluates its transfer of ESRs as either a sale or a secured financing. Through June 30, 2016, all of

the Company’s ESR transfers have qualified as sales. The sale can occur simultaneous or subsequent to an

acquisition or securitization transaction. The Company’s MSRs are carried at fair value excluding the fair value of

the ESRs sold.

For the six months ended June 30, 2016 and 2015, the Company completed MSR acquisitions with an aggregate

notional of approximately $3.1 billion and $17.9 billion, respectively, and purchase price of approximately $2.7

million and $197.8 million respectively. There were no MSR sales in the six months ended June 30, 2016 and

2015.

For the six months ended June 30, 2016 and 2015, the Company completed sales of excess servicing rights of

pools of newly originated and acquired government loans of approximately $1.7 billion and $1.0 billion,

respectively, to unrelated third parties and received proceeds of approximately $12.1 million and $9.9 million,

respectively.




50


The table below presents a summary of MSRs categorized by type as of the periods indicated:

Loan Amount $ Fair Value $ Loan Amount $ Fair Value $

MSRs – Base retained and excess sold $ 30,449,690 $ 78,102 $ 29,954,468 $ 66,472

MSRs – Full servicing retained 8,627,683 27,973 8,613,496 44,802

Total $ 39,077,373 $ 106,075 $ 38,567,964 $ 111,274


Accounting Change

The Company made a voluntary election to change the reporting of its MSR to improve transparency,

comparability, and standardize loss assumptions. The Company previously reported reserves for mortgage

servicing claims as a liability in the accompanying consolidated statement of financial condition, separate from its

MSR. However, the Company now believes it is more preferable to include the liability for mortgage servicing

claims within its MSR. The voluntary change is applied retrospectively, and prior periods have been conformed to

the current presentation. The change in accounting principle did not have any impact to net income or members’

deficit, but did result in changes to certain financial statement line items in the consolidated statements of

financial condition, operations, and cash flows as described below.




51


Accounting Change – (continued)

The retrospective application of the change in accounting principle resulted in an impact to the consolidated

statement of financial condition for the six months ending June 30, 2015 reflecting a decrease in the MSR asset of

$73.0 million and an offsetting decrease to the reserves for losses on loan origination and mortgage servicing

claims in the same amount. There was no impact to members’ deficit for the same period. The accompanying

consolidated statement of financial condition reflects the change in accounting principle as of the six months

ended June 30, 2015. The impact of the changes to the accompanying consolidated statements of financial

condition is presented for the period indicated.

As Reported As AdjustedEffect of

Change

ASSETS

Cash and cash equivalents 174,482$ 174,482$ -$

Restricted cash 14,289 14,289 -

Trust assets:

Residential mortgage loans 3,058,590 3,058,590 -

Real estate owned 70,167 70,167 -

Total trust assets 3,128,757 3,128,757 -

Mortgage loans held for sale, at estimated fair value 343,063 343,063 -

Servicer advances 71,610 71,610 -

Mortgage servicing rights, at estimated fair value 112,406 39,441 (72,965)

Property, furniture and equipment, net 17,876 17,876 -

Prepaid expenses and other assets 43,605 43,605 -

Total assets 3,906,088$ 3,833,123$ (72,965)$

LIABILITIES AND MEMBERS’ CAPITAL

Liabilities

Non-recourse trust liabilities – securitized mortgage borrowings 3,128,757$ 3,128,757$ -$

Warehouse line of credit 317,766 317,766 -

Servicing advances lines of credit 50,000 50,000 -

Servicing Liabilities 175,813 175,813 -

Accounts payable and accrued liabilities 47,846 47,846 -

Reserves for losses on loan origination and mortgage servicing claims 76,090 3,125 (72,965)

Accrued compensation 14,711 14,711 -

Accrued interest payable 6,303 6,303 -

Notes payable 2,027 2,027 -

Other liabilities 9,798 9,798 -

Long-term debt, at estimated fair value 389,310 389,310 -

Total liabilities 4,218,421 4,145,456 (72,965)

Commitments and Contingencies

Members’ Capital

Controlling interests (312,333) (312,333) -

Non-controlling interests - - -

Total members’ capital (312,333) (312,333) -

Total liabilities and members’ capital 3,906,088$ 3,833,123$ (72,965)$

At June 30, 2015 (unaudited)




52



The retrospective application of the change in accounting principle did not result in a change to net income in the

consolidated statement of operations for the prior year. However, there were changes within the consolidated

statement of operations. Revenue was impacted favorably by approximately $0.9 million offset by changes in the

fair value of mortgage servicing rights and servicing claims activity in an equal amount that reflect the impact of

reclassifying servicing claims into the fair value of the mortgage servicing rights and elimination of the provision

for servicing claims in revenue. The accompanying condensed consolidated statement of operations reflects the

change in accounting principle as of the six months ended June 30, 2015. The impact of the changes to the

accompanying consolidated statements of operations is presented for the period indicated.

As Reported As Adjusted Effect of Change

REVENUES

Mortgage servicing 58,444$ 54,225$ (4,219)$

Mortgage banking 60,508 65,621 5,113

Real estate services 22,362 22,362 -

Commissions 9,225 9,225 -

Management fees 4,480 4,480 -

Other 361 361 -

Total revenues 155,380 156,274 894

EXPENSES 162,965 162,965 -

OPERATING INCOME (LOSS) (7,585) (6,691) 894

OTHER INCOME (EXPENSE)

Interest, net (9,361) (9,361) -

Change In fair value of mortgage servicing rights 1,539 7,892 6,353

Change In fair value of debt (15,455) (15,455) -

Change in reserves for mortgage servicing claims 7,247 - (7,247)

Other income (expense), net (16,030) (16,924) (894)

TRUST INCOME (EXPENSE) - - -

NET LOSS BEFORE INCOME TAXES (23,615) (23,615) -

INCOME TAXES 11 11 -

NET LOSS (23,626)$ (23,626)$ -$

For the Six Months Ended June 30, 2015 (unaudited)

The retrospective application of the change in accounting principle did not result in a change to the net ending

cash balance as of June 30, 2015. However, there was a reclassification between the provision for servicing claims

and mortgage servicing rights within the operating activities line items. The impact of the changes to the

condensed consolidated cash flow statement is presented for the six months ended June 30, 2015.




53




CASH FLOWS FROM OPERATING ACTIVITIES

Net loss (23,626)$ (23,626)$ -$

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization 2,752 2,752 -

Net change in fair value of long term debt 15,455 15,455 -

Change in fair value of residential mortgage loans and non-recourse trust liabilities, net –

securitized trusts(19,732) (19,732) -

Loss on sale of real estate owned – securitized trusts 19,664 19,664 -

Provision for losses on real estate owned – securitized trusts 67 67 -

Accretion of interest income and expense on residential mortgage loans and non-recourse trust

liabilities, net – securitized trusts18,133 18,133 -

Origination and purchase of mortgage loans held for sale (1,661,747) (1,661,747) -

Proceeds from sales of, and principal payments from mortgages loans held for sale 1,585,975 1,585,975 -

Mark to market gain on mortgage loans held for sale (2,882) (2,882) -

Provision for repurchases and servicing claims (1,322) 812 2,134

Unrealized gain on IRLC and hedging instruments (2,943) (2,943) -

Loss on sale of fixed assets 70 70 -

Net change in operating assets and liabilities:

Accounts and notes receivable from affiliates (1,445) (1,445) -

Servicing advances 19,765 19,765 -

Mortgage servicing rights (65,970) (72,323) (6,353)

Other assets (3,306) (3,306) -

Accounts payable and accrued liabilities 60,343 64,562 4,219

Servicing liabilities 86,240 86,240 -

Net cash provided by operating activities 25,491 25,491 -

Net cash provided by investing activities 119,717 119,717 -

Net cash used in financing activities (68,161) (68,161) -

NET INCREASE IN CASH AND CASH EQUIVALENTS 77,047 77,047 -

CASH AND CASH EQUIVALENTS – beginning of period 97,435 97,435 -

CASH AND CASH EQUIVALENTS – end of period 174,482$ 174,482$ -$





54



The following table summarizes MSR activity inclusive of the change in accounting principle described above for

the period indicated:


Balance at beginning of period 65,747$ 34,933$ (30,814)$

Additions from securitizations 15,927 15,927 -

Acquired 38,505 (10,000) (48,505)

Sales of excess servicing strips (9,311) (9,311) -

Changes in fair value:

Collection or realization of cash flows (7,989) (7,989) -

Changes in valuation model inputs or assumptions 9,527 15,881 6,354

Total changes in fair value 1,538 7,892 6,354

Balance, at end of period 112,406$ 39,441$ (72,965)$


NOTE 5 – CLEARING, CUSTODIAL, AND TRUST ACCOUNTS

Clearing Accounts

Payments received from borrowers on mortgage loans serviced are initially reported as clearing accounts within

cash and cash equivalents with an offsetting liability in the statements of financial condition. Funds are

subsequently moved to the custodial accounts in accordance with the contractual obligations and regulatory

guidelines. As of June 30, 2016 and December 31, 2015 the clearing account balances were $212.2 million and

$140.4 million, respectively.

Custodial Accounts

Principal, interest, taxes and insurance collections, including payoff and liquidation proceeds, on mortgage loans

serviced are placed in separate custodial accounts for each loan pool. Such funds are excluded from the balance

sheets managed by the Company, and amounted to approximately $736.8 million and $626.7 million at June 30,

2016 and December 31, 2015, respectively. According to the pooling and servicing agreement (“PSA”) for each

loan pool serviced, the Company is entitled to use funds held in custodial accounts to make distributions to the

respective trustee under certain circumstances, but not for other business purposes.

Trust Accounts

The Company also collects settlement funds related to property sales for the Company’s real estate transactions

operating division. These funds, which are held in trust accounts, are excluded from the balance sheet and

amounted to approximately $23.8 million and $21.6 million at June 30, 2016 and December 31, 2015,

respectively.




55

NOTE 6 – BORROWINGS

The following table sets forth the composition of the Company’s borrowings as of the periods indicated:

June 30, 2016December 31,

2015

Long-term debt, at estimated fair value $ 390,568 $ 365,384

Warehouse lines of credit 563,582 441,275

Servicing advance lines of credit 46,821 63,182

$ 1,000,971 $ 869,841

Balance Outstanding At

Long-Term Debt, at Estimated Fair Value

As of June 30, 2016, the Step-Up Notes had a face amount of approximately $534.1 million compared to an

estimated fair value of approximately $390.6 million. The aggregate face amount exceeded the fair value by

approximately $143.5 million at June 30, 2016. The Step-Up Notes mature on January 15, 2021 at 100 percent of

their principal amount unless the maturity date is extended at the option of the Company. In no event will the

maturity of the Step-Up Notes be extended beyond January 15, 2026.

According to the agreement, for any semi-annual interest accrual period prior to January 15, 2016, the Company

may elect to pay interest on the Step-Up Notes (i) entirely in cash (“Cash Interest”) based on the interest rates

then in effect for the Step-Up Notes for the applicable interest accrual period (the “Stated Interest Rate”) or (ii) a

portion in Cash Interest and the remainder by either (a) increasing the principal amount of the outstanding Step-

Up Notes or (b) issuing additional Step-Up Notes, in each case, in a principal amount equal to such portion of

interest (such interest amount, “PIK Interest”). In the event the Company elects to pay a portion of the interest

in PIK Interest, the amount of Cash Interest to be paid on the outstanding principal amount of the Notes will not

be less than 1.00 percent per annum (such interest rate selected by the Company to calculate Cash Interest, the

“Cash Interest Rate”). The amount of PIK Interest to be paid on the outstanding principal amount of the Step-Up

Notes will be calculated based on an interest rate (the “PIK Interest Rate”) that is equal to 150 percent of the

positive difference between the Stated Interest Rate then in effect for the applicable interest accrual period and

the Cash Interest Rate selected by the Company.

For the first interest accrual period ending on July 15, 2014, interest on the Step-Up Notes was paid in Cash

Interest at the rate of 1.00 percent per annum and PIK Interest at the rate of 1.50 percent per annum. As a result,

the contractual unpaid principal balance of the Step-Up Notes at July 15, 2014 increased to approximately $534.1

million. The Company has paid the three subsequent interest payments in cash, including the payment for the

interest accrual period ending January 16, 2016 of approximately $8.0 million. After January 16, 2016, the

Company will make all interest payments on the Step-Up Notes entirely in cash.




56

NOTE 6 – BORROWINGS – (continued)

Warehouse Facilities

The Company enters into Master Repurchase Agreements with lenders who provide warehouse facilities. The

warehouse facilities are used to fund single family residential mortgage loans and early buy outs of delinquent

Government Loans. The residential mortgage loans are collateral for the warehouse facilities. In accordance with

the terms of the Master Repurchase Agreements, the Company may be required to maintain cash balances as

additional collateral for the borrowings that are included in restricted cash in the accompanying consolidated

statements of financial condition.

The following table presents the warehouse facilities as of the periods indicated:

Line Limit

(in millions)

Agreement I $155.0 1-month 97-98% 84.9$ 98.2$ 8/2016

Origination Libor+2.50%

to 3.125%

Agreement II [2] $350.0 1-month 92-96% 350.0$ 362.0$ 9/2016

Origination and Libor+2.75%

Buy-out to 3.50%

Agreement III [1] $110.0 1-month 95-98% 57.9$ 70.6$ 4/2017

Origination Libor+2.50%

to 3.00%

Agreement IV $110.0 1-month 70-95% 49.0$ 57.4$ 2/2017

Buy-out Libor+2.50%

Agreement V $6.1 12% per annum – 6.1$ -$ 8/2017

Origination

Agreement VI $20.0 20% incentive fee 83% 15.7$ -$ 8/2017

Buy-out

At June 30, 2016

Type Interest Rate

Initial

Advance

Rate

Maturity

Date(in millions) (in millions)

Outstanding Balance

Secured by LHFS

Estimated Fair Value

[1]

In April 2016, a new warehouse facility was issued with a maturity date of April 2017 [2]

In June 2016, the Company received a temporary facility limit increase to $350 million on the origination facility through July 6, 2016 from $325 million to

accommodate elevated levels of production.




57

NOTE 6 – BORROWINGS – (continued)

Warehouse Facilities – (continued)

Line Limit

(in millions)

Agreement I $ 200.0 [1] 1-month 97-98% 189.2$ 209.3$ 8/2016

Originat ion Libor+2.50%

to 3.125%

Agreement II $325.0 1-month 92-96% 199.1$ 206.3$ 9/2016

Originat ion and Libor+2.75%

Buy-out to 3.50%

Agreement III $1.0 1-month 95% -$ -$ 9/2016

Originat ion Libor+3.00%

Agreement IV $110.0 1-month 70-95% 38.5$ 44.3$ 2/2017

Buy-out Libor+2.50%

Agreement V $6.1 12% per annum – 6.1$ -$ 8/2017

Originat ion

Agreement VI $20.0 20% incentive fee 83% 8.4$ -$ 8/2017

Originat ion

At December 31, 2015

Type Interest Rate

Initial

Advance

Rate

Secured by LHFS

Estimated Fair Value Maturity

Date

Outstanding Balance

(in millions) (in millions)

[1] In December 2015, the Company received a temporary line limit increase to $200 million through January 6, 2016 from $155 million to accommodate

elevated levels of production.

Servicing Advance Facilities

At June 30, 2016, the Company had two servicing advance facilities with a total committed amount of $95.0

million, and an outstanding balance of approximately $46.8 million. The weighted average advance rate of the

two facilities at June 30, 2016 was 73 percent. These facilities include customary covenants, of which the

Company was in compliance with such covenants at June 30, 2016. The facilities mature in October 2016 and

August 2017.

The facilities are subject to a margin call if the principal balance exceeds the underlying fair value of the collateral

determined by the warehouse lender and confirmed by the Company. At June 30, 2016, the fair value of the

collateral exceeded the unpaid principal balance.




58

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Litigation

The Company and its subsidiaries are defendants or putative defendants in a number of legal proceedings,

including private and civil litigations and regulatory/government inquiries. The litigations range from individual

actions involving a single plaintiff to class action lawsuits. Investigations involve both formal and informal

proceedings. These legal proceedings are at varying stages of adjudication, arbitration or investigation, and

involve a wide variety of claims.

The Company estimated the aggregate range of probable losses at June 30, 2016 and December 31, 2015. This

estimated aggregate range of probable losses is based upon currently available information for those proceedings

in which the Company believes that an estimate of loss can be made. For certain matters, the Company does not

believe that such an estimate can be made. The Company's estimate of the aggregate range of probable losses

involves significant judgment, given the number, variety and varying stages of the proceedings (including the fact

that many are in preliminary stages), the existence in many such proceedings of multiple defendants (including

the Company) whose share of liability has yet to be determined, the yet-unresolved issues in many of the

proceedings and the uncertainty of the various potential outcomes of such proceedings. Accordingly, the

Company's estimate will change from time to time, and actual losses may vary significantly.

Set forth below is a description of the Company's material legal proceeding.

In April 2008, Carrington Capital Management, LLC (“CCM”), a fund managed by CCM and certain executives were

named as the defendants in a lawsuit brought in the United States District Court for the District of Connecticut by

an investor holding approximately 0.1 percent interest in that fund. The lawsuit generally alleges that the

defendants improperly refused to honor the plaintiff’s redemption request. In January 2011, the Court entered

an order (i) granting summary judgment in favor of Carrington on plaintiff’s claims for securities fraud, common

law fraud, negligent misrepresentation, and one of the separate theories of breach of contract advanced by

plaintiff; and (ii) denying defendants’ motion and plaintiff’s cross-motion in all other respects. In September 2013,

the parties filed cross-motions for summary judgment on each of plaintiff’s remaining claims. In April 2014, the

District Court issued an order granting summary judgment in plaintiff’s favor on his remaining breach of contract

claim. Following additional briefing, in July 2015, the Court issued a judgment and order awarding plaintiff

contract damages in the amount of $1.3 million, together with approximately 5 percent prejudgment simple

interest on that sum from October 2007, approximately $0.5 million. CCM filed a Notice of Appeal in this matter

to the United States Court of Appeals for the Second Circuit and filed its opening appellate brief on July 30, 2015.

The plaintiff filed its brief on October 28, 2015 and CCM filed its reply brief on November 12, 2015. An oral

argument was held on April 5, 2016. CCM intends to continue to vigorously appeal this decision. The Company

has recorded a liability of $1.8 million.




59

NOTE 7 – COMMITMENTS AND CONTINGENCIES – (continued)

Laws and Regulation

As with all participants of the mortgage servicing, lending, real estate and asset management industries, the

Company and its affiliates are subject to numerous laws and regulations, including but not limited to, the Dodd-

Frank Wall Street Reform and Consumer Protection Act, the Gramm-Leach Bliley Act, Federal Truth-in-Lending

Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Housing Act, Home Mortgage

Disclosure Act, the Fair Debt Collection Practices Act, Servicemember’s Civil Relief Act, Telephone Consumer

Protection Act, Financial Institutions Reform, Recovery, and Enforcement Act, False Claims Act, among other

federal, state and local laws and regulations. The Company's business is also subject to extensive regulation,

examination, investigations and reviews by various federal, state and local regulatory and enforcement agencies,

including without limitation, the Consumer Financial Protection Bureau, HUD, Ginnie Mae, Office of Inspector

General, the Securities and Exchange Commission, the Department of Justice, state regulatory agencies, State

Attorneys General, and government agencies at any time to monitor compliance with applicable regulations,

policies and procedures. It is not possible to confidently or reliably predict the outcome of any such examination,

investigations and reviews, including predicting any possible losses resulting from any judgments or fines imposed

by regulators. Responding to these matters requires the Company to devote substantial legal and regulatory

resources, resulting in higher costs and lower net cash flows.

NOTE 8 – REPORTING SEGMENTS/OPERATING DIVISIONS

The Company utilizes an internal reporting system to measure and evaluate operating performance and

determination of resource allocations of various operating segments, referred to by the Company as operating

divisions. The operating division criteria includes engaging in business activities from which an operating division

earns revenues and incurs expenses and whose operating results are regularly evaluated by the Company’s

Management Committee. Discrete financial information is available for each of the reported operating divisions.

The Company’s operating divisions are as follows:

Asset Management Operating Division

The Company has been managing capital invested in the mortgage loan market since 2004 and has developed

several scalable investment strategies and vehicles by levering the expertise of the Company’s management team

and the capabilities of the Company’s other operating divisions. These strategies and investment vehicles include

advising third-party investors deploying capital into mortgage loan and United States housing investments

through managed accounts and forming funds to aggregate capital to invest in mortgage loans and United States

housing.

Mortgages Operating Division

Mortgage Servicing Operating Unit – The Company provides residential mortgage loan servicing, special servicing,

and asset management services for investors for which it earns fees. The Company provides these services as the

owner of the MSRs or through a subservicing or special servicing agreement with a third party MSR owner. The

Company’s residential mortgage loan servicing portfolio includes both Government Loans and non-agency loans.

Non-agency loans include subprime loans originated prior to 2008.




60

NOTE 8 – REPORTING SEGMENTS/OPERATING DIVISIONS – (continued)

Mortgages Operating Division – (continued)

Mortgage Lending Operating Unit – The Company’s lending operating division originates residential mortgage

loans through its retail and wholesale lending channels. The loans are typically sold shortly after origination into a

liquid market and servicing retained by the Company.

Real Estate Transactions Operating Division

The Company’s real estate transactions operating division is an integrated provider of residential services to the

institutional and retail markets. The operating division is comprised of three operating units, including real estate

brokerage services, real estate settlement services and portfolio services. These three operating units work

together to provide a “one-stop” shop for clients, both institutional and retail, looking to buy or sell single family

properties. The synergies between these businesses and the other Carrington family of companies help the

Company’s retail clients to simplify the home purchase and sale process, and for institutional investors efficiently

manage their residential portfolios.

Real Estate Logistics Operating Division

The Company’s real estate logistics operating division is comprised of affiliated companies that provide resolution

strategies, property management, and field and technology services to holders of single family residential

properties.

Corporate Support

Corporate support items include shared services functions and expenses that are not directly related to one of the

Company’s operating divisions above including human resource, information system, risk management, legal and

accounting departments. Corporate support provides services across all of the operating divisions of the

Company.




61

NOTE 8 – REPORTING SEGMENTS/OPERATING DIVISIONS – (continued)

Financial information for the Company’s operating divisions and corporate support is as follows for the periods

indicated:

Asset

Management

Revenue 84,808$ 98,869$ 21,397$ 13,990$ 4,337$ -$ $ 223,401

Operating expense 79,590 55,265 13,708 11,221 3,034 47,587 210,405

Income (loss) from operations 5,218 43,604 7,689 2,769 1,303 (47,587) 12,996

Other income (expense), net:

Interest income 5,571 3,152 - - 181 - 8,904

Interest expense (6,989) (4,880) - (1) - (9,258) (21,128)

Change in fair value of mortage

servicing rights - 916 - - - - 916

Change in fair value of long-

term debt - - - - - (25,184) (25,184)

Operating Division Income/(loss)

before income taxes 3,800$ 42,792$ 7,689$ 2,768$ 1,484$ (82,029)$ (23,496)$

Asset

Management

Revenue 59,551$ 61,648$ 16,464$ 14,224$ 4,387$ -$ $ 156,274

Operating expense 52,757 41,970 11,846 9,683 3,631 43,078 162,965

Income (loss) from operations 6,794 19,678 4,618 4,541 756 (43,078) (6,691)

Other income (expense), net:

Interest income 3,659 787 - - 189 - 4,635

Interest expense (4,058) (3,351) - (4) - (6,583) (13,996)

Change in fair value of mortage

servicing rights - 7,892 - - - - 7,892

Change in fair value of long-

term debt - - - - - (15,455) (15,455)

Operating Division Income/(loss)

before income taxes

Asset

Management

Total Assets at June 30, 2016 [1] 556,891$ 3,353,625$ 9,278$ 9,412$ 5,637$ 3,297$ $ 3,938,140

Total Assets at December 31, 2015 [1] 436,950$ 3,476,683$ 10,566$ 8,063$ 5,847$ 3,085$ $ 3,941,194

Mortgages

Mortgage

Lending

Mortgage

Servicing

Real Estate

Transactions

Mortgages

Consolidated

Real Estate

Logistics

Corporate

Support

Mortgage

Lending

Mortgage

Servicing

(65,116)$ (23,615)$


6,395$ 25,006$ 4,618$ 4,537$ 945$


Consolidated

Consolidated

Mortgages

Mortgage

Lending

Mortgage

Servicing

Real Estate

Transactions

Real Estate

Transactions

Real Estate

Logistics

Corporate

Support

Real Estate

Logistics

Corporate

Support

[1]

All operating division assets balances exclude intercompany balances.




62

NOTE 9 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date the financial statements are issued. Subsequent

events are events or transactions that occur after the balance sheet date but before financial statements are

issued. The Company recognizes in the financial statements the effects of all subsequent events that provide

additional evidence about conditions that existed at the date of the balance sheet, including the estimates

inherent in the process of preparing the financial statements. The Company’s financial statements do not

recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance

sheet but arose after the balance sheet date and before financial statements are available to be issued.

On July 1, 2016, the Company entered into a mortgage servicing rights purchase and sale agreement with a

financial institution, pursuant to which the Company has agreed to acquire mortgage servicing rights. The first

portion of this flow acquisition comprised of approximately $0.7 billion in unpaid principal balance of U.S.

residential mortgage loans originated through Ginnie Mae loan programs due to the delinquent status of the

related mortgage loans, for which the Company received an inducement payment of approximately $7.1 million.

The transaction was settled and approximately 4,700 loans were boarded in July 2016 and the remaining portion

of the flow acquisition is scheduled to be completed on September 15, 2016.

On July 12, 2016, the Company increased one of its servicing advance lines to $50 million with the ability to use

$30 million to fund single family residential mortgage loans. This line matures in October 2016.

On July 29, 2016, the Company completed a sale of the excess servicing rights of a pool of GNMA loans of

approximately $1.0 billion in unpaid principal balance to an unrelated third party for approximately $6.0 million.

As previously disclosed, in April 2015, the Company acquired mortgage servicing rights from a financial institution

of approximately $17.9 billion in UPB of U.S. residential mortgage loans. The purchase price was financed by

certain third party investors (the “Investors”) who contemporaneously acquired the ESR from CMS. On July 29,

2016, CMS and the Investors entered into a transaction whereby the Investors assigned the ESR to a newly

created wholly-owned subsidiary of CMS. In exchange, the Investors received various preferred equity interests in

the wholly-owned subsidiary. CMS determined that the newly created wholly-owned subsidiary was a variable

interest entity and that CMS is the primary beneficiary and will therefore consolidate the subsidiary with the

preferred equity recorded as non-controlling interests.

On August 3, 2016, the Company entered into a mortgage servicing rights purchase and sale agreement with a

financial institution, pursuant to which the Company agreed to acquire mortgage servicing rights of an estimated

$1.1 billion in unpaid principal balance of an estimated 20,600 U.S. residential mortgage loans held in various

private-label securitizations. Due to the low unpaid principal balance of the related mortgage loans, the Company

will receive an inducement payment which is not finalized and subject to certain adjustments. The transaction is

expected to settle and the mortgage loans are expected to transfer on September 1, 2016.

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