PHH CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File No. 1-7797

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PHH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MARYLAND 52-0551284
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

1 CAMPUS DRIVE 07054
PARSIPPANY, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

(973) 428-9700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is, therefore, filing this Form with the reduced disclosure
format.

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PHH CORPORATION AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INDEPENDENT ACCOUNTANTS' REPORT

To the Board of Directors and Stockholder of
PHH Corporation
Parsippany, New Jersey

We have reviewed the accompanying consolidated condensed balance sheet of PHH
Corporation and subsidiaries (the "Company"), a wholly-owned subsidiary of
Cendant Corporation, as of June 30, 2002, and the related consolidated condensed
statements of income and cash flows for the three and six month periods ended
June 30, 2002 and 2001. These financial statements are the responsibility of the
Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to such consolidated condensed financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2001, and the related consolidated statements of
income, stockholder's equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 7, 2002 (February 21, 2002
as to Note 19), we expressed an unqualified opinion (and included an explanatory
paragraph relating to the modification of the accounting for interest income and
impairment of beneficial interests in securitization transactions and the
accounting for derivative instruments and hedging activities, as discussed in
Note 1 to the consolidated financial statements) on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated condensed balance sheet as of December 31, 2001 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.

/s/ Deloitte & Touche LLP
Parsippany, New Jersey
August 12, 2002

1

PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN MILLIONS)

See Notes to Consolidated Condensed Financial Statements.

2

PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)

See Notes to Consolidated Condensed Financial Statements.

3

PHH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)

See Notes to Consolidated Condensed Financial Statements.

4

PHH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNLESS OTHERWISE NOTED, ALL AMOUNTS ARE IN MILLIONS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION
The accompanying unaudited Consolidated Condensed Financial Statements
include the accounts and transactions of PHH Corporation and its
subsidiaries (collectively, the "Company" or "PHH"). The Company is a
wholly-owned subsidiary of Cendant Corporation ("Cendant"). Pursuant to
certain covenant requirements in the indentures under which the Company
issues debt, the Company continues to operate and maintain its status as a
separate public reporting entity.

In management's opinion, the Consolidated Condensed Financial Statements
contain all normal recurring adjustments necessary for a fair presentation
of interim results reported. The results of operations reported for interim
periods are not necessarily indicative of the results of operations for the
entire year or any subsequent interim period. In addition, management is
required to make estimates and assumptions that affect the amounts reported
and related disclosures. Estimates, by their nature, are based on judgment
and available information. Accordingly, actual results could differ from
those estimates. The Consolidated Condensed Financial Statements should be
read in conjunction with the Company's Annual Report on Form 10-K dated
March 29, 2002.

Certain reclassifications have been made to prior period amounts to conform
to the current period presentation.

CHANGES IN ACCOUNTING POLICIES
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," in its
entirety. Prior to the adoption of SFAS No. 142, all intangible assets were
amortized on a straight-line basis over their estimated periods to be
benefited. Subsequent to the adoption, the Company did not amortize any
goodwill or indefinite-lived intangible assets during 2002.

In connection with the implementation of SFAS No. 142, the Company is
required to assess goodwill and indefinite-lived intangible assets for
impairment annually, or more frequently if circumstances indicate
impairment may have occurred. The Company reviewed the carrying value of
all its goodwill and other intangible assets by comparing such amounts to
their fair value and determined that the carrying amounts of such assets
did not exceed their respective fair values. Accordingly, the initial
implementation of this standard did not result in a charge and, as such,
did not impact the Company's results of operations during 2002.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." Such
standard is effective for exit or disposal activities initiated after
December 31, 2002, with earlier application encouraged. SFAS No. 146
addresses financial accounting and reporting for costs incurred in
connection with exit or disposal activities, including restructurings, and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under SFAS No. 146, a liability related to an exit or disposal activity is
not recognized until such liability has actually been incurred, as opposed
to a liability being recognized at the time of a commitment to an exit
plan, which was the standard for liability recognition under EITF Issue No.
94-3. The Company does not expect the adoption of SFAS No. 146 to have a
material effect on its financial condition or results of operations.

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2. INTANGIBLE ASSETS

Intangible assets consisted of:

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(a) Included as a component of other assets on the Company's Consolidated
Condensed Balance Sheets.

Additionally, the Company's mortgage servicing rights portfolio, including
qualifying hedges, approximated $2.2 billion and $2.0 billion as of June
30, 2002 and December 31, 2001, respectively. During the six months ended
June 30, 2002, the Company generated $429 million of mortgage servicing
rights, with a weighted average amortization period of approximately eight
years. In addition, the carrying value of the mortgage servicing rights
portfolio was reduced by amortization and valuation adjustments of $259
million.

The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 are as follows:

Amortization expense relating to all intangible assets (including mortgage
servicing rights) during the three and six months ended June 30, 2002 was
approximately $83 million and $177 million, respectively. Amortization
expense relating to all intangible assets (including mortgage servicing
rights) during the three and six months ended June 30, 2001 was
approximately $74 million and $119 million, respectively, including the
amortization of goodwill and trademarks of $5 million and $6 million,
respectively. Based on the Company's amortizable intangible assets as of
June 30, 2002, the Company expects related amortization expense for the
remainder of 2002 and the five succeeding fiscal years to approximate $187
million, $329 million, $295 million, $267 million, $243 million and $220
million.

Had the Company applied the non-amortization provisions of SFAS No. 142 for
the three and six months ended June 30, 2001, net income would have been as
follows:

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3. FOURTH QUARTER 2001 RESTRUCTURING

The liability resulting from the Company's restructuring plan committed to
in fourth quarter 2001 as a result of changes in business and consumer
behavior following the September 11th terrorist attacks is classified as a
component of accounts payable and other liabilities. The initial
recognition of the charge and the corresponding utilization from inception
are summarized by category as follows:

Personnel related costs primarily included severance resulting from the
rightsizing of certain businesses and corporate functions. The Company
formally communicated the termination of employment to approximately 700
employees, representing a wide range of employee groups and as of June 30,
2002, the Company had terminated approximately 650 employees. All other
costs were incurred primarily in connection with facility closures and
lease obligations resulting from the consolidation of business operations.
These initiatives were substantially completed as of June 30, 2002. The
majority of the remaining personnel related costs are expected to be paid
by the end of fourth quarter 2002.

4. LIABILITIES UNDER MANAGEMENT AND MORTGAGE PROGRAMS

Debt under management and mortgage programs consisted of:

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(a) The balance at June 30, 2002 primarily represents borrowings \
outstanding under the Company's Chesapeake Funding (formerly Greyhound
Funding) program.
(b) The balance at June 30, 2002 principally relates to mortgage loans
sold under repurchase agreements.
(c) The balance at June 30, 2002 reflects the issuance during second
quarter 2002 of (i) $443 million of unsecured medium-term notes with
maturities ranging from May 2005 through May 2012 and (ii) $128
million of unsecured medium-term notes with maturities ranging from
June 2005 to June 2017, of which approximately $85 million may be
subject to repurchase by the Company in third quarter 2002.
(d) The balance at June 30, 2002 reflects the repayment of $750 million
during second quarter 2002 of outstanding borrowings under a revolving
credit facility scheduled to mature in February 2005.

As of June 30, 2002, the Company had an additional $500 million of
available capacity under the Chesapeake Funding program to fund vehicles
under management programs and related receivables. Additionally, the
Company has $299 million of available capacity under its mortgage warehouse
facilities.

During first quarter 2002, the Company renewed its $750 million credit
facility, which matured in February 2002. The new facility bears interest
at LIBOR plus an applicable margin, as defined in the agreement, and
terminates on February 21, 2004. PHH is required to pay a per annum
utilization fee of 25 basis points if usage

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under the new facility exceeds 25% of aggregate commitments. During second
quarter 2002, the Company terminated $250 million of its revolving credit
facilities, which were scheduled to mature in November and December 2002.
As of June 30, 2002, there were no outstanding borrowings under any of the
Company's credit facilities and the Company had approximately $1.6 billion
of availability under these facilities and $2.2 billion of availability for
public debt issuances under its shelf registration statements. The Company
was in compliance with all of the related debt covenants as of June 30,
2002.

OTHER SECURITIZATION FACILITIES
As of June 30, 2002, the Company was servicing $590 million of relocation
receivables sold to a special purpose entity. The maximum funding capacity
through this special purpose entity is $600 million and, as of June 30,
2002, the Company had available capacity of $85 million under this
facility. Gains recognized on the securitization of relocation receivables
during the three and six months ended June 30, 2002 and 2001 were not
material.

As of June 30, 2002, the Company was also servicing approximately $1.6
billion of mortgage loans sold to a special purpose entity on a
non-recourse basis. In addition to the mortgage loans sold to the special
purpose entity, as of June 30, 2002, the Company was servicing $106 billion
of mortgage loans sold to the secondary market, substantially all of which
were sold on a non-recourse basis. The maximum funding capacity through
this special purpose entity is $3.2 billion and, as of June 30, 2002, the
Company had available capacity of approximately $1.6 billion. In addition
to the capacity through the special purpose entity, the Company has the
capacity, under a registration statement with the Securities and Exchange
Commission, to securitize approximately $1.0 billion of mortgage loans.
During the three months ended June 30, 2002 and 2001, the Company
recognized pre-tax gains of $76 million and $125 million, respectively, on
$8.1 billion and $9.9 billion, respectively, of mortgage loans sold into
the secondary market. During the six months ended June 30, 2002 and 2001,
the Company recognized pre-tax gains of $199 million and $209 million,
respectively, on $16.7 billion and $15.8 billion, respectively, of mortgage
loans sold into the secondary market. The sale of mortgage loans into the
secondary market is customary practice in the mortgage industry.

5. COMMITMENTS AND CONTINGENCIES

The June 1999 disposition of the Company's fleet businesses was structured
as a tax-free reorganization and, accordingly, no tax provision was
recorded on a majority of the gain. However, pursuant to an interpretive
ruling, the Internal Revenue Service ("IRS") has taken the position that
similarly structured transactions do not qualify as tax-free
reorganizations under the Internal Revenue Code Section 368(a)(1)(A). If
the transaction is not considered a tax-free reorganization, the resultant
incremental liability could range between $10 million and $170 million
depending upon certain factors, including utilization of tax attributes.
Notwithstanding the IRS interpretive ruling, the Company believes that,
based upon analysis of current tax law, its position would prevail, if
challenged.

The Company is involved in pending litigation in the usual course of
business. In the opinion of management, such other litigation will not have
a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.

PARENT COMPANY LITIGATION
On March 18, 2002, the Supreme Court denied all final petitions relating to
Cendant's principal securities class action lawsuit. As of December 31,
2001, Cendant deposited cash totaling $1.41 billion to a trust established
for the benefit of the plaintiffs in the lawsuit. Cendant made an
additional payment of $250 million during March 2002 and funded the
remaining balance of the liability with a cash payment of $1.2 billion on
May 24, 2002. Cendant has no remaining liability relating to its principal
securities class action lawsuit.

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6. COMPREHENSIVE INCOME

The components of comprehensive income are summarized as follows:

The after-tax components of accumulated other comprehensive loss for the
six months ended June 30, 2002 are as follows:

7. SEGMENT INFORMATION

Management evaluates each segment's performance based upon earnings before
income taxes and non-program related depreciation and amortization, both of
which are not measured in assessing segment performance or are not segment
specific. Such measure is then adjusted to exclude certain items which are
of a non-recurring or unusual nature and are also not measured in assessing
segment performance or are not segment specific ("Adjusted EBITDA").
Management believes such discussions are the most informative
representation of how management evaluates performance. However, the
Company's presentation of Adjusted EBITDA may not be comparable with
similar measures used by other companies.

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(a) Included in Corporate and Other are the results of operations of the
Company's non-strategic businesses and unallocated corporate overhead.

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Provided below is a reconciliation of Adjusted EBITDA to income before
income taxes and minority interest.

****

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES THERETO INCLUDED ELSEWHERE
HEREIN. UNLESS OTHERWISE NOTED, ALL DOLLAR AMOUNTS ARE IN MILLIONS.

We are a provider of relocation, mortgage and fleet management services. Our
Real Estate Services segment provides homebuyers with mortgages and facilitates
employee relocations and our Fleet Management Services segment provides fleet
management and fuel card services to corporate clients and government agencies.

We seek organic growth augmented by the acquisition and integration of
complementary businesses and routinely review and evaluate our portfolio of
existing businesses to determine if they continue to meet our current
objectives. As a result, we are from time to time engaged in a number of
preliminary discussions concerning possible acquisitions, divestitures, joint
ventures and/or related corporate transactions. We intend to continually explore
and conduct discussions with regard to such transactions.

RESULTS OF REPORTABLE SEGMENTS

The underlying discussions of each segment's operating results focuses on
Adjusted EBITDA, which is defined as earnings before income taxes and
non-program related depreciation and amortization, both of which are not
measured in assessing segment performance or are not segment specific. Such
measure is then adjusted to exclude certain items which are of a non-recurring
or unusual nature and are also not measured in assessing segment performance or
are not segment specific. Management believes such discussions are the most
informative representation of how management evaluates performance. However, our
presentation of Adjusted EBITDA may not be comparable with similar measures used
by other companies.

THREE MONTHS ENDED JUNE 30, 2002 VS. THREE MONTHS ENDED JUNE 30, 2001

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* Not meaningful.
(a) Included in Corporate and Other are the results of operations of our
non-strategic businesses and unallocated corporate overhead.

REAL ESTATE SERVICES
Revenues and Adjusted EBITDA decreased $16 million (5%) and $17 million (16%)
primarily due to a $19 million revenue reduction from relocation activities as a
result of a decline in relocation-related homesale closings and lower interest
rates charged to our clients. Partially offsetting the decline in revenue from
relocation activities was an overall increase in revenues from mortgage-related
activities

Revenues from mortgage loans sold increased $18 million (11%) in second quarter
2002 compared with the prior year quarter, as a 59 basis point increase in the
average origination margin more than offset a $1.8 billion (18%) reduction in
mortgage loans sold. Closed mortgage loans increased $606 million (5%) to $12.4
billion, substantially due to an increase in the volume of purchase mortgage
closings. Purchase mortgage closings grew 14% to $8.2 billion, while
refinancings declined from $4.7 billion to $4.3 billion. A significant portion
of mortgages closed in any quarter will generate revenues in future periods as
such loans are packaged and sold (revenues are recognized upon the sale of the
loan, typically 45-60 days after closing).

Net revenues from servicing mortgage loans declined $15 million. Recurring
servicing fees (fees received for servicing existing loans in the portfolio)
increased $18 million (21%) due to a quarter-over-quarter increase in the
average servicing portfolio. However, such recurring activity was more than
offset by increased mortgage servicing rights amortization and a reduction in
the valuation of our mortgage servicing rights portfolio due to the high levels
of current and projected loan prepayments, resulting from a lower interest rate
environment.

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FLEET MANAGEMENT
Revenues decreased $16 million, while Adjusted EBITDA increased $4 million
substantially due to lower interest rates charged to our clients.

SIX MONTHS ENDED JUNE 30, 2002 VS. SIX MONTHS ENDED JUNE 30, 2001

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* Not meaningful as periods are not comparable due to the acquisition of
Fleet on March 1, 2001.
(a) Included in Corporate and Other are the results of operations of our
non-strategic businesses and unallocated corporate overhead.

REAL ESTATE SERVICES
Revenues increased $14 million (3%), while Adjusted EBITDA decreased $5 million
(3%) primarily due to a $25 million revenue reduction from relocation activities
as a result of a decline in relocation-related homesale closings and lower
interest rates charged to our clients. Partially offsetting the decline in
revenue from relocation activities was an overall increase in revenues from
mortgage-related activities

Revenues from mortgage loans sold increased $118 million (47%) in six months
2002 versus the comparable prior year period due to an $838 million (5%)
increase in the volume of loans sold and a 63 basis point increase in the
average origination margin. The increased margin on the sale of mortgage loans
to the secondary market is consistent with higher mortgage loan production
environments. Closed mortgage loans in six months 2002 increased $5.6 billion
(29%) to $25.1 billion, consisting of a $1.6 billion (14%) increase in purchase
mortgage closings and a $4.0 billion (53%) increase in refinancings.

Net revenues from mortgage servicing declined $83 million in six months 2002
versus the comparable prior year period. Recurring servicing fees (fees received
for servicing existing loans in the portfolio) increased $35 million (21%) due
to a corresponding 21% increase in the average servicing portfolio. However,
such recurring activity was more than offset by increased mortgage servicing
rights amortization and a reduction in the valuation of our mortgage servicing
rights portfolio due to the high levels of current and projected loan
prepayments and refinancing activity, resulting from a lower interest rate
environment.

FLEET MANAGEMENT
Revenues and Adjusted EBITDA increased $217 million and $18 million,
respectively, substantially due to the acquisition of Fleet on March 1, 2001.
Fleet's reported operating results were included from the acquisition date and,
therefore, our results in 2001 reflect only four months of Fleet's operations.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We purchase assets, or finance the purchase of assets, on behalf of our clients.
We seek to manage the interest rate exposures inherent in these assets by
matching them with financial liabilities that have similar terms and interest
rate characteristics. We classify these activities as assets under management
and mortgage programs and liabilities under management and mortgage programs.

Such activities are conducted and managed by legally separate finance and/or
mortgage companies. Accordingly, the financial results of our finance activities
vary from the rest of our businesses based upon the impact of the relative
business and financial risks and asset attributes, as well as the nature and
timing associated with the respective cash flows. We believe that it is
appropriate to segregate our assets under management and mortgage programs and
our liabilities under management and mortgage programs separately from the
assets and liabilities of the rest of our businesses because, ultimately, the
source of repayment of such liabilities is the realization of such assets.

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FINANCIAL CONDITION

Total assets exclusive of assets under management and mortgage programs
increased primarily due to (i) the recognition of mortgage loans previously sold
to the Government National Mortgage Association ("GNMA") that, because of
delinquency, we now have the option to repurchase from the GNMA pool and (ii) an
increase in cash (see "Liquidity and Capital Resources" below for a detailed
discussion of such increase).

Assets under management and mortgage programs decreased principally due to a
reduction of $444 million in mortgage loans held for sale primarily due to
timing differences arising between the origination and sales of such loans,
partially offset by the addition of $180 million of mortgage servicing rights
(net of related amortization and valuation adjustments).

Liabilities under management and mortgage programs decreased primarily due to
(i) the repayment of $750 million of outstanding borrowings under our revolving
credit facilities and (ii) a decrease of $104 million in secured short-term
mortgage borrowings due to lower mortgage warehousing needs. Such decreases were
partially offset by (i) the issuance during 2002 of $571 million of unsecured
term notes bearing interest, (ii) a net issuance of $102 million in secured term
notes under the Chesapeake Funding program and (iii) $64 million of borrowings
to fund relocation receivables.

Stockholders' equity increased primarily due to $105 million of net income
generated during the six months ended June 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are cash on hand, our ability to generate
cash through operations and financing activities, as well as available credit
and securitization facilities.

CASH FLOWS
At June 30, 2002, we had $173 million of cash on hand, an increase of $41
million from $132 million at December 31, 2001. The following table summarizes
such increase:

Net cash provided by operating activities increased primarily due to
continued growth in our mortgage business, which resulted from an increase in
the volume of mortgage loans sold during six months ended June 30, 2002. Net
cash used in investing activities decreased primarily due to less cash used
(i) for acquisitions and (ii) to acquire vehicles for our fleet management
operations. We used cash in financing activities during six months ended June
30, 2002 primarily for the repayment of borrowings under revolving credit
facilities as compared to generating cash from financing activities through
debt issuances during the six months ended June 30, 2001.

Also, during the six months ended June 30, 2002, we made cash payments of $6
million and $2 million for personnel related and facility related costs,
respectively, resulting from the restructuring charge we recorded in fourth
quarter 2001 as a result of changes in business and consumer behavior following
the September 11th terrorist

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attacks. Such liability approximated $10 million as of June 30, 2002. As of June
30, 2002, the initiatives committed to by management in this restructuring plan
were substantially completed. The majority of the remaining personnel related
costs are expected to be paid by the end of fourth quarter 2002.

Capital expenditures during the six months ended June 30, 2002 amounted to $20
million and were utilized to support operational growth, enhance marketing
opportunities and develop operating efficiencies through technological
improvements. We continue to anticipate aggregate capital expenditure
investments during 2002 of approximately $60 million.

AVAILABLE CREDIT AND SECURITIZATION FACILITIES
At June 30, 2002, we had approximately $2.4 billion of available funding
arrangements and credit facilities.

We also sell a significant portion of residential mortgage loans generated in
our mortgage business and receivables generated in our relocation business into
securitization entities, generally on a non-recourse basis, as part of our
financing strategy. We retain the servicing rights and, in some instances,
subordinated residual interests in the mortgage loans and relocation
receivables. The investors generally have no recourse to our other assets for
failure of debtors to pay when due.

As of June 30, 2002, we were servicing $590 million of relocation receivables
sold to a special purpose entity. The maximum funding capacity through this
special purpose entity is $600 million and, as of June 30, 2002, we had
available capacity of $85 million under this facility. We were also servicing
approximately $1.6 billion of mortgage loans sold to a special purpose entity as
of June 30, 2002. In addition to the mortgage loans sold to the special purpose
entity, as of June 30, 2002, we were servicing $106 billion of mortgage loans
sold to the secondary market. The maximum funding capacity through this special
purpose entity is $3.2 billion and, as of June 30, 2002, we had available
capacity of approximately $1.6 billion. In addition to the capacity through the
special purpose entity, we have the capacity, under a registration statement
with the Securities and Exchange Commission, to securitize approximately $1.0
billion of mortgage loans. The sale of mortgage loans into the secondary market
is customary practice in the mortgage industry.

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FINANCIAL OBLIGATIONS
At June 30, 2002, we had approximately $5.9 billion of indebtedness, which
consisted of:

Our debt decreased $181 million primarily due to (i) the repayment of $750
million of outstanding borrowings under our revolving credit facilities and (ii)
a decrease of $104 million in secured short-term mortgage borrowings due to
lower mortgage warehousing needs. Such decreases were partially offset by (i)
the issuance during 2002 of $571 million of unsecured term notes bearing
interest, (ii) a net issuance of $102 million in secured term notes under the
Chesapeake Funding program and (iii) $64 million of borrowings to fund
relocation receivables.

We also currently have $2.2 billion of availability for public debt issuances
under shelf registration statements.

LIQUIDITY RISK
Our liquidity position may be negatively affected by unfavorable conditions in
any one of the industries in which we operate, as our ability to generate cash
flows from operating activities may be reduced due to those unfavorable
conditions. Additionally, our liquidity could be adversely affected by
deterioration in the performance of the underlying assets of our management and
mortgage programs. Our liquidity as it relates to mortgage programs is highly
dependent on the secondary markets for mortgage loans. Access to certain of our
securitization facilities and our ability to act as servicer thereto also may be
limited in the event that our credit ratings are downgraded below investment
grade and, in certain circumstances, where we fail to meet certain financial
ratios. However, we do not believe that our credit ratings are likely to fall
below such thresholds. Additionally, we monitor the maintenance of these
financial ratios and, as of June 30, 2002, we were in compliance with all
covenants under these facilities.

Currently our credit ratings are as follows:

A security rating is not a recommendation to buy, sell or hold securities and is
subject to revision or withdrawal at any time by the rating agency.

FORWARD-LOOKING STATEMENTS

Forward-looking statements in our public filings or other public statements are
subject to known and unknown risks, uncertainties and other factors which may
cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These forward-looking statements were based on
various factors and were derived utilizing numerous important assumptions and
other important factors that could cause actual results to differ materially
from those in the forward-looking statements. Forward-looking statements include
the information concerning our future financial performance, business strategy,
projected plans and objectives.

Statements preceded by, followed by or that otherwise include the words
"believes", "expects", "anticipates", "intends", "project", "estimates",
"plans", "may increase", "may fluctuate" and similar expressions or future

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or conditional verbs such as "will", "should", "would", "may" and "could" are
generally forward-looking in nature and not historical facts. You should
understand that the following important factors and assumptions could affect our
future results and could cause actual results to differ materially from those
expressed in such forward-looking statements:

- the effect of economic conditions and interest rate changes on the
economy on a national, regional or international basis and the impact
thereof on our businesses;
- the effects of changes in current interest rates, particularly on our
mortgage business;
- the resolution or outcome of Cendant's unresolved pending litigation
relating to its previously announced accounting irregularities and
other related litigation;
- our ability to develop and implement operational, technological and
financial systems to manage growing operations and to achieve enhanced
earnings or effect cost savings;
- competition in our existing and potential future lines of business and
the financial resources of, and products available to, competitors;
- failure to reduce quickly our substantial technology costs in response
to a reduction in revenue;
- our failure to provide fully integrated disaster recovery technology
solutions in the event of a disaster;
- our ability to integrate and operate successfully acquired and merged
businesses and risks associated with such businesses, the
compatibility of the operating systems of the combining companies, and
the degree to which our existing administrative and back-office
functions and costs and those of the acquired companies are
complementary or redundant;
- our ability to obtain financing on acceptable terms to finance our
growth strategy and to operate within the limitations imposed by
financing arrangements and to maintain our credit ratings;
- and changes in laws and regulations, including changes in accounting
standards and privacy policy regulation.

Other factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of such other
assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. Most of these factors are
difficult to predict accurately and are generally beyond our control.

You should consider the areas of risk described above in connection with any
forward-looking statements that may be made by us and our businesses generally.
Except for our ongoing obligations to disclose material information under the
federal securities laws, we undertake no obligation to release publicly any
revisions to any forward-looking statements, to report events or to report the
occurrence of unanticipated events unless required by law. For any
forward-looking statements contained in any document, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

As previously discussed in our 2001 Annual Report on Form 10-K, we assess our
market risk based on changes in interest and foreign currency exchange rates
utilizing a sensitivity analysis. The sensitivity analysis measures the
potential loss in earnings, fair values, and cash flows based on a hypothetical
10% change (increase and decrease) in our market risk sensitive positions. We
used June 30, 2002 market rates to perform a sensitivity analysis separately for
each of our market risk exposures. The estimates assume instantaneous, parallel
shifts in interest rate yield curves and exchange rates. We have determined,
through such analyses, that the impact of a 10% change in foreign currency
exchange rates and prices on our earnings, fair values and cash flows and that
the impact of a 10% change in interest rates on our fair values and cash flows
would not be material. The potential loss in earnings resulting from the impact
of a 10% increase and decrease in interest rates was $39 million and $53
million, respectively, for the six months ended June 30, 2002.

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PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

See Exhibit Index

(b) REPORTS ON FORM 8-K

On June 4, 2002, we filed a current report on Form 8-K to report under Item 5
that we have entered into a Selling Agent Agreement and Supplemental Indenture
No. 3 in connection with the PHH Internotes(R) offering.

On June 21, 2002, we filed a current report on Form 8-K to include under Item 5
our presentation at the Annual Internotes Dealer Conference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

CENDANT CORPORATION

/s/ Duncan H. Cocroft
------------------------------------
Duncan H. Cocroft
Executive Vice President and
Chief Financial Officer

/s/ John T. Mcclain
------------------------------------
John T. McClain
Senior Vice President, Finance and
Corporate Controller

Date: August 14, 2002

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EXHIBIT INDEX