UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

PHH CORPORATION

MARYLAND		52-0551284
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
3000 LEADENHALL ROAD
MT. LAUREL, NEW JERSEY		08054
(Address of principal executive offices)		(Zip Code)

856-917-1744
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No þ

     As of July 19, 2010, 55,492,224 shares of PHH Common stock were outstanding.

 

 

TABLE OF CONTENTS

Item				Description		Page
				Cautionary Note Regarding Forward-Looking Statements			2
				PART I — FINANCIAL INFORMATION
	1			Financial Statements			5
				Condensed Consolidated Statements of Operations			5
				Condensed Consolidated Balance Sheets			6
				Condensed Consolidated Statement of Changes in Equity			7
				Condensed Consolidated Statements of Cash Flows			8
				Note 1. Summary of Significant Accounting Policies			9
				Note 2. (Loss) Earnings Per Share			11
				Note 3. Restricted Cash, Cash Equivalents and Investments			12
				Note 4. Mortgage Servicing Rights			13
				Note 5. Loan Servicing Portfolio			15
				Note 6. Mortgage Loan Sales			16
				Note 7. Derivatives and Risk Management Activities			18
				Note 8. Vehicle Leasing Activities			21
				Note 9. Debt and Borrowing Arrangements			22
				Note 10. Income Taxes			28
				Note 11. Commitments and Contingencies			29
				Note 12. Accumulated Other Comprehensive Income			30
				Note 13. Fair Value Measurements			31
				Note 14. Variable Interest Entities			42
				Note 15. Segment Information			45
	2			Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
	3			Quantitative and Qualitative Disclosures About Market Risk			85
	4			Controls and Procedures			89
				PART II — OTHER INFORMATION
	1			Legal Proceedings			91
	1A			Risk Factors			91
	2			Unregistered Sales of Equity Securities and Use of Proceeds			96
	3			Defaults Upon Senior Securities			96
	4			(Removed and Reserved)			96
	5			Other Information			96
	6			Exhibits			96
				Signatures			97
				Exhibit Index			98
EX-4.4.3
EX-4.4.4
EX-4.4.5
EX-4.4.6
EX-4.4.7
EX-4.4.8
EX-4.4..9
EX-4.4.10
EX-4.4.11
EX-4.4.12
EX-4.4.13
EX-10.1.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2

     Except as expressly indicated or unless the context otherwise requires, the “Company,” “PHH,” “we,” “our” or “us” means PHH Corporation, a Maryland corporation, and its subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Statements in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (this “Form 10-Q”) that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors and were derived utilizing numerous important assumptions that may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Investors are cautioned not to place undue reliance on forward-looking statements.

     Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and are not historical facts. Forward-looking statements in this Form 10-Q include, but are not limited to, statements concerning the following: (i) our expectations regarding the impact of the adoption of recently issued accounting pronouncements on our financial statements; (ii) our belief that we would have various periods to cure an event of default if one or more notices of default were to be given by our lenders or trustees under certain of our financing agreements; (iii) our continued belief that the amount of securities held in trust related to our potential obligation from our reinsurance agreements will be significantly higher than claims expected to be paid; (iv) our belief that the Homeowner Affordability and Stability Plan (“HASP”) programs had a favorable impact on mortgage industry originations which may continue during the remainder of 2010; (v) our expectations regarding origination volumes, including purchase originations, and loan margins in the mortgage industry; (vi) our belief that HASP’s loan modification program provides additional opportunities for our Mortgage Servicing segment and could reduce our exposure to future foreclosure-related losses; (vii) our belief that the increase in demand for new vehicle production for the remainder of 2010 projected by the United States (“U.S.”) automobile industry analysts may include an increase in the demand for commercial fleet vehicles; (viii) our belief that our sources of liquidity are adequate to fund operations for the next 12 months; (ix) our expected capital expenditures for 2010; (x) our expectation that the London Interbank Offered Rate and commercial paper, long-term U.S. Department of the Treasury (“Treasury”) and mortgage interest rates will remain our primary benchmark for market risk for the foreseeable future; and (xi) our expectation that we will continue to modify the types of mortgage loans that we originate in accordance with secondary market liquidity.

     The factors and assumptions discussed below and the risks factors described in “Item 1A. Risk Factors” in this Form 10-Q and “Part I—Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 could cause actual results to differ materially from those expressed in such forward-looking statements:

	§		the effects of environmental, economic or political conditions on the international, national or regional economy, the outbreak or escalation of hostilities or terrorist attacks and the impact thereof on our businesses;
	§		the effects of continued market volatility or continued economic decline on the availability and cost of our financing arrangements, the value of our assets and the price of our Common stock;
	§		the effects of a continued decline in the volume or value of U.S. home sales and home prices, due to adverse economic changes or otherwise, on our Mortgage Production and Mortgage Servicing segments;
	§		the effects of changes in current interest rates on our business and our financing costs;
	§		our decisions regarding the use of derivatives related to mortgage servicing rights, if any, and the resulting potential volatility of the results of operations of our Mortgage Servicing segment;

	§		the effects of increases in our actual and projected repurchases of, indemnification given in respect of, or related losses associated with, sold mortgage loans for which we have provided representations and warranties or other contractual recourse to purchasers and insurers of such loans, including increases in our loss severity and reserves associated with such loans;
	§		the effects of reinsurance claims in excess of projected levels and in excess of reinsurance premiums we are entitled to receive or amounts currently held in trust to pay such claims;
	§		the effects of any significant adverse changes in the underwriting criteria of government-sponsored entities (“GSEs”), including the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, including any changes caused by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);
	§		the ability to maintain our status as a GSE-approved servicer, including the ability to continue to comply with the GSEs’ respective selling and servicing guides, including any changes caused by the Dodd-Frank Act;
	§		changes in laws and regulations, including changes in mortgage- and real estate-related laws and regulations (including changes caused by the Dodd-Frank Act) and state, federal and foreign tax laws and accounting standards;
	§		the effects of the insolvency of any of the counterparties to our significant customer contracts or financing arrangements or the inability or unwillingness of such counterparties to perform their respective obligations under, or to renew on terms favorable to us, such contracts, or our ability to continue to comply with the terms of our significant customer contracts, including service level agreements;
	§		the ability to develop and implement operational, technological and financial systems to manage our operations and to achieve enhanced earnings or effect cost savings, including the ability to timely implement and successfully execute our transformation initiatives;
	§		the effects of competition in our existing and potential future lines of business, including the impact of consolidation within the industries in which we operate and competitors with greater financial resources and broader product lines;
	§		the willingness or ability of automobile manufacturers to make new vehicles available to us on commercially favorable terms;
	§		the ability to quickly reduce overhead and infrastructure costs in response to a reduction in revenue;
	§		the ability to implement fully integrated disaster recovery technology solutions in the event of a disaster;
	§		the ability to obtain financing (including refinancing existing indebtedness) on acceptable terms, if at all, to finance our operations or growth strategy, to operate within the limitations imposed by our financing arrangements and to maintain the amount of cash required to service our indebtedness;
	§		the ability to maintain our relationships with our existing clients and to establish relationships with new clients;
	§		a deterioration in the performance of assets held as collateral for secured borrowings;
	§		the impact of the failure to maintain our credit ratings;
	§		any failure to comply with covenants under our financing arrangements;

	§		the effects of the consolidation of financial institutions and the related impact on the availability of credit; and
	§		the impact of actions taken or to be taken by the Treasury and the Board of Governors of the Federal Reserve System on the credit markets and the U.S. economy.

     Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control. In addition, we operate in a rapidly changing and competitive environment. New risk factors may emerge from time to time and it is not possible to predict all such risk factors.

     The factors and assumptions discussed above may have an impact on the continued accuracy of any forward-looking statements that we make. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PHH CORPORATION AND SUBSIDIARIES

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
Revenues
Mortgage fees		$	66			$	86			$	118			$	147
Fleet management fees			40				38				78				75
Net fee income			106				124				196				222
Fleet lease income			349				360				688				724
Gain on mortgage loans, net			139				147				244				335
Mortgage interest income			22				25				40				50
Mortgage interest expense			(41	)			(37	)			(79	)			(73	)
Mortgage net finance expense			(19	)			(12	)			(39	)			(23	)
Loan servicing income			97				100				198				200
Change in fair value of mortgage servicing rights			(320	)			55				(372	)			(108	)
Net loan servicing (loss) income			(223	)			155				(174	)			92
Other income (expense)			19				(6	)			33				5
Net revenues			371				768				948				1,355
Expenses
Salaries and related expenses			119				128				233				243
Occupancy and other office expenses			14				12				29				27
Depreciation on operating leases			306				322				614				647
Fleet interest expense			25				21				48				51
Other depreciation and amortization			5				7				11				13
Other operating expenses			117				92				209				183
Total expenses			586				582				1,144				1,164
(Loss) income before income taxes			(215	)			186				(196	)			191
(Benefit from) provision for income taxes			(89	)			75				(78	)			75
Net (loss) income			(126	)			111				(118	)			116
Less: net income attributable to noncontrolling interest			7				5				7				8
Net (loss) income attributable to PHH Corporation		$	(133	)		$	106			$	(125	)		$	108
Basic (loss) earnings per share attributable to PHH Corporation		$	(2.40	)		$	1.93			$	(2.26	)		$	1.98
Diluted (loss) earnings per share attributable to PHH Corporation		$	(2.40	)		$	1.91			$	(2.26	)		$	1.96

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES

		June 30,				December 31,
		2010				2009
ASSETS
Cash and cash equivalents		$	184			$	150
Restricted cash, cash equivalents and investments (including $241 of available-for-sale securities at fair value as of June 30, 2010)			559				596
Mortgage loans held for sale			2,090				1,218
Accounts receivable, net			507				469
Net investment in fleet leases			3,574				3,610
Mortgage servicing rights			1,236				1,413
Property, plant and equipment, net			45				49
Goodwill			25				25
Other assets			658				593
Total assets (1)		$	8,878			$	8,123
LIABILITIES AND EQUITY
Accounts payable and accrued expenses		$	515			$	495
Debt			5,999				5,160
Deferred income taxes			618				702
Other liabilities			358				262
Total liabilities (2)			7,490				6,619
Commitments and contingencies (Note 11)			—				—
EQUITY
Preferred stock, $0.01 par value; 1,090,000 shares authorized at June 30, 2010 and December 31, 2009; none issued or outstanding at June 30, 2010 or December 31, 2009			—				—
Common stock, $0.01 par value; 273,910,000 shares authorized at June 30, 2010 and December 31, 2009; 55,492,224 shares issued and outstanding at June 30, 2010; 54,774,639 shares issued and outstanding at December 31, 2009			1				1
Additional paid-in capital			1,064				1,056
Retained earnings			291				416
Accumulated other comprehensive income			18				19
Total PHH Corporation stockholders’ equity			1,374				1,492
Noncontrolling interest			14				12
Total equity			1,388				1,504
Total liabilities and equity		$	8,878			$	8,123

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES

		PHH Corporation Stockholders
																		Accumulated
										Additional								Other
		Common Stock								Paid-In				Retained				Comprehensive				Noncontrolling				Total
		Shares				Amount				Capital				Earnings				Income (Loss)				Interest				Equity
Balance at December 31, 2009			54,774,639			$	1			$	1,056			$	416			$	19			$	12			$	1,504
Net (loss) income			—				—				—				(125	)			—				7				(118	)
Other comprehensive loss, net of income taxes of $1			—				—				—				—				(1	)			—				(1	)
Stock compensation expense			—				—				5				—				—				—				5
Stock options exercised, including excess tax benefit of $0			453,562				—				6				—				—				—				6
Restricted stock award vesting, net of excess tax benefit of $0			264,023				—				(3	)			—				—				—				(3	)
Distributions to noncontrolling interest			—				—				—				—				—				(5	)			(5	)
Balance at June 30, 2010			55,492,224			$	1			$	1,064			$	291			$	18			$	14			$	1,388

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES

		Six Months
		Ended June 30,
		2010				2009
Cash flows from operating activities:
Net (loss) income		$	(118	)		$	116
Adjustments to reconcile Net (loss) income to net cash (used in) provided by operating activities:
Capitalization of originated mortgage servicing rights			(195	)			(267	)
Net unrealized loss on mortgage servicing rights			372				108
Vehicle depreciation			614				647
Other depreciation and amortization			11				13
Origination of mortgage loans held for sale			(13,649	)			(15,920	)
Proceeds on sale of and payments from mortgage loans held for sale			13,001				15,415
Net gain on interest rate lock commitments, mortgage loans held for sale and related derivatives			(203	)			(219	)
Deferred income tax (benefit) provision			(85	)			71
Other adjustments and changes in other assets and liabilities, net			55				118
Net cash (used in) provided by operating activities			(197	)			82
Cash flows from investing activities:
Investment in vehicles			(797	)			(524	)
Proceeds on sale of investment vehicles			192				220
Purchase of mortgage servicing rights			—				(1	)
Proceeds on sale of mortgage servicing rights			5				1
Purchases of property, plant and equipment			(6	)			(5	)
Purchases of restricted investments			(288	)			—
Proceeds from restricted investments			48				—
Decrease (increase) in Restricted cash and cash equivalents			278				(120	)
Other, net			6				6
Net cash used in investing activities			(562	)			(423	)
Cash flows from financing activities:
Proceeds from borrowings			22,125				24,172
Principal payments on borrowings			(21,301	)			(23,737	)
Issuances of Company Common stock			6				—
Cash paid for debt issuance costs			(29	)			(42	)
Other, net			(8	)			(4	)
Net cash provided by financing activities			793				389
Effect of changes in exchange rates on Cash and cash equivalents			—				(11	)
Net increase in Cash and cash equivalents			34				37
Cash and cash equivalents at beginning of period			150				109
Cash and cash equivalents at end of period		$	184			$	146

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

     PHH Corporation and subsidiaries (collectively, “PHH” or the “Company”) is a leading outsource provider of mortgage and fleet management services operating in the following business segments:

	§		Mortgage Production — provides mortgage loan origination services and sells mortgage loans.
	§		Mortgage Servicing — performs servicing activities for originated and purchased loans.
	§		Fleet Management Services — provides commercial fleet management services.

     The Condensed Consolidated Financial Statements include the accounts and transactions of PHH and its subsidiaries, as well as entities in which the Company directly or indirectly has a controlling interest and variable interest entities of which the Company is the primary beneficiary. PHH Home Loans, LLC and its subsidiaries (collectively, “PHH Home Loans” or the “Mortgage Venture”) are consolidated within PHH’s Condensed Consolidated Financial Statements and Realogy Corporation’s (“Realogy’s”) ownership interest is presented as a noncontrolling interest in the Condensed Consolidated Financial Statements.

     The Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In management’s opinion, the unaudited Condensed Consolidated Financial Statements contain all adjustments, which include normal and recurring adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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

Changes in Accounting Policies

     Transfers of Financial Assets. In June 2009, the Financial Accounting Standards Board (the “FASB”) updated Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing” (“ASC 860”) to eliminate the concept of a qualifying special-purpose entity (“QSPE”), modify the criteria for applying sale accounting to transfers of financial assets or portions of financial assets, differentiate between the initial measurement of an interest held in connection with the transfer of an entire financial asset recognized as a sale and participating interests recognized as a sale and remove the provision allowing classification of interests received in a guaranteed mortgage securitization transaction that does not qualify as a sale as available-for-sale or trading

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

securities. The updates to ASC 860 clarify (i) that an entity must consider all arrangements or agreements made contemporaneously or in contemplation of a transfer, (ii) the isolation analysis related to the transferor and its consolidated subsidiaries and (iii) the principle of effective control over the transferred financial asset. The updates to ASC 860 also enhance financial statement disclosures. Revised recognition and measurement provisions are to be applied to transfers occurring on or after the effective date and the disclosure provisions are to be applied to transfers that occurred both before and after the effective date. The Company adopted the updates to ASC 860 effective January 1, 2010. Except for the elimination of QSPEs addressed in the updates to ASC 810, “Consolidation” (“ASC 810”) below, the adoption of the updates to ASC 860 did not impact the Company’s Condensed Consolidated Financial Statements.

     Consolidation of Variable Interest Entities. In June 2009, the FASB updated ASC 810 to modify certain characteristics that identify a VIE, revise the criteria for determining the primary beneficiary of a VIE, add an additional reconsideration event to determining whether an entity is a VIE, eliminating troubled debt restructurings as an excluded reconsideration event and enhance disclosures regarding involvement with a VIE. Additionally, with the elimination of the concept of QSPEs in the updates to ASC 860, entities previously considered QSPEs are now within the scope of ASC 810. Entities required to consolidate or deconsolidate a VIE will recognize a cumulative effect in retained earnings for any difference in the carrying amount of the interest recognized. The Company adopted the updates to ASC 810 effective January 1, 2010. As a result of the adoption of updates to ASC 810, assets of consolidated VIEs that can be used only to settle the obligations of the VIE and liabilities of consolidated VIEs for which creditors or beneficial interest holders do not have recourse to the general credit of the Company are presented separately on the face of the Company’s Condensed Consolidated Balance Sheets. As a result of the updates to ASC 860 eliminating the concept of QSPEs, the Company was required to consolidate a mortgage loan securitization trust that previously met the QSPE scope exception under ASC 860. Upon consolidation, the Company elected the fair value option of measuring the assets and liabilities of the mortgage loan securitization trust at fair value under ASC 825, “Financial Instruments.” See Note 13, “Fair Value Measurements” for the transition adjustment related to the adoption of the updates to ASC 810 and ASC 860, which had no impact on Retained earnings, and Note 14, “Variable Interest Entities” for further discussion.

     Fair Value Measurements. In January 2010, the FASB updated ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) to add disclosures for transfers in and out of level one and level two of the valuation hierarchy and to present separately information about purchases, sales, issuances and settlements in the reconciliation for assets and liabilities classified within level three of the valuation hierarchy. The updates to ASC 820 also clarify existing disclosure requirements about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The Company adopted the disclosure provisions of the updates to ASC 820 for transfers in and out of level one and level two, level of disaggregation and inputs and valuation techniques used to measure fair value effective January 1, 2010. The additional disclosures resulting from the adoption of the updates to ASC 820 are included in Note 13, “Fair Value Measurements” in the Company’s Notes to Condensed Consolidated Financial Statements. Certain other disclosures about the activity in the reconciliation of level three activity are effective for fiscal years and interim periods beginning after December 15, 2010, which will enhance the disclosure requirements and will not impact the Company’s financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements

     Revenue Recognition. In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Multiple Deliverable Arrangements” (“ASU No. 2009-13”), an update to ASC 605, “Revenue Recognition” (“ASC 605”). ASU No. 2009-13 amends ASC 605 for how to determine whether an arrangement involving multiple deliverables (i) contains more than one unit of accounting and (ii) how the arrangement consideration should be (a) measured and (b) allocated to the separate units of accounting. ASU No. 2009-13 is effective prospectively for arrangements entered into or materially modified in fiscal years beginning on or after June 15,

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

2010. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU No. 2009-13 on its Condensed Consolidated Financial Statements.

     Loan Modifications. In April 2010, the FASB issued ASU No. 2010-18, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset” (“ASU No. 2010-18”), an update to ASC 310, “Receivables” (“ASC 310”). ASU No. 2010-18 amends ASC 310 for modifications of loans that are accounted for within a pool, such that these modifications do not result in the removal of loans from the pool even if the modifications would be considered a troubled debt restructuring. ASU 2010-18 is effective for modifications of loans within pools under ASC 310 occurring in the first interim or annual period ending on or after July 15, 2010. The adoption of ASU 2010-18 is not expected to impact the Company’s Condensed Consolidated Financial Statements.

     Financing Receivables. In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU No. 2010-20”), an update to ASC 310. ASU No. 2010-20 enhances the disclosure requirements of ASC 310 regarding the credit quality of financing receivables and the allowance for credit losses and requires entities to provide a greater level of disaggregated information about the credit quality of financing receivables and the allowance for credit losses. In addition, ASU No. 2010-20 requires disclosure of credit quality indicators, past due information, and modifications of its financing receivables. For public entities, the end of period disclosure requirements of ASU No. 2010-20 are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. ASU No. 2010-20 will enhance the disclosure requirements for financing receivables and credit losses, but will not impact the Company’s financial position, results of operations or cash flows.

2. (Loss) Earnings Per Share

     Basic (loss) earnings per share attributable to PHH Corporation was computed by dividing Net (loss) income attributable to PHH Corporation during the period by the weighted-average number of shares outstanding during the period. Diluted (loss) earnings per share attributable to PHH Corporation was computed by dividing Net (loss) income attributable to PHH Corporation by the weighted-average number of shares outstanding, assuming all potentially dilutive common shares were issued. The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for the three and six months ended June 30, 2010 excludes approximately 2.7 million outstanding stock-based compensation awards, as well as the assumed conversion of the Company’s 2012 Convertible Notes and related purchased options and sold warrants as their inclusion would be anti-dilutive. Additionally, the sold warrants related to the Company’s 2014 Convertible Notes were excluded from the computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for the three and six months ended June 30, 2010, as their inclusion would be anti-dilutive. The 2014 Convertible Notes and related purchased options are also excluded from the weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for the three and six months ended June 30, 2010 as they are currently to be settled only in cash. The Company’s Convertible Notes are defined and further discussed in Note 9, “Debt and Borrowing Arrangements.”

     The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for both the three and six months ended June 30, 2009 excludes approximately 2.8 million outstanding stock-based compensation awards, as well as the assumed conversion of the Company’s 2012 Convertible Notes and related purchased options and sold warrants as their inclusion would be anti-dilutive.

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     The following table summarizes the basic and diluted (loss) earnings per share attributable to PHH Corporation calculations for the periods indicated:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
		(In millions, except share and per share data)
Net (loss) income attributable to PHH Corporation		$	(133	)		$	106			$	(125	)		$	108
Weighted-average common shares outstanding — basic			55,547,650				54,502,265				55,293,111				54,441,028
Effect of potentially dilutive securities:
Stock options			—				20,857				—				10,605
Restricted stock units			—				550,772				—				356,522
Weighted-average common shares outstanding — diluted			55,547,650				55,073,894				55,293,111				54,808,155
Basic (loss) earnings per share attributable to PHH Corporation		$	(2.40	)		$	1.93			$	(2.26	)		$	1.98
Diluted (loss) earnings per share attributable to PHH Corporation		$	(2.40	)		$	1.91			$	(2.26	)		$	1.96

3. Restricted Cash, Cash Equivalents and Investments

     The Company’s Restricted cash, cash equivalents and investments primarily relate to (i) amounts specifically designated to purchase assets, to repay debt and/or to provide over-collateralization within the Company’s asset-backed debt arrangements, (ii) funds collected and held for pending mortgage closings and (iii) accounts held in trust for the capital fund requirements of and potential claims related to the Company’s wholly owned mortgage reinsurance subsidiary, Atrium Reinsurance Corporation (“Atrium”).

     During the three months ended June 30, 2010, the Company invested in certain high credit quality debt securities using the restricted cash within Atrium. These investments remain in trust for the capital fund requirements of, and potential claims related to, Atrium. Restricted cash and cash equivalents includes marketable securities with original maturities of three months or less.

     The following tables summarize certain information regarding the Company’s Restricted cash, cash equivalents and investment balances:

		June 30,				December 31,
		2010				2009
		(In millions)
Restricted cash and cash equivalents		$	318			$	596
Restricted investments (at fair value)			241				—
Restricted cash, cash equivalents and investments		$	559			$	596

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

		June 30, 2010
																		Weighted-
																		average
		Amortized				Fair				Unrealized				Unrealized				remaining
		Cost				Value				Gains				Losses				maturity
		(In millions)
Restricted investments classified as available-for-sale:
Corporate securities		$	46			$	46			$	—			$	—			31 mos.
Agency securities (1)			157				158				1				—			20 mos.
Government securities			37				37				—				—			24 mos.
Total available-for-sale securities		$	240			$	241			$	1			$	—			23 mos.

     The Company’s restricted investments are recorded at fair value and classified as available-for-sale. During both the three and six months ended June 30, 2010, the amount of realized gains from the sale of available-for-sale securities was not significant. There were no available-for-sale securities outstanding during the six months ended June 30, 2009.

4. Mortgage Servicing Rights

     The activity in the Company’s loan servicing portfolio associated with its capitalized MSRs consisted of:

		Six Months
		Ended June 30,
		2010				2009
		(In millions)
Unpaid principal balance of capitalized loan servicing portfolio:
Balance, beginning of period		$	127,700			$	129,078
Additions			12,381				14,050
Payoffs, sales and curtailments			(9,984	)			(17,141	)
Balance, end of period		$	130,097			$	125,987

     The activity in the Company’s capitalized MSRs consisted of:

		Six Months
		Ended June 30,
		2010				2009
		(In millions)
Mortgage Servicing Rights:
Balance, beginning of period		$	1,413			$	1,282
Additions			195				268
Changes in fair value due to:
Realization of expected cash flows			(110	)			(212	)
Changes in market inputs or assumptions used in the valuation model			(262	)			104
Sales			—				(6	)
Balance, end of period		$	1,236			$	1,436

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     The significant assumptions used in estimating the fair value of MSRs were as follows (in annual rates):

		June 30,
		2010				2009
Weighted-average prepayment speed (CPR)			15	%			16	%
Option adjusted spread, in basis points (“bps”)			719				554
Volatility			29	%			31	%

     The value of the Company’s MSRs is driven by the net positive cash flows associated with the Company’s servicing activities. These cash flows include contractually specified servicing fees, late fees and other ancillary servicing revenue. The Company recorded contractually specified servicing fees, late fees and other ancillary servicing revenue within Loan servicing income in the Condensed Consolidated Statements of Operations as follows:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2010				2009				2010				2009
		(In millions)
Net service fee revenue		$	99			$	105			$	196			$	212
Late fees			5				4				10				9
Other ancillary servicing revenue			8				11				18				16

     As of June 30, 2010, the Company’s MSRs had a weighted-average life of approximately 4.7 years. Approximately 69% of the MSRs associated with the loan servicing portfolio as of June 30, 2010 were restricted from sale without prior approval from the Company’s private-label clients or investors.

     The following summarizes certain information regarding the initial and ending capitalization rates of the Company’s MSRs:

		Six Months
		Ended June 30,
		2010				2009
Initial capitalization rate of additions to MSRs			1.58	%			1.91	%
Weighted-average servicing fee of additions to MSRs (in bps)			30				37

		June 30,
		2010				2009
Capitalized servicing rate			0.95	%			1.14	%
Capitalized servicing multiple			3.1				3.5
Weighted-average servicing fee (in bps)			30				33

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

5. Loan Servicing Portfolio

     The following tables summarize certain information regarding the Company’s mortgage loan servicing portfolio for the periods indicated. Unless otherwise noted, the information presented includes both loans held for sale and loans subserviced for others.

Portfolio Activity

		Six Months
		Ended June 30,
		2010				2009
		(In millions)
Unpaid principal balance of loan servicing portfolio:
Balance, beginning of period		$	151,481			$	149,750
Additions			16,119				17,606
Payoffs, sales and curtailments			(11,633	)			(18,173	)
Balance, end of period		$	155,967			$	149,183

Portfolio Composition

		June 30,
		2010				2009
		(In millions)
Owned servicing portfolio		$	132,774			$	128,670
Subserviced portfolio			23,193				20,513
Total servicing portfolio		$	155,967			$	149,183
Fixed rate		$	107,113			$	97,846
Adjustable rate			48,854				51,337
Total servicing portfolio		$	155,967			$	149,183
Conventional loans		$	130,969			$	130,378
Government loans			18,204				11,936
Home equity lines of credit			6,794				6,869
Total servicing portfolio		$	155,967			$	149,183
Weighted-average interest rate			5.2	%			5.5	%

Portfolio Delinquency⁽¹⁾

		June 30,
		2010								2009
		Number				Unpaid				Number				Unpaid
		of Loans				Balance				of Loans				Balance
30 days			2.38	%			2.09	%			2.50	%			2.22	%
60 days			0.57	%			0.54	%			0.72	%			0.68	%
90 or more days			1.75	%			1.86	%			0.89	%			0.93	%
Total delinquency			4.70	%			4.49	%			4.11	%			3.83	%
Foreclosure/real estate owned/bankruptcies			2.66	%			2.73	%			2.62	%			2.72	%

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     As of June 30, 2010 and December 31, 2009, the Company had outstanding servicing advance receivables of $152 million and $141 million, respectively, which were included in Accounts receivable, net in the Condensed Consolidated Balance Sheets.

6. Mortgage Loan Sales

     The Company sells its residential mortgage loans through one of the following methods: (i) sales to Fannie Mae and Freddie Mac and loan sales to other investors guaranteed by the Government National Mortgage Association (collectively, Government-Sponsored entities or “GSEs”), or (ii) sales to private investors, or sponsored securitizations through the Company’s wholly owned subsidiary, PHH Mortgage Capital, LLC (“PHHMC”), which maintains securities issuing capacity through a public registration statement. During the six months ended June 30, 2010, 97% of the Company’s mortgage loan sales were to the GSEs and the remaining 3% were sold to private investors. The Company did not execute any sales or securitizations through PHHMC during the six months ended June 30, 2010. During the six months ended June 30, 2010, the Company retained MSRs on approximately 98% of mortgage loans sold. The Company did not retain any interests from sales or securitizations other than MSRs during the six months ended June 30, 2010.

     Key economic assumptions used in measuring the fair value of the Company’s MSRs at June 30, 2010 and the effect on fair value from adverse changes in those assumptions were as follows:

		MSRs
		(In millions)
Fair value of retained interests		$	1,236
Weighted-average life (in years)			4.7
Weighted-average servicing fee (in bps)			30
Weighted-average prepayment speed (annual rate)			15	%
Impact on fair value of 10% adverse change		$	(79	)
Impact on fair value of 20% adverse change			(151	)
Option adjusted spread (in bps)			719
Impact on fair value of 10% adverse change		$	(46	)
Impact on fair value of 20% adverse change			(90	)
Volatility (annual rate)			29	%
Impact on fair value of 10% adverse change		$	(12	)
Impact on fair value of 20% adverse change			(24	)

     These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption is calculated without changing any other assumption; in reality, changes in one assumption may result in changes in another, which may magnify or counteract the sensitivities. Further, this analysis does not assume any impact resulting from management’s intervention to mitigate these variations.

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     The following table sets forth information regarding cash flows relating to the Company’s loan sales in which it has continuing involvement.

		Six Months Ended
		June 30,
		2010				2009
		(In millions)
Proceeds from new loan sales or securitizations		$	12,599			$	14,139
Servicing fees received (1)			196				212
Other cash flows received on retained interests (2)			1				4
Purchases of delinquent or foreclosed loans			(50	)			(52	)
Servicing advances			(846	)			(483	)
Repayment of servicing advances			829				489

     During the three and six months ended June 30, 2010, the Company recognized pre-tax gains of $84 million and $198 million, respectively, related to the sale or securitization of residential mortgage loans which are recorded in Gain on mortgage loans, net in the Condensed Consolidated Statement of Operations.

     During the three and six months ended June 30, 2009, the Company recognized pre-tax gains of $235 million and $353 million, respectively, related to the sale or securitization of residential mortgage loans which are recorded in Gain on mortgage loans, net in the Condensed Consolidated Statements of Operations.

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

7. Derivatives and Risk Management Activities

     The Company did not have any derivative instruments designated as hedging instruments as of and during the six months ended June 30, 2010 or 2009. The following tables summarize the amounts recorded in the Company’s Condensed Consolidated Balance Sheets for derivative instruments not designated as hedging instruments:

		June 30, 2010
		Asset Derivatives										Liability Derivatives
		Balance										Balance
		Sheet		Fair				Notional				Sheet		Fair				Notional
		Presentation		Value				Amount				Presentation		Value				Amount
		(In millions)
Interest rate lock commitments (“IRLCs”)		Other assets		$	148			$	5,336			Other liabilities		$	6			$	76
Option contracts related to interest rate and price risk for MLHS and IRLCs		Other assets			3				1,670			N/A			—				—
Forward delivery commitments not subject to master netting arrangements:
Related to interest rate and price risk for MLHS and IRLCs		Other assets			15				1,226			Other liabilities			38				2,616
Forward delivery commitments subject to master netting arrangements(1):
Related to interest rate and price risk for MLHS and IRLCs		Other assets			15				1,405			Other assets			34				1,814
Related to interest rate and price risk for MLHS and IRLCs		Other liabilities			18				1,355			Other liabilities			61				3,125
Contracts related to interest rate risk for variable-rate debt arrangements and fixed-rate leases		Other assets			3				666			N/A			—				—
Derivative instruments related to the issuance of the 2014 Convertible Notes(2)		Other assets			44				—			Other liabilities			44				—
Foreign exchange contracts		Other assets			4				99			Other liabilities			—				42
Total derivative instruments					250										183
Impact of master netting arrangements(1)					(52	)									(52	)
Cash collateral					23										(10	)
Net fair value of derivative instruments				$	221									$	121

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

		December 31, 2009
		Asset Derivatives										Liability Derivatives
		Balance										Balance
		Sheet		Fair				Notional				Sheet		Fair				Notional
		Presentation		Value				Amount				Presentation		Value				Amount
		(In millions)
IRLCs		Other assets		$	31			$	3,507			Other liabilities		$	5			$	934
Forward delivery commitments not subject to master netting arrangements:
Related to interest rate and price risk for MLHS and IRLCs		Other assets			44				3,121			Other liabilities			9				855
Forward delivery commitments subject to master netting arrangements(1):
Related to interest rate and price risk for MLHS and IRLCs		Other assets			34				2,415			Other assets			4				483
Contracts related to interest rate risk for variable-rate debt arrangements and fixed-rate leases		Other assets			8				911			N/A			—				—
Derivative instruments related to the issuance of the 2014 Convertible Notes(2)		Other assets			37				—			Other liabilities			37				—
Foreign exchange contracts		N/A			—				—			Other liabilities			2				285
Total derivative instruments					154										57
Impact of master netting arrangements(1)					(4	)									(4	)
Cash collateral					(6	)									(1	)
Net fair value of derivative instruments				$	144									$	52

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     The following table summarizes the gains (losses) recorded in the Company’s Condensed Consolidated Statements of Operations for derivative instruments not designated as hedging instruments:

		Statement of		Three Months Ended								Six Months Ended
		Operations		June 30,								June 30,
		Presentation		2010				2009				2010				2009
				(In millions)
IRLCs		Gain on mortgage loans, net		$	379			$	108			$	581			$	277
Option contracts related to interest rate and price risk for MLHS and IRLCs		Gain on mortgage loans, net			(12	)			—				(12	)			—
Forward delivery commitments related to interest rate and price risk for MLHS and IRLCs		Gain on mortgage loans, net			(189	)			9				(246	)			(37	)
Contracts related to interest rate risk for variable-rate debt arrangements and fixed-rate leases		Fleet interest expense			(3	)			—				(6	)			(1	)
Foreign exchange contracts		Fleet interest expense			6				(19	)			5				(15	)
Total derivative instruments				$	181			$	98			$	322			$	224

     The Company’s principal market exposure is to interest rate risk, specifically long-term United States (“U.S.”) Department of the Treasury and mortgage interest rates due to their impact on mortgage-related assets and commitments. The Company also has exposure to the London Interbank Offered Rate (“LIBOR”) due to the impact on variable-rate borrowings, other interest rate sensitive liabilities and net investment in fixed-rate lease assets. From time to time, the Company uses various financial instruments, including swap contracts, forward delivery commitments on mortgage-backed securities (“MBS”) or whole loans, futures and options contracts to manage and reduce this risk.

     Foreign Exchange. On January 27, 2010, Fleet Leasing Receivables Trust (“FLRT”), the Company’s Canadian special purpose trust, issued approximately $81 million of senior Class A term asset-backed notes, which were denominated in U.S. dollars, to finance a fixed pool of eligible lease assets in Canada. The notes are amortizing and the lease cash flows related to the underlying collateralized leases, which are denominated in Canadian dollars, are used to repay the principal outstanding under the notes. As such, the Company is subject to foreign exchange risk associated with Canadian dollar denominated lease assets collateralizing U.S. dollar denominated borrowings, and the Company has entered into a currency swap agreement to manage such risk.

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

8. Vehicle Leasing Activities

     The components of Net investment in fleet leases were as follows:

		June 30,				December 31,
		2010				2009
		(In millions)
Operating Leases:
Vehicles under open-end operating leases		$	7,445			$	7,446
Vehicles under closed-end operating leases			235				263
Vehicles under operating leases			7,680				7,709
Less: Accumulated depreciation			(4,471	)			(4,382	)
Net investment in operating leases			3,209				3,327
Direct Financing Leases:
Lease payments receivable			117				121
Less: Unearned income			(3	)			(4	)
Net investment in direct financing leases			114				117
Off-Lease Vehicles:
Vehicles not yet subject to a lease			249				164
Vehicles held for sale			8				9
Less: Accumulated depreciation			(6	)			(7	)
Net investment in off-lease vehicles			251				166
Net investment in fleet leases		$	3,574			$	3,610

		June 30,				December 31,
		2010				2009
Vehicles under open-end leases			96	%			95	%
Vehicles under closed-end leases			4	%			5	%
Vehicles under variable-rate leases			77	%			76	%
Vehicles under fixed-rate leases			23	%			24	%

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

9. Debt and Borrowing Arrangements

     The following tables summarize the components of the Company’s indebtedness as of June 30, 2010 and December 31, 2009:

June 30, 2010
																		Assets Held as Collateral(1)
																										Mortgage				Net
														Maturity/												Loans				Investment
										Interest				Expiry				Accounts				Restricted				Held for				in Fleet
		Balance				Capacity(2)				Rate(3)				Date				Receivable				Cash				Sale				Leases
		(Dollars in millions)
Chesapeake Series 2009-1 Term Notes		$	1,000			$	1,000								5/20/2010
Chesapeake Series 2009-2 Term Notes			903				903								2/17/2011
Chesapeake Series 2009-3 Term Notes			50				50								10/20/2011
Chesapeake Series 2009-4 Term Notes			222				222								2/18/2010
Chesapeake Series 2010-1 Variable Funding Notes			500				1,000								5/31/2011
FLRT Series 2010-1 Notes			284				284								2/2011–11/2013
Other			42				42								11/2010–6/2016
Total Vehicle Management Asset-Backed Debt			3,001				3,501				2.1	%(4)						$	34			$	259			$	—			$	3,332
RBS Repurchase Facility			502				800				3.0	%			6/24/2011				—				—				523				—
CSFB Mortgage Repurchase Facility			334				350				2.9	%			5/25/2011				—				—				351				—
CSFB Mortgage Venture Repurchase Facility			68				150				2.9	%			5/25/2011				—				—				72				—
Ally Bank Mortgage Venture Repurchase Facility			52				150				4.2	%			3/30/2011				—				—				64				—
Fannie Mae Repurchase Facilities			722				722				1.0	%			N/A				—				—				722				—
Other			58				84				2.9%–4.2	%			9/2010 – 10/2010				63				—				5				—
Total Mortgage Warehouse and Other Asset-Backed Debt			1,736				2,256												63				—				1,737				—
Term Notes			433				433				7.2%-7.9	%(5)			3/2013-4/2018				—				—				—				—
Credit Facilities			379				810				1.0%-4.2	%(6)			1//2011-2/2013				—				—				—				—
Convertible Notes due 2012			229				229				4.0	%(7)			4/15/2012				—				—				—				—
Convertible Notes due 2014			186				186				4.0	%(8)			9/1/2014				—				—				—				—
Total Unsecured Debt			1,227				1,658												—				—				—				—
Mortgage Loan Securitization Debt Certificates, at Fair Value(9)			35				35				7.0	%(10)			12/2027				—				—				—				—
Total Debt		$	5,999			$	7,450											$	97			$	259			$	1,737			$	3,332