2016 Year-End Financial Report (MASTER) - RNS Submit · ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2016. 2 ... divisions for the years ended December 31, 2016 and 2015

Registered number: 4467291

CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES ANNUAL FINANCIAL REPORT

FOR THE YEAR ENDED DECEMBER 31, 2016

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TABLE OF CONTENTS

DISCLOSURE REGARDING FORWARD‐LOOKING STATEMENTS ..................................................................................... 3

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

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES ................................................................................................. 28

CONSOLIDATED FINANCIAL STATEMENTS .................................................................................................................. 29

INDEPENDENT AUDITORS’ REPORT ............................................................................................................................ 30

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ........................................................................ 31

CONSOLIDATED STATEMENTS OF OPERATIONS ........................................................................................ 32

CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ INTERESTS/(DEFICIT) ..................................... 33

CONSOLIDATED STATEMENTS OF CASH FLOWS ........................................................................................ 34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................................ 35

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DISCLOSURE REGARDING FORWARD‐LOOKING STATEMENTS Statements made in this Annual 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 Annual 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 Annual 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 “GSEs”);

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 MSR acquisitions;

our ability to obtain sufficient capital to meet our financing and debt service 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 negotiate favorable economic terms with investors and counterparties;

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 Government National Mortgage Association (“GNMA” or “Ginnie Mae”), Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”) and others that facilitate the issuance of residential mortgage backed securities;

changes to the nature of the guarantees of Federal Housing Administration (“FHA”), United States Department of Veterans Affairs (“VA”), or United States Department of Agriculture (“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 information 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.

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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 Annual Report. The forward‐looking statements made in this Annual 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 Annual 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.

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MANAGEMENT REPORT Carrington Holding Company, LLC (the “Company”) presents its Annual Financial Report and the audited consolidated financial statements of the Company and its subsidiaries for the years ended December 31, 2016 and 2015. Principal activities The Company is a holding company whose primary businesses include asset management, mortgage, real estate transactions, and real estate logistics. The mortgage 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 U.S. 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 December 31, 2016, the Company had approximately 5,200 full‐time employees and independent agents across 105 offices.

The Company is one of 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 mortgage 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 years ended December 31, 2016 and 2015. Year‐end Results The following table presents condensed statement of operations for the periods indicated.

2016 2015 $ change % change

Revenues 494,374$ 336,593$ 157,781$ 47 %

Operating expenses 452,122 359,101 93,021 26

Income/(loss) from operations 42,252 (22,508) 64,760 NM*

Other income/(expense):

Interest income 17,036 11,085 5,951 54

Interest expense (43,850) (30,399) (13,451) (44)

Change in fair value of mortgage servicing rights 15,975 75,289 (59,314) (79)

Change in fair value of long‐term debt 52,087 8,470 43,617 515

Net income before income taxes 83,500$ 41,937$ 41,563$ 99 %

* NM ‐ Not meaningful

For the Years Ended December 31,

($ in thousands)

Comparison of Consolidated Results for the Years Ended December 31, 2016 and 2015 Revenues for the year ended December 31, 2016 were $494.4 million, an increase of $157.8 million, or 47%, from

$336.6 million for the year ended December 31, 2015. The increase was primarily due to higher revenue from the

Company’s mortgage operating division.

Operating expenses for the year ended December 31, 2016 were $452.1 million, an increase of $93.0 million, or 26%, from $359.1 million for the year ended December 31, 2015. The increase was primarily driven by expansion of the mortgage servicing and lending platforms that resulted in higher compensation and benefits expenses related to increased staffing levels, origination activities, loan servicing, origination activities, occupancy, and general and administrative expenses. Interest income was $17.0 million for the year ended December 31, 2016, an increase of $6.0 million, or 54%, from $11.1 million for the year ended December 31, 2015 as a result of higher mortgage loan originations. Interest expense was $43.9 million for the year ended December 31, 2016, an increase of $13.5 million, or 44%, from $30.4 million for the year ended December 31, 2015. The increase was primarily due to additional borrowings on our warehouse facilities related to higher loan originations and a rate increase on our long‐term debt. The change in fair value of our MSRs was $16.0 million for the year ended December 31, 2016, a decrease of $59.3 million or 79%, from $75.3 million for the year ended December 31, 2015. The decrease in fair value was primarily due to changes in valuation assumptions reflective of current market conditions and prepayments. The change in fair value of long‐term debt was $52.1 million for the year ended December 31, 2016, compared to $8.5 million for the year ended December 31, 2015. As of December 31, 2016 the fair value of the long‐term debt decreased to $313.3 million from $365.4 million as of December 31, 2015, resulting in income for the year ended December 31, 2016.

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Consolidated securitization trust (the “Trust”) income offset expense for the year ended December 31, 2016 and 2015. The trust activity is excluded in the table above and presented separately in the Consolidated Statements of Operations. Operating Division Results Our business is divided into four operating divisions: asset management, mortgage (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 U.S. 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 U.S. housing market. CCM is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). As of December 31, 2016, CCM had offices in Old Greenwich, Connecticut; Aliso Viejo, California; Brentwood, Tennessee; and Oceanside, California. As of December 31, 2016, CCM had $99.3 million of discretionary fund assets on which the Company earns advisory fees. In addition, CCM oversees assets of $4.3 billion inclusive of $2.6 billion of securitized mortgage trust assets and $1.7 billion of separately managed non‐discretionary capital. CCM also manages acquisitions of MSRs and sales of excess servicing rights (“ESRs”) for the Company’s affiliated mortgage operating division. MSRs acquired and ESRs sold during the year ended December 31, 2016 were $12.5 billion and $3.6 billion of unpaid principal balance (“UPB”), respectively. Our affiliated operating divisions including mortgage, 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.


Revenues:

Revenues 11,889$ 7,441$ 4,448$ 60 %

Intercompany and other 1,964 1 1,963$ NM

Total Asset Management Operating Division Revenue 13,853 7,442 6,411 86

Operating expenses 6,568 6,631 (63) (1)

Income from operations 7,285 811 6,474 798


Interest income, net 357 372 (15) (4)

Asset Management Operating Division Income 7,642$ 1,183$ 6,459$ 546 %


($ in thousands)

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Comparison of Asset Management Operating Division Results for the Years Ended December 31, 2016 and 2015 Asset management operating division revenues for the year ended December 31, 2016 were $13.9 million, an increase of $6.4 million, or 86%, from $7.4 million for the year ended December 31, 2015. Operating expenses for the years ended December 31, 2016 and 2015 remained at $6.6 million. Mortgage Operating Division The Company’s mortgage 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 FHA, VA, or 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. 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 2016 as a U.S. residential primary servicer for subprime product at ‘RPS3’, Outlook Stable, and as a special servicer at ‘RSS3’, Outlook Stable. The servicing portfolio grew significantly through MSR acquisitions of $12.5 billion and $25.4 billion of UPB for the years ended December 31, 2016 and 2015, respectively. The Company also expanded its servicing portfolio through the addition of $5.7 billion of loans originated by the Company. The acquired MSR portfolios consist primarily of Government Agency loans, some of which were distressed or significantly delinquent. As of December 31, 2016, the mortgage servicing operating unit serviced approximately 420,000 residential mortgage loans with aggregate UPB of $51.3 billion. CMS is a Ginnie Mae approved issuer, a Freddie Mac approved seller/servicer and a Fannie Mae approved seller/servicer. As of December 31, 2016, MSD had primary offices located in Anaheim, California; Westfield, Indiana; and Plano, Texas.

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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 27,241,699$ 53 % 25,842,207$ 58 % 1,399,492$ 5 %

Originated government loans 10,156,874 20 5,512,231 12 4,644,643 84

Securitized non‐prime loans 5,119,640 10 5,746,056 13 (626,416) (11)

Subserviced loans 4,738,469 9 6,466,173 14 (1,727,704) (27)

Other acquired and originated loans 4,064,799 8 1,282,053 3 2,782,746 217

Total Loan Amount $ 51,321,481 100 % $ 44,848,720 100 % $ 6,472,761 14 %

As of December 31,

% change

($ in thousands)

20152016

% of Total% of Total

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

2016 2015 change % change

Loan count ‐ servicing 419,609 351,163 68,446 19 %

Ending unpaid principal balance $ 51,321,481 $ 44,848,720 6,472,761$ 14 %

Average unpaid principal balance $ 122 $ 128 (6)$ (5) %

Average original loan amount $ 141 $ 144 (3)$ (2) %

Average coupon 5.09% 5.11% (0.02) (0) %

Average FICO credit score 665 664 1 0 %

60+ day delinquent [1] 2.65% 2.29% 0.36 16 %

Bankruptcy [1] 2.90% 2.56% 0.34 13 %

Foreclosure [1] 5.62% 6.73% (1.11) (16) %

REO [1] 0.72% 0.41% 0.31 76 %

[1] % based on loan count.

($ in thousands)

As of December 31,

The following table is a servicing roll‐forward of UPB and loan count as of the periods indicated.

UPB Count

($ in thousands)

Beginning Balance, December 31, 2015 44,848,720$ 351,163

Acquisitions [1] 12,040,864 105,945

Originations 5,682,888 32,888

Payoffs (8,732,895) (65,234)

Principal reductions and other [2] (1,687,910) ‐

Servicing transfers to others (830,186) (5,153)

Ending Balance, December 31, 2016 $ 51,321,481 419,609

For the Year Ended December 31,

2016

[1] Acquisitions exclude previously subserviced loans that were in the prior reported balance.

[2] Loans in the principal reductions and other category do not impact the portfolio loan count due to the nature of the transactions. The loans are

included in other line items in the table.

The mortgage 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 $ 98,982 $ 74,125

Modification re‐pool gains 77,376 22,586

Late charges 21,017 16,494

Modification fees 4,419 4,929

Servicing claims provision (8,709) (494)

Other fees 18,590 14,845

Total Servicing Revenue $ 211,675 $ 132,485


($ 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 deferred service fees are subject to the performance of the legacy portfolios and do not relate to agency portfolios the Company services. These uncollected servicing fees are not recorded as servicing revenue until collected. Uncollected servicing fees for delinquent loans and foreclosed real estate totaled approximately $23.8 million and $26.5 million as of December 31, 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 years ended December 31, 2016 and 2015, the Company modified loan amounts in the aggregate of $888.3 million and $556.9 million, and repooled loans in the aggregate of $1.3 billion and $253.0 million, respectively. The following table summarizes the operating results from our mortgage servicing operating unit for the periods indicated.


Revenues:

Revenues 211,675$ 132,485$ 79,190$ 60 %

Intercompany and other (619) 8,963 (9,582) (107)

Total Mortgage Servicing Operating Unit Revenue 211,056 141,448 69,608 49


Income from operations 93,427 46,249 47,178 102


Interest expense, net (3,455) (4,708) 1,253 27

Change in fair value of mortgage servicing rights 15,975 75,289 (59,314) (79)

Mortgage Servicing Operating Unit Income 105,947$ 116,830$ (10,883)$ (9) %

($ in thousands)


Comparison of Mortgage Servicing Operating Unit Results for the Years Ended December 31, 2016 and 2015 Mortgage servicing operating unit revenues for the year ended December 31, 2016 were $211.1 million, an increase of $69.6 million, or 49%, from $141.4 million for the year ended December 31, 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.

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Operating expenses for the year ended December 31, 2016 were $117.6 million, an increase of $22.4 million, or 24%, from $95.2 million for the year ended December 31, 2015. This increase was primarily due to higher loan servicing costs and compensation and benefits expenses related to increase in staffing levels due to the portfolio growth. Net interest expense was $3.5 million for the year ended December 31, 2016, a decrease of $1.3 million, or 27% as compared with $4.7 million for the year ended December 31, 2015. The change in fair value of our MSRs was $16.0 million, as compared to $75.3 million for the year ended December 31, 2015. The decrease in fair value from the prior year was primarily due to changes in valuation assumptions reflective of current market conditions and prepayments. 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 December 31, 2016, CRS's portfolio consisted of approximately 1,000 accounts with UPB of approximately $129.6 million. Due to improvement in the residential real estate market and corresponding 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, a Freddie Mac approved seller/servicer and a Fannie Mae 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.

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

2016 2015 $ Change

Retail 3,730,633$ 66 % 2,202,328$ 63 % 1,528,305$ 69 %

Wholesale 1,952,255 34 1,296,821 37 655,434 51

Total 5,682,888$ 100 % 3,499,149$ 100 % 2,183,739$ 62 %

Purchase 1,177,999$ 21 % 936,938$ 27 % 241,061$ 26 %

Refinance 4,504,889 79 2,562,211 73 1,942,678 76

Total 5,682,888$ 100 % 3,499,149$ 100 % 2,183,739$ 62 %

Government 5,411,328$ 95 % 3,377,836$ 97 % 2,033,492$ 60 %

Conventional 271,560 5 121,313 3 150,247 124

Total 5,682,888$ 100 % 3,499,149$ 100 % 2,183,739$ 62 %


($ in thousands)

% of Total % of Total % Change

For the year ended December 31, 2016, the mortgage lending operating unit originated $5.7 billion in loan volume, an increase of approximately $2.2 billion, or 62%, versus $3.5 billion for the year ended December 31, 2015. The mix of origination volume from purchase versus refinance transactions was 21% versus 79% for the year ended December 31, 2016 compared to 27% and 73% purchase versus refinance transactions for the year ended December 31, 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 retail and wholesale channels. For the year ended December 31, 2016 and 2015, the channel mix was 66% retail and 34% wholesale versus 63% retail and 37% wholesale, 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. MLD provides mortgage products to borrowers across the credit spectrum and specializes in originating government loans to borrowers with FICO scores below 640, a strategy referred by the Company as “Serving the Underserved.” The Company believes it is uniquely qualified to serve this market as it has the infrastructure to support this unique market, including a team of 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 experience in high‐touch servicing necessary to 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 42 branch offices located in 18 states with a highly trained sales force. All loans are underwritten through a centralized operations team that includes pre‐funding audits and incorporates call‐recording for compliance and quality assurance. As of December 31, 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. Carrington Mortgage UK Limited is a residential mortgage protection broker with offices in Glenrothes, Stonehaven, Fraserburgh, Anstruther, Edinburgh, Glasgow and Norwich.

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


Revenues:

Revenues 201,735$ 130,357$ 71,378$ 55 %

Intercompany and other (1,174) (7,567) 6,393 (84)

Total Mortgage Lending Operating Division Revenue 200,561 122,790 77,771 63


Income from operations 31,454 71 31,383 NM

Other (expense):

Interest expense, net (3,685) (473) (3,212) (679)

Mortgage Lending Operating Division Income 27,769$ (402)$ 28,171$ NM %


($ in thousands)

Comparison of Mortgage Lending Operating Unit Results for the Years Ended December 31, 2016 and 2015 Mortgage lending revenues for the year ended December 31, 2016 were $200.6 million, an increase of $77.8 million or 63% from $122.8 million for the year ended December 31, 2015. This increase was driven primarily by higher origination volume of $5.7 billion for the year ended December 31, 2016, an increase of $2.2 billion or 62% from $3.5 billion for the year ended December 31, 2015. Operating expenses for the year ended December 31, 2016 were $169.1 million, an increase of $46.4 million, or 38% from $122.7 million for the year ended December 31, 2015. This increase was primarily due to higher compensation and benefits expense related to an increase in staffing levels, origination costs, occupancy and other general and administrative expenses associated with expansion of the lending platform. Interest income, net of expense, resulted in net expense of $3.7 million, an increase in expense of $3.2 million for the year ended December 31, 2016, from an expense of $0.5 million for the year ended December 31, 2015. This increase in expense was primarily due to an increase in origination volume of loans held for sale. 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 may assist retail clients in simplifying the home purchase and sale process, and aid institutional investors in efficiently managing their residential portfolios.

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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 December 31, 2016, CRES had approximately 2,000 independent sales associates. CRES was founded in 2008 during the height of the distressed real estate market specializing in the disposition of Real Estate Owned (“REO”) assets as well as traditional residential real estate sales. 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 where CRES does not operate. For the year ended December 31, 2016, CRES had $2.0 billion in total property sales or approximately 10,700 closing sides, of which $645.4 million or 33% was derived from our institutional clients, $1.2 billion or 60% was generated by our network of independent sales associates and $136.0 million or 7% from CPN. Carrington Settlement Services Operating Unit The Company’s settlement services business is comprised of a title agency, Carrington Title Services, LLC (“CTS”), and an escrow company, Carrington Escrow, Inc. (“CEI”). These companies assist with the closing of real estate transactions by providing 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 divided between purchase, conveyance title and foreclosure related search products such as property abstract reports. 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 year ended December 31, 2016, CTS assisted in approximately 64,000 transactions including, foreclosure abstracts, title policies and closings, and recorded revenue of $15.8 million. CEI performed approximately 1,200 closings and recorded revenue of $0.8 million for the year ended December 31, 2016. 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 mortgage 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 year ended December 31, 2016, the portfolio services business assisted on approximately 12,400 new transactions and recorded revenue of $3.6 million.

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Comparison of Real Estate Transactions Operating Division Results for the Years ended December 31, 2016 and 2015


Revenues:

Revenues 39,508$ 36,421$ 3,087$ 8 %

Intercompany and other (15) (1,088) 1,073 (99)

Total Real Estate Transactions

Operating Division Revenue 39,493 35,333 4,160 12


Income from operations 11,691 10,314 1,377 13

Other expense:

Interest income/(expense), net ‐ ‐ ‐ ‐

Real Estate Transactions Operating

Division Income 11,691$ 10,314$ 1,377$ 13 %

($ in thousands)


The real estate transactions operating division revenue was $39.5 million for the year ended December 31, 2016, an increase of $4.2 million or 12% from $35.3 million for the year ended December 31, 2015. The increase was primarily due to growth in the settlement services operating unit attributable to higher refinance production sourced from our mortgage lending operating unit as well as from several new third party clients. Operating expenses in the real estate transactions operating division were $27.8 million, for the year ended December 31, 2016, an increase of $2.8 million, or 11%, from $25.0 million for the year ended December 31, 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. 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”).

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Carrington Property Services Operating Unit CPS is a property asset management company, managing approximately 4,300 properties as of December 31, 2016 and recorded revenue of $13.8 million for the year ended December 31, 2016. CPS provides property asset management and marketing services that can be customized to meet the needs of its customers. Unlike traditional property management companies, which focus exclusively on the disposition of REO assets, CPS is 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 services 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 2,700 and 1,500 properties for disposition as of December 31, 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 GSEs and servicers. In 2016, the rental management portfolio declined consistent with collateral value improvement in the residential real estate market. As of December 31, 2016, CPS had approximately 1,700 rental properties under management. In August 2016, Morningstar Credit Ratings, LLC (“Morningstar”) reaffirmed CPS’s 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’.

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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. For the year ended December 31, 2016, CHS recorded revenue of $15.7 million. Azure Home specialized in luxury residential real estate market services that include brokerage services for acquisition, disposition and rental of properties through ongoing residential care and maintenance. The Company has discontinued the Azure Home business in the first quarter of 2017. 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 year ended December 31, 2016, 72% 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 Years ended December 31, 2016 and 2015 The following table summarizes the operating results from our real estate logistics operating division for the periods indicated.


Revenues:

Revenues 29,567$ 29,889$ (322)$ (1) %

Intercompany and other (156) (309) 153 (50)

Total Real Estate Logistics Operating Division Revenue 29,411 29,580 (169) (1)


Income from operations 6,023 8,242 (2,219) (27)

Other expense:

Interest expense, net (2) (7) 5 ‐

Real Estate Logistics Operating Division Income 6,021$ 8,235$ (2,214)$ (27) %


($ in thousands)

The real estate logistics operating division revenue was $29.4 million for the year ended December 31, 2016, a decrease of $0.2 million or 1% from $29.6 million for the year ended December 31, 2015. The decrease was primarily due to lower revenues in the property services operating unit due to a decline in the rental management portfolio.

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Operating expenses in the real estate logistics operating division were $23.4 million, an increase of $2.1 million or 10% from $21.3 million for the year ended December 31, 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 22% to $107.6 million for the year ended December 31, 2016 from $88.2 million for the year ended December 31, 2015. Liquidity Cash and cash equivalents consisted of the following at the dates indicated.

2016 2015

Operating cash 36,039$ 17,347$

Clearing accounts 174,130 140,354

210,169$ 157,701$

($ in thousands)

As of December 31,

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


Operating activities (58,678)$ (109,014)$ 50,336$ (46) %

Less trust related activity 44,418 42,990 1,428 3

Operating activities excluding trust (103,096)$ (152,004)$ 48,908$ (32) %

Investing activities 250,715$ 262,022$ (11,307)$ (4) %

Less trust related activity 255,073 251,264 3,809 2

Investing activities excluding trust (4,358)$ 10,758$ (15,116)$ (141) %

Financing activities (139,569)$ (92,742)$ (46,827)$ (50) %

Less trust related activity (299,491) (294,254) (5,237) (2)

Financing activities excluding trust 159,922$ 201,512$ (41,590)$ (21) %

($ in thousands)


Operating activities ‐ Net cash used by operating activities, excluding Trust activity, was $103.1 million for the year ended December 31, 2016, as compared to net cash used by operating activities of $152.0 million in the same period from the prior year. The $48.9 million decrease in cash used for operating activities, excluding Trust activity, during the year ended December 31, 2016, was primarily due to an increase in proceeds from sales of, and principal payments from, mortgage loans held for sale, partially offset by an increase in costs associated with an increase in originated loans.

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Investing activities ‐ Net cash used by investing activities, excluding Trust activity, was $4.4 million for the year ended December 31, 2016, as compared to net cash provided by investing activities of $10.8 million for the same period in the prior year. The $15.1 million increase in net cash used by investing activities, excluding Trust activity, during the year ended December 31, 2016, was primarily due to the payments for acquired MSRs partially offset by cash received from the sale of ESRs. Financing activities ‐ Net cash provided by financing activities, excluding Trust activity, was $159.9 million for the year ended December 31, 2016, as compared to $201.5 million of net cash provided by financing activities for the year ended December 31, 2015. The $41.6 million decrease in cash provided by financing activities during the year ended December 31, 2016 was primarily due to decrease in the cash proceeds received from the Company’s credit facilities compared to the prior year period, partially offset by cash contributions from the Company’s non‐controlling interest during the fourth quarter of 2016. Refer to Note 14, for additional discussion regarding the Company’s non‐controlling interest. Trust related activity had no net effect on the cash flows for the years ended December 31, 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 facilities with aggregate line limits of $821.1 million and advance limits ranging from 70% to 99%. As of December 31, 2016, the outstanding balance across the seven lines was $543.6 million.

December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015

Agreement I [1] Warehouse $ 155,000 $ 200,000 $ 74,342 $ 189,214

Agreement II [1] Warehouse/FHA Buyout 325,000 325,000 290,333 199,140

Agreement III [2] Warehouse 160,000 ‐ 107,368 –

Agreement IV [3] FHA Buyout 110,000 110,000 49,366 38,455

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

Agreement VI FHA Buyout 20,000 20,000 16,074 8,366

Agreement VII [4] FHA Buyout 45,000 ‐ ‐ ‐

$ 821,100 $ 661,100 $ 543,583 $ 441,275

Maximum Available Balance Outstanding

($ in thousands)

[1] In September 2016, the Company renewed two of its warehouse facilities with a maturity date occurring in September 2017.

[2] In April 2016, a new warehouse facility was issued with a line limit of $110.0 million and a maturity date occurring in April 2017. In August 2016, the

Company received a temporary line limit increase to $160.0 million through November 28, 2016 from $110.0 million to accommodate elevated levels of production. In November 2016, this temporary line limit increase was extended through February 2017. [3] In February 2017, the Company renewed one of its FHA buy out warehouse facilities with a maturity date occurring in April 2017.

[4] In July 2016, the Company increased one of its servicing advance facilities to $50.0 million with the ability to use $30.0 million to fund early buyouts of

single family residential loans and extended the related maturity date occurring in October 2016. In September 2016, the Company amended the servicing advance facility to $65.0 million with a sublimit of $45.0 million which may be used to buy out FHA loans. In October 2016, the facility was renewed with a maturity date occurring in October 2017.

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Servicing Advance Facilities As of December 31, 2016, the Company had two servicing advance facilities with a total committed amount of $140.0 million, of which $45.0 million of one facility may be used as a warehouse facility to fund early buyouts on single‐family residential loans (See Agreement VII in the Warehouse Facilities section above). The two servicing advance facilities have an outstanding balance of $78.5 million as of December 31, 2016. The weighted average advance rate of the two facilities as of December 31, 2016 was 79%. In comparison, as of December 31, 2015, the Company had a total committed amount of $75.0 million, an outstanding balance of $63.2 million and a weighted average advance rate of 80%. These facilities include customary covenants, of which the Company was in compliance as of December 31, 2016 and 2015. The facilities are subject to a margin call if the principal balance exceeds the underlying fair value of the collateral determined by the third party lender and confirmed by the Company. As of December 31, 2016, the fair value of the collateral exceeded the UPB. 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 and diversification of 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 U.S. 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 U.S. housing market and the major structural changes occurring across the mortgage industry. Significant Events On January 1, 2016, the Company entered into a MSRs purchase and sale agreement with Ginnie Mae, pursuant to which the Company purchased MSRs related to U.S. residential mortgage loans originated through Ginnie Mae loan programs with approximately $2.1 billion in UPB. 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 $16.6 million was financed by an unrelated third party, who contemporaneously acquired the ESR from CMS. Pursuant to the 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.

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On January 29, 2016, the Company entered into a MSRs purchase and sale agreement and a related servicing agreement with a financial institution, pursuant to which the Company agreed to acquire MSRs of $907.6 million in UPB of U.S. residential mortgage loans originated through Ginnie Mae loan programs. Due to the delinquent status of the related mortgage loans the Company received an inducement payment of $12.6 million. Prior to the closing date, CMS was sub‐servicing approximately 5,000 of these loans for the 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 ESRs of a pool of originated GNMA loans of approximately $1.2 billion in UPB to an unrelated third party for $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 occurring in February 2017. On April 1, 2016, the Company completed a sale of the ESRs of a pool of originated GNMA loans of $492.6 million of UPB to an unrelated third party for $3.4 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. On June 8, 2016, the Company entered into a MSRs purchase and sale agreement with a financial institution, pursuant to which the Company agreed to acquire MSRs comprised of $1.0 billion in UPB of U.S. residential mortgage loans originated through Ginnie Mae loan programs. Due to the delinquent status of the related mortgage loans the Company received an inducement payment of $10.5 million. The transaction was settled and approximately 4,700 loans were boarded in July 2016 and the remaining, approximately 16,800 loans, were boarded in September 2016. This transaction was managed by the Company’s asset management operating division. On July 12, 2016, the Company increased one of its servicing advance lines to $50.0 million with the ability to use $30.0 million to fund single‐family residential mortgage loans and extended the related maturity date to October 2016. In September 2016, the Company further increased this servicing advice line to $65.0 million with the ability to use $45.0 million to fund early buyouts of single family residential mortgage loans. In October 2016, this advance line was renewed with a maturity date occurring in October 2017. On July 29, 2016, the Company completed a sale of the ESRs of a pool of originated GNMA loans of $1.0 billion in UPB to an unrelated third party for $6.0 million. This transaction was managed by the Company’s asset management operating division. As previously disclosed in April 2015, the Company acquired MSRs from a financial institution of $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, CMS ESR Holdings, LLC (“ESR Holdings”). In exchange, the Investors received various preferred equity interests in ESR Holdings. CMS determined that ESR Holdings is a variable interest entity (“VIE”), CMS is the primary beneficiary and consolidates the subsidiary with the preferred equity recorded as non‐controlling interests.

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On August 3, 2016, the Company entered into a MSR purchase and sale agreement with a financial institution, pursuant to which the Company agreed to acquire MSRs of an estimated $1.0 billion in unpaid principal balance of an estimated 20,800 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 received an inducement payment of $10.5 million. The transaction settled in September 2016. This transaction was managed by the Company’s asset management operating division. On September 9, 2016, the Company renewed one of its warehouse facilities with a maturity date of September 8, 2017. On September 30, 2016, the Company renewed one of its warehouse facilities with a maturity date of September 29, 2017. On October 14, 2016, the Company completed a sale of the ESRs of a pool of originated GNMA loans of $903.2 million in UPB to an unrelated third party for $8.1 million. This transaction was managed by the Company’s asset management operating division. On November 2, 2016, the Company entered into a MSR purchase and sale agreement with a financial institution, pursuant to which CMS agreed to purchase MSRs of $2.8 billion in UPB of U.S. residential mortgage loans for a purchase price of $20.0 million. The purchase agreement also provides for an additional purchase of approximately $600.0 million in UPB of U.S. residential mortgage loans that were boarded in February 2017. Contemporaneously with the purchase of the MSRs, CMS sold the ESR to its wholly‐owned subsidiary CMS ESR Holdings II, LLC (“ESR Holdings II”) for $20.5 million. ESR Holdings II funded its acquisition of the ESR by issuing preferred equity interests to third party investors in exchange for cash proceeds. CMS determined that ESR Holdings II is a VIE, CMS is the primary beneficiary and consolidates the subsidiary with the preferred equity recorded as non‐controlling interests. This transaction was managed by the Company’s asset management operating division. On November 10, 2016, the Company entered into a MSR purchase and sale agreement with a financial institution, pursuant to which CMS agreed to purchase MSRs of $4.5 billion in UPB of U.S. residential mortgage loans for a purchase price of $37.5 million. Contemporaneously with the purchase of the MSRs, CMS sold the ESR to its wholly‐owned subsidiary CMS ESR Holdings III, LLC (“ESR Holdings III”) for $37.5 million. ESR Holdings III funded its acquisition of the ESR by issuing preferred equity interests to third party investors in exchange for cash proceeds. CMS determined that ESR Holdings III is a VIE, CMS is the primary beneficiary and consolidates the subsidiary with the preferred equity recorded as non‐controlling interests. This transaction was managed by the Company’s asset management operating division. On November 18, 2016, CMS became a Fannie Mae approved seller/servicer. Significant Post Balance Sheet Events Important events that have occurred since the end of the financial year are set out in Note 21 (Subsequent Events) to the accompanying consolidated financial statements.

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Key Performance Measures Management believes that the following are the key (financial and non‐financial) performance indicators used to measure the performance of the Company:

• Mortgage operating division, mortgage servicing operating unit: revenues, operating expenses, and aggregate UPB of the servicing portfolio;

• Mortgage operating division, mortgage lending operating unit: revenues, operating expenses,

origination volume and source, and production mix of refinancing versus purchase loans;

• Asset management operating division: revenues, operating expenses, and amount of assets under management;

• Real estate transactions operating division: revenues, operating expenses, number of sales agents,

sales volume, and title and settlement transactions; and

• Real estate logistics operating division: revenues, operating expenses, properties under management, preservation orders and inspections.

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 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 U.S. 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 December 31, 2016, the Company had approximately $1.2 billion aggregate principal amount of total debt and financing facilities outstanding on a consolidated basis, mainly comprised of $543.6 million in senior secured warehouse facilities, $78.5 million in senior secured servicing advance facilities and $534.1 million in long‐term debt.

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The Company’s Step‐Up Notes having a face amount of $534.1 million required interest payments of $17.4 million for the year ended December 31, 2016. The interest rate in effect for the Step‐Up Notes increases by 0.50% on each semi‐annual payment date. As the interest rate increases, the interest payments require a greater amount of the Company’s liquidity. This high level of debt service payments could adversely affect the Company’s operating flexibility and put it at a competitive disadvantage. If the Company is not able to make a semi‐annual interest payment, the Step‐Up Notes can be accelerated and made immediately due and payable which could have a material adverse effect on the liquidity, financial position and results of operations of the Company.

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.

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 from a certain state regulator 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. The Company has cooperated with the state regulator in this matter and has provided and will continue to provide supplemental materials requested. The most recent request for information in this matter was made in April 2016. Although the Company believes that it has meritorious legal and factual defenses to these matters, the ultimate outcome with respect to this regulatory inquiry remains uncertain. As such, there are no assurances that regulatory inquiries such as the one 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.

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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 MSRs 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.

CMS is an approved Ginnie Mae issuer, Freddie Mac seller and servicer and Fannie Mae seller 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, Freddie Mac or Fannie Mae 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, Freddie Mac or Fannie Mae, 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.

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 December 31, 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.

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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 U.S. 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 their 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 MSRs 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.

Risk Management

The issuer’s financial risk management objectives and policies are set out in Note 15 (Concentration of Risks) to

the consolidated financial statements.

Management

The Executive Officers who held office as of December 31, 2016 and subsequently were as follows:

Bruce M. Rose……………..Founder, CEO David S. Gordon…………..Chief Operating Officer Peter Salce…………………..President and Chief Financial Officer Darren Fulco………………..Chief Strategy Officer Scott Siegler…………………General Counsel Andrew Taffet……………..Chief Investment Officer and Head of Asset Management

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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; 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, 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 Company; and

• the Management Report includes a fair review of the development and performance and the position

of the Company, together with a description of the principal risks and uncertainties that it faces.

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CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2016 and 2015

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INDEPENDENT AUDITORS’ REPORT To the Members of Carrington Holding Company, LLC Report on Financial Statements We have audited the accompanying consolidated financial statements of Carrington Holding Company, LLC and subsidiaries (the “Company”), a Delaware limited liability company, which comprise the consolidated statements of financial condition as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in members’ interests/(deficit) and cash flows for the two years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial condition of the Company as of December 31, 2016 and 2015, and the consolidated results of their operations and cash flows for each of the two years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter

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 10 of the accompanying consolidated financial statements, the Company's servicer advance financing arrangements and a majority of its loan origination warehouse lines of credit become due in 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. Our opinion is not modified with respect to this matter. /s/ SQUAR MILNER LLP Newport Beach, California March 28, 2017

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

(dollars in thousands)

2016 2015

Cash and cash equivalents $ 210,169 $ 157,701

Restricted cash 12,382 12,624

Trust assets (securitized mortgage collateral):

Residential mortgage loans, at estimated fair value 2,553,244 2,979,278

Real estate owned, at net realizable value 93,810 75,675

Total trust assets 2,647,054 3,054,953

Mortgage loans held for sale, at estimated fair value 561,539 459,922

Servicer advances 98,136 77,201

Mortgage servicing rights, net, at estimated fair value 320,268 111,274

Property, furniture and equipment, net 22,897 22,787

Prepaid expenses and other assets 68,766 45,272

Total assets 3,941,211$ 3,941,734$

Liabilities

Nonrecourse trust liabilities (securitized mortgage borrowings), at estimated

' fair value $ 2,647,054 3,054,953$

Warehouse facilities 543,583 441,275

Servicing advance facilities 78,495 63,182

Servicing liabilities 213,481 167,443

Accounts payable and accrued liabilities 54,587 59,128

Reserves for losses on loans sold 6,800 3,826

Accrued compensation 21,573 19,425

Accrued interest payable 10,866 8,097

Notes payable, net 1,661 1,887

Long‐term debt, at estimated fair value 313,297 365,384

Other liabilities 21,017 3,918

Total liabilities 3,912,414 4,188,518

Commitments and Contingencies (Note 13)

Members’ Interests/(Deficit)

Controlling interests (163,291) (246,784)

Non‐controlling interests 192,088 ‐

Total members’ interests/(deficit) 28,797 (246,784)

Total liabilities and members’ interests/(deficit) $ 3,941,211 3,941,734$

ASSETS

LIABILITIES AND MEMBERS’ INTERESTS/(DEFICIT)

December 31,

See accompanying notes to consolidated financial statements

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CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS


2016 2015

REVENUES

Mortgage banking $ 201,735 $ 130,357

Mortgage servicing 211,675 132,485

Real estate services 53,080 47,942

Broker commissions 15,510 18,273

Management fees 11,737 7,440

Other 637 96

Total revenues 494,374 336,593

OPERATING EXPENSES

Compensation and benefits 312,172 245,134

General and administrative 131,669 107,578

Depreciation 8,281 6,257

Other ‐ 132

Total expenses 452,122 359,101

INCOME/(LOSS) FROM OPERATIONS 42,252 (22,508)

OTHER INCOME/(EXPENSE)

Interest income 17,036 11,085

Interest expense (43,850) (30,399)

Change in fair value of mortgage servicing rights 15,975 75,289

Change in fair value of long‐term debt 52,087 8,470

Other income, net 41,248 64,445

TRUST INCOME/(EXPENSE)

Interest income 119,373 132,071

Interest expense (119,373) (132,071)

Loss on sale of REO (34,095) (35,663)

Benefit/(provision) for REO losses 282 (564)

Change in fair value of securitized residential mortgage

loans and non‐recourse trust liabilities, net 33,813 36,227

Trust income/(expense), net ‐ ‐

NET INCOME BEFORE INCOME TAXES 83,500 41,937

INCOME TAX EXPENSE 7 13

NET INCOME $ 83,493 $ 41,924



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CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ INTERESTS/(DEFICIT)


Managing

Member

Non‐Managing

Members

Total Members'

Interests/(Deficit)

MEMBERS’ DEFICIT – December 31, 2014 (287,794)$ (914)$ $ ‐ $ (288,708)Net Income 37,770 4,154 ‐ 41,924

MEMBERS’ (DEFICIT)/INTERESTS – December 31, 2015 (250,024)$ 3,240$ ‐$ (246,784)$ Contributions ‐ ‐ 211,462 211,462 Distributions ‐ ‐ (19,374) (19,374)Net Income 75,486 8,007 ‐ 83,493

MEMBERS’ (DEFICIT)/INTERESTS – December 31, 2016 (174,538)$ 11,247$ 192,088$ 28,797$

Controlling Interests

Non‐Controlling

Interests


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


2016 2015

CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 83,493 $ 41,924

Adjustments to reconcile net income to net cash used in operating activities:

Depreciation 8,281 6,257

Change in fair value of long‐term debt (52,087) (8,470)

Change in fair value of residential mortgage loans and nonrecourse trust liabilities, net

– securitized trusts (33,813) (36,227)

Loss on sale of real estate owned – securitized trusts 34,095 35,663

(Benefit)/Provision for losses on real estate owned – securitized trusts (282) 564

Accretion of interest income and expense on residential mortgage loans and non‐

recourse trust liabilities, net – securitized trusts 44,418 42,990

Originations and purchases of mortgage loans held for sale (6,935,999) (3,752,390)

Proceeds from sales of, and principal payments from, mortgage loans held for sale 6,830,325 3,563,505

Mark to market loss/(gain) on mortgage loans held for sale 4,057 (6,629)

Unrealized (gain) on interest rate lock commitments ("IRLC") and hedging instruments (4,703) (2,651)

Provision for losses on loans sold 4,001 2,874

(Gain)/loss on sale of property, furniture and equipment (7) 124

Net change in operating assets and liabilities:

Due to/from affiliates (1,678) 47

Servicer advances (20,935) 14,174

Mortgage servicing rights (57,838) (108,467)

Prepaid expenses and other assets (21,815) (5,728)

Accounts payable and accrued liabilities 15,771 25,556

Servicing liabilities 46,038 77,870

Net cash used in operating activities (58,678) (109,014)

CASH FLOWS FROM INVESTING ACTIVITIES

Change in restricted cash 242 (5,300)

Purchases of property, furniture and equipment (8,384) (16,128)

Principal reductions on residential mortgage loans – securitized trusts 201,986 194,915

Proceeds from sale of real estate owned – securitized trusts 53,087 56,349

Cash (paid)/received from acquisition of mortgage servicing rights (21,726) 17,626

Cash received from stand‐alone sale of excess servicing rights 25,510 14,500

Redemptions of equity method investments ‐ 60

Net cash provided by investing activities 250,715 262,022

CASH FLOWS FROM FINANCING ACTIVITIES

Net repayments of servicing advance facilities 15,313 5,137

Repayment of securitized mortgage borrowings – securitized trusts (299,491) (294,254)

Net proceeds from warehouse facilities on mortgage loans held for sale 102,308 196,596

Repayments of notes payable (231) (221)

Distributions to non‐controlling interests (13,990) ‐

Contributions from non‐controlling interests 56,522 ‐

Net cash used in financing activities (139,569) (92,742)

NET INCREASE IN CASH AND CASH EQUIVALENTS 52,468 60,266

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

CASH AND CASH EQUIVALENTS – end of year $ 210,169 $ 157,701

CASH PAID FOR INTEREST $ 37,338 $ 24,952

CASH PAID FOR INCOME TAXES $ 13 $ 9

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS

Transfer of residential mortgage loans to real estate owned – securitized trusts $ 105,035 $ 107,475

Contribution of mortgage servicing rights from non‐controlling interest $ 154,940 $ ‐



CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2016 and 2015 (dollars in thousands)

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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”), a Delaware limited liability company, is a holding company whose primary businesses include asset management, mortgage, 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 U.S. 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 December 31, 2016, the Company had approximately 5,200 full‐time employees and independent agents across 105 offices. The Company’s primary wholly owned subsidiaries are:

Entity Operating Division [1]

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

Carrington Mortgage Services, LLC (“CMS”) Mortgage

Carrington Resolution Services, LLC (“CRS”) Mortgage

Carrington Mortgage UK Limited (“Carrington UK”) Mortgage

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 (“CDS”) 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 20 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 U.S. real estate, mortgage, and fixed income markets. CCM is registered with the Securities and Exchange Commission as an investment adviser subject to the provisions of the Investment Advisers Act of 1940.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Business Summary – (continued)

Mortgage 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 Government National Mortgage Association (“GNMA” or “Ginnie Mae”) issuer, a Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) approved seller/servicer and a Federal National Mortgage Association (“Fannie Mae”) approved seller/servicer.

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 consolidated financial statements of CHC have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and to conform to predominant practices within the financial services industry. 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 (“MSRs”), the fair value measurement of financial instruments, mortgage banking interest rate lock commitments (“IRLCs”) 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.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Principles of Consolidation The accompanying consolidated financial statements include accounts of the Company, other entities in which the Company has a controlling financial interest and variable interest entities (“VIE”) for which the Company is the primary beneficiary. All inter‐company balances and transactions have been eliminated in consolidation. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as special purpose entities, through arrangements that do not involve voting interests. A VIE is an entity having either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or equity investors at risk that lack the ability to control the entity’s activities. Variable interests are investments or other interests that will absorb portions of a VIE’s expected losses or receive portions of the VIE’s expected residual returns. The Company consolidates the assets and liabilities of VIEs of which the Company is the primary beneficiary. The primary beneficiary is the party that holds both the power to direct the activities that most significantly impact the VIE and holds a variable interest that could potentially be significant to the VIE. To determine whether a variable interest the Company holds could potentially be significant to the VIE, the Company considers both quantitative and qualitative factors regarding the nature, size and form of its involvement with the VIE. The Company assesses whether it is the primary beneficiary of a VIE on an ongoing basis.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Principles of Consolidation – (continued) Pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810‐10, Consolidation, certain investment products/entities for which the risks and rewards of ownership are not directly linked to voting interests may be deemed VIEs. The Company reviews factors, such as the ability to direct the activities of the VIE and the rights of the equity holders and obligations of equity holders to absorb losses or receive expected residual returns, to determine if the investment product/entity is a VIE. The Company is required to consolidate a VIE when it is deemed to be the primary beneficiary, which is evaluated continuously as facts and circumstances change. The Company follows FASB Accounting Standards Update (“ASU”) 2010‐10, Amendments for Certain Investment Funds, which deferred the consolidation requirements of Statement of Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation No. 46(R), for funds managed by the Company’s asset management subsidiary, CCM. Where CCM has an interest in and investment product/entity that has qualified for the deferral of the consolidation rules under ASU 2010‐10, the analysis is based on consolidation rules prior to January 1, 2010. These rules require an analysis to determine (a) whether an entity in which CCM has a variable interest is a VIE and (b) whether CCM’s involvement, through the holding of equity interests would be expected to absorb a majority of the variability of the investment product/entity. Under both criteria, CCM determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether CCM is the primary beneficiary, CCM evaluates its economic interests in the investment product/entity held either directly by CCM or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that CCM is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by CCM, affiliates of CCM or third parties) or amendments to the governing documents of the respective entities could affect an entity’s status as a VIE or the determination of the primary beneficiary. At each reporting date, CCM assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly. For annual periods beginning January 1, 2017 and interim periods beginning January 1, 2018, the Company will adopt ASU 2015‐02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which will modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities and eliminate the presumption that a general partner should consolidate a limited partnership. The Company owns the mezzanine and subordinated securities (credit enhancement (“CE”) bond, prepayment bonds and ESRs certificates) arising from single‐family subprime mortgage loan acquisition and securitization. In cases where the Company has the power to direct the activities of the trust (as servicer) and the right to receive potential benefits (even if remote) through the CE bond and other subordinate bonds, the Company consolidates these securitization trusts.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Principles of Consolidation – (continued) The Company finances certain of its purchases of MSRs through the sale of the right to receive the excess of the servicing fee rate over a specified rate. This excess is referred to as excess servicing rights (“ESRs”). The Company has various structures to execute its financing from ESRs transactions, including the formation of special purpose entities. The Company will consolidate such entities to the extent these entities are VIEs for which the Company is the primary beneficiary. The Company originates and sells forward or securitizes residential mortgage loans in the form of mortgage‐backed securities insured or guaranteed by government and government‐sponsored enterprises such as Ginnie Mae (referred to as “Government Agencies” or “GSEs”). Sales or securitizations usually occur within 30 days of loan closing. The Company retains servicing rights associated with securitized loans and receives a servicing fee for services provided. The Company acts only as a fiduciary and does not have a variable interest in these securitization trusts. As a result, the Company accounts for these transactions as sales upon transfer. Cash and Cash Equivalents Cash and cash equivalents include cash held by depository institutions and short‐term investments with remaining maturities at acquisition of less than three months. The Company places its cash with financial institutions with investment grade ratings. At times, such amounts may be in excess of the Federal Deposit Insurance Corporation insurance limit. Custodial and Trust 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 $825.1 million and $626.7 million as of December 31, 2016 and 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. 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 $29.6 million and $21.6 million as of December 31, 2016 and 2015, respectively.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Fair Value Option The Company follows FASB ASC 825, Financial Instruments, which permits entities to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). Changes in the fair value of eligible items are reported in operations and additionally, fees and costs associated with instruments for which the Fair Value Option is elected are recognized as earned and expensed when incurred, rather than deferred. The Fair Value Option is applied on an instrument by instrument basis (with certain exceptions), is irrevocable (unless a new election date occurs) and is applied only to an entire instrument. The Company has elected the fair value option on its MSRs, mortgage loans held for sale (“LHFS”) and residential mortgage loans within securitized mortgage collateral, securitized mortgage borrowings, and long‐term debt. Fair Value of Financial Instruments The Company follows FASB ASC 820‐10, Fair Value Measurements and Disclosures, with respect to financial and nonfinancial assets and liabilities that are measured at estimated fair value. The Company’s financial instruments measured at fair value on a recurring basis include MSRs, LHFS, residential real estate mortgage loans within securitized residential mortgage collateral (“RMC”), securitized mortgage borrowings (“SMB”), long‐term debt, IRLCs, and hedging instruments. The Company does not have any assets and liabilities that are measured at fair value on a nonrecurring basis, except for real estate owned. For further information about the Company’s recurring and nonrecurring fair value measurement disclosures, see Note 2 herein. Management has concluded that it is not practical to determine the estimated fair value of amounts due from/to affiliates, as included in the prepaid expenses and other assets in the accompanying consolidated statements of financial condition. Disclosure rules for fair value measurements require that for financial instruments for which it is not practicable to estimate fair value, information pertinent to those instruments be disclosed. Further information as to these financial instruments from related parties is included in Note 18. Fair Value Measurements Fair value measurements under FASB ASC 820 establish a framework for measuring fair value under GAAP and expand disclosures about fair value measurements. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. FASB ASC 820 also prioritizes the use of market‐based assumptions, or observable inputs, over entity‐specific assumptions or unobservable inputs when measuring fair value and establishes a three‐level hierarchy based upon the relative reliability and availability of the inputs to market participants for the valuation of an asset or liability as of the measurement date. The fair value hierarchy designates quoted prices in active markets for identical assets or liabilities at the highest level and unobservable inputs at the lowest level.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Fair Value Measurements – (continued) FASB ASC 820‐10‐65‐4 provides additional guidance for estimating fair value in accordance with FASB ASC 820‐10 when the volume and level of market activity for the asset or liability have significantly decreased and on identifying circumstances that indicate a transaction is not orderly. It acknowledges that in these circumstances quoted prices may not be determinative of fair value. FASB ASC 820‐10‐65‐4 emphasizes that even if there has been a significant decrease in the volume and level of market activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Under FASB ASC 820‐10‐65‐4, quoted prices for assets or liabilities in inactive markets may require adjustment due to uncertainty as to whether the underlying transactions are orderly. There is little information, if any, to evaluate if individual transactions are orderly in an inactive market. Accordingly, the Company is required to evaluate the facts and circumstances to determine whether the transaction is orderly based on the weight of the evidence. FASB ASC 820‐10‐65‐4 does not designate a specific method for adjusting a transaction or quoted price, however, it does provide guidance for determining how much weight to give a transaction or quoted price. Price quotes derived from transactions that are not orderly are not considered to be determinative of fair value and should be given less weight, if any, when estimating fair value. Trust Assets and Liabilities Securitized Mortgage Collateral Securitized mortgage collateral includes non‐conforming residential mortgage loans with adjustable and fixed rate loans that were acquired and securitized prior to 2008, as well as residential real estate owned, acquired in foreclosure. Historically, such loans were securitized mortgages in the form of real estate mortgage investment conduits (“REMICs”). These securitizations are evaluated for consolidation based on the provisions of FASB ASC 810‐10‐25. The Company accounts for the residential mortgage loans within the RMC at estimated fair value, with changes in fair value during the period reflected in earnings. Fair value measurements are based on the Company’s estimated cash flow models, which incorporate assumptions, inputs of other market participants and quoted prices for the underlying bonds. The Company’s assumptions include its expectations of inputs that other market participants would use. These assumptions include judgments about the underlying collateral, prepayment speeds, credit losses, investor yield requirements, forward interest rates and certain other factors. Interest income on securitized mortgage collateral is recorded quarterly using the effective yield for the period based on the previous quarter‐end’s estimated fair value. Residential mortgage loans within the RMC are generally not placed on nonaccrual status since the servicer remits the interest payments to the trust regardless of the delinquency status of the underlying mortgage loan.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Securitized Mortgage Collateral – (continued) Real estate owned (“REO”) are assets within the RMC and are recorded as a separate asset for accounting and reporting purposes, and consist of residential real estate acquired in satisfaction of loans. REO are carried at the net realizable value, which includes the estimated fair value of the residential real estate less estimated selling and holding costs. Adjustments to the loan carrying value required at the time of foreclosure affect the carrying amount of REO. Subsequent write‐downs in the net realizable value of REO are included in loss on sale of REO in the consolidated statements of operations. REO are not financial instruments and therefore the fair value option is not an election option by the Company. Securitized Mortgage Borrowings Securitized mortgage borrowings include the bonds from the REMIC securitization trusts. These bonds from each issuance are payable from the principal and interest payments and payoffs on the underlying mortgage loans collateralizing such debt, as well as the proceeds from liquidations of REO. If the principal and interest payments are insufficient to repay the debt, the shortfall is generally allocated first to the CE bond holders (owned by the Company) then, if necessary, to the remaining bond holders (third party investors) in accordance with the specific terms (waterfall) of the various respective indentures. Securitized mortgage borrowings typically were structured to pay the bond holders based on one‐month LIBOR with interest payable monthly. The maturity of each class of securitized mortgage borrowing is directly affected by the amount of net interest spread, overcollateralization and the rate of principal prepayments and defaults on the related securitized mortgage collateral. The actual maturity of any class (i.e., original bond investment grade ratings of AAA, AA, A, BBB, BB, B, etc.) of a securitized mortgage borrowing can occur later than the stated maturities of the underlying mortgages. When the Company issued securitized mortgage borrowings, the Company generally sought an investment grade rating by nationally recognized rating agencies. To secure such ratings, it was often necessary to incorporate certain structural features that provide for CE. This generally included the pledge of collateral in excess of the principal amount of the securities to be issued. The Company’s total loss exposure is limited to the Company’s initial net economic investment in each securitization trust, which are the separately certificated CE bonds retained. The Company accounts for securitized mortgage borrowings and CE bonds at fair value, with changes in fair value during the period reflected in earnings. Fair value measurements are based on the Company’s estimated cash flow models, which incorporate assumptions, inputs of other market participants and quoted prices for the underlying bonds. The Company’s assumptions include its expectations of inputs that other market participants would use. These assumptions include judgments about the underlying collateral, prepayment speeds, credit losses, investor yield requirements, forward interest rates and certain other factors. Interest expense on securitized mortgage borrowings are recorded quarterly using the effective yield for the period based on the previous quarter‐end’s estimated fair value.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Mortgage Loans Held for Sale Mortgage loans are carried at their estimated fair values. All changes in fair value are recognized as a component of mortgage banking revenues in the accompanying consolidated statements of operations. The Company also made an automatic election to record future LHFS at fair value. The Company’s fair value election for LHFS is intended to better reflect the underlying economics of the Company as well as eliminate the operational complexities of risk management activities related to its LHFS pursuant to FASB ASC 815, Derivatives and Hedging. Transfers of Financial Assets The Company recognizes transfers of financial assets as sales when it surrenders control over the financial assets. Control over transferred financial assets is deemed to be surrendered when (i) the financial assets have been isolated from the Company, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred mortgage loans, and (iii) the Company does not maintain effective control over the transferred financial assets through either (a) an agreement that entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return specific financial assets. The Company evaluates its mortgage loan sales, ESRs sales and other financial asset transfers for sales treatment. To the extent the transfer of assets qualifies as a sale, the Company derecognizes the asset and records the gain or loss on the sale date. In the event the Company determines that the transfer of assets does not qualify as a sale, the transfer would be treated as a secured borrowing. Reserves for Losses on Loans Sold For mortgage loans originated and sold by the Company, the risk of loss or default by the borrower is generally transferred to the buyer/investor. However, the Company is required to make certain representations relating to credit information, loan documentation and collateral. These representations and warranties may extend through the contractual life of the mortgage loan. The types of representations and warranties made depend on each buyer/investor. Subsequent to the sale, if underwriting deficiencies, borrower fraud or documentation defects are discovered in individual mortgage loans, the Company may be obligated to repurchase the respective mortgage loan or indemnify the investors for any losses from borrower defaults if such deficiency or defect cannot be cured within the specified period following discovery for loans sold in whole loan trades, in the case of early loan payoffs and early defaults on certain loans, the Company may be required to repay all or a portion of the premium initially paid by the investor. The estimated obligation associated with early loan payoffs and early defaults is calculated based on historical loss experience by type of loan. The obligation for losses related to the loans originated discussed above is recorded at Company’s estimated expected future losses using historical and projected loss frequency and loss severity ratios relating to loans previously sold.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES ‐ (continued) Interest Rate Lock Commitments and Hedging Instruments In accordance with FASB ASC 815, the Company records its IRLCs and hedging instruments at fair value as either assets or liabilities on the consolidated statements of financial condition and are accounted for as freestanding IRLCs and hedging instruments. The Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is set prior to funding. IRLCs expose the Company to interest rate risk for commitments and loans it originates until those loans are sold in the secondary market. IRLCs on mortgage loan funding commitments for mortgage loans that are intended to be sold are considered to be derivative instruments and are recorded at fair value on the consolidated statements of financial condition with the change in fair value between reporting periods recorded in the consolidated statements of operations. The Company hedges its interest rate risk utilizing forward sold or “to‐be‐announced” mortgage‐backed securities (“TBA MBS”). Further information concerning IRLCs and TBA MBS are included in Note 2. Mortgage Servicing Rights The Company accounts for its MSRs under the fair value measurement method as prescribed by the FASB ASC 860‐50‐35, Transfers and Servicing, and as such, servicing assets or liabilities are measured at estimated fair value and changes in fair value are reported in the consolidated statements of operations. For purposes of performing MSR valuation analysis, the Company utilizes current market assumptions commonly used by buyers of these types of residential servicing rights, such as prepayment speeds, cost to service the underlying mortgage loans, forward interest rates and discount rates and incorporating current market data observed in the secondary servicing market. MSRs are stratified on the basis of certain risk characteristics including payment status (current, delinquent, or foreclosure), loan type (fixed‐rate or adjustable‐rate), interest rate band, and credit quality characteristics of the underlying borrower. Changes in these assumptions can have significant impact on the fair value of the MSRs. The Company from time to time enters into agreements to transfer (to an unrelated third party) the right to receive the ESRs related to MSRs owned by the Company. At the point of transfer, the Company evaluates whether the transfer qualifies as a sale. When the transfer qualifies as a sale, the Company derecognizes the portion of the MSR sold in exchange for the proceeds received. In other ESRs transactions, the Company may form a new entity in which the Company transfers the ESRs to the newly formed entity and a third party provides financing to this entity. If these new entities are VIEs, and the Company is the primary beneficiary, the Company will consolidate the entity. These entities hold the ESRs associated with the MSR owned by the Company. Because the ESRs is a claim to a portion of the cash flows from the MSRs, the fair value measurement of the ESRs is similar to that of the related MSR. The Company uses the same discounted cash flow approach to measure the estimated fair value of the ESRs as used to measure MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSR and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESRs. When a ESR and the related MSR are both owned/consolidated, the Company will report the ESR and MSR together as one accounting unit. As of December 31, 2016, for all consolidated ESR transactions, the Company also owned the related MSR.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Property, Furniture and Equipment Property, furniture, and equipment are stated at cost. Depreciation is provided by straight‐line and accelerated methods over the estimated useful lives of the related assets, ranging from three to seven years. The Company reviews the carrying value of its property, furniture, and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. There were no indicators or impairments as of December 31, 2016 and 2015. Financing Costs For debt instruments in which the fair value option was not elected, financing costs are deferred and amortized using the effective interest method over the life of the related debt obligations. Intangible Assets Intangible assets, including goodwill, internal‐use software and trademarks, are included in prepaid expenses and other assets in the consolidated statements of financial condition. The Company follows FASB ASC 350‐10, Intangibles – Goodwill and Other, which addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under FASB ASC 350‐10, the Company is not required to amortize goodwill and other intangible assets with indefinite lives but will subject such assets to periodic testing for impairment. These assets are tested for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. The first step in the two‐step process of the impairment analysis is to determine the fair value of the Company and each of its reporting units and compare the fair value of each reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, a second step must be followed to calculate the goodwill impairment. The second step involves determining the fair value of the individual assets and liabilities of the reporting unit that failed the first step and calculating the implied fair value of goodwill. To determine the fair value of the Company and each of its reporting units, the Company utilizes a valuation approach using comparable businesses adjusted for size, cost of equity, and other risk characteristics. Long‐Term Debt Long‐term debt consisting of Extendible Payment‐In‐Kind Step‐Up Notes (the “Step‐Up Notes”), is reported at estimated fair value, based on the Company’s irrevocable election to measure these notes at fair value pursuant to FASB ASC 825. These notes are measured based upon market transactions. Where market transactions are unavailable, a valuation analysis is prepared utilizing a discounted cash flow analysis by management, which considers the Company’s own credit risk. Unrealized gains and losses are recognized in earnings in the accompanying consolidated statements of operations.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Servicing Liabilities Servicing liabilities represent amounts that the Company borrowed from the custodial accounts (such custodial accounts are excluded from the consolidated statements of financial condition) as permitted by and pursuant to servicing contracts, primarily to pay required principal and interest advances. Custodial accounts are comprised of amounts that are collected from borrowers. Instruments with Characteristics of Liabilities and Equity The Company follows FASB ASC 480‐10, Distinguishing Liabilities from Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that a company classify a financial instrument that is within its scope as a liability. In determining whether a freestanding financial instrument embodies an obligation, non‐substantive or minimal features are not taken into consideration. Membership Interests and Earnings Per Share A member of a limited liability company possesses a membership interest which provides the member a percentage ownership in such company. These membership interests are not constituted from individual shares and accordingly, no earnings per share amounts have been included in the accompanying consolidated statements of operations. Commitments and Contingencies From time to time, the Company and its subsidiaries may be subject to commitments under contractual and other commercial obligations as well as contingencies relating to legal disputes. The Company recognizes liabilities for commitments and contingencies when a loss is probable and the amount can be reasonably estimated. Revenue Recognition Mortgage Banking Revenue derived from the Company’s mortgage lending operating unit includes the origination (funding either a purchase or refinancing) and sale of residential mortgage loans. Mortgage loans are originated through the Company’s marketing channels. Mortgage fees consist of fee income earned on all loan originations, including loans closed to be sold and fee‐based closings. With the election of the Fair Value Option for LHFS, fee income related to application and underwriting fees and fees on closed loans are recognized as earned, and the related direct loan origination costs are recognized when incurred. Gain (loss) on mortgage loans includes the realized and unrealized gains and losses on the Company’s LHFS. The valuation of the Company’s LHFS approximates a whole‐loan price, which includes the value of the related MSRs. Mortgage fee income and gain on sales of loans are included in Mortgage Banking revenues in the accompanying consolidated statements of operations.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Mortgage Servicing Fees CMS is entitled to collect fees for the loans that it services. The primary fee that is collected is the servicing fee. This fee is generally expressed as a percent of the unpaid principal balance of the loan, and is deducted from the interest portion of the payment when collected. Loan servicing fees for the underlying loans that were originated through GSE programs are recorded net of guarantee fees paid. CMS also collects modification incentive fees, late fees, insufficient funds fees, and other ancillary fees during the course of performing its servicing activities. All fees are recognized as income when earned, which typically occurs when cash is collected. Deferred servicing fees due to the servicer on delinquent mortgages are not recognized until the delinquent mortgage is resolved. Real Estate Services Fees and Broker Commissions Real estate services fees and broker commissions are comprised primarily of the following: brokerage, title, settlement, insurance, escrow, document processing, foreclosure trustee services and property management, preservation, rehabilitation and restoration services. Such fees are recognized in the period services are performed, and when collectability is reasonably assured. Deferred revenue is recorded when fees are received in advance of services performed. Management Fees The Company earns management fees relating to the terms of the investment management agreements entered into with its investment partnerships and other managed accounts. The Company recognizes management fee income in the period during which the related services are performed when collectability is reasonably assured, and the amounts have been contractually earned in accordance with the relevant agreements. As the Company may also invest in the investment partnerships or other partnerships, fees are recognized as revenue only to the extent of the outside ownership interests. Other Other income represents interest income, investment in limited partnerships and other miscellaneous income. Revenue is recorded when earned, and when collectability is reasonably assured. Income Taxes Under present income tax laws, a limited liability company is not subject to federal or state income taxes. The members include their respective share of the Company’s profit or losses in their separate tax returns. Subsidiary companies which are incorporated entities and earned income during the period will have tax assets or liabilities, which are presented on the consolidated statements of financial condition, and tax expenses or benefits, which are shown in the consolidated statements of operations.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Recently Issued Accounting Pronouncements Adopted In April 2015, the FASB issued ASU 2015‐03, Interest — Imputation of Interest (Subtopic 835‐30): Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be included in the carrying value of the related debt liability, when recognized, on the face of the balance sheet. In August 2015, the FASB issued ASU No. 2015‐15 ‐ Imputation of Interest (Subtopic 835‐30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line‐of‐Credit Arrangements, which clarified given the absence of authoritative guidance within ASU 2015‐03, the SEC Staff would not object to an entity deferring and presenting debt issuance costs related to line‐of‐credit arrangements as an asset and subsequently amortizing the deferred debt issuance cost ratably over the term of the line‐of‐credit arrangement, regardless of whether there are any outstanding borrowings on the line‐of‐credit arrangement. The Company adopted ASU 2015‐03 and ASU 2015‐15 during the fourth quarter of 2016, and reclassified unamortized debt issuance costs that are not related to line‐of‐credit arrangements totaling $16 thousand and $21 thousand from other assets to notes payable as of December 31, 2016 and 2015, respectively. In August 2014, the FASB issued ASU 2014‐13 – Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. ASU 2014‐13 provides a measurement alternative to companies that consolidate collateralized financing entities. The measurement alternative allows companies to 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. The adoption of this ASU during the year ended December 31, 2016 did not have an impact the financial statements of the Company because the Company was already following the method prescribed by ASU 2014‐13.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Recently Issued Accounting Pronouncements Not Yet Adopted In January 2017, the FASB issued ASU 2017‐04, Intangibles ‐ Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017‐04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. ASU 2017‐04 is effective for the Company in annual and interim periods beginning after December 15, 2021. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements. In January 2017, the FASB issued ASU 2017‐01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017‐01 clarifies that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017‐01 is effective for the Company in annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements. In November 2016, the FASB issued ASU 2016‐18, Statement of Cash Flows (Topic 230): Restricted Cash, which amends the classification and presentation of changes in restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016‐18 is effective for the Company in fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements. In October 2016, the FASB issued ASU 2016‐17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. ASU 2016‐17 amends the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is a primary beneficiary of that VIE. ASU 2016‐17 is effective for the Company in fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.



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NOTE 1 ‐ SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES – (continued) Recently Issued Accounting Pronouncements Not Yet Adopted – (continued) In February 2016, the FASB issued ASU 2016‐02, Leases (Topic 842). The new guidance will require lessees 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 the Company in the fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all entities. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements. In January 2016, the FASB issued ASU 2016‐01, Financial Instruments – Overall (Subtopic 825‐10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016‐01 amends the presentation and accounting for certain financial instruments, including liabilities measured at fair value under the fair value option and equity investments. This guidance also updates fair value presentation and disclosure requirements for financial instruments measured at amortized cost. ASU 2016‐01 is effective for the Company in fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The new guidance permits early adoption for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements. In February 2015, the FASB issued ASU 2015‐02, Consolidation (Topic 810): Amendments to the Consolidation Analysis which amends the consolidation requirements in ASC 810, primarily related to limited partnerships and VIEs. The amendments in this ASU are effective for the Company in fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. 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 adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements. In May 2014, the FASB issued ASU 2014‐09 – Revenue from Contracts with Customers (Topic 606), 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. This ASU become effective for the Company in annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019, as amended by ASU 2015‐14. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.



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NOTE 2 ‐ FAIR VALUE MEASUREMENTS Fair Value Hierarchy The application of fair value measurements may be on a recurring or nonrecurring 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 RMC, SMB, long‐term debt, and IRLCs 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 years ended December 31, 2016 and 2015.



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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 $ 561,539 $ ‐ $ 503,059 $ 58,480

IRLC and hedging assets 10,357 ‐ 5,899 4,458

Mortgage servicing rights 320,268 ‐ ‐ 320,268

Trust assets – RMC 2,553,244 ‐ ‐ 2,553,244

Total assets at estimated fair value $ 3,445,408 $ ‐ $ 508,958 $ 2,936,450

Liabilities

IRLC and hedging l iabil ities $ 2,891 $ ‐ $ 1,440 $ 1,451

Long‐term debt 313,297 ‐ ‐ 313,297

Trust l iabil ities – SMB 2,647,054 ‐ ‐ 2,647,054

Total l iabil ities at estimated fair value $ 2,963,242 $ ‐ $ 1,440 $ 2,961,802

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 4,419 ‐ 168 4,251

Mortgage servicing rights 111,274 ‐ ‐ 111,274

Trust assets – RMC 2,979,278 ‐ ‐ 2,979,278

Total assets at estimated fair value $ 3,554,893 $ ‐ $ 413,543 $ 3,141,350

Liabilities

IRLC and hedging l iabil ities $ 1,656 $ ‐ $ 1,517 $ 139

Long‐term debt 365,384 ‐ ‐ 365,384

Trust l iabil ities – SMB 3,054,953 ‐ ‐ 3,054,953

Total l iabil ities at estimated fair value $ 3,421,993 $ ‐ $ 1,517 $ 3,420,476

Recurring Fair Value Measurements

As of December 31, 2016



As of December 31, 2016, approximately 87% of assets and 76% 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.



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NOTE 2 ‐ FAIR VALUE MEASUREMENTS – (continued) Recurring Fair Value Measurements – (continued) 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 LHFS is based on commitments outstanding from investors and the secondary markets current offering for portfolios with similar characteristics. Therefore, LHFS 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 balance (“UPB”) of the Company’s LHFS classified as Level 2 as of December 31, 2016 and 2015 were $482.2 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 repurchases certain Ginnie Mae delinquent loans in connection with loan modifications and loss mitigation activity as part of the Company’s servicing obligations, when repurchasing the loan will provide more than a trivial benefit to the Company. 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, certain 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 UPB of the Company’s repurchased loans as of December 31, 2016 and 2015 was $64.0 million and $49.8 million, respectively. Interest rate lock commitments and hedging instruments, carried at estimated fair value – The Company’s IRLCs and hedging assets and liabilities are carried at estimated fair value and are accounted for as freestanding derivative financial instruments. The Company extends commitments to prospective residential mortgage borrowers referred to as 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. As of December 31, 2016 and 2015, there were $530.2 million and $559.8 million, respectively, of IRLCs notional outstanding. As of December 31, 2016 and 2015, there was $891.5 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.



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NOTE 2 ‐ FAIR VALUE MEASUREMENTS – (continued) Recurring Fair Value Measurements – (continued) 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 5. Residential mortgage loans within securitized RMC, carried at estimated fair value – 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 December 31, 2016, residential mortgage loans within securitized trusts had an UPB of $3.3 billion and an estimated fair value of $2.6 billion. The aggregate UPB exceeded the estimated fair value by $0.7 billion as of December 31, 2016. As of December 31, 2015, residential mortgage loans had an UPB of approximately $3.6 billion and an estimated fair value of $3.0 billion. The aggregate UPB exceeded the fair value by $0.6 billion as of December 31, 2015. The aggregate UPB of loans 90 days or more past due was approximately $846.1 million and $1.1 billion as of December 31, 2016 and 2015, respectively. Securitized mortgage borrowings, carried at estimated fair value – 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 December 31, 2016, securitized mortgage borrowings within securitized trusts had an UPB of a $3.2 billion and estimated fair value of $2.6 billion. The aggregate UPB exceeded the estimated fair value by $0.6 billion as of December 31, 2016. As of December 31, 2015, securitized mortgage borrowings had an UPB of approximately $3.6 billion and estimated fair value of $3.1 billion. The aggregate UPB exceeded the fair value by estimated $0.5 billion as of December 31, 2015.



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NOTE 2 ‐ FAIR VALUE MEASUREMENTS – (continued) Recurring Fair Value Measurements – (continued) Long‐term debt, carried at estimated fair value – The Company elected the fair value option on its Step‐Up Notes, see Note 10 for additional information. 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. As of December 31, 2016, Step‐Up Notes had an UPB of $534.1 million and an estimated fair value of $313.3 million. The aggregate UPB exceeded the fair value by approximately $220.8 million as of December 31, 2016. As of December 31, 2015, Step‐Up Notes had an UPB of $534.1 million and an estimated fair value of $365.4 million. The aggregate UPB exceeded the fair value by approximately $168.7 million as of December 31, 2015.



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NOTE 2 ‐ FAIR VALUE MEASUREMENTS – (continued) Recurring Fair Value Measurements – (continued) The following tables present the activity of the assets and liabilities reported at fair value on a recurring basis for the years ended December 31, 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 ‐ ‐ (105,034) ‐ ‐ ‐

Total gains (losses) in earnings:

Interest income ‐ ‐ 119,373 ‐ ‐ ‐

Interest expense ‐ ‐ ‐ (119,373) ‐ ‐

Change in fair value 15,975 52,087 (167,032) 200,845 ‐ (2,284)

Total gains (losses) in earnings 15,975 52,087 (47,659) 81,472 ‐ (2,284)

Purchases, issuances and settlements:

Purchases, net 176,666 ‐ ‐ ‐ ‐ ‐

Issuances, net 41,863 ‐ ‐ ‐ ‐ 1,253,111

Settlements, net (25,510) ‐ (273,341) 326,427 (1,105) (1,238,894)


MSRs LT Debt RMC SMB IRLCs LHFS


Transfers into Level 3 ‐ ‐ ‐ ‐ ‐ ‐

Transfers out of Level 3 ‐ ‐ (107,475) ‐ ‐ ‐

Total gains (losses) in earnings:

Interest income ‐ ‐ 132,071 ‐ ‐ ‐

Interest expense ‐ ‐ ‐ (132,071) ‐ ‐

Change in fair value 75,289 8,470 51,189 (14,962) ‐ (1,557)

Total gains (losses) in earnings 75,289 8,470 183,260 (147,033) ‐ (1,557)

Purchases, issuances and settlements:

Purchases, net (17,626) ‐ ‐ ‐ ‐ 253,241

Issuances, net 33,178 ‐ ‐ ‐ ‐ ‐

Settlements, net (14,500) ‐ (256,325) 312,674 2,642 (245,780)


Level 3 Recurring Fair Value Measurements

For the Year Ended December 31, 2015

Level 3 Recurring Fair Value Measurements




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NOTE 2 ‐ FAIR VALUE MEASUREMENTS – (continued) Recurring Fair Value Measurements – (continued) The following table presents the changes in recurring fair value measurements included in net income in the consolidated statements of operations for the years ended December 31, 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 119,373$ ‐$ 33,813$ ‐$ ‐$ ‐$ 153,186$

Securitized mortgage borrowings ‐ (119,373) ‐ ‐ ‐ ‐ (119,373)

Mortgage servicing rights ‐ ‐ ‐ ‐ 15,975 ‐ 15,975

Long‐term debt ‐ ‐ ‐ 52,087 ‐ ‐ 52,087

Loans held for sale ‐ ‐ ‐ ‐ ‐ (4,057) (4,057)

IRLCs and hedging instruments ‐ ‐ ‐ ‐ ‐ 4,703 4,703

Total 119,373$ (119,373)$ 33,813$ 52,087$ 15,975$ 646$ 102,521$

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 132,071$ ‐$ 36,227$ ‐$ ‐$ ‐$ 168,298$

Securitized mortgage borrowings ‐ (132,071) ‐ ‐ ‐ ‐ (132,071)

Mortgage servicing rights ‐ ‐ ‐ ‐ 75,289 ‐ 75,289

Long‐term debt ‐ ‐ ‐ 8,470 ‐ ‐ 8,470

Loans held for sale ‐ ‐ ‐ ‐ ‐ 6,629 6,629

IRLCs and hedging instruments ‐ ‐ ‐ ‐ ‐ 2,651 2,651

Total 132,071$ (132,071)$ 36,227$ 8,470$ 75,289$ 9,280$ 129,266$

Change in Fair Value of


Change in Fair Value Included in Net Income for the Year Ended December 31, 2016

Change in Fair Value of


Change in Fair Value Included in Net Income for the Year Ended December 31, 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.



58

NOTE 2 ‐ FAIR VALUE MEASUREMENTS – (continued) Nonrecurring Fair Value Measurements – (continued) The following table presents the fair value of assets measured for impairment on a nonrecurring basis and the related losses for the periods indicated:

Level 2016 2015 2016 2015

REO 2 $ 93,810 $ 75,675 $ 34,095 $ 35,663

As of December, 31

Total Losses


Nonrecurring Fair Value Measurements

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”). REO 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.



59

NOTE 2 ‐ FAIR VALUE MEASUREMENTS – (continued) Valuation Techniques and Unobservable Inputs 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 basis as for the periods indicated:

Estimated Valuation Unobservable Range of

Fair Value Technique [1] Input Inputs

Financial Instrument –

Backed by Real Estate:

RMC $ 2,553,244 DCF [2] Yield 4.43% – 5.43% 4.80%

SMB 2,647,054 DCF [2] Prepayment rate 6.55% –17.40% 8.46%

Default rates 3.57% – 8.32% 6.06%

Financial Instrument – Other:

MSRs, inclusive of ESRs 320,268 DCF [2] Discount rate 6.00% – 17.75% 11.90%

Weighted average

prepayment rate3.95% – 51.15% 12.55%

LHFS 58,480 Market Pricing Forward sales 91.38% 91.38%

IRLCs 3,007 Market Pricing Pull‐through rate 72.48% – 100.00% 86.27%

Long‐term debt 313,297 DCF [2] Discount rate 17.14% 17.14%


Weighted Average

[1] There were no changes in the techniques used for valuing Level 3 instruments.

[2] Discounted cash flow.



60

NOTE 2 ‐ FAIR VALUE MEASUREMENTS – (continued) 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 rate4.08% – 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%


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.



61

NOTE 2 ‐ FAIR VALUE MEASUREMENTS – (continued) Interest Rate Lock Commitments and Hedging Instruments The following table includes information pertaining to the Company’s IRLCs and hedging instrument assets and liabilities, for the periods indicated:

2016 2015 2016 2015

IRLCs 530,224$ 559,800$ $ (1,105) $ 2,642

TBA MBS 891,450$ 713,400$ $ (33) $ (8,640)

Notional Balances Total (Losses) Gains[1] [2]

As of December 31, For the Years Ended December 31,

[1] Amounts included in Mortgage Banking revenue within the accompanying consolidated statements of operations.

[2] Amounts include realized and unrealized gains (losses).

The Company’s TBA MBS agreements are with counterparties which are comprised of large financial institutions.

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. 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 Level Carrying Value Fair Value

Assets

Cash and cash equivalents 1 $ 210,169 $ 210,169 1 $ 157,701 $ 157,701

Restricted cash 1 12,382 12,382 1 12,624 12,624

Servicer advances 3 98,136 98,136 3 77,201 77,201

Investments in affi liated partnerships 3 52 52 3 52 52

Total $ 320,739 $ 320,739 $ 247,578 $ 247,578

Liabilities

Warehouse facil ities 2 $ 543,583 $ 543,583 2 $ 441,275 $ 441,275

Servicing advance facil ities 2 78,495 78,495 2 63,182 63,182

Notes payable, net 3 1,661 1,661 3 1,887 1,887

Total $ 623,739 $ 623,739 $ 506,344 $ 506,344

2016 2015

As of December 31,

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.



62

NOTE 2 ‐ FAIR VALUE MEASUREMENTS – (continued) Disclosure about the Fair Value of Other Financial Instruments – (continued) 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 are generally realized within a relatively short period of time, and do not bear interest. Short‐term secured liabilities (warehouse facilities, servicing advance facilities) – 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, net – Notes payable are carried at amortized cost, net of deferred issuance 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. NOTE 3 – TRUST ASSETS AND LIABILITIES

Securitized Mortgage Collateral Securitized mortgage collateral includes mortgages secured by residential real estate and real estate owned through foreclosure and consisted of the following at the periods indicated:

2016 2015

Mortgages secured by residential real estate $ 3,321,737 $ 3,641,208

Fair value adjustment (768,493) (661,930)

Mortgages secured by residential real estate, at fair value 2,553,244 2,979,278

Residential real estate owned 99,467 81,614

Net realizable value ("NRV") adjustment (5,657) (5,939)

Residential real estate owned at NRV 93,810 75,675

Total securitized mortgage collateral $ 2,647,054 $ 3,054,953

As of December 31,

The Company discontinued private level REMIC acquisitions. The estimated fair value of the net trust assets from such REMIC acquisitions is zero. As of December 31, 2016 and 2015, the Company had advances on its consolidated securitization trusts of $25.4 million and $40.6 million, respectively. The Company may be required to advance funds to cover delinquent principal and interest payments not received from borrowers in addition to property taxes, maintenance, repairs and marketing costs.



63

NOTE 3 – TRUST ASSETS AND LIABILITIES – (continued)

Securitized Mortgage Borrowings

The following table presents selected information on securitized mortgage borrowings as of the periods indicated:

Year of Issuance

Original Issuance

Amount 2016 2015

Fixed Interest

Rates

Interest Rate

Margins Over

One‐Month

LIBOR

Interest Rate

Margins After

Contractual Call

Date

2004 632,773$ 26,509$ 31,816$ 4.93% ‐ 5.51% N/A 0.90% ‐ 3.75%

2005 6,179,787 661,516 734,837 3.77% ‐ 4.78% 0.38% ‐ 1.30% 0.66% ‐ 2.18%

2006 9,694,020 2,156,840 2,378,762 4.33% ‐ 4.84% 0.08% ‐ 0.45% 0.16% ‐ 0.68%

2007 1,258,830 384,980 434,035 4.66% ‐ 4.78% 0.10% ‐ 0.30% 0.20% ‐ 0.45%

Subtotal securitized mortgage borrowings 17,765,410 3,229,845 3,579,450

Fair value adjustment ‐ (582,791) (524,497)

Total securitized mortgage borrowings 17,765,410$ 2,647,054$ 3,054,953$

As of December 31, Range of Interest Rates

NOTE 4 ‐ 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, IRLCs and related hedging instruments. Mortgage Loans Held for Sale The following table represents the fair value of mortgage LHFS by type of loan as of the periods indicated:

UPB Fair Value UPB Fair Value

Government [1] $ 513,668 $ 528,630 $ 428,851 $ 447,779

Conventional 32,532 32,909 11,675 12,143

$ 546,200 $ 561,539 $ 440,526 $ 459,922

As of December 31,

20152016

[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] $ 5,411,328 95 % $ 3,377,836 97 %

Conventional 271,560 5 121,313 3

$ 5,682,888 100 % $ 3,499,149 100 %

%


2016 2015

[1] Includes all government‐insured or guaranteed loans including FHA, VA and USDA.



64

NOTE 4 ‐ MORTGAGE BANKING – (continued)

Originations and Gain on Sale – (continued) Net revenue on mortgage banking activities includes mark to market pricing adjustments on loan commitments and forward sales contracts, and initial capitalized value of MSRs. The following table presents the components of mortgage banking net revenue for the periods indicated:

2016 2015

Gain on sale of mortgage loans, net $ 210,931 $ 132,600

Mark to market (losses)/gains on LHFS (4,057) 6,629

Repurchase provision for sold loans (4,001) (2,874)

Realized losses from IRLC and hedging instruments (5,841) (8,649)

Unrealized gains from IRLC and hedging instruments 4,703 2,651

Net revenue $ 201,735 $ 130,357


Delinquent Loans The Company had the following Government Loans included within its LHFS portfolio that were classified as delinquent or non‐accrual loans as of the periods indicated:

2016 2015

Current through 89 days delinquent $ 504,752 $ 420,178

90 or more days delinquent 56,787 39,744

Mortgage loans held for sale $ 561,539 $ 459,922

As of December 31,

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:

2016 2015

Balance, beginning of year $ 3,826 $ 4,111

Provisions 4,001 2,874

Charge offs (1,027) (3,159)

Balance, end of year $ 6,800 $ 3,826

As of December 31,



65

NOTE 5 ‐ 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 MSRs 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. 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 as of 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 assets (inclusive of any consolidated ESR assets) and mortgage servicing liabilities as of the dates indicated are as follows:

2016 2015

Mortgage servicing assets $ 354,189 $ 116,532

Mortgage servicing l iabil ities (33,921) (5,258)

Mortgage servicing rights, net $ 320,268 $ 111,274

As of December 31,

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.



66

NOTE 5 ‐ MORTGAGE SERVICING RIGHTS – (continued) Mortgage loans that are sold, in which servicing is retained by the Company, are reported as MSRs in the consolidated statement of financial condition after sale. The UPB of the loans underlying the Company’s owned MSR portfolio as of December 31, 2016 and 2015 was approximately $46.0 billion and $38.6 billion, respectively. The following table presents the UPB of these loans based on loan type at the dates indicated:

2016 2015

Agency $ 37,398,573 $ 32,821,908

Non‐Agency 8,648,916 5,746,056

Total $ 46,047,489 $ 38,567,964

As of December 31,

The Company is an active market participant and acquires pools of bulk MSR assets either autonomously or with a capital partner. The Company finances, through several large financial institutions, certain 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 MSRs holder, the Company is also entitled to the ancillary income and continues to provide servicing and advancing functions. When the Company transfers its ESRs, it evaluates such transfer as either a sale or a secured financing. The Company also enters into alternative ESR structures in which the Company forms a new entity in which the Company transfers the ESR to the newly formed entity and a third party provides capital. Refer to Note 14 for additional discussion regarding the consolidated ESR transactions, which can occur simultaneous or subsequent to the initial ESR sale. The Company’s MSRs are carried at fair value excluding the fair value of the ESRs sold. For the years ended December 31, 2016 and 2015, the Company completed MSR acquisitions with an aggregate notional of $12.5 billion and $25.4 billion, respectively, and purchase price of $38.6 million and $268.8 million respectively. There were no MSR sales in the years ended December 31, 2016 and 2015, however during these periods the Company completed sales of ESRs of pools of newly originated and acquired government loans of $3.6 billion and $1.6 billion, respectively, to unrelated third parties and received proceeds of $25.5 million and $14.5 million, respectively. 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 $ 19,536,778 $ 70,087 $ 29,954,468 $ 66,472

MSRs – Full servicing retained, including ESRs 26,510,711 250,181 8,613,496 44,802

Total $ 46,047,489 $ 320,268 $ 38,567,964 $ 111,274

2016 2015

As of December 31,



67

NOTE 5 ‐ MORTGAGE SERVICING RIGHTS – (continued) The following table summarizes MSR activity for the periods indicated:

2016 2015

Balance, beginning of period 111,274$ $ 34,933

Additions from securitizations 41,863 33,178

Acquired mortgage servicing (l iabil ities) net of assets (34,796) (17,626)

Acquired from consolidation of VIEs 211,462 ‐

Net additions 218,529 15,552

Sale of excess servicing rights (25,510) (14,500)

Changes in fair value:

Collection or realization of cash flows (45,540) (18,958)

Changes in valuation model inputs or assumptions 61,515 94,247

Total changes in fair value 15,975 75,289

Balance, end of period 320,268$ 111,274$


Sensitivity Analysis The fair value of MSRs is sensitive to changes in interest rates, including their effect on prepayment speeds. MSRs typically decrease in value when interest rates decline. Declining interest rates result in voluntary prepayments that lower the expected net servicing cash flows and life of the MSR asset.

The following table outlines the key economic assumptions used to determine the fair value of the Company’s MSRs as of December 31, 2016 and 2015, and indicates the sensitivities of those fair values to immediate adverse changes in those assumptions as presented below:

2016 2015

Fair value $ 320,268 111,274

Weighted‐average annual prepayment 12.55% 14.44%

Impact of 10% adverse change (8,725)$ (7,803)$


Weighted‐average discount rate 11.90% 11.97%



As of December 31,



68

NOTE 5 ‐ MORTGAGE SERVICING RIGHTS – (continued) Sensitivity Analysis – (continued)

The sensitivity analysis in the table above is hypothetical and should be used with caution. Changes in fair value based on variations in assumptions generally cannot be easily extrapolated, because the relationship of the assumptions change to the change in fair value is often interrelated and may not be linear. Each variable was changed independently without changing any other assumption. Generally, changes in one factor may result in a change to an interrelated factor, which may present different results than the impact of initial change.

The valuation of MSRs includes numerous assumptions of varying lower sensitivities in addition to the assumptions discussed above. Other assumptions include, but are not limited to, market cost to service, involuntary prepayment, servicer claims losses, prepayment penalties, ancillary income, advance financing cost, and float on escrow balances.

NOTE 6 – SERVICER ADVANCES AND LIABILITIES Servicer Advances Under certain pooling and servicing agreements, when the borrower fails to make a contractually scheduled payment, the Company may be required to advance the principal and interest payment, less the servicing fee, to meet the remittance requirements of the investors. To make the advance, the Company may first use any available excess funds in the related custodial account, and, if the advance requirement has not been met, the Company must use its own funds to fulfill the obligation. In addition, the Company may be required to advance, from its own funds, property taxes and insurance for borrowers that have insufficient escrow accounts, plus property preservation expenses related to foreclosed properties. The Company is only required to make advances if they are deemed recoverable.

Servicing advances on non‐agency securitized loans are typically recovered from a cash flow hierarchy according to the terms of the pooling and servicing agreement. The advance cash flow hierarchy first seeks to recover the advance from the proceeds of the mortgage loan for which the advance was made. If the proceeds are insufficient, the advance is recovered from the cash collected from all borrowers in a securitization trust.

Advances on loans contained within a government security are recoverable from the respective agency providing the guarantee or insurance based on a requested reimbursement from the agency.

The outstanding servicer advances consisted of the following as of the periods indicated:

2016 2015

Taxes and insurance $ 39,143 $ 32,278

Principal and interest 23,810 29,205

Foreclosure, bankruptcy and other 35,183 15,718

Total servicer advances 98,136$ 77,201$

As of December 31,



69

NOTE 6 – SERVICER ADVANCES AND LIABILITIES – (continued) Servicing Liabilities Servicing liabilities represent amounts that the Company borrowed from the custodial accounts (such custodial accounts are excluded from the consolidated statements of financial condition) pursuant to servicing contracts, primarily to pay required principal and interest advances. Custodial accounts are comprised of amounts that are collected from borrowers. Servicing liabilities are summarized as of the periods indicated:

2016 2015

Principal and interest advances due custodial accounts $ 24,245 $ 27,037

Borrower and escrow payments due custodial accounts 179,405 129,729

Unapplied funds 9,831 10,677

Total servicing l iabil ities 213,481$ 167,443$

As of December 31,

NOTE 7 – 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 December 31, 2016 and 2015 the clearing account balances were $174.1 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 $825.1 million and $626.7 million as of December 31, 2016 and 2015, respectively. According to the 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 sheets and amounted to $29.6 million and $21.6 million as of December 31, 2016 and 2015, respectively.



70

NOTE 8 – PROPERTY, FURNITURE AND EQUIPMENT Property, furniture and equipment, net consisted of the following as of the periods indicated:

2016 2015

Property, furniture and equipment:

Vehicles $ 482 $ 497

Computer, phone and information technology 15,176 11,720

Leasehold improvements 14,605 12,114

Furniture and office 10,709 9,990

Other fixed assets 1,733 1,111

42,705 35,432

Less: accumulated depreciation (19,808) (12,645)

Total property, furniture and equipment, net 22,897 22,787

As of December 31,

Leases The Company and its subsidiaries lease premises and certain equipment under capital leases and non‐cancelable operating leases with terms expiring through 2024, exclusive of renewal option periods. Future minimum lease payments for the Company and its subsidiaries within its operating divisions are as follows:

Year ending Mortgage Lending Mortgage ServicingReal Estate

Transactions

Real Estate

LogisticsAsset Management Corporate Support Total

2017 $ 1,947 $ 6,961 $ 1,677 $ 65 $ 70 $ 4,388 $ 15,108

2018 867 8,003 1,064 2 73 3,768 13,777

2019 450 8,233 550 ‐ 12 3,413 12,658

2020 317 8,378 52 ‐ ‐ 2,287 11,034

2021 ‐ 8,335 ‐ ‐ ‐ 1,142 9,477

Thereafter ‐ 6,128 ‐ ‐ ‐ 3,261 9,389

Total 3,581$ 46,038$ 3,343$ 67$ 155$ 18,259$ 71,443$


Total rent expense for the years ended December 31, 2016 and 2015 were $12.4 million and $11.3 million, respectively.



71

NOTE 9 – PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other assets are comprised of the following as of the periods indicated:

2016 2015

Accounts receivable $ 38,920 $ 23,145

Prepaid expenses 8,611 8,184

IRLC and hedging instruments 10,357 4,419

Goodwill 4,547 4,547

Internal‐use software and trademarks 1,997 ‐

Other 4,334 4,977

Total prepaid expenses and other assets 68,766$ 45,272$

As of December 31,

NOTE 10 – BORROWINGS The following table sets forth the composition of the Company’s borrowings as of the periods indicated:

2016 2015

Long‐term debt, at estimated fair value $ 313,297 $ 365,384

Warehouse facil ities 543,583 441,275

Servicing advance facil ities 78,495 63,182

$ 935,375 $ 869,841

As of December 31,

Long‐Term Debt, at Estimated Fair Value As of December 31, 2016, the Step‐Up Notes had a face amount of $534.1 million compared to an estimated fair value of approximately $313.3 million. The aggregate face amount exceeded the fair value by approximately $220.8 million as of December 31, 2016. The Step‐Up Notes mature on January 15, 2021 at 100% 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.



72

NOTE 10 – BORROWINGS – (continued) Long‐Term Debt, at Estimated Fair Value – (continued) According to the agreement, for any semi‐annual interest accrual period prior to January 15, 2016, the Company had the ability 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”). 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% per annum and PIK Interest at the rate of 1.50% per annum. As a result, the contractual UPB of the Step‐Up Notes at July 15, 2014 increased to approximately $534.1 million. The Company elected to make all interest payments, payable on January 15, 2015, July 15, 2015 and January 15, 2016 entirely in cash. All subsequent interest payments are required to be paid entirely in cash. For the year ended December 31, 2016 and 2015, the Company made $17.4 million and $12.0 million, respectively, in interest payments on the Step‐Up Notes. As part of the semi‐annual interest payment schedule, the Company made an additional payment of $10.7 million in January 2017. 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.



73

NOTE 10 – BORROWINGS – (continued) Warehouse Facilities – (continued) The following table presents the warehouse facilities as of the periods indicated:

Line Limit

(in millions)

Agreement I [1] $155.0 1‐month 97‐98% 74.3$ 81.7$ 9/2017

Origination Libor+2.375%

to 3.025%

Agreement II [1] $325.0 1‐month 93‐96% 290.3$ 304.8$ 9/2017

Origination and Libor+2.75%

Buy- out to 3.50%

Agreement III [2] $160.0 1‐month 95‐98% 107.4$ 117.7$ 4/2017


to 3.00%

Agreement IV [3] $110.0 1‐month 70‐95% 49.4$ 57.0$ 4/2017

Buy- out Libor+2.50%

Agreement V [4] $6.1 12% per annum – 6.1$ ‐$ 8/2017

Origination

Agreement VI [5] $20.0 20% incentive fee 83% 16.1$ ‐$ 8/2017

Buy- out

Agreement VII [6] $45.0 1‐month Libor + 3.50% 99% ‐$ ‐$ 10/2017

Buy- out


Type Interest Rate

Initial

Advance RateMaturity Date(in millions) (in millions)

Outstanding Balance

Secured by LHFS Estimated

Fair Value

[1] In September 2016, the Company renewed two of its warehouse facilities with a maturity date occurring in September 2017.

[2] In April 2016, a new warehouse facility was issued with a line limit of $110.0 million and a maturity date occurring in April 2017. In August 2016, the

Company received a temporary line limit increase to $160.0 million through November 28, 2016 from $110.0 million to accommodate elevated levels of production. In November 2016, this temporary line limit increase was extended through February 2017. [3] In February 2017, the Company renewed one of its warehouse facilities with a maturity date occurring in April 2017.

[4] The estimated fair value of LHFS secured by this line is included in Agreements I, II and III.

[5] The estimated fair value of LHFS secured by this line is included in Agreement IV.

[6] In July 2016, the Company increased one of its servicing advance facilities to $50.0 million with the ability to use $30.0 million to fund early buyouts of

single family residential loans and extended the related maturity date occurring in October 2016. In September 2016, the Company amended the servicing advance facility to $65.0 million with a sublimit of $45.0 million which may be used to buy out FHA loans. In October 2016, the facility was renewed with a maturity date occurring in October 2017.



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NOTE 10 – BORROWINGS – (continued) Warehouse Facilities – (continued)

Line Limit

(in mill ions)

Agreement I [1] $200.0 1‐month 97‐98% 189.2$ 209.3$ 8/2016


to 3.125%

Agreement II $325.0 1‐month 92‐96% 199.1$ 206.3$ 9/2016

Origination and Libor+2.75%

Buy- out to 3.50%

Agreement III $1.0 1‐month 95% ‐$ ‐$ 9/2016


Agreement IV $110.0 1‐month 70‐95% 38.5$ 44.3$ 2/2017

Buy- out Libor+2.50%

Agreement V [2] $6.1 12% per annum – 6.1$ ‐$ 8/2017

Origination

Agreement VI [3] $20.0 20% incentive fee 83% 8.4$ ‐$ 8/2017

Origination

Maturity

Date

Outstanding Balance

(in mill ions) (in mill ions)


Type Interest Rate

Initial

Advance Rate

Secured by LHFS Estimated

Fair Value

[1] In September 2015, the line was renewed with a maturity date of August 2016. In December 2015, the Company received a temporary line limit increase

to $200.0 million through January 6, 2016 from $155.0 million to accommodate elevated levels of production. [2] The estimated fair value of LHFS secured by this line is included in Agreements I and II.

[3] The estimated fair value of LHFS secured by this line is included in Agreement IV.

Servicing Advance Facilities As of December 31, 2016, the Company had two servicing advance facilities with a total committed amount of $140.0 million, of which $45.0 million of one facility may be used as a warehouse facility to fund early buyouts on single‐family residential loans (See Agreement VII in the Warehouse Facilities section above). The two servicing advance facilities have an outstanding balance of $78.5 million. The weighted average advance rate of the two facilities as of December 31, 2016 was 79%. These facilities include customary covenants, of which the Company was in compliance with such covenants as of December 31, 2016. The facilities mature in October 2017 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 third party lender and confirmed by the Company. As of December 31, 2016, the fair value of the collateral exceeded the UPB.



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NOTE 11 – NOTES PAYABLE On December 30, 2014, the Company entered into a loan and security agreement (“Note”). The Note is secured by real and personal property, and requires monthly principal payment of $17,250 and interest at one‐month LIBOR plus 2.80%. All remaining principal and accrued interest are due on December 30, 2019.

The Company had outstanding secured notes payable as follows as of the periods indicated:

Description Original Balance 2016 2015 Rate Maturity Date

Agreement I $ 2,070 $ 1,673 $ 1,880 1‐month Libor + 2.80% December 2019

Agreement II 58 3 8 8.89% ‐ 9.49% June 2017

Agreement III 99 1 20 4.75% ‐ 5.59% February 2017

Total 2,227$ 1,677 1,908

Unamortized debt issuance cost (16) (21)

Notes payable, net 1,661$ 1,887$

Outstanding Balance

As of December 31,

Future minimum principal payments on the secured notes are as follows as of the periods indicated:

Year ending Amount

2017 $ 211

2018 207

2019 1,259

2020 ‐

2021 ‐

Thereafter ‐

Total 1,677$

NOTE 12 – DEFERRED REVENUE Effective November 28, 2012, Carrington Insurance Agency, LLC (“CIA”) entered into an asset purchase agreement with an unrelated party to transfer its rights, title and interests to insurance commissions placed on or after the aforementioned effective date. The contract stipulates a minimum required production of $125.0 million in policies placed by CIA in exchange for $21.2 million in cash paid to CIA on the effective date. CIA recorded the cash received as deferred revenue which is recognized as new policies are placed by CIA. The deferred revenue amount included in accounts payable and accrued liabilities in the accompanying consolidated statements of financial condition was approximately $3.0 million and $7.7 million as of December 31, 2016 and 2015, respectively.



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NOTE 13 – 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 as of December 31, 2016 and 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, 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% 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% prejudgment simple interest on that sum from October 2007, of approximately $0.5 million. CCM filed a Notice of Appeal in this matter and the United States Court of Appeals for the Second Circuit heard an oral argument on April 5, 2016 and issued a decision on March 13, 2017. The Second Circuit affirmed the District Court’s breach of contract ruling and reversed and remanded the District Court’s damages ruling. The Second Circuit directed the District Court to conduct further proceedings to determine an appropriate damages award. The schedule and expected timeframe of the remanded proceedings is not yet known. CCM intends to explore all further options regarding this litigation including, but not limited to, fully adjudicating the remanded question regarding appropriate damages. The Company has recorded a liability of $1.8 million.



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NOTE 13 – 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, Servicemembers 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, U.S. Department of Housing and Urban Development, 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.



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NOTE 14 – MEMBERS’ (DEFICIT)/INTERESTS The managing member of The Carrington Companies, LLC (“TCC”), the parent entity of the Company, issued 9.09% an additional membership interest in TCC to a new non‐managing member on October 1, 2015. Non‐controlling interests includes preferred shares in the Company’s three consolidated wholly‐owned subsidiaries, CMS ESR Holdings, LLC (“ESR Holdings”), CMS ESR Holdings II, LLC, (“ESR Holdings II”) and CMS ESR Holdings III, LLC (“ESR Holdings III”). In cases where subsidiaries are capitalized through a subscription payable, such subscription must be funded prior to financial statement issuance, in accordance with FASB ASC 310‐10‐S99‐2. On July 29, 2016, CMS and a third party investor entered into a transaction whereby the third party investor contributed $153.9 million of ESRs previously purchased from CMS in 2015, to a newly created wholly‐owned subsidiary, ESR Holdings. In exchange, the third‐party investor received various preferred equity interests in ESR Holdings. In November 2016, contemporaneously with the purchase of certain MSRs, CMS transferred the related ESR to its wholly‐owned subsidiaries, ESR Holdings II and ESR Holdings III totaling $20.0 million and $37.5 million, respectively. ESR Holdings II and ESR Holdings III funded its acquisitions of the ESRs by issuing preferred equity interests to third party investors in exchange for cash proceeds. CMS determined that the newly created wholly‐owned subsidiaries are a VIE, CMS is the primary beneficiary and therefore, consolidates the subsidiaries with the preferred equity recorded as non‐controlling interests. For the year ended December 31, 2016, total contributions from the non‐controlling interest amounted to $211.5 million of which $154.9 million was a non‐cash contribution and the remainder was a cash contribution. For the year ended December 31, 2016, total distributions to the non‐controlling interests amounted to $19.4 million, of which $14.0 million was made in cash and $5.4 million was included in accounts payable and accrued liabilities in the consolidated statements of financial condition as of December 31, 2016. The ownership and income allocation for the years ended December 31, 2016 and 2015 are reflected in the table

below.

Managing MemberExisting Non‐

Managing Member

New Non‐

Managing MemberTotal Controlling

Non‐

Controlling

Interests

Total Members'

(Deficit)/Interests

Balance, December 31, 2014 $ (287,794) $ (914) $ ‐ $ (288,708) $ ‐ $ (288,708)

Net income (loss) 1/1/15 ‐ 9/30/15 (1,450) (7) ‐ (1,457) ‐ (1,457)

Net income 10/1/15 ‐ 12/31/15 39,220 217 3,944 43,381 ‐ 43,381

Balance, December 31, 2015 (250,024) (704) 3,944 (246,784) ‐ (246,784)

Contributions ‐ ‐ ‐ ‐ 211,462 211,462

Distributions ‐ ‐ ‐ ‐ (19,374) (19,374)

Net income 2016 75,486 417 7,590 83,493 ‐ 83,493

Balance, December 31, 2016 (174,538)$ (287)$ 11,534$ (163,291)$ 192,088$ 28,797$

Ownership, December 31, 2016 90.41% 0.50% 9.09% 100.00%





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NOTE 15 – CONCENTRATION OF RISKS In the ordinary course of business, the Company will encounter certain economic and regulatory risks. Economic risks include credit risk, interest rate risk and market risk. Credit risk is the risk of default, primarily in the loan portfolio that results from borrowers’ inability or unwillingness to make contractually required payments. Interest rate risk is the risk that the valuation of the Company’s interest sensitive assets and liabilities and its net interest income will change due to changes in interest rates. Market risk includes the inability of prospective borrowers to engage in commitments to originate loans. Regulatory risks include administrative enforcement actions and/or civil or criminal liability resulting from any alleged failure to comply with the laws and regulations applicable to the Company’s business. As of December 31, 2016, the Company was approved to originate, and originated loans in 45 states and the U.S. Virgin Islands, Puerto Rico and the District of Columbia. The Company had significant originations (greater than 5% of total originations) in the following states for the periods indicated:

State 2016 2015

California 17.06% 17.90%

Florida 7.25% 9.66%

Texas 6.93% 6.89%

New York 5.60% 5.45%

Virginia 4.58% 5.11%


Percent of Originations,

Changes in the real estate market, or significant increases in interest rates, could have a material adverse impact on the Company’s mortgage lending operations. The MSRs that are owned by the Company are subject to fluctuations in their estimated fair value due to various risk factors including market, credit, and interest rate risks. A significant amount of the loans serviced under these contractual agreements are to subprime borrowers and are generally more volatile than prime loans. The Company attempts to mitigate the risk by utilizing assumptions that it believes are appropriate. The assumptions utilized, however, are inherently uncertain, subject to changes in political, economic and market conditions and accordingly, it is typical to realize volatility in the estimated fair value over the respective lives of the MSRs. The Company uses financing facilities with various lenders to facilitate the funding of servicing advances and residential mortgage loans, and would be exposed to material adverse risk resulting from counterparty nonperformance. In addition, these financing facilities expire at various times during 2017 and the Company is exposed to material adverse risk if the financing facilities are not renewed. No assurance can be given that such renewals will occur, or if such renewals occur that they will be renewed with similar or favorable terms. However, the Company does not anticipate any nonperformance by the counterparties and believes its financing facilities will be renewed with similar terms. Refer to Note 10 for additional information regarding the Company’s borrowings.



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NOTE 16 – LONG‐TERM INCENTIVE PLAN

TCC, LLC adopted a long‐term incentive plan (“Plan”) pursuant to which it awards units to eligible participants on the terms and conditions in the Plan agreement. Employees of the Company and its affiliates are eligible to participate in the Plan. There are 46,750,000 units reserved under the Plan. Such units vest based on years of service and are paid out only upon events specified in the Plan agreement, including but not limited to events of liquidity such as the sale of the Company or one or more of its affiliates. The total units outstanding as of December 31, 2016 and 2015 were 32,853,100 and 31,853,100, respectively. No compensation expense was recorded in relation to the awards in the accompanying consolidated statements of operations for 2016 and 2015.

NOTE 17 – INCOME TAXES Four indirect subsidiaries of CHC are U.S. corporations and two are foreign subsidiaries. All other subsidiaries (both direct and indirect) are limited liability companies. The provision for income taxes included in other expenses in the accompanying consolidated statements of operations is presented below as of the periods indicated:

2016 2015

Current provision

Federal $ 4 $ 10

State 3 3

Foreign ‐ ‐

Net current provision 7 13

U.S. deferred tax provision ‐ ‐

Foreign deferred tax provision ‐ ‐

Total tax provision 7$ 13$


The differences between expected income tax expense based on the statutory Federal U.S. income tax rates and the Company’s effective tax rates are summarized as follows as of the periods indicated:

2016 2015

Federal income tax based on statutory rate $ (1,430) $ (1,667)

State tax, net of federal income tax benefit 2 2

Permanent differences 5 7

Valuation allowance 1,430 1,671

Total income tax expense $ 7 $ 13




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NOTE 17 – INCOME TAXES – (continued) Deferred taxes are computed on the differences between the book and tax bases in assets and liabilities. Deferred income taxes arise as a result of differences in the methods used to determine income and expenses for financial reporting versus tax reporting, including the utilization of prior year losses applied to the current year. The Company established a full valuation allowance on its net deferred tax asset as of December 31, 2016 and 2015. The Company will recognize interest and penalties related to unrecognized tax benefits and penalties as income tax expense. As of December 31, 2016 and 2015, the Company did not have liability for unrecognized tax benefits. The Company’s income tax returns may be subject to examination by federal, state and foreign taxing authorities. Because application of tax laws and regulations for many types of transactions is susceptible to varying interpretations, amounts reported in the accompanying consolidated financial statements could be changed at a later date upon final determination by taxing authorities. Management believes that the Company has no uncertain income tax positions that could materially affect its financial statements at both the federal and state jurisdiction levels. The Company’s income tax returns remain open for examination generally for three years for federal income taxes, and four years for state income taxes. NOTE 18 – RELATED PARTY TRANSACTIONS Affiliate Services Affiliates of the Company earn service fees by providing a variety of services on an arms‐length basis and at market rates to CMS. The affiliates providing the services are paid by CMS or the respective securitization trusts serviced by CMS, which are described below: Property Field Services CPS performs site inspections on specified properties in default and assists CMS in developing a marketing strategy for liquidating properties. When a property is foreclosed upon and subsequently sold to a third party, CPS receives a fee equal to 1% of the sales price. This fee is paid directly to CPS at the close of escrow and is taken from the market standard sales commission remitted to the real estate agents. During the years ended December 31, 2016 and 2015, CPS received $2.1 million and $1.8 million, respectively, for liquidating properties for CMS. In addition, CPS performs valuation services consisting primarily of broker price opinions. During the years ended December 31, 2016 and 2015, CPS received $4.6 million and $4.0 million, respectively, for performing these services.



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NOTE 18 – RELATED PARTY TRANSACTIONS – (continued) Document Services CDS performs document services functions for loan modifications negotiated by CMS. These activities include the preparation of the documents, coordinating the delivery of the documents to the borrowers and facilitating the successful recovery of the signed documents. During the years ended December 31, 2016 and 2015, CDS received $1.7 million and $1.6 million, respectively, for performing these services. Foreclosure Services CFS performs various non‐judicial foreclosure trustee activities for properties that CMS services in the states of California, Nevada, Texas and Arizona. These activities include preparing notice of defaults, initiating foreclosure sales and facilitating the transfer of the properties upon sale. During the years ended December 31, 2016 and 2015, CFS received $1.9 million and $1.2 million, respectively, for performing these services. Real Estate Services CRES, through its licensed brokerage subsidiaries, CEI and CTS, acts as the sales, escrow and settlement agent, respectively, when selling various CMS‐serviced properties that have previously been foreclosed upon as well as unrelated third party properties. When the property is sold to a third party, CRES generally receives a net sales commission ranging between 2.0% and 2.5% of the sales price plus market standard title and escrow fees. During the years ended December 31, 2016 and 2015, CRES received $4.2 million and $3.5 million, respectively, in net sales commissions, title and escrow fees. In addition, CTS provides CMS search reports for properties serviced by CMS. During the years ended December 31, 2016 and 2015, CTS received $2.3 million and $1.6 million, respectively, for performing these services. Recovery Services CRS, a wholly owned subsidiary of Carrington Mortgage Holdings, LLC (“CMH”), performs debt resolution services on behalf of affiliated companies and unrelated third parties for loans that have been previously charged off. CRS receives a fee of 40% of the amount collected. CRS received $0.1 million and $0.3 million for years ended December 31, 2016 and 2015, respectively, for performing these services. Due to improvement in the markets 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. Asset Management Services CCM, a wholly owned subsidiary of CMH, manages the acquisitions of MSRs and sales of ESRs for the Company’s affiliated mortgage operating division. CCM received $2.0 million and $1.5 million for the years ended December 31, 2016 and 2015, respectively, for performing these services.



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NOTE 18 – RELATED PARTY TRANSACTIONS – (continued) Other Borrowings From time to time, the Company borrows from its controlling members on a short term basis. As of December 31, 2016, no amounts were outstanding in connection with these borrowings. NOTE 19 – BUSINESS COMBINATIONS On March 4, 2015, the Company acquired certain assets of two real estate brokerage firms, Prosults Realty of Tampa, LLC and Prosults Realty of Naples, LLC for a purchase price of approximately $0.6 million. The purchase price primarily consisted of approximately $0.1 million in cash and $0.5 million in estimated earn‐out contingencies, allocated to goodwill. The earn‐out is contingent upon achieving certain predetermined agent retention and, earnings goals. For each of the years ended December 31, 2016 and 2015, the Company has paid $0.1 million in contingent consideration. The purpose of the acquisition was to expand the real estate transactions operating division of the Company by acquiring more real estate agents. NOTE 20 – 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 U.S. housing investments through managed accounts and forming funds to aggregate capital to invest in mortgage loans and U.S. housing.



84

NOTE 20 – REPORTING SEGMENTS/OPERATING DIVISIONS – (continued) Mortgage 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. 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.



85

NOTE 20 – REPORTING SEGMENTS/OPERATING DIVISIONS – (continued) Financial information for the Company’s operating divisions and corporate support is as follows for the periods indicated:

Revenues:

Revenues 201,735$ 211,675$ 39,081$ 29,509$ 11,737$ ‐$ 493,737

Other income ‐ ‐ 427 58 152 ‐ 637

Total revenue 201,735 211,675 39,508 29,567 11,889 ‐ 494,374

Operating expenses 169,107 117,629 27,802 23,388 6,568 107,628 452,122

Income/(loss) from operations 32,628 94,046 11,706 6,179 5,321 (107,628) 42,252

Other income/(expense), net:

Interest income 11,656 5,023 ‐ ‐ 357 ‐ 17,036

Interest expense (15,341) (8,478) ‐ (2) ‐ (20,029) (43,850)

Change in fair value of mortgage

servicing rights ‐ 15,975 ‐ ‐ ‐ ‐ 15,975

Change in fair value of long‐ term debt ‐ ‐ ‐ ‐ ‐ 52,087 52,087

Operating division income/(loss)

before income taxes 28,943$ 106,566$ 11,706$ 6,177$ 5,678$ (75,570)$ 83,500$

Asset

Management

Revenues:

Revenues 130,357$ 132,485$ 36,379$ 29,836$ 7,440$ ‐$ 336,497

Other income ‐ ‐ 42 53 1 ‐ 96

Total revenue 130,357 132,485 36,421 29,889 7,441 ‐ 336,593

Operating expenses 122,719 95,199 25,019 21,338 6,631 88,195 359,101

Income/(loss) from operations 7,638 37,286 11,402 8,551 810 (88,195) (22,508)

Other income/(expense), net:

Interest income 8,658 2,055 ‐ ‐ 372 ‐ 11,085

Interest expense (9,131) (6,763) ‐ (7) ‐ (14,498) (30,399)

Change in fair value of mortgage

servicing rights ‐ 75,289 ‐ ‐ ‐ ‐ 75,289

Change in fair value of long‐ term debt ‐ ‐ ‐ ‐ ‐ 8,470 8,470

Operating division income/(loss)

before income taxes

Asset

Management

Total Assets as of December 31, 2016 [1] 526,613$ 3,381,009$ 10,303$ 11,459$ 7,846$ 3,981$ $ 3,941,211

Total Assets as of December 31, 2015 [1] 436,938$ 3,477,235$ 10,566$ 8,063$ 5,847$ 3,085$ $ 3,941,734

Real Estate

Logistics

Corporate

Support Consolidated

Consolidated

Mortgage

Mortgage

Lending

Mortgage

Servicing

Real Estate

Transactions

Real Estate

Transactions

Real Estate

Logistics

Corporate

Support

(94,223)$ 41,937$


7,165$ 107,867$ 11,402$ 8,544$ 1,182$


Mortgage

Mortgage

Lending

Mortgage

Servicing

Mortgage

Mortgage

Lending

Mortgage

Servicing

Real Estate

Transactions Consolidated

Real Estate

Logistics

Corporate

Support

Asset

Management

[1] All operating division assets balances exclude intercompany balances.



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NOTE 21 – 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. MSR and ESR Transactions In January 2017, the Company completed a sale of the ESRs of a pool of originated GNMA loans of approximately $916.1 million of UPB to a third party investor through a fund managed by the Company’s asset management operating division for approximately $7.9 million. In February 2017, the Company completed the purchase of approximately $602.4 million in UPB of U.S. residential mortgage loans, as part of purchase agreement entered in November 2016, for $4.6 million. In February 2017, the Company completed a sale of the ESRs of a pool of originated GNMA loans of approximately $295.0 million of UPB to a third party investor through a fund managed by the Company’s asset management operating division for approximately $2.6 million. Warehouse and Servicing Advance Facilities In January 2017, the Company entered into a new warehouse facility of $50.0 million with a maturity date of January 18, 2018. In February 2017, the Company increased this warehouse facility to $75.0 million. In February 2017, the Company renewed one of its warehouse facilities with a new maturity of April 28, 2017. In February 2017, the Company renewed one of its servicing advance facilities with a new maturity of February 15, 2018.

Documents

2016 Year-End Financial Report (MASTER) - RNS Submit · ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2016. 2 ... divisions for the years ended December 31, 2016 and 2015