UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                      to

PHH CORPORATION

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

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

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

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

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

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

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

     As of November 3, 2009, 54,743,820 shares of PHH Common stock were outstanding.

 

 

TABLE OF CONTENTS

Item		Description		Page

		Cautionary Note Regarding Forward-Looking Statements			2
		PART I
1		Financial Statements			5
		Condensed Consolidated Statements of Operations			5
		Condensed Consolidated Balance Sheets			6
		Condensed Consolidated Statement of Changes in Equity			7
		Condensed Consolidated Statements of Cash Flows			8
		Note 1. Summary of Significant Accounting Policies			9
		Note 2. (Loss) Earnings Per Share			13
		Note 3. Mortgage Servicing Rights			14
		Note 4. Loan Servicing Portfolio			16
		Note 5. Mortgage Loan Sales			17
		Note 6. Derivatives and Risk Management Activities			20
		Note 7. Vehicle Leasing Activities			23
		Note 8. Debt and Borrowing Arrangements			24
		Note 9. Income Taxes			31
		Note 10. Commitments and Contingencies			31
		Note 11. Stock-Related Matters			34
		Note 12. Accumulated Other Comprehensive Income (Loss)			34
		Note 13. Fair Value Measurements			35
		Note 14. Variable Interest Entities			42
		Note 15. Segment Information			44
		Note 16. Subsequent Events			46
2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
3		Quantitative and Qualitative Disclosures About Market Risk			87
4		Controls and Procedures			92
		PART II
1		Legal Proceedings			92
1A		Risk Factors			93
2		Unregistered Sales of Equity Securities and Use of Proceeds			97
3		Defaults Upon Senior Securities			97
4		Submission of Matters to a Vote of Security Holders			97
5		Other Information			97
6		Exhibits			97
		Signatures			98
		Exhibit Index			99
EX-4.5.11
EX-10.1.2
EX-10.11
EX-10.12
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Statements in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (this “Form 10-Q”) that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors and were derived utilizing numerous important assumptions that may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Investors are cautioned not to place undue reliance on forward-looking statements.

     Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and are not historical facts. Forward-looking statements in this Form 10-Q include, but are not limited to, statements concerning the following: (i) our expectations regarding the future impact of the adoption of recently issued accounting pronouncements on our financial statements; (ii) our belief that we would have various periods to cure an event of default if one or more notices of default were to be given by our lenders or trustees under certain of our financing agreements; (iii) our expectations regarding origination volumes, including refinance originations, and loan margins in the mortgage industry; (iv) our belief that the higher margins experienced in the mortgage industry are reflective of a longer-term view of the returns required to manage the underlying risk of a mortgage production business; (v) our expectations regarding recent government initiatives, including, but not limited to, the American Recovery and Reinvestment Act of 2009, the Homeowner Affordability Stability Plan (“HASP”) and the Public-Private Investment Program and the impact that these initiatives may have on our Mortgage Production and Mortgage Servicing segments; (vi) our intention to continue to evaluate our cost structure in relation to projected origination volumes, in an effort to properly align our resources and expenses with expected mortgage origination volumes; (vii) our belief that HASP’s loan modification programs provide additional opportunities for our Mortgage Servicing segment and could reduce our exposure to future foreclosure-related losses; (viii) our continued belief that the amount of securities held in trust related to our potential obligation from our reinsurance agreements will be significantly higher than claims expected to be paid; (ix) our expectations regarding access to and spreads on future securities that may be issued by our wholly owned subsidiary, Chesapeake Funding LLC; (x) our belief that our assets may be considered eligible collateral under the Canadian Secured Credit Facility (“CSCF”) and that the CSCF may stimulate the private and public demand for asset-backed commercial paper in Canada; (xi) our expectation that the United States (“U.S.”) and Canadian asset-backed securities markets will continue to improve during the remainder of 2009 and into 2010 and that we will be able to take advantage of this improvement; (xii) our expectation that the reorganized General Motors and Chrysler may be more financially viable suppliers in the future and our belief that any disruption in vehicle production by the North American automobile manufacturers would have little impact on our ability to provide our clients with vehicle leases as we would have the alternative to rely on foreign suppliers; (xiii) our belief that trends in the North American automobile industry have been reflected in our Fleet Management Services segment; (xiv) our expectation that as the fleets of our Fleet Management Services segment’s clients age, they may require greater levels of maintenance services and other fee-based products; (xv) our intention to pursue alternative sources of potential funding, including the possible issuance of additional securities eligible under the Term Asset-Backed Securities Loan Facility to private investors through March 2010; (xvi) our belief that the modifications in our lease pricing are reflective of revised pricing throughout the industry; (xvii) our expected savings during the remainder of 2009 from cost-reduction initiatives; (xviii) our belief that our sources of liquidity are adequate to fund operations for the next 12 months; (xix) our expected capital expenditures for 2009; (xx) our expectation that the London Interbank Offered Rate and commercial paper, long-term U.S. Department of the Treasury (“Treasury”) and mortgage interest rates will remain our primary benchmark for market risk for the foreseeable future; (xxi) our expectation that increased reliance on the natural business hedge could result in greater volatility in the results of our Mortgage Servicing segment and (xxii) our expectation that we will continue to modify the types of mortgage loans that we originate in accordance with secondary market liquidity.

     The factors and assumptions discussed below and the risks factors in “Part I—Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, as amended by the risk factors in “Part II—Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and “Part II—Item 1A. Risk Factors” in this Form 10-Q could cause actual results to differ materially from those expressed in any such forward-looking statements:

	•		the effects of environmental, economic or political conditions on the international, national or regional economy, the outbreak or escalation of hostilities or terrorist attacks and the impact thereof on our businesses;
	•		the effects of continued market volatility or continued economic decline on the availability and cost of our financing arrangements, the value of our assets and the price of our Common stock;
	•		the effects of a continued decline in the volume or value of U.S. home sales and home prices, due to adverse economic changes or otherwise, on our Mortgage Production and Mortgage Servicing segments;
	•		the effects of changes in current interest rates on our business and our financing costs;
	•		our decisions regarding the use of derivatives related to mortgage servicing rights, if any, and the resulting potential volatility of the results of operations of our Mortgage Servicing segment;
	•		the effects of increases in our actual and projected repurchases of, indemnification given in respect of, or related losses associated with, sold mortgage loans for which we have provided representations and warranties or other contractual recourse to purchasers and insurers of such loans, including increases in our loss severity and reserves associated with such loans;
	•		the effects of reinsurance claims in excess of projected levels and in excess of reinsurance premiums we are entitled to receive or amounts currently held in trust to pay such claims;
	•		the effects of any significant adverse changes in the underwriting criteria of government-sponsored entities, including the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation;
	•		the effects of the insolvency of any of the counterparties to our significant customer contracts or financing arrangements or the inability or unwillingness of such counterparties to perform their respective obligations under such contracts;
	•		the ability to develop and implement operational, technological and financial systems to manage our operations and to achieve enhanced earnings or effect cost savings;
	•		the effects of competition in our existing and potential future lines of business, including the impact of consolidation within the industries in which we operate and competitors with greater financial resources and broader product lines;
	•		the effects of the decline in the results of operations or financial condition of automobile manufacturers and/or their willingness or ability to make new vehicles available to us on commercially favorable terms, if at all;
	•		the ability to quickly reduce overhead and infrastructure costs in response to a reduction in revenue;
	•		the ability to implement fully integrated disaster recovery technology solutions in the event of a disaster;

	•		the ability to obtain financing on acceptable terms, if at all, to finance our operations or growth strategy, to operate within the limitations imposed by our financing arrangements and to maintain the amount of cash required to service our indebtedness;
	•		the ability to maintain our relationships with our existing clients;
	•		a deterioration in the performance of assets held as collateral for secured borrowings;
	•		the impact of the failure to maintain our credit ratings;
	•		any failure to comply with certain financial covenants under our financing arrangements;
	•		the effects of the declining health of the U.S. and global banking systems, the consolidation of financial institutions and the related impact on the availability of credit;
	•		the impact of the Emergency Economic Stabilization Act of 2008 enacted by the U.S. government on the securities markets and valuations of mortgage-backed securities;
	•		the impact of actions taken or to be taken by the Treasury and the Federal Reserve Bank on the credit markets and the U.S. economy;
	•		the impact of the adverse conditions in the North American automotive industry; and
	•		changes in laws and regulations, including changes in accounting standards, mortgage- and real estate-related regulations and state, federal and foreign tax laws.

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

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

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PHH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
Revenues
Mortgage fees		$	69			$	50			$	216			$	172
Fleet management fees			37				40				112				123
Net fee income			106				90				328				295
Fleet lease income			363				401				1,087				1,191
Gain on mortgage loans, net			115				49				450				177
Mortgage interest income			20				38				70				138
Mortgage interest expense			(36	)			(44	)			(109	)			(128	)
Mortgage net finance (expense) income			(16	)			(6	)			(39	)			10
Loan servicing income			109				111				309				330
Change in fair value of mortgage servicing rights			(186	)			(77	)			(294	)			(109	)
Net derivative loss related to mortgage servicing rights			—				(62	)			—				(179	)
Valuation adjustments related to mortgage servicing rights			(186	)			(139	)			(294	)			(288	)
Net loan servicing (loss) income			(77	)			(28	)			15				42
Other income			16				27				21				123
Net revenues			507				533				1,862				1,838
Expenses
Salaries and related expenses			114				108				357				341
Occupancy and other office expenses			16				19				43				55
Depreciation on operating leases			315				325				962				971
Fleet interest expense			21				37				72				119
Other depreciation and amortization			7				7				20				19
Other operating expenses			114				117				297				337
Goodwill impairment			—				61				—				61
Total expenses			587				674				1,751				1,903
(Loss) income before income taxes			(80	)			(141	)			111				(65	)
(Benefit from) provision for income taxes			(32	)			(28	)			43				(1	)
Net (loss) income			(48	)			(113	)			68				(64	)
Less: net income (loss) attributable to noncontrolling interest			4				(29	)			12				(26	)
Net (loss) income attributable to PHH Corporation		$	(52	)		$	(84	)		$	56			$	(38	)
Basic (loss) earnings per share attributable to PHH Corporation		$	(0.94	)		$	(1.56	)		$	1.03			$	(0.70	)
Diluted (loss) earnings per share attributable to PHH Corporation		$	(0.94	)		$	(1.56	)		$	1.02			$	(0.70	)

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		September 30,				December 31,
		2009				2008
ASSETS
Cash and cash equivalents		$	140			$	109
Restricted cash			641				614
Mortgage loans held for sale			1,256				1,006
Accounts receivable, net			496				468
Net investment in fleet leases			3,698				4,204
Mortgage servicing rights			1,367				1,282
Investment securities			12				37
Property, plant and equipment, net			51				63
Goodwill			25				25
Other assets			601				465
Total assets		$	8,287			$	8,273
LIABILITIES AND EQUITY
Accounts payable and accrued expenses		$	508			$	451
Debt			5,455				5,764
Deferred income taxes			620				579
Other liabilities			311				212
Total liabilities			6,894				7,006
Commitments and contingencies (Note 10)			—				—
EQUITY
Preferred stock, $0.01 par value; 1,090,000 shares authorized at September 30, 2009 and December 31, 2008; none issued or outstanding at September 30, 2009 or December 31, 2008			—				—
Common stock, $0.01 par value; 273,910,000 and 108,910,000 shares authorized at September 30, 2009 and December 31, 2008, respectively; 54,743,740 shares issued and outstanding at September 30, 2009; 54,256,294 shares issued and outstanding at December 31, 2008			1				1
Additional paid-in capital			1,053				1,005
Retained earnings			319				263
Accumulated other comprehensive income (loss)			15				(3	)
Total PHH Corporation stockholders’ equity			1,388				1,266
Noncontrolling interest			5				1
Total equity			1,393				1,267
Total liabilities and equity		$	8,287			$	8,273

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Nine Months Ended September 30, 2009
(Unaudited)
(In millions, except share data)

		PHH Corporation Stockholders
																		Accumulated
										Additional								Other
		Common Stock								Paid-In				Retained				Comprehensive				Noncontrolling				Total
		Shares				Amount				Capital				Earnings				(Loss) Income				Interest				Equity
Balance at December 31, 2008			54,256,294			$	1			$	1,005			$	263			$	(3	)		$	1			$	1,267
Net income			—				—				—				56				—				12				68
Distributions to noncontrolling interest			—				—				—				—				—				(8	)			(8	)
Other comprehensive income, net of income taxes of $0			—				—				—				—				18				—				18
Proceeds on the sale of Sold Warrants (Note 8)			—				—				35				—				—				—				35
Stock compensation expense			—				—				9				—				—				—				9
Stock options exercised, including excess tax benefit of $0			302,760				—				5				—				—				—				5
Restricted stock award vesting, net of excess tax benefit of $0			184,686				—				(1	)			—				—				—				(1	)
Balance at September 30, 2009			54,743,740			$	1			$	1,053			$	319			$	15			$	5			$	1,393

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)

		Nine Months
		Ended September 30,
		2009				2008
Cash flows from operating activities:
Net income (loss)		$	68			$	(64	)
Adjustments to reconcile Net income (loss) to net cash provided by operating activities:
Goodwill impairment charge			—				61
Capitalization of originated mortgage servicing rights			(384	)			(272	)
Net unrealized loss on mortgage servicing rights and related derivatives			294				288
Vehicle depreciation			962				971
Other depreciation and amortization			20				19
Origination of mortgage loans held for sale			(23,056	)			(17,235	)
Proceeds on sale of and payments from mortgage loans held for sale			23,208				17,706
Net gain on interest rate lock commitments, mortgage loans held for sale and related derivatives			(443	)			(142	)
Deferred income tax provision			37				11
Other adjustments and changes in other assets and liabilities, net			172				5
Net cash provided by operating activities			878				1,348
Cash flows from investing activities:
Investment in vehicles			(741	)			(1,463	)
Proceeds on sale of investment vehicles			309				414
Purchase of mortgage servicing rights			(1	)			(6	)
Proceeds on sale of mortgage servicing rights			1				175
Cash paid on derivatives related to mortgage servicing rights			—				(129	)
Net settlement proceeds from derivatives related to mortgage servicing rights			—				26
Purchases of property, plant and equipment			(8	)			(16	)
Increase in Restricted cash			(27	)			(79	)
Other, net			6				10
Net cash used in investing activities			(461	)			(1,068	)
Cash flows from financing activities:
Net decrease in short-term borrowings			—				(73	)
Proceeds from borrowings			35,116				24,601
Principal payments on borrowings			(35,378	)			(24,777	)
Issuances of Company Common stock			—				1
Proceeds from the sale of Sold Warrants			35				24
Cash paid for Purchased Options			(66	)			(51	)
Cash paid for debt issuance costs			(51	)			(52	)
Other, net			(9	)			(5	)
Net cash used in financing activities			(353	)			(332	)
Effect of changes in exchange rates on Cash and cash equivalents			(33	)			8
Net increase (decrease) in Cash and cash equivalents			31				(44	)
Cash and cash equivalents at beginning of period			109				149
Cash and cash equivalents at end of period		$	140			$	105

See Notes to Condensed Consolidated Financial Statements.

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

1. Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

     The Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In management’s opinion, the unaudited Condensed Consolidated Financial Statements contain all adjustments, which include normal and recurring adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

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

Changes in Accounting Policies

     Fair Value Measurements. In February 2008, the Financial Accounting Standards Board (the “FASB”) updated Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”) to delay the effective date for one year for nonfinancial assets and nonfinancial liabilities, except for those that are recognized or disclosed at fair value on a recurring basis. The Company elected the deferral for nonfinancial assets and nonfinancial liabilities and adopted the provisions of ASC 820 for its assessment of impairment of its Goodwill, other intangible assets, net investment in operating leases, net investment in off-lease

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

vehicles, real estate owned (“REO”) and Property, plant and equipment, net effective January 1, 2009. The Company’s measurement of fair value for these nonfinancial assets, when applicable, will incorporate the assumptions market participants would use in pricing the asset, where available, which may differ from the Company’s own intended use of such assets and related assumptions and therefore may result in a different fair value than the fair value measured on a basis prior to the application of ASC 820. There were no events or circumstances resulting in the measurement of fair value for any significant nonfinancial assets other than REO during the three or nine months ended September 30, 2009. See Note 13, “Fair Value Measurements” for additional information.

     Business Combinations. In December 2007, the FASB updated ASC 805, “Business Combinations” (“ASC 805”) which applies the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses and establishes principles and requirements for how the acquirer recognizes and measures identifiable assets acquired and liabilities assumed, including assets and liabilities arising from contingencies, any noncontrolling interest in the acquiree and goodwill acquired or gain realized from a bargain purchase. In April 2009, the FASB further updated ASC 805 for the initial recognition and measurement of assets and liabilities arising from contingencies in a business combination. Subsequent measurement of assets and liabilities arising from contingencies is determined on a systematic and rational basis depending on their nature. Contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination are required to be initially recognized at fair value and subsequently measured for contingent consideration arrangements. The Company adopted the December 2007 and April 2009 updates to ASC 805 effective January 1, 2009. The adoption of the updates to ASC 805 will impact the Company’s Consolidated Financial Statements prospectively in the event of any business combinations entered into by the Company after December 31, 2008 in which the Company is the acquirer.

     Noncontrolling Interests. In December 2007, the FASB updated ASC 810, “Consolidation” (“ASC 810”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, ASC 810 requires a noncontrolling interest in a subsidiary to be reported as equity, separate from the parent’s equity, in the consolidated statement of financial position and the amount of net income or loss and comprehensive income or loss attributable to the parent and noncontrolling interest to be presented separately on the face of the consolidated financial statements. Changes in a parent’s ownership interest in its subsidiary in which a controlling financial interest is retained are accounted for as equity transactions. If a controlling financial interest in the subsidiary is not retained, the subsidiary is deconsolidated and any retained noncontrolling equity interest is initially measured at fair value. The Company adopted the updates to ASC 810 effective January 1, 2009, including retrospective application for the presentation of periods prior to January 1, 2009. The adoption of the updates to ASC 810 did not have a significant impact on the Company’s Consolidated Financial Statements.

     Transfers of Financial Assets and Repurchase Financing Transactions. In February 2008, the FASB updated ASC 860, “Transfers and Servicing” (“ASC 860”). The objective of the updates to ASC 860 is to provide guidance on accounting for the transfer of a financial asset and repurchase financing. An initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement unless certain criteria are met at the inception of the transaction. If the criteria are met, the initial transfer of the financial asset and repurchase financing transaction shall be evaluated separately. The Company adopted the updates to ASC 860 effective January 1, 2009. The adoption of the updates to ASC 860 did not impact the Company’s Consolidated Financial Statements.

     Disclosures about Derivative Instruments and Hedging Activities. In March 2008, the FASB updated ASC 815, “Derivatives and Hedging” (“ASC 815”) to enhance disclosure requirements for derivative instruments and hedging activities regarding how and why derivative instruments are used, how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations and how they affect financial position, financial performance and cash flows. The updates to ASC 815 require qualitative disclosures about

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

objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The Company adopted the enhanced disclosure provisions of ASC 815 effective January 1, 2009. The additional disclosures resulting from the adoption of the updates to ASC 815 are included in Note 6, “Derivatives and Risk Management Activities” in the Company’s Notes to Condensed Consolidated Financial Statements.

     Financial Guarantee Insurance Contracts. In May 2008, the FASB updated ASC 944, “Financial Services—Insurance” (“ASC 944”). The updates clarify how ASC 944 applies to financial guarantee insurance and reinsurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. The updates to ASC 944 require insurance enterprises to recognize a liability for the unearned premium revenue at inception of the financial guarantee insurance contract and recognize revenue over the period of the contract in proportion to the amount of insurance protection provided. The updates to ASC 944 also require an insurance enterprise to recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. Additional disclosures about financial guarantee contracts are also required. The Company adopted the updates to ASC 944 effective January 1, 2009. The adoption of the updates to ASC 944 did not impact the Company’s Consolidated Financial Statements.

     Intangible Assets. In April 2008, the FASB updated ASC 350, “Intangibles—Goodwill and Other” (“ASC 350”) which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset in order to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. The Company adopted the updates to ASC 350 effective January 1, 2009 for application to intangible assets acquired after the effective date. The Company’s accounting policy is to expense the costs to renew or extend recognized intangible assets as the costs are incurred.

     Convertible Debt Instruments. In May 2008, the FASB updated ASC 470, “Debt” (“ASC 470”) which requires the issuer of certain convertible debt instruments that may be settled in cash or other assets upon conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The Company adopted the updates to ASC 470 effective January 1, 2009. The adoption of the updates to ASC 470 did not impact the Company’s Consolidated Financial Statements as its application of other GAAP for its 4.0% Convertible Senior Notes due 2012 (the “2012 Convertible Notes”) results in separate accounting for the liability and equity components of the 2012 Convertible Notes and continued amortization of the original issue discount.

     Participating Securities. In June 2008, the FASB updated ASC 260, “Earnings Per Share” (“ASC 260”) to address whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two class method. The Company adopted the updates to ASC 260 effective January 1, 2009. The adoption of the updates to ASC 260 did not impact the Company’s Consolidated Financial Statements.

     Instruments Indexed to Stock. In June 2008, the FASB ratified the consensus reached by the Emerging Issues Task Force on three issues discussed at its June 12, 2008 meeting and updated ASC 815. The issues include how an entity should evaluate whether an instrument, or embedded feature, is indexed to its own stock, how the currency in which the strike price of an equity-linked financial instrument, or embedded equity-linked feature, is denominated affects the determination of whether the instrument is indexed to an entity’s own stock and how the issuer should account for market-based employee stock option valuation instruments. The Company adopted the updates to ASC 815 effective January 1, 2009. The adoption of the updates to ASC 815 did not impact the Company’s Consolidated Financial Statements.

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

     Fair Value Measurements. In April 2009, the FASB updated ASC 820 to provide additional guidance for determining fair value when the volume and level of activity for an asset or liability has significantly decreased and on identifying circumstances that indicate a transaction is not orderly. The Company adopted the provisions of the updates to ASC 820 effective June 30, 2009. The adoption of the updates to ASC 820 did not impact the Company’s Consolidated Financial Statements.

     Disclosures about Fair Value of Financial Instruments. In April 2009, the FASB updated ASC 825, “Financial Instruments” (“ASC 825”) to require the disclosure of fair value for interim and annual reporting periods for all financial instruments for which it is practicable to estimate the value, whether recognized or not recognized in the statement of financial position. The Company adopted the updates to ASC 825 effective June 30, 2009. The adoption of the updates to ASC 825 did not impact the Company’s financial position, results of operations or cash flows. Disclosures of the fair value of the Company’s financial instruments are included in Note 8, “Debt and Borrowing Arrangements” and Note 13, “Fair Value Measurements” in the Company’s Notes to Condensed Consolidated Financial Statements.

     Subsequent Events. In May 2009, the FASB updated ASC 855, “Subsequent Events” (“ASC 855”) to establish the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. The Company adopted the updates to ASC 855 effective June 30, 2009. The updates to ASC 855 did not impact the Company’s financial position, results of operations or cash flows. The Company evaluated subsequent events with respect to the Condensed Consolidated Financial Statements as of and for the three and nine months ended September 30, 2009 through November 5, 2009, the date of issuance of its financial statements.

     Accounting Standards Codification. In June 2009, the FASB updated ASC 105, “Generally Accepted Accounting Principles” (“ASC 105”) to establish the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative non-governmental GAAP. The Codification reorganizes GAAP pronouncements into accounting topics and displays all topics using a consistent structure. It also includes relevant SEC guidance that follows the same topical structure in separate sections in the Codification. The Company adopted the updates to ASC 105 effective September 30, 2009. The Codification impacted the reference to accounting pronouncements within the Company’s Notes to Consolidated Financial Statements, but had no impact on its financial position, results of operations or cash flows.

     Income Taxes. In September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-06, “Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities” (“ASU No. 2009-06”), an update to ASC 740, “Income Taxes” (“ASC 740”). ASU No. 2009-06 (i) amends the scope of ASC 740 to include tax exempt, not-for-profit entities, pass-through entities and entities taxed in a manner similar to pass-through entities, (ii) amends the definition of “tax position” to include an entity’s status, including its status as a pass-through entity or tax-exempt entity and (iii) eliminates certain disclosure requirements for nonpublic entities. The Company adopted ASU No. 2009-06 effective September 30, 2009. The adoption of ASU No. 2009-06 did not impact the Company’s Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

     Transfers of Financial Assets. In June 2009, the FASB updated ASC 860 to eliminate the concept of a qualifying special-purpose entity (“QSPE”), modify the criteria for applying sale accounting to transfers of financial assets or portions of financial assets, differentiate between the initial measurement of an interest held in connection with the transfer of an entire financial asset recognized as a sale and participating interests recognized

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

as a sale and remove the provision allowing classification of interests received in a guaranteed mortgage securitization transaction that does not qualify as a sale as available-for-sale or trading securities. The updates to ASC 860 clarify (i) that an entity must consider all arrangements or agreements made contemporaneously or in contemplation of a transfer, (ii) the isolation analysis related to the transferor and its consolidated subsidiaries and (iii) the principle of effective control over the transferred financial asset. The updates to ASC 860 also enhance financial statement disclosures. The updates to ASC 860 are effective for fiscal years beginning after November 15, 2009 with earlier application prohibited. Revised recognition and measurement provisions are to be applied to transfers occurring on or after the effective date and the disclosure provisions are to be applied to transfers that occurred both before and after the effective date. The Company is currently evaluating the impact of adopting the updates to ASC 860 on its Consolidated Financial Statements.

     Consolidation of Variable Interest Entities. In June 2009, the FASB updated ASC 810 to modify certain characteristics that identify a variable interest entity (“VIE”), revise the criteria for determining the primary beneficiary of a VIE, add an additional reconsideration event to determining whether an entity is a VIE, eliminating troubled debt restructurings as an excluded reconsideration event and enhance disclosures regarding involvement with a VIE. Additionally, with the elimination of the concept of QSPEs in the updates to ASC 860, entities previously considered QSPEs are now within the scope of ASC 810. Entities required to consolidate or deconsolidate a VIE will recognize a cumulative effect in retained earnings for any difference in the carrying amount of the interest recognized. The updates to ASC 810 are effective for fiscal years beginning after November 15, 2009 with earlier application prohibited. The Company is currently evaluating the impact of adopting the updates to ASC 810 on its Consolidated Financial Statements.

     Fair Value Measurements and Disclosures. In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU No. 2009-05”), an update to ASC 820. ASU No. 2009-05 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, fair value measurement of the liability is to be estimated with one or more valuation techniques that use (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets or (iii) another valuation technique consistent with the principles of ASC 820, such as an income or market approach. ASU No. 2009-05 is effective for the first reporting period, including interim periods, beginning after the issuance with early adoption permitted. A change, if any, in valuation techniques and related inputs resulting from the application of the principles of ASU No. 2009-05 and quantification of the total effect, if practicable, shall be disclosed in the period of adoption. The Company is currently evaluating the impact of adopting ASU No. 2009-05 on its Consolidated Financial Statements. However, the Company does not expect the adoption of ASU No. 2009-05 to have a significant impact on its Consolidated Financial Statements.

     Revenue Recognition. In October 2009, the FASB issued ASU No. 2009-13, “Multiple Deliverable Arrangements” (“ASU No. 2009-13”), an update to ASC 605, “Revenue Recognition” (“ASC 605”). ASU No. 2009-13 amends ASC 605 for how to determine whether an arrangement involving multiple deliverables (i) contains more than one unit of accounting and (ii) how the arrangement consideration should be (a) measured and (b) allocated to the separate units of accounting. ASU No. 2009-13 is effective prospectively for arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU No. 2009-13 on its Consolidated Financial Statements.

2. (Loss) Earnings Per Share

     Basic (loss) earnings per share attributable to PHH Corporation was computed by dividing Net (loss) income attributable to PHH Corporation during the period by the weighted-average number of shares outstanding during the period. Diluted (loss) earnings per share attributable to PHH Corporation was computed by dividing Net (loss) income attributable to PHH Corporation by the weighted-average number of shares outstanding, assuming all potentially dilutive common shares were issued. The weighted-average computation of the dilutive effect of

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

potentially issuable shares of Common stock under the treasury stock method for the three and nine months ended September 30, 2009 excludes approximately 4.1 million and 1.3 million, respectively, outstanding stock-based compensation awards, as well as the assumed conversion of the Company’s 2012 Convertible Notes, (as defined and further discussed in Note 8, “Debt and Borrowing Arrangements”) and the related purchased options and sold warrants and the sold warrants related to the 2014 Convertible Notes (as defined and further discussed in Note 8, “Debt and Borrowing Arrangements”), as their inclusion would be anti-dilutive. Additionally, the 2014 Convertible Notes and related purchased options are excluded from the weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for the three and nine months ended September 30, 2009 as they are currently to be settled only in cash. See Note 8, “Debt and Borrowing Arrangements” for a description of the 2014 Convertible Notes and related purchased options and sold warrants transactions. The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method for both the three and nine months ended September 30, 2008 excludes approximately 4.3 million outstanding stock-based compensation awards, as well as the assumed conversion of the Company’s outstanding 2012 Convertible Notes and the related purchased options and sold warrants, as their inclusion would be anti-dilutive.

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

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
		(In millions, except share and per share data)
Net (loss) income attributable to PHH Corporation		$	(52	)		$	(84	)		$	56			$	(38	)
Weighted-average common shares outstanding — basic			54,744,366				54,331,664				54,542,681				54,265,271
Effect of potentially dilutive securities:
Stock options			—				—				59,500				—
Restricted stock units			—				—				491,151				—
Weighted-average common shares outstanding — diluted			54,744,366				54,331,664				55,093,332				54,265,271
Basic (loss) earnings per share attributable to PHH Corporation		$	(0.94	)		$	(1.56	)		$	1.03			$	(0.70	)
Diluted (loss) earnings per share attributable to PHH Corporation		$	(0.94	)		$	(1.56	)		$	1.02			$	(0.70	)

3. Mortgage Servicing Rights

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

		Nine Months
		Ended September 30,
		2009				2008
		(In millions)
Balance, beginning of period		$	129,078			$	126,540
Additions			21,379				17,044
Payoffs, sales and curtailments			(23,417	)			(14,318	)
Balance, end of period		$	127,040			$	129,266

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

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

		Nine Months Ended
		September 30,
		2009				2008
		(In millions)
Mortgage Servicing Rights:
Balance, beginning of period		$	1,282			$	1,502
Additions			385				278
Changes in fair value due to:
Realization of expected cash flows			(309	)			(212	)
Changes in market inputs or assumptions used in the valuation model			15				103
Sales			(6	)			—
Balance, end of period		$	1,367			$	1,671

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

		September 30,
		2009				2008
Prepayment speed (CPR)			17	%			17	%
Option adjusted spread (in basis points)			596				493
Volatility			32	%			22	%

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

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
						(In millions)
Net service fee revenue		$	104			$	109			$	316			$	324
Late fees			5				5				14				16
Other ancillary servicing revenue			12				5				28				18

     As of September 30, 2009, the Company’s MSRs had a weighted-average life of approximately 4.7 years. Approximately 70% of the MSRs associated with the loan servicing portfolio as of September 30, 2009 were restricted from sale without prior approval from the Company’s private-label clients or investors.

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

		Nine Months
		Ended September 30,
		2009				2008
Initial capitalization rate of additions to MSRs			1.80	%			1.63	%
Weighted-average servicing fee of additions to MSRs (in basis points)			34				34

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

		September 30,
		2009				2008
Capitalized servicing rate			1.08	%			1.29	%
Capitalized servicing multiple			3.3				4.0
Weighted-average servicing fee (in basis points)			33				32

4. Loan Servicing Portfolio

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

Portfolio Activity

		Nine Months Ended
		September 30,
		2009				2008
		(In millions)
Balance, beginning of period		$	149,750			$	159,183
Additions			25,799				24,428
Payoffs, sales and curtailments(1)			(25,815	)			(34,897	)
Balance, end of period		$	149,734			$	148,714

Portfolio Composition

		September 30,
		2009				2008
		(In millions)
Owned servicing portfolio		$	128,846			$	133,135
Subserviced portfolio			20,888				15,579
Total servicing portfolio		$	149,734			$	148,714
Fixed rate		$	99,672			$	93,075
Adjustable rate			50,062				55,639
Total servicing portfolio		$	149,734			$	148,714
Conventional loans		$	129,915			$	132,963
Government loans			13,125				10,127
Home equity lines of credit			6,694				5,624
Total servicing portfolio		$	149,734			$	148,714
Weighted-average interest rate			5.4	%			5.8	%

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

Portfolio Delinquency ⁽²⁾

		September 30,
		2009								2008
		Number				Unpaid				Number				Unpaid
		of Loans				Balance				of Loans				Balance
30 days			2.57	%			2.28	%			2.33	%			2.03	%
60 days			0.82	%			0.79	%			0.60	%			0.55	%
90 or more days			1.39	%			1.47	%			0.58	%			0.53	%
Total delinquency			4.78	%			4.54	%			3.51	%			3.11	%
Foreclosure/real estate owned/bankruptcies			2.65	%			2.72	%			1.72	%			1.63	%

     As of September 30, 2009 and December 31, 2008, the Company had outstanding servicing advance receivables of $118 million and $117 million, respectively, which were included in Accounts receivable, net in the Condensed Consolidated Balance Sheets.

5. Mortgage Loan Sales

     The Company sells its residential mortgage loans through one of the following methods: (i) sales to the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation and loan sales to other investors guaranteed by the Government National Mortgage Association (collectively, “Government-Sponsored Entities” or “GSEs”), or (ii) sales to private investors, or sponsored securitizations through the Company’s wholly owned subsidiary, PHH Mortgage Capital, LLC (“PHHMC”), which maintains securities issuing capacity through a public registration statement. During the nine months ended September 30, 2009, 94% of the Company’s mortgage loan sales were to the GSEs and the remaining 6% were sold to private investors. The Company did not execute any sales or securitizations through PHHMC during the nine months ended September 30, 2009. During the nine months ended September 30, 2009, the Company retained MSRs on approximately 95% of mortgage loans sold. The Company did not retain any interests from sales or securitizations other than MSRs during the nine months ended September 30, 2009.

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

     Key economic assumptions used in measuring the fair value of the Company’s retained interests in sold or securitized mortgage loans at September 30, 2009 and the effect on the fair value of those interests from adverse changes in those assumptions were as follows:

		Investment
		Securities				MSRs
		(Dollars in millions)
Fair value of retained interests		$	12			$	1,367
Weighted-average life (in years)			8.1				4.7
Weighted-average servicing fee (in basis points)			N/A				33
Prepayment speed (annual rate)			9-26	%			17	%
Impact on fair value of 10% adverse change		$	—			$	(84	)
Impact on fair value of 20% adverse change			(1	)			(160	)
Discount rate/Option adjusted spread (annual rate and basis points, respectively)			4-30	%			596
Impact on fair value of 10% adverse change		$	(1	)		$	(50	)
Impact on fair value of 20% adverse change			(2	)			(97	)
Volatility (annual rate)			N/A				32	%
Impact on fair value of 10% adverse change			N/A			$	(28	)
Impact on fair value of 20% adverse change			N/A				(55	)
Credit losses (cumulative rate)			8-11	%			N/A
Impact on fair value of 10% adverse change		$	(1	)			N/A
Impact on fair value of 20% adverse change			(2	)			N/A

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

     The following table presents information about delinquencies and components of sold or securitized residential mortgage loans for which the Company has retained interests (except for MSRs) as of and for the nine months ended September 30, 2009:

Principal

Total

Amount 60

Principal

Days or More

Net Credit

Amount

Past Due(1)

Losses

(In millions)

Residential mortgage loans (2)

$

923

$

228

$

23

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

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

		Nine Months Ended
		September 30,
		2009
		(In millions)
Proceeds from new loan sales or securitizations		$	21,515
Servicing fees received (1)			316
Other cash flows received on retained interests (2)			4
Purchases of delinquent or foreclosed loans			(81	)
Servicing advances			(767	)
Repayment of servicing advances			757

     During the three and nine months ended September 30, 2009, the Company recognized pre-tax gains of $82 million and $435 million, respectively, related to the sale or securitization of residential mortgage loans which are recorded in Gain on mortgage loans, net in the Condensed Consolidated Statements of Operations.

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

6. Derivatives and Risk Management Activities

     The Company did not have any derivative instruments designated as hedging instruments as of or during the nine months ended September 30, 2009. The following table summarizes the amounts recorded in the Company’s Condensed Consolidated Balance Sheet for derivative instruments not designated as hedging instruments as of September 30, 2009:

		Asset Derivatives												Liability Derivatives
		Balance												Balance
		Sheet				Fair				Notional				Sheet				Fair				Notional
		Presentation				Value				Amount				Presentation				Value				Amount
										(In millions)
Interest rate lock commitments (“IRLCs”)		Other assets				$	77			$	4,349			Other liabilities				$	1			$	43
Forward delivery commitments not subject to master netting arrangements:
Related to interest rate and price risk for MLHS and IRLCs		Other assets					6				657			Other liabilities					17				1,970
Forward delivery commitments subject to master netting arrangements(1):
Related to interest rate and price risk for MLHS and IRLCs		Other liabilities					3				414			Other liabilities					16				1,737
Contracts related to interest rate risk for debt arrangements and variable-rate leases		Other assets					7				884			N/A					—				—
Derivative instruments related to the issuance of the 2014 Convertible Notes		Other assets					67				10			Other liabilities					67				10
Foreign exchange contracts		N/A					—				—			Other liabilities					3				266
Total derivative instruments							160			$	6,314								104			$	4,026
Impact of master netting arrangements(1)							(3	)											(3	)
Cash collateral							—												(1	)
Net fair value of derivative instruments						$	157											$	100

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

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

Three Months Ended

Nine Months Ended

September 30, 2009

September 30, 2009

Statement of

Statement of

Operations

Gain

Operations

Gain

Presentation

(Loss)

Presentation

(Loss)

(In millions)

Interest rate lock commitments

Gain on mortgage loans, net

$

209

Gain on mortgage loans, net

$

486

Forward delivery commitments related to interest rate and price risk for MLHS and IRLCs

Gain on mortgage loans, net

(13

)

Gain on mortgage loans, net

(50

)

Contracts related to interest rate risk for debt arrangements and variable-rate leases

Fleet interest expense

(2

)

Fleet interest expense

(3

)

Foreign exchange contracts

Fleet interest expense

24

Fleet interest expense

39

Total derivative instruments

$

218

$

472

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

     The following is a description of the Company’s risk management policies related to IRLCs, MLHS, MSRs and debt:

     Interest Rate Lock Commitments. IRLCs represent an agreement to extend credit to a mortgage loan applicant whereby the interest rate on the loan is set prior to funding. The loan commitment binds the Company (subject to the loan approval process) to lend funds to a potential borrower at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, the Company’s outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the IRLC through the loan funding date or expiration date. The Company’s loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. The Company uses forward delivery commitments on MBS or whole loans to attempt to manage the interest rate and price risk. The Company considers historical commitment-to-closing ratios to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs. (See Note 13, “Fair Value Measurements” for additional information regarding IRLCs.)

     Mortgage Loans Held for Sale. The Company is subject to interest rate and price risk on its MLHS from the loan funding date until the date the loan is sold into the secondary market. The Company primarily uses mortgage forward delivery commitments on MBS or whole loans to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Forward delivery commitments on MBS or whole loans may not be available for all products that the Company originates; therefore, the Company may use a combination of

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

derivative instruments, including forward delivery commitments for similar products or treasury futures, to minimize the interest rate and price risk. (See Note 13, “Fair Value Measurements” for additional information regarding MLHS and related forward delivery commitments.)

     Mortgage Servicing Rights. The Company’s MSRs are subject to substantial interest rate risk as the mortgage notes underlying the MSRs permit the borrowers to prepay the loans. Therefore, the value of the MSRs generally tends to diminish in periods of declining interest rates (as prepayments increase) and increase in periods of rising interest rates (as prepayments decrease). Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards and product characteristics. The amount and composition of derivatives, if any, that the Company may use will depend on the exposure to loss of value on the Company’s MSRs, the expected cost of the derivatives, the Company’s expected liquidity needs and the expected increased earnings generated by the origination of new loans resulting from the decline in interest rates. This serves as an economic hedge of the Company’s MSRs, which provides a benefit when increased borrower refinancing activity results in higher production volumes which would partially offset declines in the value of the Company’s MSRs thereby reducing the need to use derivatives. The benefit of this economic hedge depends on the decline in interest rates required to create an incentive for borrowers to refinance their mortgage loans and lower their interest rates; however, this benefit may not be realized under certain circumstances regardless of the change in interest rates.

     During the year ended December 31, 2008, the Company assessed the composition of its capitalized mortgage loan servicing portfolio and its relative sensitivity to refinance if interest rates decline, the cost of hedging and the anticipated effectiveness of the hedge given the economic environment. Based on that assessment, the Company made the decision to close out substantially all of its derivatives related to MSRs during the three months ended September 30, 2008. As of September 30, 2009, the Company does not have any outstanding derivatives used to offset potential adverse changes in the fair value of MSRs that could affect reported earnings.

     During the three and nine months ended September 30, 2008, the Company used a combination of derivative instruments to offset potential adverse changes in the fair value of its MSRs. The change in fair value of derivatives is intended to react in the opposite direction of the change in the fair value of MSRs. The MSRs derivatives generally increase in value as interest rates decline and decrease in value as interest rates rise. The effectiveness of derivatives related to MSRs is dependent upon the level at which the change in fair value of the derivatives, which is primarily driven by changes in interest rates, correlates to the change in fair value of the MSRs, which is influenced by changes in interest rates as well as other factors, including home prices, underwriting standards and product characteristics. These derivatives included interest rate swap contracts, interest rate futures contracts, interest rate forward contracts, mortgage forward contracts, options on forward contracts, options on futures contracts, options on swap contracts and principal-only swaps. During the three and nine months ended September 30, 2008, all of the derivatives associated with the MSRs were freestanding derivatives and were not designated in a hedge relationship. These derivatives were classified as Other assets or Other liabilities in the Condensed Consolidated Balance Sheet with changes in their fair values recorded in Net derivative loss related to mortgage servicing rights in the Condensed Consolidated Statements of Operations.

     Debt. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed- and variable-rate assets and liabilities. Derivative instruments used in these hedging strategies include swaps, interest rate caps and instruments with purchased option features. To more closely match the characteristics of the related assets, including the Company’s net investment in variable-rate lease assets, the Company either issues variable-rate debt or fixed-rate debt, which may be swapped to variable LIBOR-based rates. From time to time, the Company uses derivatives that convert variable cash flows to fixed cash flows to manage the risk associated with its variable-rate debt and net investment in variable-rate lease assets. Such derivatives may include freestanding derivatives and derivatives designated as cash flow hedges.

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

     In conjunction with the issuance of the 2014 Convertible Notes (as defined and further discussed in Note 8, “Debt and Borrowing Arrangements”), the Company recognized the Conversion Option (derivative liability) and Purchased Options (derivative asset) (both of which are defined and further discussed in Note 8, “Debt and Borrowing Arrangements”), each of which are indexed to the Company’s common stock, in Other liabilities and Other assets, respectively, with the offsetting changes in their fair value recognized in Mortgage interest expense in the Condensed Consolidated Financial Statements. The Conversion Option allowed the Company to reduce the coupon rate of the 2014 Convertible Notes and the associated semiannual interest payments. The Purchased Options and Sold Warrants (as defined and further discussed in Note 8, “Debt and Borrowing Arrangements”) are intended to reduce the potential dilution to the Company’s Common stock upon conversion of the 2014 Convertible Notes and generally have the effect of increasing the conversion price from $25.805 to $34.74 per share. See Note 8, “Debt and Borrowing Arrangements” for further discussion regarding the 2014 Convertible Notes and the related Conversion Option, Purchased Options and Sold Warrants.

     Foreign Exchange. Due to disruptions in the credit markets, the Company has been unable to utilize certain direct financing lease funding structures, which include the receipt of substantial lease prepayments, for new lease originations by its Canadian fleet management operations. Alternatively, approximately $266 million of additional leases are being funded by the Company’s unsecured borrowings as of September 30, 2009 in comparison to before the disruptions in the credit markets. As such, the Company is subject to foreign exchange risk associated with the use of domestic borrowings to fund Canadian leases, and has entered into foreign exchange forward contracts to manage such risk. During the three and nine months ended September 30, 2009, the Company recorded net foreign exchange transaction losses of $24 million and $39 million, respectively, and net gains of $24 million and $39 million, respectively, related to the foreign exchange forward contracts, both of which were included in Fleet interest expense in the Condensed Consolidated Statements of Operations, and as such the net foreign exchange impact related to the use of domestic borrowings to fund additional Canadian leases was not significant.

7. Vehicle Leasing Activities

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

		September 30,				December 31,
		2009				2008
		(In millions)
Operating Leases:
Vehicles under open-end operating leases		$	7,549			$	7,542
Vehicles under closed-end operating leases			264				266
Vehicles under operating leases			7,813				7,808
Less: Accumulated depreciation			(4,326	)			(3,999	)
Net investment in operating leases			3,487				3,809
Direct Financing Leases:
Lease payments receivable			107				141
Less: Unearned income			(5	)			(7	)
Net investment in direct financing leases			102				134
Off-Lease Vehicles:
Vehicles not yet subject to a lease			108				254
Vehicles held for sale			3				18
Less: Accumulated depreciation			(2	)			(11	)
Net investment in off-lease vehicles			109				261
Net investment in fleet leases		$	3,698			$	4,204

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

		September 30,				December 31,
		2009				2008
Vehicles under open-end leases			95	%			94	%
Vehicles under closed-end leases			5	%			6	%
Vehicles under variable-rate leases			75	%			73	%
Vehicles under fixed-rate leases			25	%			27	%

8. Debt and Borrowing Arrangements

     The following tables summarize the components of the Company’s indebtedness as of September 30, 2009 and December 31, 2008:

September 30, 2009
																		Assets Held as Collateral(1)
																										Mortgage				Net
														Maturity/												Loans				Investment
										Interest				Expiry				Accounts				Restricted				Held for				in Fleet
		Balance				Capacity(2)				Rate(3)				Date				Receivable				Cash				Sale				Leases(4)
		(Dollars in millions)
Chesapeake Series 2006-1 Variable Funding Notes		$	154			$	154								3/27/2009	(5)
Chesapeake Series 2006-2 Variable Funding Notes			768				768								2/26/2009	(5)
Chesapeake Series 2009-1 Term Notes			1,000				1,000								5/20/2010
Chesapeake Series 2009-2 Class A Term Notes			850				850								2/17/2011
Chesapeake Series 2009-2 Class B Term Notes(6)			27				27								2/17/2011
Chesapeake Series 2009-2 Class C Term Notes(6)			24				24								2/17/2011
Other			34				34								3/2010 — 6/2016
Total Vehicle Management Asset-Backed Debt			2,857				2,857				2.2	%(7)						$	30			$	361			$	—			$	3,130
RBS Repurchase Facility(8)			552				1,500				3.0	%			6/24/2010				—				—				599				—
Fannie Mae Repurchase Facilities(9)			418				418				1.0	%			N/A				—				—				423				—
Other			4				4				3.1	%			10/29/2009				—				—				4				—
Total Mortgage Warehouse Asset-Backed Debt			974				1,922												—				—				1,026				—
Term Notes(10)			440				440				6.5%—7.9	%(11)			4/2010—4/2018				—				—				—				—
Credit Facilities(12)			789				1,305				1.0	%(13)			1/6/2011				—				—				—				—
Convertible Notes due 2012(14)			218				218				4.0	%			4/15/2012				—				—				—				—
Convertible Notes due 2014(15)			177				177				4.0	%			9/1/2014				—				—				—				—
Total Unsecured Debt			1,624				2,140												—				—				—				—
Total Debt		$	5,455			$	6,919											$	30			$	361			$	1,026			$	3,130