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EX-31.1 - EXHIBIT 31.1 - HOME LOAN SERVICING SOLUTIONS, LTD.ex311-ceo302certificationx.htm
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EX-12.1 - EXHIBIT 12.1 - HOME LOAN SERVICING SOLUTIONS, LTD.ex121ratioerngstofxdchrgs.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________________to _____________________
Commission File Number: 1-35431
 
Home Loan Servicing Solutions, Ltd.
(Exact name of registrant as specified in its charter)

Cayman Islands
 
98-0683664
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)

Home Loan Servicing Solutions, Ltd.
c/o Intertrust Corporate Services (Cayman) Limited
190 Elgin Avenue
George Town, Grand Cayman KY1-9005
Cayman Islands
(Address of principal executive offices) (Zip Code)
(345) 945-3727
(Registrant’s telephone number, including area code)
Title of each class
 
Name of each exchange on which registered
Ordinary shares, par value $0.01 per share
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes ¨ No x

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 x No ¨





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 x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ¨ No x

Aggregate market value of the ordinary shares of the registrant held by non-affiliates as of June 30, 2014: $1,590,856,062

Number of Ordinary Shares, $0.01 par value, outstanding as of April 6, 2015: 71,016,771 shares.
 






HOME LOAN SERVICING SOLUTIONS, LTD.
FORM 10-K

INDEX
 
 
 
  
PAGE
 
 
  
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  


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FORWARD-LOOKING STATEMENTS

This Annual Report contains 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. All statements, other than statements of historical facts included in this report including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.

These forward-looking statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “might,” “should,” “could,” “would,” “intend,” “consider,” “expect,” “foresee,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Such statements are not guarantees of future performance as they are subject to certain assumptions, inherent risks and uncertainties in predicting future results and conditions that could cause the actual results to differ materially from those projected in these forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to, the following:

Our ordinary shares may continue to trade even though we are in the process of winding down, and distributions to shareholders may be below any trading price;
The amount of the final distribution and our ability to cease reporting depends upon whether our shareholders approve the New Merger (as defined in Part I, Item 1, “Business”);
The ability to close the New Merger on the proposed terms and within the anticipated time period, or at all, which is dependent on the parties’ approval to satisfy certain closing conditions;
The impact of the Asset Sale and the New Merger on third party relationships;
Litigation related to the Asset Sale or New Merger;
We cannot assure you of the exact amount or timing of any final distribution to our shareholders under the Liquidation Plan (as defined in Part I, Item 1, “Business”);
The impact of the subpoenas from the Securities and Exchange Commission relating to communications with investors named in the subpoena, and our previously disclosed restatement of our consolidated financial statements and former material weakness in our internal control over financial reporting and certain related party matters;
Regulatory investigations and legal proceedings may have an impact on the timing and implementation of the Liquidation Plan;
The Asset Sale (as defined in Part I, Item 1, “Business”) or Liquidation Plan may result in certain adverse U.S. federal income tax consequences described in Part I, Item 1A, “Risk Factors – Risks Related to Taxation;”
The ability to favorably resolve the alleged event of default under the Sixth Amended and Restated Indenture, dated as of January 17, 2014, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, Wells Fargo Securities, LLC and Credit Suisse AG, New York Branch;
Assumptions about the availability of and our ability to make acquisitions of residential mortgage assets from Ocwen Financial Corporation and its subsidiaries (collectively "Ocwen") or others on terms consistent with our business and economic model;
Estimates regarding prepayment speeds, default rates, delinquency rates, severity, servicing advances, amortization of Notes receivable – Rights to MSRs, custodial account balances, interest income, operating costs, interest costs and other drivers of our results;
The potential for fluctuations in the valuation of our Notes receivable – Rights to MSRs and Loans held for investment;
Assumptions regarding the availability of refinancing options for subprime and Alt-A borrowers;
Expectations regarding incentive fees in our servicing contract and the stability of our net servicing fee revenue;
Assumptions about the effectiveness of our hedging strategy;
Assumptions regarding amount and timing of additional debt or equity offerings;
Assumptions related to sources of liquidity, our ability to fund servicing advances, our ability to pursue new asset classes and the adequacy of our financial resources;
Assumptions regarding our financing strategy, advance rate, costs and other terms for financing new asset classes;
Assumptions regarding margin calls on financing facilities;
Changes in rating methodologies by our rating agencies and our ability to obtain or maintain ratings of our financing facilities;
Our ability to enforce contractual remedies against Ocwen;
Our status with respect to legal ownership of the rights to mortgage servicing rights we acquired from Ocwen;
Our ability to pay monthly dividends;
The performance of Ocwen or others as mortgage servicer;

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The ability of Ocwen to maintain its residential mortgage servicer ratings and the effects, if any, of any changes in such ratings on our financing arrangements or agreements with Ocwen;
Our competitive position;
Our dependence on the services of our senior management team;
Regulatory investigations and legal proceedings against us;
Regulatory investigations and legal proceedings against Ocwen, Altisource or others with whom we may conduct business;
Uncertainty related to future government regulation and housing policies;
Assumptions regarding our tax rate and decisions by taxing authorities; and
General economic and market conditions.

All forward-looking statements are subject to certain risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Important factors that could cause or contribute to such difference include those risks specific to our business detailed within this Annual Report and our other reports and filings with the Securities and Exchange Commission (“SEC”) including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including any amendments thereto. You should not place undue reliance on such forward-looking statements, which speak only as of their dates. Home Loan Servicing Solutions, Ltd. (collectively referred to throughout as “HLSS”, “us”, “our”, “we”, or the “Company”) undertakes no obligation to update or revise forward-looking statements.¸ whether as a result of new information, future events or otherwise.

For more information on the uncertainty of forward-looking statements see Part I, Item 1A, "Risk Factors” in this Annual Report.

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PART I

ITEM 1.
 
BUSINESS

Recent Developments

Ocwen Financial Corporation (together with its subsidiaries, collectively "Ocwen") has been and is subject to certain federal and state regulatory matters.

On December 19, 2013, Ocwen reached an agreement, involving the Consumer Financial Protection Bureau (“CFPB”), various state attorneys general and other agencies that regulate the mortgage servicing industry, which agreement was approved by consent judgment by the U.S. District Court for the District of Columbia on February 26, 2014.

On September 15, 2014, the Company received a subpoena from the SEC requesting that it provide certain information related to the Company’s prior accounting conventions for and valuations of our Notes receivable – Rights to MSRs that resulted in the restatement of our consolidated financial statements for the years ended December 31, 2013 and 2012 and for the quarter ended March 31, 2014 during August 2014.

On December 22, 2014, the Company received a subpoena from the SEC requesting that it provide information related to certain governance documents and transactions and certain communications regarding the same.

On December 22, 2014, Ocwen announced that it had reached a settlement agreement with the New York Department of Financial Services (the "NY DFS") related to investigations into Ocwen's mortgage servicing practices in the State of New York.
 
On January 14, 2015, our Moody’s Investors Service (“Moody's”) credit rating was downgraded to B3/Negative and on January 16, 2015, Standard & Poor’s (“S&P”) affirmed its credit rating of B+ but downgraded our outlook from Stable to Negative.

As a result of Ocwen’s settlement agreement with the NY DFS, on January 16, 2015, William C. Erbey stepped down as non-executive Chairman of the Board of Directors of Home Loan Servicing Solutions, Ltd. (collectively referred to throughout as “HLSS”, “us”, “our”, “we”, or the “Company”), Ocwen, Altisource Portfolio Solutions, S.A. (“Altisource”), Altisource Asset Management Corporation ("AAMC") and Altisource Residential Corporation ("Residential"). Concurrently, Robert J. McGinnis was appointed as non-executive Chairman of HLSS.

On January 23, 2015, counsel to BlueMountain Capital Management, LLC (“BlueMountain”), which has represented that it is the investment manager of funds that hold certain Series 2012-T2 and Series 2013-T3 Notes (the “Notes”) issued by the HLSS Servicer Advance Receivables Trust (the “HSART Trust”), sent a letter to HLSS Holdings, LLC (“HLSS Holdings”), the HSART Trust, Ocwen and Deutsche Bank National Trust Company (the “Indenture Trustee”), asserting certain alleged events of default under the indenture governing Notes issued by the HSART Trust. BlueMountain has publicly stated that it has taken a “short position” on behalf of certain funds in the stock of HLSS and Ocwen.

On January 23, 2015, Ocwen announced that it had reached a settlement with the California Department of Business Oversight (the "CA DBO") in relation to an action dated October 3, 2014 in the State of California.

On January 23, 2015, Gibbs & Bruns LLP, on behalf of its clients, issued a press release regarding notices of nonperformance provided to various trustees in relation to Ocwen’s servicing practices under 119 residential mortgage-backed securities trusts (the “RMBS Notices”).

On January 26, 2015, we announced that HLSS Holdings had sent a letter to the Indenture Trustee in response to the BlueMountain allegations and that we intended to vigorously defend against any claims that may be asserted by BlueMountain.

On January 29, 2015, Moody’s downgraded Ocwen’s servicer quality (“SQ”) assessment from “SQ3+” to “SQ3-” as a primary servicer of subprime residential loans and as a special servicer of residential mortgage loans. During February 2015, Fitch Ratings Inc. (“Fitch”) downgraded Ocwen's residential primary servicer rating for subprime products from “RPS3” to “RPS4,” and Morningstar, Inc. (“Morningstar”) downgraded its rating to “MOR RS3.”


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During February and March 2015, Ocwen received two notices of servicer termination affecting four separate PSAs underlying our Notes receivable – Rights to MSRs due to servicer rating downgrades.

On February 17, 2015, HLSS Holdings and our wholly-owned subsidiary HLSS Servicer Advance Facility Transferor, LLC, the depositor to the HSART Trust (the “Depositor”), entered into an agreement (the “Agreement”) with the Indenture Trustee. Pursuant to the Agreement, the parties agreed, among other things, that during the term of the Agreement the Indenture Trustee will not commence a judicial proceeding to seek judicial guidance regarding the allegations made in the BlueMountain letter prior to April 15, 2015, and HLSS Holdings and the Depositor agreed to allow the Indenture Trustee to withhold from distribution certain excess funds that would otherwise be distributable to the Depositor in an amount up to the Interest Accrual Differential for the related interest accrual period under the HSART Trust indenture. For the purposes of the Agreement, the “Interest Accrual Differential” means, with respect to any interest accrual period under the HSART Trust indenture beginning with the interest accrual period relating to the February 17, 2015 monthly payment date thereunder and any class of HSART Trust notes issued prior to January 17, 2014, an amount equal to the excess of (a) the related interest accrual for such class of notes at the interest rate in effect for such class in the absence of an event of default under the HSART Trust indenture (the “Non-FAE Rate”) plus 3.00% per annum over (b) the related interest accrual for such class of notes at the Non-FAE Rate. The Depositor and HLSS Holdings subsequently agreed to allow the Indenture Trustee to withhold on the same basis with respect to HSART Trust notes issued on or after January 17, 2014. The effect of this agreement will be to increase the amount deposited and held in Debt service accounts by approximately $11.8 million per month.

On February 20, 2015, counsel to BlueMountain sent another letter asserting certain alleged events of default under the indenture governing Notes issued by the HSART Trust.

On February 20, 2015, HLSS Mortgage Master Trust II, a wholly-owned subsidiary of the Company, completed the sale of its entire portfolio of re-performing mortgage loans (“RPLs”) to an unrelated third party purchaser through the execution of a Mortgage Loan Purchase and Sale Agreement (the “RPL MLPSA”). Under the RPL MLPSA, the purchase price for the RPLs was $337.6 million (the “Purchase Price”). The Purchase Price is subject to a 5% holdback pending completion of the Purchaser's due diligence.
  
On February 22, 2015, we entered into an Agreement and Plan of Merger (the “Old Merger Agreement”) with New Residential Investment Corp., a Delaware corporation (“NRZ”), and Hexagon Merger Sub, Ltd., a Cayman Islands exempted company and a wholly-owned subsidiary of NRZ (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub would merge with and into us (the “Old Merger”).

During the month of February 2015, our management developed a management plan that included the following elements:

Entering into the Old Merger Agreement with NRZ;
Negotiating certain commitments from various lenders for replacement advance financing, though never consummated;
Selling our entire portfolio of RPLs for an immaterial gain and concurrently repaying the related borrowings in full;
Marketing our Government National Mortgage Association (“GNMA”) early buy-out (“EBO”) loan portfolios and extending the maturity of the related borrowings to allow for continued marketing;
Working closely with our legal counsel to address BlueMountain’s allegations of default, which we believe are without merit, and any potential impact of such allegations on our advance financing facilities; and
Amending our senior secured term loan facility agreement to extend the deadline to furnish annual financial statements to April 10, 2015, to amend certain terms of cross default to our advance financing facilities and to permit an amendment to the Ocwen Subservicing Agreement (as defined below).

On March 3, 2015, we filed a Form 12b-25 indicating that additional time to complete our Annual Report on Form 10-K for the year ended December 31, 2014 was necessary in order to complete the assessment of recent events related to our business and determine the impact on our financial statements and related disclosures.

On March 18, 2015, we filed a Form 8-K indicating that we required additional time to prepare information related to our ability to operate as a going concern and to provide such information to our auditors for the purposes of their audit of our financial statements for the year ended December 31, 2014.

On March 18, 2015, we received notification from The Nasdaq Stock Market LLC (“Nasdaq”) stating that the Company is no longer in compliance with Nasdaq Listing Rule 5250(c)(1) for continued listing due to the Company not having timely filed its Annual Report on Form 10-K for the year ended December 31, 2014.

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On March 23, 2015, the Company received a subpoena from the SEC requesting that it provide information concerning communications between the Company and certain investment advisors and hedge funds. The SEC also requested documents relating to the Company’s structure, certain governance documents and any investigations or complaints connected to trading in the Company’s securities.

On April 6, 2015, HLSS, HLSS Holdings and Ocwen entered into an amendment to the Purchase Agreement and the sale supplements (effective upon completion of the Asset Sale described below) to, among other things, (i) obtain Ocwen's consent to the assignment by HLSS of its interest under the Purchase Agreement and each sale supplement, (ii) provide that HLSS Holdings will not become the named servicer in connection with any Rights to MSRs, or direct the replacement of Ocwen as named servicer, before April 6, 2017 except under certain limited circumstances, (iii) extend the scheduled term of Ocwen's servicing appointment under each sale supplement until the earlier of 8 years from the date of such sale supplement and April 30, 2020, and (iv) provide that Ocwen will reimburse HLSS Holdings for certain increased financing costs resulting from servicer rating downgrades of Ocwen. In addition, under such amendment (x) Ocwen agrees to exercise any “clean-up call” rights under any servicing agreement related to Rights to MSRs only at the direction of HLSS and to sell to HLSS, on an “as-is” basis, the economic beneficial interest in the right to purchase the mortgage loans and other assets in the trust for each designated servicing agreement pursuant to such clean-up call rights and (y) HLSS agrees to pay to Ocwen a fee equal to 0.50% of  the outstanding balance of the performing mortgage loans purchased in connection with any such exercise and to pay Ocwen’s related costs and expenses of exercise.

On April 6, 2015, to best address concerns relating to our ability to operate as a going concern and the associated impact on our business on an expedited basis, we agreed with NRZ and Merger Sub to terminate the Old Merger Agreement and immediately complete the sale of substantially all of our assets (the “Asset Sale”). The Asset Sale was made in accordance with the terms and conditions of a Share and Asset Purchase Agreement entered into on April 6, 2015 (the “NRZ Purchase Agreement”) between us, NRZ, MSR-EBO Acquisitions LLC (“HLSS MSR-EBO”) and HLSS Advances Acquisition Corp. (“HLSS Advances”). In connection with the Asset Sale, among other things, (i) HLSS MSR-EBO acquired substantially all of the assets of the Company (including all of the issued share capital of HLSS Luxco 1B S.à r.l. (“Luxco 1B”)) and (ii) HLSS Advances acquired all of the issued share capital of HLSS Luxco 1A S.à r.l. (“Luxco 1A”) and assumed substantially all of the liabilities of the Company, including certain post-closing liabilities of the Company. In exchange, the Company received an amount in cash equal to $1.0 billion plus 28,286,980 newly issued shares of NRZ common stock with a par value $0.01 per share. In conjunction with the Asset Sale, our senior secured term loan facility was retired.

Concurrently with the execution of the NRZ Purchase Agreement, our Board of Directors adopted and approved a plan of complete liquidation and dissolution (the “Liquidation Plan”), pursuant to which we will (1) cease our business activities other than such activities that are necessary to carry out the provisions of the Liquidation Plan, (2) pay or make adequate provision for operating expenses expected to be incurred through the completion of the Liquidation Plan and (3) distribute to our shareholders in one or more distributions, (a) the cash received by the Company in the Asset Sale and the net proceeds from the sale of NRZ common stock received by the Company in the Asset Sale, less (b) amounts used to pay the liabilities of the Company and less a reserve in the amount of $50 million that will be held by the Company at the discretion of the Board to ensure that the Company will be able to meet known and unknown liabilities up to the date of the consummation of the transactions contemplated by the New Merger (as defined below) or, if the transactions contemplated by the New Merger are not consummated, the date of the final liquidating distribution after settlement of the liabilities and to ensure that the Company has available resources in the event that it is necessary to enforce against third parties any contractual or other rights of the Company or its officers or directors. If the New Merger is consummated, our shares will be converted automatically into the right to receive $0.69 per share in cash without interest (the “Merger Consideration”).  If the New Merger is not consummated and post-closing expenses and liabilities do not exceed $50 million, it is anticipated that a further cash distribution will be made to shareholders.

Immediately following the closing of the Asset Sale contemplated by the NRZ Purchase Agreement, we entered into: (i) an Agreement and Plan of Merger (the “New Merger Agreement”) with NRZ and Merger Sub, pursuant to which, among other things, the Company will be merged with and into Merger Sub (the “New Merger”), with the Company ceasing its corporate existence and Merger Sub surviving the New Merger, (ii) a Services Agreement, pursuant to which HLSS Advances Acquisition Corp. will provide us with certain services following the consummation of the Asset Sale, including, among other things, handling (including defending, prosecuting or resolving) all claims, disputes or controversies (including any litigation, arbitration, governmental investigations or inquiries or any other proceedings or negotiations) in which the Company is a party or may otherwise be involved and (iii) a Registration Rights Agreement to memorialize certain rights relating to the registration of shares of NRZ common stock to be held by the Company upon the closing of the Asset Sale. On the terms and subject to the conditions set forth in the New Merger Agreement, at the effective time of the New Merger (the “Effective Time”), each ordinary share, par value $0.01 per share, of the Company (the “Company Shares”) issued and outstanding immediately prior to the Effective Time

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(other than Company Shares owned by any direct or indirect wholly-owned subsidiary of NRZ (other than Merger Sub) or of Merger Sub and Company Shares as to which dissenters’ rights have been properly exercised) will be converted automatically into the right to receive the Merger Consideration. The parties’ obligations to consummate the New Merger are subject to certain closing conditions, including approval of the New Merger by the requisite vote of the shareholders, the absence of any legal restraints that would prohibit the consummation of the New Merger and other conditions customary for a transaction of this type. Each of us, NRZ and Merger Sub has made certain customary representations, warranties and covenants in the New Merger Agreement, including, among other things, covenants related to the conduct of our business during the interim period between the execution of the New Merger Agreement and the consummation of the New Merger. The New Merger Agreement provides for certain termination rights for both us and NRZ, including, if approval of the New Merger by the requisite vote of the shareholders is not obtained or if the New Merger is not consummated by the nine month anniversary of the date of the New Merger Agreement.

General

We are a Cayman Islands exempted company focused on acquiring assets related to residential mortgages, including assets whereby we acquire the rights to receive the servicing fees less compensation to the current servicer for their servicing activities (“Rights to MSRs”), servicing advances associated with our Rights to MSRs, whole loans held for investment, and other residential mortgage-related assets (collectively the "Residential Mortgage Assets"). We launched our operations on March 5, 2012, at which time we acquired Rights to MSRs related to a residential mortgage portfolio with $15.2 billion unpaid principal balance (“UPB”) from Ocwen Financial Corporation (together with its subsidiaries, collectively "Ocwen"). As of December 31, 2014, we have increased our asset base to include Rights to MSRs with underlying UPB of $160.8 billion, servicing advances of $6.1 billion, and whole loans held for investment of $815.7 million. See Part II, Item 8 "Financial Statements and Supplementary Data – Note 2, Asset Acquisitions" for more information regarding the assets we have acquired.

We have not and do not intend to develop our own mortgage servicing platform. Instead, we will rely on third-party residential mortgage loan servicers, such as Ocwen. As of December 31, 2014, all of our Rights to MSRs have been acquired from and are serviced by Ocwen, and our Loans held for investment are serviced by Ocwen and PennyMac Loan Services, LLC (“PennyMac”).

With respect to our Rights to MSRs, prior to the transfer of legal ownership of the underlying mortgage servicing rights to us, Ocwen remains obligated to service the underlying residential mortgage loans and remit to us the servicing fees collected each month (Ocwen retains certain ancillary income such as late charges, modification fees, etc.). In the event of transfer of legal ownership of any mortgage servicing rights to us, Ocwen will service the underlying mortgage loans on our behalf as servicer, and we will receive the servicing fees (excluding certain ancillary income). As compensation for its servicing activities, Ocwen receives from us a monthly base fee equal to 12% of such servicing fees collected each month. Ocwen also earns a monthly performance-based incentive fee that fluctuates based on collections and servicing advance reduction criteria with respect to the underlying mortgage loans. The method used to calculate the fees that we pay to Ocwen with respect to the Rights to MSRs is the same as the method used to calculate the fees that we would pay to Ocwen under a subservicing agreement with respect to any mortgage servicing rights should we subsequently directly acquire the mortgage servicing rights. As a result, the compensation to be paid to Ocwen will not vary based on whether Ocwen or we hold legal title to the underlying mortgage servicing rights. As of December 31, 2014, all of our Rights to MSRs have been acquired from and are serviced by Ocwen.

Our primary source of income is interest income on the Notes receivable – Rights to MSRs. This interest income represents the servicing fees collected by Ocwen on the underlying mortgage servicing rights less any amounts due to Ocwen for its services under the related purchase agreements and the amount of amortization of the Notes receivable – Rights to MSRs. Increases or decreases in the fair value of our Notes receivable – Rights to MSRs serve to decrease or increase, respectively, our amortization of the Notes receivable – Rights to MSRs. If we were to meet all the requirements for legal ownership of the mortgage servicing rights in the future, we would account for our Notes receivable – Rights to MSRs as mortgage servicing rights and would begin recording servicing fee revenue related to the mortgage servicing rights rather than interest income on the Notes receivable – Rights to MSRs.

Substantially all of the Rights to MSRs and related servicing advances we have purchased to date relate to subprime and Alt-A loans. The prepayment rate on subprime and Alt-A loans has demonstrated little correlation with interest rates in recent years which is a characteristic that we find attractive and which fits within our business strategy. We intend to continue to acquire assets pertaining to subprime and Alt-A mortgage loans that were originated prior to 2008. Given the low volume of originations of subprime and Alt-A loans since 2007, at some point in the future we may be unable to acquire sufficient similar assets. As such, we may explore additional residential mortgage opportunities such as investing in additional Federal Housing Administration (“FHA”) guaranteed early buy-out (“EBO”) program or other whole loans. If we are unsuccessful in our attempts to pursue these

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alternative opportunities or any other opportunities not currently contemplated, we may decide to return cash to shareholders in the form of increased dividends, a special dividend or share repurchases.

We intend to continue to finance the acquisitions of additional similar Residential Mortgage Assets in two ways:
 
In order to remain fully invested and to offset the impact of prepayments in our servicing portfolio, we expect to continue to utilize cash flow from operations in excess of our dividend to purchase Residential Mortgage Assets that have low credit risk and attractive, risk adjusted yield.
We may issue additional debt or equity to allow us to execute larger purchases of Residential Mortgage Assets. These purchases will be subject to market conditions and will likely require that additional financing capacity be arranged.

We are incorporated as an exempted company in the Cayman Islands which currently does not levy income taxes on individuals or companies. We expect that we and our wholly owned subsidiary Luxco 1B have been and will be treated as a Passive Foreign Investment Company (“PFIC”) under U.S. federal income tax laws with respect to our investing activities. Except for our U.S. subsidiaries that are taxed as corporations for U.S. federal income tax purposes, we do not expect to be treated as engaged in a trade or business in the United States and thus do not expect to be subject to U.S. federal income taxation.

Our Business Model

Our business model is predicated on purchasing Residential Mortgage Assets and engaging one or more residential mortgage loan servicers to service the mortgage loans underlying our Residential Mortgage Assets. As of December 31, 2014, we have acquired Rights to MSRs and the related servicing advances, GNMA EBO whole loans and RPLs. On February 20, 2015, we sold the RPLs to an unrelated third party. Our Residential Mortgage Assets are serviced by Ocwen and PennyMac.

Acquiring Rights to MSRs results in the Company recording Notes receivable – Rights to MSRs, Match funded advances and Match funded liabilities. Our agreements with Ocwen provide for us to earn retained fees related to such Rights to MSRs, which averaged 22.16 basis points of the UPB of the related mortgage loans during 2014. Retained fees are further reduced by the reduction of the Notes receivable – Rights to MSRs due to the run-off of UPB over time and are adjusted for changes in the fair value of the Notes receivable – Rights to MSRs to arrive at Interest income from the Notes receivable – Rights to MSRs. This source of revenue allows us to pay operating expenses and other expenses such as Interest expense, and the income that remains is available for distribution to the holders of our ordinary shares in the form of monthly dividends. The key attributes of our business model are as follows:

Stable Income Stream. Interest income from the Notes receivable – Rights to MSRs is driven primarily by the retained fee we have negotiated with Ocwen. The retained fee we negotiated with Ocwen ranges from 13.0 to 32.5 basis points in accordance with a pre-determined schedule set forth in the applicable subservicing supplement. Our primary reductions to income include Interest expense and operating expenses. The amortization component of our Notes receivable – Rights to MSRs, as adjusted for changes in fair value of the Notes receivable – Rights to MSRs, is a reduction to the Interest income – Notes receivable – Rights to MSRs line item in our Consolidated Statements of Operations. We manage our exposure to rising interest rates through our fixed rate term note borrowing, the variable rate interest income earned on custodial account balances and our interest rate swap agreements.

Stable Balance Sheet. Match funded advances are our largest asset class and comprise 75.2% of our total assets as of December 31, 2014. Match funded advances are relatively low risk assets because they represent a first priority lien against the proceeds from the underlying mortgage loans and are recoverable from loan and pool level proceeds over a relatively short period of time. Match funded advances relating to the Notes receivable – Rights to MSRs were 3.81% of the UPB of the mortgage loans serviced as of December 31, 2014, resulting in significant overcollateralization. We expect the advance ratio on the mortgage loans to which we currently hold the Rights to MSRs to decline over time.

Notes receivable – Rights to MSRs comprise 7.6% of our total assets as of December 31, 2014. Notes receivable – Rights to MSRs are valued, in part, based on the expected life of the pool of mortgage loans underlying these assets. We recorded the Notes receivable – Rights to MSRs at fair value on the date of acquisition and adjust the carrying value to fair value at each reporting date. We amortize the Notes receivable – Rights to MSRs and deduct the amortization, as adjusted for changes in fair value, from the net of the servicing fees received by us and the servicing fees paid to Ocwen with respect to the Rights to MSRs.

Prepayment speeds relating to subprime and Alt-A mortgage loans, which comprise substantially all of our Rights to MSRs and related servicing advances, are relatively insensitive to interest rate fluctuations as the borrowers often do not have the ability to refinance their loans due to low credit scores or high loan to value ratios. In some instances, borrowers have the ability to

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refinance their loans, but choose not to because they are indifferent between the economics of their current loan and a modified loan. Our agreements with our servicers protect our Residential Mortgage Assets from significant losses should loan refinancing activity substantially increase.

Loans held for investment consist of whole residential mortgage loans acquired from others and comprise 10.0% of our total assets at December 31, 2014. As of December 31, 2014, our Loans held for investment were comprised of 58.5% GNMA EBO loans and 41.5% RPLs. We have not originated any mortgage loans to date.

Our GNMA EBO loans were recorded at the purchase price and are carried at the lower of cost or market. We accrue interest income on these loans at the amount that we are guaranteed to receive under either the related purchase agreement or by the FHA. The GNMA EBO loans represent minimal credit risk due to the 100% FHA guarantees on the UPB and a portion of the interest receivable. In addition, our Other assets includes Claims receivable from FHA of $109.6 million as a result of our GNMA EBO loans (see Part II, Item 8, "Financial Statements and Supplementary Data – Note 6, Other assets"). We also receive a portion of the GNMA incentives to our servicers for successful loan modifications that are re-securitized in a GNMA securitization.

Our RPLs were recorded at the purchase price and are accounted for under the requirements of Accounting Standards Codification ("ASC") 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, which requires us to accrete interest income on a level-yield basis over the estimated life of the RPL pools. Prior to the sale of the RPLs on February 20, 2015, we periodically assessed the expected future cash flows of the RPL pools and adjusted our assumptions as needed, including assumptions related to default rates, delinquency rates, interest rates and prepayment speeds. Under ASC 310-30, subsequent decreases to the expected cash flows would generally result in an impairment loss, and subsequent increases in cash flows would result in a reversal of impairment losses to the extent of prior charges, if any, and an adjustment in the accretable yield recognized on a prospective basis over the pools' remaining life, which will have a positive impact on interest income. During 2014, we made no material adjustments to our assumptions, and we recognized no impairment losses or increases in interest income as a result.

Cash comprises approximately 2.6% of our total assets at December 31, 2014. At December 31, 2014, $488.9 million of our total maximum borrowing capacity remained unused. We maintain unused borrowing capacity for two reasons:

As a protection should advances increase due to increased delinquencies; and

To provide capacity for the acquisition of additional servicing rights or to pursue other investment opportunities.

 We believe that our cash balance and unused financing capacity are sufficient to meet foreseeable future requirements.

While we expect our interest income to vary based on the UPB of the mortgage loans underlying the Residential Mortgage Assets, we do not expect significant interest expense volatility as a result of changes in market interest rates. This is because 50.9% of our borrowing is in the form of fixed rate term notes. We also earn interest income at market rates on custodial account balances. Lastly, we hedge a portion of our variable rate borrowings through fixed for floating interest rate swap agreements. Changes in prepayment speeds underlying the Residential Mortgage Loans ultimately impact future interest income. Servicing advances do not earn interest and are self-liquidating over a short period of time.

Since servicing advances are non-interest bearing and the interest expense to finance servicing advances is one of our largest expenses, our agreements with Ocwen provide for a reduction in the subservicing fees payable to Ocwen in any month if the advance ratio exceeds a predetermined level for that month. If we do not receive an amount equal to the retained fee in any given month, as expressed in terms of basis points of the average UPB of the mortgage loans serviced, a shortfall in the retained fee is created. Ocwen does not earn the full amount of its subservicing fees for any month that there is such a shortfall, or in any subsequent month, until we have recovered all shortfalls in the retained fee.

The Market Opportunity

We continue to believe that the current dynamics of the subprime and Alt-A mortgage market have created a unique opportunity where there is the potential for a continued supply of Residential Mortgage Assets to be sold over the next several years. These dynamics include:

Sustained higher borrower delinquencies and defaults experienced over the last several years and increased regulatory oversight has led to substantially higher costs for mortgage servicers and negatively impacted their profitability; and


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Our belief that subprime and Alt-A mortgage servicing has become less attractive to many mortgage servicers due to increasingly negative publicity and heightened government and regulatory scrutiny.
 
We believe that our business model is currently optimized to allow us to be highly competitive in the acquisition of Residential Mortgage Assets for subprime and Alt-A mortgage loans due to our ability to access reliable and cost effective sources of financing and cost structure.

We actively seek to purchase Residential Mortgage Assets from third parties, such as banks, other financial institutions and independent mortgage servicers, and our ability to capitalize on such opportunities could depend on our ability to to develop operating capabilities to manage new servicers.

We may explore other residential mortgage opportunities with appropriate characteristics including low credit risk and attractive risk adjusted yield.

Competitive Strengths

We believe we are well positioned to execute our business strategy based on the following competitive strengths:

Experienced Management Team with Extensive Knowledge of the Mortgage Servicing Industry. We have an executive management team with extensive experience in the mortgage servicing industry. This experience includes evaluating and acquiring Residential Mortgage Assets, performing asset valuation analyses and financing mortgage servicing businesses through a variety of economic cycles. Key members of our executive management team also have experience in managing a public company in the mortgage servicing industry.

Focus on subprime and Alt-A mortgage loans. Since the Residential Mortgage Assets that we have acquired pertain to subprime and Alt-A loans, our asset mix is heavily weighted toward mortgage servicing advances which are the first amounts to be repaid from the collection of the underlying mortgage loans and, therefore, have relatively low credit risk. We believe that our concentration in subprime and Alt-A related assets could result in a lower cost of capital than for competitors that own a mix of assets that includes mortgage servicing rights for prime loans where prepayment speeds correlate with interest rates.

Asset Acquisition and Evaluation Expertise. We believe that our asset acquisition evaluation process which includes using proprietary historical data to project the performance of mortgage loans, and our executive management team’s experience and judgment in identifying, assessing, valuing and acquiring new Residential Mortgage Assets enables us to accurately price assets.

Description of the Purchase Agreement

We have entered into a purchase agreement with Ocwen pursuant to which we may agree to purchase mortgage servicing rights, associated servicing advances and other related assets from Ocwen from time to time (the "Purchase Agreement"). The specific terms of any acquisition of mortgage servicing rights, associated servicing advances and related assets, are (and may be in the future) documented pursuant to separate sale supplements to the Purchase Agreement.

Because Ocwen acts as the servicer of the loans underlying our Rights to MSRs, we pay Ocwen a monthly base fee and a monthly performance-based incentive fee pursuant to the Purchase Agreement and each related sale supplement for a six year period after the closing of each acquisition of Rights to MSRs.

The Purchase Agreement includes various Ocwen warranties, representations and indemnifications relating to Ocwen's performance of its duties as servicer. As of December 31, 2014, Ocwen serviced each mortgage loan underlying the Rights to MSRs under the terms of the Purchase Agreement and the applicable sale supplement.

On April 6, 2015, HLSS, HLSS Holdings and Ocwen entered into an amendment to the Purchase Agreement and the sale supplements (effective upon completion of the Asset Sale described below) to, among other things, (i) obtain Ocwen's consent to the assignment by HLSS of its interest under the Purchase Agreement and each sale supplement, (ii) provide that HLSS Holdings will not become the named servicer in connection with any Rights to MSRs, or direct the replacement of Ocwen as named servicer, before April 6, 2017 except under certain limited circumstances, (iii) extend the scheduled term of Ocwen's servicing appointment under each sale supplement until the earlier of 8 years from the date of such sale supplement and April 30, 2020, and (iv) provide that Ocwen will reimburse HLSS Holdings for certain increased financing costs resulting from servicer rating downgrades of Ocwen. In addition, under such amendment (x) Ocwen agrees to exercise any “clean-up call” rights under any servicing agreement related to Rights to MSRs only at the direction of HLSS and to sell to HLSS, on an “as-is” basis, the

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economic beneficial interest in the right to purchase the mortgage loans and other assets in the trust for each designated servicing agreement pursuant to such clean-up call rights and (y) HLSS agrees to pay to Ocwen a fee equal to 0.50% of  the outstanding balance of the performing mortgage loans purchased in connection with any such exercise and to pay Ocwen’s related costs and expenses of exercise.

Description of the Subservicing Agreement

We have entered into a subservicing agreement with Ocwen (the "Subservicing Agreement") pursuant to which we may engage Ocwen to act as the subservicer of pools of residential mortgage loans underlying the Rights to MSRs that we acquire. The specific terms of each subservicing arrangement with respect to each pool of mortgage loans are (and may be in the future) documented pursuant to separate subservicing supplements to the Subservicing Agreement in each case having a six year term.

We have entered into separate subservicing supplements to the Subservicing Agreement with Ocwen pursuant to which Ocwen has agreed to act as subservicer of the mortgage loans underlying Rights to MSRs on the terms described below effective upon the transfer of Rights to MSRs to us. As of December 31, 2014, no transfer of Rights to MSRs to us had occurred.

We pay Ocwen a monthly base fee pursuant to the subservicing supplement relating to the Rights to MSRs transferred to us equal to 12% of the servicing fees collected in any given month. This monthly base fee payable to Ocwen is expressed as a percentage of the servicing fees actually collected in any given month, which varies from month to month based on the level of collections of principal and interest for the mortgage loans serviced.

Ocwen receives a performance-based incentive fee to the extent the servicing fee revenue that it collects for any given month exceeds the sum of the monthly base fee and the retained fee. The performance-based incentive fee payable in any month is reduced if the advance ratio exceeds a predetermined level for that month. If the advance ratio is exceeded in any month, any performance-based incentive fee payable for such month will be reduced by 1-month LIBOR plus 275 bps per annum of the amount of any such excess servicing advances.

Description of the Ocwen Professional Services Agreement

We have a professional services agreement with Ocwen that enables us to provide certain services to Ocwen and for Ocwen to provide certain services to us (the "Professional Services Agreement"). Services provided by us under this agreement may include valuation and analysis of mortgage servicing rights, capital markets activities, advance financing management, treasury management, legal services and other similar services. Services provided by Ocwen under this agreement may include business strategy, legal, tax, licensing and regulatory compliance support services, risk management services and other similar services. The services provided by the parties under this agreement are on an as-needed basis, and the fees represent actual costs incurred plus an additional markup of 15%.

Description of Altisource Administrative Services Agreement

We have an administrative services agreement with Altisource that enables Altisource to provide certain administrative services to us (the "Altisource Administrative Services Agreement"). Services provided to us under this agreement may include human resources administration (benefit plan design, recruiting, hiring and training and compliance support), legal and regulatory compliance support services, general business consulting, corporate services (facilities management, security and travel services), finance and accounting support services (financial analysis, financial reporting and tax services), risk management services, vendor management and other related services. The services Altisource provides to us under this agreement are on an as-needed basis, and the fees we pay Altisource are based on the actual costs incurred by them plus an additional markup of 15%.

Competition

Our success depends, in large part, on our ability to acquire Residential Mortgage Assets on terms consistent with our business and economic model. In acquiring these assets, we expect to compete with independent mortgage loan servicers, mortgage Real Estate Investment Trusts ("REITs"), MSR investment funds, private equity firms, hedge funds and other large financial services companies. Many of our anticipated competitors are significantly larger than we are, have access to greater capital and other resources and may have other advantages over us. In addition, some of our competitors may have higher risk tolerances or different risk assessments which could lead them to offer higher prices for assets that we might be interested in acquiring and cause us to lose bids for those assets. Lastly, a component of our business is the ability to offer relatively low cost financing for asset purchases. Should we not be able to provide competitive financing rates, Ocwen or other third parties could

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look elsewhere to finance asset purchases. Thus, we may not be able to achieve our business goals or expectations due to the competitive risks that we face.
 
Regulation

State and Federal Consumer Protection Regulation

Because we do not plan to service loans, we intend to rely on the servicers we engage to comply with extensive regulation by federal, state and local governmental authorities, including the Federal Trade Commission (“FTC”) and the SEC. Servicers are also subject to regulation by the state agencies that license servicing and collection activities in a number of states. Servicers are subject to audits and examinations conducted by these states. Beginning in July 2011, non-bank servicers became subject to supervision, examination and enforcement by the CFPB, a federal entity responsible for administering and enforcing the laws and regulations for consumer financial products and services, such as residential mortgage loans. We expect that servicers will incur significant ongoing costs to comply with new and existing laws and governmental regulation of the residential mortgage servicing business.

Recently, Ocwen reached separate settlements with the CFPB, the NY DFS and the California Department of Business Oversight (the "CA DBO") related to its servicing practices. See Item 1A, "Risk Factors – Regulatory scrutiny regarding foreclosure processes could lengthen foreclosure timelines which could increase advances which would negatively impact our liquidity and profitability” for further details.

A failure to comply with applicable federal, state and local consumer protection laws can lead to:
 
Civil and criminal liability;
Damage to our reputation in the industry;
Inability to raise capital;
Defaults under our financing arrangements;
Administrative fines and penalties and litigation, including class action lawsuits; and
Governmental investigations and enforcement actions.

Employees

We have fourteen employees, including three executive officers. As of April 6, 2015, all of our employees became employees of a subsidiary of an affiliate of NRZ, and the employees will continue to manage our Liquidation Plan under a management services agreement.

Available Information

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available free of charge through our website at www.hlss.com as soon as such material is electronically filed with or furnished to the SEC. The public may also read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.

The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers, including HLSS that file electronically with the SEC at www.sec.gov. We have also posted on our website, and available in print upon request, the charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics for Senior Financial Officers. Within the time period required by the SEC and NASDAQ Global Select Market, we will post on our website any amendment to or waiver of the Code of Ethics for Senior Financial Officers, as well as any amendment to the Code of Ethics or waiver thereto applicable to any executive officer or director. The information provided on our website is not part of this report and is therefore not incorporated herein by reference.


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ITEM 1A.
 
RISK FACTORS

An investment in our ordinary shares involves significant risks. We describe below the principal risks and uncertainties that we believe affect us or could affect us in the future. The risks and uncertainties described below are not the only ones facing us. You should carefully read and consider the risks and uncertainties described below, together with all of the other information included in this Annual Report on Form 10-K and in our other filings with the SEC.

Risks Related to Owning Our Ordinary Shares

Our ordinary shares may continue to trade even though we are in the process of winding down, and distributions to shareholders, in the aggregate, may be below any trading price.

Now that we have completed the Asset Sale, we intend to delist from the Nasdaq Stock Exchange. Trading in our shares is highly speculative, and the market for our shares will be highly illiquid. The only value associated with our shares is the right to receive the Merger Consideration at the time of the consummation of the New Merger or, if not consummated, a final distribution in accordance with the Liquidation Plan. Because of the difficulty in determining whether the Merger will be consummated or estimating the amount and timing of any final distribution and due to other risk factors discussed herein, our ordinary shares may be subject to significant volatility and may trade above the amount that may be ultimately realized by our shareholders.

The amount that we have reserved for final distribution to shareholders could be reduced if the New Merger is not approved and for any post-closing liabilities related to the wind down process.

We have reserved $50 million of the purchase price paid to us by NRZ for expenses incurred during the wind down process. If the New Merger is not approved, we will incur ongoing expenses to comply with the applicable reporting requirements of the Securities and Exchange Act of 1934, as amended, which will reduce the amount reserved for final distribution to shareholders.

We cannot assure you of the exact amount or timing of any final distribution to our shareholders under the Liquidation Plan.

The winding down process is subject to numerous uncertainties and may not result in any remaining capital for a final distribution to our shareholders. The precise nature, amount and timing of any final distribution to our shareholders will depend on and could be delayed by, among other things, the approval of the New Merger, the timing of the consummation of the New Merger, the Company’s ongoing operating expenses, administrative and tax filings associated with our winding down, potential claim settlements with creditors arising from obligations incurred subsequent to the Asset Sale and unexpected or greater than expected expenses. If the New Merger does not occur, we expect the final distribution to be delayed.

We may conduct future sales of additional ordinary shares or other securities that are dilutive to our equity, which may adversely affect the value of our ordinary shares.

We may issue additional ordinary shares or other securities that are convertible into or exchangeable for, or that represent the right to receive, ordinary shares or any substantially similar securities. The value of our ordinary shares could decline as a result of sales by us of a large number of ordinary shares or other similar securities in the market or the perception that such sales could occur.

We may not be able to pay monthly dividends on our ordinary shares at the current rate or at all.

While we intend to continue to pay monthly dividends at the current rate, we may not be able to do so in the future. We intend to distribute approximately 90% of our Net income over time to our shareholders, although we are not required by law to do so.

Our dividend policy is subject to the discretion of our Board of Directors and will depend, among other things, on cash available for distributions, general economic and business conditions; our strategic plans and prospects; our financial results and condition; contractual, legal and regulatory restrictions on the declaration and payment of dividends by us and such other factors as our Board of Directors considers to be relevant. We note that cash available for distribution may be limited given an agreement between HLSS Holding, our wholly-owned subsidiary HLSS Servicer Advance Facility Transferor, LLC, the Depositor and the Indenture Trustee to permit it to withhold from distribution certain excess funds that would otherwise be distributable to the Depositor in an amount up to the Interest Accrual Differential (or a similar amount) for the related interest accrual period under the HSART Trust indenture. For the purposes of the Agreement, the “Interest Accrual Differential” means, with respect to any interest accrual period under the HSART Trust indenture beginning with the interest accrual period relating to the February 17,

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2015 monthly payment date thereunder and any class of HSART Trust notes issued prior to January 17, 2014, an amount equal to the excess of (a) the related Non-FAE Rate plus 3.00% per annum over (b) the related interest accrual for such class of notes at the Non-FAE Rate.

Risks Related to Our Business and Industry

We are highly dependent upon our senior management team.

Our business model and the execution of our business strategy are highly dependent upon the members of our senior management team. The loss of the services of any of our senior executives or key employees could delay or prevent us from executing our business strategy and could significantly and negatively affect our business.

We do not intend to operate a mortgage servicing platform and will need to engage servicers to service any Residential Mortgage Assets that we ultimately acquire. We may not be able to engage servicers on terms that are favorable to us or at all.

We do not intend to operate a mortgage servicing platform. Our success will depend on our ability to enter into agreements with mortgage servicers to service any Residential Mortgage Assets that we ultimately acquire. The terms of any agreement will be negotiated with the servicer prior to the acquisition of the related Residential Mortgage Assets. If we are not able to engage a servicer under reasonable terms or at all, we may not be able to acquire additional Residential Mortgage Assets, which could negatively impact our profitability.

It is unlikely that the term of any agreement we enter into will match the life of any Residential Mortgage Assets that we ultimately acquire and, therefore, such agreements will need to be renewed. As a result, the terms of any new agreement or renewal will depend on the economic environment and the costs of providing servicing at that time. In addition, the terms of any future servicing agreements may not be similar to the terms of our current agreements.

We are dependent on others to act as servicer with respect to our Residential Mortgage Assets.

We are dependent on the servicers we engage to service our Residential Mortgage Assets. A failure of a servicer to perform its servicing obligations under a related pooling and servicing agreement (“PSA”) could result in the termination of the servicer. If this occurs, we will only have recourse against the servicer, and if the servicer is unable to make any applicable indemnification payments owed to us, we could lose a portion or all of the value of the related Residential Mortgage Asset.

On January 23, 2015, Gibbs & Bruns LLP, on behalf of its clients, issued a press release regarding the RMBS Notices provided to various trustees in relation to Ocwen’s servicing practices under 119 residential mortgage-backed securities trusts.

We may pursue new asset classes with different risk and return characteristics than our current portfolios of Residential Mortgage Assets.

While we expect to continue to purchase Rights to MSRs and Loans held for investment in the future, we may invest in other classes of residential mortgage-related assets. While we intend to invest only in assets with an attractive risk-adjusted yield, the assets we acquire may be more volatile than expected or have a different risk profile compared to our current asset mix.

We may not be able to successfully compete for the acquisition of Residential Mortgage Assets, which could adversely affect our business.

Our success depends, in large part, on our ability to acquire additional Residential Mortgage Assets on terms consistent with our business and economic model. We expect to compete with independent mortgage loan servicers, mortgage REITs, MSR- and other mortgage-focused mutual or hedge funds, private equity firms and other large financial services companies in acquiring additional Residential Mortgage Assets. Many of our anticipated competitors are significantly larger than we are, have access to greater capital and other resources, are capable of obtaining financing at lower interest rates and may have other advantages over us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could lead them to offer higher prices than we would be willing to pay for the same assets. If we are unable to compete for new assets and our Residential Mortgage Asset portfolio declines over time, our administrative expenses may increase relative to our equity base.


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Our assumptions in determining the purchase price for Residential Mortgage Assets may be inaccurate or the basis for such assumptions may change, which could adversely affect our results of operations.

To the extent that we purchase Residential Mortgage Assets in the future, our success will be highly dependent upon accurate pricing of such Residential Mortgage Assets. In determining the purchase price for Residential Mortgage Assets, we will make several significant assumptions, including, but not limited to, the following:

Projected prepayment and repayment rates;
Amounts of future servicing advances;
Projected delinquency and default rates;
Projections of cash flows on loans underlying the assets;
Future interest rates and other financing costs;
Advance rates on our advance financing facilities; and
The costs associated with engaging servicers to service the loans.
 
If any of our assumptions regarding the Residential Mortgage Assets that we acquire are inaccurate or the basis for such assumptions change, the price we pay to acquire Residential Mortgage Assets may prove to be too high, which could result in lower than expected profitability or a loss.

Future economic slowdowns and/or deterioration of the housing market could increase delinquencies and defaults on the Residential Mortgage Assets we acquire, which would negatively affect our operating results.

During any period in which the borrower is not making payments on a mortgage loan, the servicer is generally required to advance its own funds to meet contractual principal and interest remittance requirements for the securitization trust that owns the mortgage loans; to pay property taxes and insurance premiums; to process foreclosures and to maintain, repair and market foreclosed real estate properties.

If the economy slows and/or the housing market deteriorates, our operating results would be adversely affected in the following ways:
 
Interest Income. Because we recognize interest income as principal and interest payments are collected from the borrowers on the mortgage loans underlying our Rights to MSRs and as delinquent loans are resolved, an increase in delinquencies would reduce the interest income that we recognize. Also, increased delinquencies and defaults could reduce the interest income recognized on any new RPL portfolios we may acquire;

Expenses. If the ratio of advances to the UPB of our portfolio increases beyond a certain point, the increase in Interest expense could exceed the reduction in our incentive fee paid to Ocwen, thus resulting in a reduction to our profitability. Also, servicing expenses charged to us by the servicers of our Loans held for investment would increase; and

Valuation of Rights to MSRs and RPLs. Increased delinquency and default rates on mortgage loans will decrease the fair value of our Rights to MSRs or may result in us recognizing an impairment on any new RPLs we may acquire.
 
A significant increase in prepayment speeds would reduce the UPB of the mortgage loans underlying our Residential Mortgage Assets and could adversely affect our operating results.

Prepayment speeds significantly affect our business. Prepayment speed is the measurement of how quickly borrowers pay down the UPB of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. Prepayment speeds have a significant impact on our interest income and the valuation of our Residential Mortgage Assets as follows:

Interest Income. If prepayment speeds increase, our interest income earned on our Residential Mortgage Assets will decline more rapidly than estimated because of the greater than expected decrease in the UPB of the mortgage loans on which interest income is based.

Valuation of Residential Mortgage Assets. We base the price we pay for Residential Mortgage Assets on, among other things, our projection of the cash flows from the related pool of mortgage loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speeds are significantly different

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than expected, the fair value of our Residential Mortgage Assets could decline faster than expected, which would have a negative impact on our operating results.
 
If we are unable to maintain the UPB of the mortgage loans underlying our Rights to MSRs at an adequate level through the acquisition of additional Rights to MSRs or other assets with similar characteristics, we would likely reevaluate our long-term business strategy, which could include pursuing asset classes that differ from our current Rights to MSRs. We could also sell our remaining Residential Mortgage Assets and use the proceeds to pay a liquidating distribution to our shareholders. In any such event, our shareholders may not be able to recover the full value of their initial investment in our ordinary shares.

If our assumptions regarding subprime and Alt-A borrower refinancing options prove incorrect, or if the Federal government implements policies that help non-agency borrowers refinance, the UPB underlying our Rights to MSRs could decline faster than expected, which would adversely affect our operating results.

We make a number of assumptions about future servicing fees, expenses, assets and liabilities relating to our Rights to MSRs. These assumptions are based on our view that subprime and Alt-A borrowers have limited refinancing options. Refinancings and other voluntary prepayments are a small component of total prepayments with liquidations and other involuntary prepayments being the larger component. If subprime and Alt-A borrowers were able to refinance their mortgage loans at a faster rate than expected and had a financial incentive to do so, prepayment speeds could increase, resulting in a faster reduction of the aggregate UPB of the mortgage loans underlying our Rights to MSRs, which would adversely affect our operating results.

The fair value of our Rights to MSRs is imprecise and may materially and adversely affect our operating results.

The fair value of our Rights to MSRs is based on significant unobservable assumptions that may prove to be imprecise. We engage independent valuation firms to assist in the measurement of the fair value of our Rights to MSRs on a quarterly basis, but the fair value at which our Rights to MSRs is recorded may not be an indication of their realizable value. Ultimate realization of the value of the Rights to MSRs depends to a great extent on economic and other conditions that are beyond our control. Further, fair value is only an estimate based on a good faith judgment of the price at which the Rights to MSRs can be sold since market prices of these assets can only be determined by negotiation between a willing buyer and seller. The estimation of the fair value of our Rights to MSRs includes significant unobservable inputs, and valuations of these assets are subject to judgments that may vary among market participants. Changes in the estimated fair values of our Rights to MSRs are directly charged or credited to earnings for the period. If we were to liquidate the Rights to MSRs, the realized value may be more than or less than the amount at which such assets were recorded. We could be materially and adversely affected by a reduction in the fair value of our Rights to MSRs, and such valuations may fluctuate over short periods of time.

The properties underlying Loans held for investment that we acquire through foreclosure may contain unknown environmental defects, which could increase our risk of loss.

Environmental protection laws that apply to properties that secure or underlie our Loans held for investment could diminish the value of the properties and result in losses. We may also be exposed to environmental liabilities with respect to properties of which we become a direct or indirect owner or to which we take title, which could adversely affect our business and financial results.

If Ocwen fails to adequately perform its loss mitigation obligations, we could be required to make additional servicing advances, and the time period for collecting servicing advances may extend, adversely affecting our liquidity and earnings.

Ocwen is required to service the mortgage loans in accordance with specified standards and employ loss mitigation techniques to reduce the probability that borrowers will default on their loans and to minimize losses when defaults occur. These loss mitigation techniques may include the modification of mortgage loan rates, principal balances and maturities. If Ocwen fails to adequately perform its loss mitigation obligations under these agreements, we could be required to purchase or fund servicing advances in excess of those that we might otherwise have had to purchase or fund, and the time period for collecting servicing advances may extend. Any increase in servicing advances or material increase in the time to resolution of a defaulted loan could result in increased financing costs to us and adversely affect our liquidity and Net income.

Failure by Ocwen to ensure that servicing advances comply with the terms of the PSAs may have a material adverse effect on our operating results.

Servicing advances that are improperly made may not be eligible for financing under our advance financing facilities and may not be reimbursable by the related securitization trusts or other owners of the mortgage loan, which would reduce our

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liquidity and may cause us to suffer a loss. Ocwen may be unwilling or unable to make indemnification payments for any such losses we incur.

We may be unable to obtain sufficient or cost effective servicer advance financing necessary to meet the financing requirements of our business, which could adversely affect our liquidity position and result in a loss of servicing rights.

If delinquencies increase with respect to the mortgage loans underlying our Rights to MSRs, we will require more funding than we currently expect, which may not be available to us on favorable terms or at all. We currently meet our servicing advance financing requirements through our servicing advance facilities. Under normal market conditions, mortgage servicers typically have been able to renew or refinance liquidity facilities for mortgage servicing rights. However, during the economic crisis that began in 2007, there were periods of time when some mortgage servicers were unable to renew these facilities. Borrowing conditions have improved since that time; however, market conditions or other factors, including legal or regulatory matters applicable to us or our servicers, at the time of any renewal or refinancing may prevent us from being able to renew or refinance our advance financing facilities or obtain additional facilities on favorable terms or at all. Ocwen may not have any obligation to us to fund any servicing advances that we are required to purchase or fund. Our inability to obtain adequate financing to fund servicing advances could result in the loss or impairment of our Rights to MSRs pursuant to the Purchase Agreement and applicable sale supplement. If, for this reason, our Rights to MSRs are lost or impaired, we will bear the full economic impact of this loss and may not, in certain circumstances, have the right to seek indemnification from Ocwen.

Failure to favorably resolve alleged events of default by BlueMountain may have a material adverse effect on our liquidity and operating results.

On January 23, 2015, counsel for BlueMountain asserted certain alleged events of default under the indenture governing our notes issued by the HSART Trust. On February 17, 2015, our subsidiary, HLSS Holdings, and the Depositor agreed with the Indenture Trustee that it will not commence a judicial proceeding to seek judicial guidance regarding the allegations made in the BlueMountain letter, and HLSS Holdings has agreed to allow the Indenture Trustee to withhold from distribution certain excess funds that would otherwise be distributable to the Depositor in an amount up to the Interest Accrual Differential (or similar amount). On February 20, 2015, counsel to BlueMountain sent another letter asserting certain alleged events of default under the indenture governing Notes issued by the HSART Trust. While HLSS intends to vigorously defend against any claims asserted by BlueMountain, our inability to resolve these issues favorably could result in a prolonged withholding of the excess funds, the forfeiture of such funds or other material adverse effects on our liquidity and operating results.

Our ability to borrow may be adversely affected by the suspension or delay of the rating of our notes by the credit agency providing the ratings.

The majority of our advance financing facilities are rated by one rating agency, and this agency may suspend rating notes backed by servicing advances at any time. Rating agency delays may result in our inability to obtain timely ratings on new notes, which could adversely impact the availability of borrowings or the interest rates, advance rates or other financing terms and adversely affect our results of operations and liquidity. Further, if we are unable to secure ratings from other agencies, limited investor demand for unrated notes could result in further adverse changes to our liquidity and profitability.

Downgrades in our corporate credit ratings could impact our ability to issue term loans within our senior secured term loan facility or a newly created facility.

On June 13, 2013, in connection with our senior secured term loan facility agreement, we were issued credit ratings of Ba3/Stable and B+/Stable from Moody’s and S&P, respectively. As of December 31, 2014, our Moody's credit rating had been downgraded to B2/Negative, and on January 14, 2015, our Moody's credit rating was further downgraded to B3/Negative. On January 16, 2015, S&P affirmed their credit rating of B+ but downgraded our outlook from Stable to Negative.

Our ability to secure additional financing for servicing advances is largely dependent on the evaluation of the pledged collateral and not on our corporate credit rating. Downgrades in our corporate credit ratings could impact our ability to issue additional term loans within our senior secured term loan facility or a newly created facility.

A downgrade in our servicers' or subservicers' rating could have an adverse effect on our financial condition or results of operations.

S&P, Moody’s, Fitch and Morningstar rate many mortgage servicers, including Ocwen. These ratings are subject to change in the future without notice. Servicer ratings are important to our ability to finance servicing advances.

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On November 14, 2012, S&P placed its “above average” servicer rating on Ocwen on CreditWatch “negative” as opposed to “stable”. S&P stated that it took this action due to Ocwen’s purchases of Homeward Residential Inc. (“ Homeward ”) (which has since been completed) and of the mortgage servicing platform of GMAC Mortgage LLC and Residential Capital LLC (which has since been completed). S&P also stated that it would continue to monitor the impact that these acquisitions have on Ocwen’s servicing operations.

On August 28, 2014, Moody's downgraded Ocwen's servicer quality ("SQ") assessments from SQ2- to SQ3+ as a primary servicer of subprime residential loans and as a special servicer of residential mortgage loans. Also, Moody's downgraded Ocwen's component assessment for loan administration from "above average" to "average". Moody's stated that these downgrades were due to heightened regulatory scrutiny by the SEC and the NY DFS, regulatory concerns regarding force-placed insurance fees, and concerns about Ocwen's challenges integrating acquired servicing platforms and managing the distressed loan portfolios.

On January 29, 2015, Moody’s downgraded Ocwen’s servicer quality (“SQ”) assessment from “SQ3+” to “SQ3-” as a primary servicer of subprime residential loans and as a special servicer of residential mortgage loans. During February 2015, Fitch Ratings Inc. (“Fitch”) downgraded Ocwen's residential primary servicer rating for subprime products from “RPS3” to “RPS4,” and Morningstar, Inc. (“Morningstar”) downgraded its rating to “MOR RS3.”

Certain of our financing facilities require that our servicers or subservicers maintain specified servicer ratings, and failure by our servicers or subservicers to maintain the minimum rating could result in adverse adjustments to our advance rates, liquidity and profitability. In addition, some PSAs may also require that the servicer or subservicer maintain specified servicer ratings. The failure to maintain the specified rating may result in the termination of the servicer under such PSAs. Any such downgrade could have an adverse effect on our business, financing activities, financial condition or results of operations.

During February and March 2015, Ocwen received two notices of servicer termination related to four separate PSAs underlying our Notes receivable – Rights to MSRs due to servicer rating downgrades. While we believe the financial impact of the termination of servicing under these four PSAs would be immaterial to our overall financial condition, Ocwen could be subject to further terminations as a result of its failure to maintain required minimum servicer ratings, which could have an adverse effect on our business, financing activities, financial condition and results of operations.

Changes in financing terms for our Loans held for investment may adversely affect our return on our investments and may reduce our liquidity.

We have leveraged our Loans held for investment acquired to date in repurchase agreements with maturities of one year or less. Repurchase agreements generally allow the counterparties to determine the market value of the collateral and are subject to margin calls that could adversely affect our liquidity by requiring us to repay a portion of the outstanding borrowing. To the extent that we do not have sufficient cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur losses. Should market conditions or asset performance expectations deteriorate, we may not be able to refinance our repurchase facilities or enter into longer-term securitization facilities, and this could result in reduced advance rates, higher interest rates or other changes in terms that could adversely impact our results of operations and liquidity.

Our borrowings collateralized by Loans held for investment require that we make certain representations and warranties that, if determined to be inaccurate, could require us to repurchase loans or cover losses.

Our financing facilities require us to make certain representations and warranties regarding the Loans held for investment that collateralize the borrowings. Although we perform due diligence on the Loans held for investment that we acquire, certain representations and warranties that we make in respect of such loans may ultimately be determined to be inaccurate. In the event of a breach of a representation or warranty, we may be required to repurchase affected loans, make indemnification payments to certain indemnified parties or address any claims associated with such breach. Further, we may have limited or no recourse against the seller from whom we purchased the loans. Such recourse may be limited due to a variety of factors, including the absence of a representation or warranty from the seller corresponding to the representation provided by us or the contractual expiration thereof.

The performance of our Loans held for investment may be adversely affected by the performance of parties who service or subservice our mortgage loans.

We contract with third parties for the servicing of the mortgage loans in our EBO and RPL whole loan portfolios. The performance of these portfolios and our ability to finance these portfolios are subject to risks associated with inadequate or

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untimely servicing. If our servicers or subservicers commit a material breach of their obligations as a servicer, we may be subject to damages if the breach is not cured within a specified period of time following notice. In addition, we may be required to indemnify an investor or our lenders against losses from any failure of our servicer or subservicer to perform the servicing obligations properly. Poor performance by a servicer or subservicer may result in greater than expected delinquencies and foreclosures and losses on our mortgage. A substantial increase in our delinquency or foreclosure rate or the inability to process claims in accordance with GNMA or FHA guidelines could adversely affect our ability to access the capital and secondary markets for our financing needs.

Representations and warranties made by us in our loan sale agreements may subject us to liability.

In connection with our sale of the RPLs to an unrelated third party, we transferred mortgages acquired by us into a trust in exchange for cash. We may enter into additional sale agreements to sell some or all of our Loans held for investment in the future. The purchaser under such sale agreements may have recourse to us with respect to any breach of the representations and warranties made by us at the time the applicable Loans held for investment are sold. Those representations and warranties may include, but are not limited to, issues such as the validity of the lien; the absence of delinquent taxes or other liens; the loans compliance with all local, state and federal laws and the delivery of all documents required to perfect title to the lien. If the purchaser is successful in asserting their claim for recourse, it could adversely affect the availability of financing under our financing facilities for the Loans held for investment or otherwise adversely impact our results of operations and liquidity.

We could have conflicts with Ocwen and Altisource, and members of our Board of Directors or management could have conflicts of interest due to their relationships with Ocwen and Altisource that may be resolved in a manner adverse to us.

We do a substantial amount of business with Ocwen and Altisource. Conflicts may arise between us and one or more of these entities because of the ongoing agreements we have with them or because of the nature of each of our respective businesses.

Our former Chairman of the Board of Directors was also the Chairman of Ocwen and Altisource until January 16, 2015. As a result, he had obligations to us as well as to Ocwen and Altisource and may have had or have appeared to have had conflicts of interest with respect to matters potentially or actually involving or affecting us, Ocwen and Altisource, as the case may be. Our former Chairman currently has substantial investments in Ocwen and Altisource and certain of our other officers own stock or options in Ocwen. Such ownership interests could create or appear to create conflicts of interest with respect to matters potentially or actually involving or affecting us, Ocwen and Altisource, as the case may be.

We have adopted policies, procedures and practices to avoid potential conflicts with respect to our dealings with Ocwen and Altisource. We also manage potential conflicts of interest through oversight by independent members of our Board of Directors (independent directors constitute a majority of our Board of Directors) and we will seek to manage these potential conflicts through dispute resolution and other provisions of our agreements with Ocwen and Altisource, as the case may be. There can be no assurance that such measures will be effective, that we will be able to resolve all conflicts with Ocwen and Altisource, as the case may be, or that the resolution of any such conflicts will be no less favorable to us than if we were dealing with a third party that had none of the connections we have with these businesses.

Risk Related to Regulatory and Legal Matters

If we are required to register under the Investment Company Act, our ability to conduct our business could be materially adversely affected, and you could suffer losses.

We are not registered, and do not intend to register, as an investment company under the Investment Company Act of 1940 (the “Investment Company Act”). We intend to conduct our operations directly and through wholly or majority-owned operating subsidiaries so that we and each of our subsidiaries is not an investment company under the Investment Company Act. We believe that neither we nor our operating subsidiaries will be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act because neither we nor our operating subsidiaries will engage primarily, or hold ourselves or our operating subsidiaries out as being engaged primarily, in the business of investing, reinvesting or trading in securities. Rather, we, through our operating subsidiaries, are primarily engaged in the non-investment company business of these subsidiaries, namely the business of purchasing or otherwise acquiring Residential Mortgage Assets and engaging and managing one or more residential mortgage loan servicers to service the pools of mortgage loans underlying these Residential Mortgage Assets. We structured the special purpose entities that we established in connection with our match funded advance financing facilities to rely on the investment company exemption provided to certain structured financing vehicles by Rule 3a-7 promulgated pursuant to the Investment Company Act.


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If, however, we or any of our subsidiaries are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements, and our activities may be restricted, among other things which would materially adversely affect our business, financial condition and results of operations and our ability to pay dividends. We may also seek exemptive relief from the SEC, which could impose significant costs on our business. If we or any of our subsidiaries were required to register as an investment company but failed to do so, the unregistered entity would be prohibited from engaging in business, and criminal and civil actions could be brought against such unregistered entity. In addition, the contracts of such unregistered entity would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of such unregistered entity and to liquidate the unregistered entity, which could lead to losses to our shareholders.

If we are named in legal proceedings involving one of our servicers, our financial results could be adversely affected.

We could be added as a defendant or investigated in any matters related to our servicers' servicing practices. If lawsuits are brought against one or more of our servicers regarding its servicing practices, we also may be added as a defendant in the future. Defending ourselves against lawsuits or adverse legal judgments against us may require that we pay significant legal fees, settlement costs, damages, penalties, indemnification payments or other charges or that we undertake remedial actions pursuant to administrative orders or court-issued injunctions, any of which could adversely affect our financial results and loss or impairment of financing under financial arrangements, including our advance financing facilities.

Two shareholder derivative actions have been filed purportedly on behalf of Ocwen Financial Corporation naming as defendants the Company and certain current and former directors and officers of Ocwen, including former HLSS Chairman William C. Erbey, entitled (i) Sokolowski v. Erbey, et al., No. 9:14-CV-81601 (S.D. Fla.), filed on December 24, 2014 (the Sokolowski Action”), and (ii) Mocavage v. Faris, et al., No. 2015CA003244 (Fla. Palm Beach Cty. Ct.), filed on March 20, 2015 (collectively, with the Sokolowski Action, the “Ocwen Derivative Actions”). The original complaint in the Sokolowski Action named as defendants certain current and former directors and officers of Ocwen, including former HLSS Chairman William C. Erbey. On February 11, 2015, plaintiff in the Sokolowski Action filed an amended complaint naming additional defendants, including HLSS. The Ocwen Derivative Actions assert a cause of action for aiding and abetting certain alleged breaches of fiduciary duty under Florida law against HLSS and others, and claim that HLSS (i) substantially assisted Ocwen’s alleged wrongful conduct by purchasing Ocwen’s mortgage servicing rights and (ii) received improper benefits as a result of its business dealings with Ocwen due to Mr. Erbey’s purported control over both HLSS and Ocwen. Additionally, the Sokolowski Action asserts a cause of action for unjust enrichment against HLSS and others. The Company intends to vigorously defend the Ocwen Derivative Actions (see Part II, Item 8, "Financial Statements and Supplementary Data - Note 18, Commitments and Contingencies").

Failure by Ocwen or our other servicers to comply with applicable laws and regulations may adversely affect our business.

The failure of Ocwen or our other servicers to comply with the laws and regulations in connection with servicing mortgage loans underlying our Residential Mortgage Assets could lead to civil and criminal liability, loss of licensing, damage to our reputation, fines and penalties, litigation, including class action lawsuits or administrative enforcement actions, and a loss or impairment of financing under our financing arrangements, including under our advance financing facilities.

Regulatory scrutiny regarding foreclosure processes could lengthen foreclosure timelines, which could increase advances and negatively impact our liquidity and profitability.

When a mortgage loan is in foreclosure, the servicer is generally required to continue to advance delinquent principal and interest to the securitization trust and to also make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent we determine that such amounts are recoverable. These servicing advances are generally recovered when the delinquency is resolved. Foreclosure moratoria or other actions that lengthen the foreclosure process increase the amount of servicing advances, lengthen the time it takes for reimbursement of such advances and increase the costs incurred during the foreclosure process. In addition, advance financing facilities generally contain provisions that limit the eligibility of servicing advances to be financed based on the length of time that servicing advances are outstanding, and, as a result, an increase in foreclosure timelines could further increase the amount of servicing advances that need to be funded from the servicer's own capital. Such increases in foreclosure timelines could increase the need for capital to fund servicing advances, which would increase our interest expense, delay the collection of interest income or servicing fee revenue until the foreclosure has been resolved and, therefore, reduce the cash that we have available to pay our operating expenses or to pay dividends.

Ocwen has publicly announced that, on December 19, 2013, Ocwen reached an agreement, which was approved by consent judgment by the U.S. District Court for the District of Columbia on February 26, 2014, involving the CFPB, various state

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attorneys general and other agencies that regulate the mortgage servicing industry. According to Ocwen's disclosure, the key elements of the settlement are as follows:

A commitment by Ocwen to service loans in accordance with specified servicing guidelines and to be subject to oversight by an independent national monitor for three years;
A payment of $127.3 million to a consumer relief fund to be disbursed by an independent administrator to eligible borrowers. In May 2014, Ocwen satisfied this obligation with regard to the consumer relief fund, $60.4 million of which is the responsibility of former owners of certain servicing portfolios acquired by Ocwen, pursuant to indemnification and loss sharing provisions in the applicable agreements;
A commitment by Ocwen to continue its principal forgiveness modification programs to delinquent and underwater borrowers, including underwater borrowers at imminent risk of default, in an aggregate amount of at least $2.0 billion over three years.

On December 22, 2014, Ocwen announced that it had reached a settlement agreement with the NY DFS related to investigations into Ocwen's mortgage servicing practices in the State of New York. According to Ocwen's disclosure, the key elements of the settlement are as follows:

Payment of $100 million to the NY DFS to be used by the State of New York for housing, foreclosure relief and community redevelopment programs;
Payment of $50 million as restitution to certain New York borrowers;
Installation of a NY DFS Operations Monitor to review and assess the adequacy and effectiveness of Ocwen's operations for a period of two years, which may be extended another twelve months at the option of the NY DFS;
Requirements that Ocwen will not share any common officers or employees with any related party and will not share risk, internal audit or vendor oversight functions with any related party;
Requirements that certain Ocwen employees, officers and directors be recused from negotiating or voting to approve certain transactions with a related party;
Resignation of Ocwen's Chairman of the Board from the Board of Directors of Ocwen and at related companies, including HLSS; and
Restrictions on Ocwen's ability to acquire new mortgage servicing rights.

On January 23, 2015, Ocwen announced that it had reached a settlement with the CA DBO in relation to an action dated October 3, 2014 in the State of California. According to Ocwen's disclosure, the key elements of the agreement are as follows:

Payment of $2.5 million;
Engagement of an independent auditor to assess Ocwen’s compliance with laws and regulations impacting California borrowers for a period of at least two years; and
Prevention of Ocwen from acquiring additional mortgage servicing rights for loans secured in the State of California until the CA DBO is satisfied that Ocwen can satisfactorily respond to the requests for information and documentation made in the course of a regulatory exam.

According to Ocwen's public disclosure, on April 28, 2014, Ocwen received a letter from the staff of the New York Regional Office of the SEC informing Ocwen that the SEC was conducting an investigation relating to Ocwen and making a request for voluntary production of documents and information relating to the April 22, 2014 surrender of certain options to purchase its common stock by Mr. Erbey, its former Executive Chairman, including the 2007 Equity Incentive Plan and the related option grant and surrender documents. On June 12, 2014, Ocwen received a subpoena from the SEC requesting production of various documents relating to its business dealings with HLSS, Altisource, AAMC and Residential and the interests of its directors and executive officers in these companies. Ocwen has also disclosed that it received an additional subpoena from the SEC related to its amendments to its Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

Regulatory action against Ocwen could increase our financing costs or operating expenses, reduce our revenues or otherwise adversely affect our business, liquidity profitability.

Regulatory actions regarding our servicers' or subservicers' servicing practices could impact our liquidity and profitability.

According to Ocwen's public disclosure, on April 28, 2014, Ocwen received a letter from the staff of the New York Regional Office of the SEC informing Ocwen that the SEC was conducting an investigation relating to Ocwen and making a request for voluntary production of documents and information relating to the April 22, 2014 surrender of certain options to purchase its

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common stock by Mr. Erbey, its former Executive Chairman, including the 2007 Equity Incentive Plan and the related option grant and surrender documents. On June 12, 2014, Ocwen received a subpoena from the SEC requesting production of various documents relating to its business dealings with HLSS, Altisource, AAMC and Residential and the interests of its directors and executive officers in these companies. Ocwen has also disclosed that it received an additional subpoena from the SEC related to its amendments to its Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

Governmental bodies may further restrict our transactions with related parties or institute policies that adversely affect our servicers' business, which could increase our operating expenses, reduce our revenues or otherwise adversely affect our business, financial condition, results of operations and ability to grow.

Our business strategy, including our asset purchase strategy, may be affected by regulatory considerations. The recent trend among federal, state and local lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings with regard to residential mortgage servicing. Our success in part depends on our ability to purchase additional Residential Mortgage Assets and engage mortgage servicers to service these assets. If regulators restrict any aspect of our or our servicers' business strategy, including Ocwen’s ability to transact business with us, we may be required to alter our strategy, which could include revisions to our Residential Mortgage Asset purchase plans or changes with respect to our mortgage servicing arrangements. 

Any restrictions imposed on Ocwen’s ability to transact business with us could have a material adverse impact on our business. Ocwen has disclosed that it is subject to a number of federal and state regulatory investigations, examinations, inquiries and requests for information that have resulted or could, in the future, result in adverse regulatory action against Ocwen. One or more of such regulatory actions or Ocwen’s failure to comply with any commitments it makes with respect to such regulatory actions could adversely affect Ocwen’s business or impose additional requirements or restrictions on its activities. Regulatory action against Ocwen could increase our operating expenses, reduce our revenues or otherwise adversely affect our business, financial condition, results of operations and ability to grow.    

A bankruptcy of Ocwen could adversely affect our business.

If Ocwen becomes subject to a bankruptcy proceeding, our business could be materially adversely affected, and you could suffer losses.

A sale of Residential Mortgage Assets or other assets could be re-characterized in an Ocwen bankruptcy proceeding as a financing secured by such Residential Mortgage Assets. We believe that Ocwen’s transfer to us of Residential Mortgage Assets and any other asset transferred pursuant to the Purchase Agreement constitutes a sale of such assets, in which case such assets would not be part of Ocwen’s bankruptcy estate. Ocwen (as debtor-in-possession in the bankruptcy proceeding), a bankruptcy trustee appointed in Ocwen’s bankruptcy proceeding, or any other party in interest, however, might assert in a bankruptcy proceeding that Residential Mortgage Assets or any other assets transferred to us pursuant to the Purchase Agreement were not sold to us but were instead pledged to us as security for Ocwen’s obligation to repay amounts paid by us to Ocwen pursuant to the Purchase Agreement. If such assertion were successful, all or part of the Residential Mortgage Assets or any other asset transferred to us pursuant to the Purchase Agreement would constitute property of the bankruptcy estate of Ocwen, and our rights against Ocwen would be those of a secured creditor with a lien on such assets. Under such circumstances, cash proceeds generated from our collateral would constitute “cash collateral” under the provisions of the U.S. bankruptcy laws. Under U.S. bankruptcy laws, Ocwen could not use our cash collateral without either (a) our consent or (b) approval by the bankruptcy court, subject to providing us with "adequate protection" under the U.S. bankruptcy laws. In addition, under such circumstances, an issue could arise as to whether certain of these assets generated after the commencement of the bankruptcy proceeding would constitute after-acquired property excluded from our lien pursuant to the U.S. bankruptcy laws.

If such a recharacterization occurs, the validity or priority of our security interest in the Residential Mortgage Assets or other assets could be challenged in a bankruptcy proceeding of Ocwen. If the purchases pursuant to the Purchase Agreement are recharacterized as secured financings as set forth above, we nevertheless created and perfected security interests with respect to the Residential Mortgage Assets and other assets that we have purchased from Ocwen to date by including a pledge of collateral in the Purchase Agreement and filing financing statements in appropriate jurisdictions. We will undertake to properly create and perfect security interests in any additional Residential Mortgage Assets and other assets that we may purchase from Ocwen in the future. Nonetheless, our security interests may be challenged and ruled unenforceable or ineffective by a bankruptcy court. If this were to occur, then Ocwen’s obligations to us with respect to purchased Residential Mortgage Assets and other assets would be deemed unsecured obligations, payable from unencumbered assets to be shared among all of Ocwen’s unsecured creditors. In addition, even if the security interests are found to be valid and enforceable, if a bankruptcy court determines that the value of the

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collateral is less than Ocwen’s underlying obligations to us, the difference between such value and the total amount of such obligations will be deemed an unsecured “deficiency” claim and the same result will occur with respect to such unsecured claim.

In addition, even if the security interest is found to be valid and enforceable, Ocwen would have the right to use the proceeds of our collateral subject to either (a) our consent or (b) approval by the bankruptcy court, subject to providing us with “adequate protection” under U.S. bankruptcy laws. Ocwen also would have the ability to confirm a chapter 11 plan over our objections if the plan complied with the “cramdown” requirements under U.S. bankruptcy laws.

If the sale of Residential Mortgage Assets or other assets is recharacterized as a secured financing, payments made by Ocwen to us prior to Ocwen commencing its bankruptcy proceeding could be challenged and subject to recovery as preferential transfers. If Ocwen were to become the subject of a bankruptcy proceeding under the United States Bankruptcy Code, there is a recharacterization as set forth above and our security interests are declared unenforceable, ineffective or subordinated, payments previously made by Ocwen to us pursuant to the Purchase Agreement may be recoverable on behalf of the bankruptcy estate as preferential transfers. A payment could constitute a preferential transfer under U.S. bankruptcy laws if the bankruptcy court were to find that the payment was a transfer of an interest of property of Ocwen that:
 
Was made to or for the benefit of a creditor;
Was for or on account of an antecedent debt owed by Ocwen before that transfer was made;
Was made while Ocwen was insolvent (a company is presumed to have been insolvent on and during the 90 days preceding the date the company’s bankruptcy petition was filed);
Was made on or within 90 days (or if we are determined to be a statutory insider, on or within one year) before Ocwen’s bankruptcy filing;
Permitted us to receive more than we would have received in a chapter 7 liquidation case of Ocwen under U.S. bankruptcy laws; and
Was a payment as to which none of the statutory defenses to a preference action apply.

If the bankruptcy court were to determine that any payments were avoidable as preferential transfers, we would be required to return such payments to Ocwen’s bankruptcy estate and would have an unsecured claim against Ocwen with respect to such returned amounts.

Payments made to us by Ocwen, or obligations incurred by Ocwen to us, could be challenged as fraudulent conveyances.  Ocwen (as debtor-in-possession in the bankruptcy proceeding), a bankruptcy trustee appointed in Ocwen’s bankruptcy proceeding, or another party in interest could also claim that Ocwen’s transfer to us of Residential Mortgage Assets or other assets or Ocwen’s agreement to incur obligations to us under the Purchase Agreement was a fraudulent conveyance. Under U.S. bankruptcy laws and similar state insolvency laws, transfers made or obligations incurred could be voided if Ocwen, at the time it made such transfers or incurred such obligations: (a) received less than reasonably equivalent value or fair consideration for such transfer or incurrence and (b) either (i) was insolvent at the time of, or was rendered insolvent by reason of, such transfer or incurrence; (ii) was engaged in, or was about to engage in, a business or transaction for which the assets remaining with Ocwen were an unreasonably small capital; or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. If any transfer or incurrence is determined to be a fraudulent conveyance, Ocwen (as debtor-in-possession in the bankruptcy proceeding) or a bankruptcy trustee on Ocwen’s behalf would be entitled to recover such transfer or to avoid the obligation previously incurred.

The Purchase Agreement could be rejected in an Ocwen bankruptcy proceeding. Ocwen (as debtor-in-possession in the bankruptcy proceeding) or a bankruptcy trustee appointed in Ocwen’s bankruptcy proceeding could seek to reject the Purchase Agreement and thereby terminate Ocwen's obligation to service the Residential Mortgage Assets, attempt to stop transferring to us the Residential Mortgage Assets and any other asset transferred pursuant to the Purchase Agreement, and terminate our right to acquire additional assets under the Purchase Agreement and our right to require Ocwen to use commercially reasonable efforts to transfer servicing. If the bankruptcy court approved the rejection, we would have a claim against Ocwen for any damages from the rejection.

A bankruptcy court could stay a transfer of servicing to another servicer. Our ability to require Ocwen to use commercially reasonable efforts to transfer servicing rights to a new servicer would be subject to the automatic stay in Ocwen’s bankruptcy proceeding. To enforce this right, we would have to seek relief from the bankruptcy court to lift such stay, and there is no assurance that the bankruptcy court would grant this relief.

Ocwen could discontinue servicing. If Ocwen were to file or to become the subject of a bankruptcy proceeding under the United States Bankruptcy Code, Ocwen could be terminated as servicer (with bankruptcy court approval) or could discontinue

23


servicing, in which case there is no assurance that we would be able to continue receiving payments and transfers in respect of the Residential Mortgage Assets and other assets purchased under the Purchase Agreement. Even if we were able to obtain the servicing rights, because we will not have and in the future do not expect to have the employees, servicing platforms, or technical resources necessary to service mortgage loans, we would need to either engage an alternate servicer (which may not be readily available on acceptable terms or at all) or negotiate a new servicing agreement with Ocwen, which presumably would be on less favorable terms to us. Any engagement of an alternate servicer by us would require the approval of the related RMBS trustees.

The automatic stay under the United States Bankruptcy Code may prevent the ongoing receipt of servicing fees or other amounts due. Even if we are successful in arguing that we own Residential Mortgage Assets and other assets purchased under the Purchase Agreement, we may need to seek relief in the bankruptcy court to obtain turnover and payment of amounts relating to such assets, and there may be difficulty in recovering payments in respect of such assets that may have been commingled with other funds of Ocwen.

A bankruptcy of Ocwen defaults our advance financing facilities and negatively impacts our ability to continue to purchase servicing advances. If Ocwen were to file or to become the subject of a bankruptcy proceeding, it will result in an event of default under our advance financing facilities that would terminate the revolving period of such facilities. In this scenario, our advance financing facilities would not have the ability to continue funding the purchase of servicing advances under the Purchase Agreement. Notwithstanding this inability to fund, Ocwen may try to force us to continue making such purchases. Although we may have contractual and legal arguments in response, there is a risk that such arguments would not be successful. If it is determined that we are in breach of our obligation to purchase servicing advances, any claims that we may have against Ocwen may be subject to offset against claims Ocwen may have against us by reason of this breach.

Any of the foregoing events might have a material adverse effect on our financial condition or operating results.

Ocwen has triggered termination events or events of default under some PSAs underlying the Rights to MSRs, and the parties to the related securitization transactions could enforce their rights against Ocwen as a result.

If a servicer termination event or event of default occurs under a PSA, the servicer may be terminated without any right to compensation for its loss from the trustee for the securitization trust, other than the right to be reimbursed for any outstanding servicing advances as the related loans are brought current, modified, liquidated or charged off. So long as we are in compliance with our obligations under our servicing agreements and purchase agreements, if Ocwen is terminated as servicer, we will have the right to receive an indemnification payment from Ocwen as servicer, even if such termination related to servicer termination events or events of default existing at the time of any transaction with Ocwen, including with respect to those servicer termination events or events of default that have been triggered in PSAs underlying the mortgage servicing rights as of December 31, 2014. If Ocwen is terminated as servicer with respect to a PSA and we are unable to enforce our contractual rights against Ocwen or Ocwen is unable to make any resulting indemnification payments to us, if any, it may have a material adverse effect on our operating results and our ability to pay dividends, our financing arrangements, including our advance financing facilities, and may make it more difficult for us to acquire additional mortgage servicing rights in the future.

On January 23, 2015, Gibbs & Bruns LLP, on behalf of its clients, issued a press release regarding the RMBS Notices provided to various trustees in relation to Ocwen’s servicing practices under 119 residential mortgage-backed securities trusts.

On January 29, 2015, Moody’s downgraded Ocwen’s SQ assessment from SQ3+ to SQ3- as a primary servicer of subprime residential loans and as a special servicer of residential mortgage loans. During February 2015, Fitch Ratings downgraded Ocwen's residential primary servicer rating for subprime products from “RPS3” to “RPS4,” and Morningstar downgraded its rating to “MOR RS3.”

Servicing issues in our portfolio of Loans held for investment could adversely impact our claims against FHA insurance and result in our reliance on servicer indemnifications which could increase the risk of losses.

We rely on our servicers to service our GNMA EBO loans in a manner that supports our ability to make claims to the FHA for shortfalls on these loans. If servicing issues result in the curtailment of FHA insurance claims, we will only have recourse against the servicer for any shortfall. If the servicer is unable to make indemnification payments owed to us under this circumstance, we could incur losses.


24


We do not have legal ownership of our acquired mortgage servicing rights.

We do not have legal ownership of mortgage servicing rights underlying our Rights to MSRs and are subject to increased risks as a result of the servicer continuing to own the mortgage servicing rights. The validity or priority of our interest in the underlying mortgage servicing could be challenged in a bankruptcy proceeding of the servicer, and the related purchase agreement could be rejected in such proceeding. See “ – A bankruptcy of Ocwen could adversely affect our business ” for an additional discussion of this risk to the Company.

We have received subpoenas from the Securities and Exchange Commission regarding our previously announced restatement of our financial statements and regarding communications with certain investors.

In August 2014, we restated our consolidated financial statements for the quarter ended March 31, 2014, and for the years ended December 31, 2013 and 2012, including the quarterly periods within those years, to correct the valuation and the related effect on amortization of our Notes receivable – Rights to MSRs that resulted from a material weakness in our internal control over financial reporting, which has since been remediated.

On September 15, 2014 we received a subpoena from the SEC requesting that we provide certain information related to our prior accounting conventions for and valuations of our Notes receivable – Rights to MSRs that resulted in the restatement. On December 22, 2014 we received a supplemental subpoena from the SEC requesting that we provide information related to certain governance documents and transactions and select communications in respect of the same.

On March 23, 2015, the Company received a subpoena from the SEC requesting that it provide information concerning communications between the Company and certain investment advisors and hedge funds. The SEC also requested documents relating to the Company’s structure, certain governance documents and any investigations or complaints connected to trading in the Company’s securities.

We cannot guarantee that we will not receive further regulatory inquiries or be subject to litigation regarding the subject matter of the subpoenas or matters relating thereto or that the existing inquiries, or, should they occur, any future regulatory inquiries or litigation, will not consume internal resources, result in additional legal and consulting costs or negatively impact our stock price.

We are a Cayman Islands exempted company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.

Our corporate affairs are governed by Cayman Islands law and our Articles of Association. The rights of shareholders to take action against our directors, the rights of minority shareholders to institute actions and the fiduciary responsibilities of our directors to us are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the latter of which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in the United States. In particular, the Cayman Islands has a less developed body of securities law than the United States and provides less protection to investors. The laws of the Cayman Islands provide only limited circumstances under which shareholders of companies may bring derivative actions and do not afford appraisal rights to dissenting shareholders in the form typically available to shareholders of a U.S. corporation other than in limited circumstances in relation to certain mergers.

In addition, a Cayman Islands company may not have standing to initiate a shareholder derivative action before the federal courts of the U.S. As a result, our shareholders may encounter more difficulty in protecting their interests against actions taken by our management or Board of Directors than they would as shareholders of a public company incorporated in the U.S.

You may have difficulty enforcing judgments obtained against us.

We are a Cayman Islands exempted company, and it may be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors. In addition, the courts of the Cayman Islands may not recognize or enforce judgments of U.S. courts against us or our directors and officers predicated upon the civil liability provisions of the securities laws of the U.S. or any state. Furthermore, Cayman Islands courts may not be willing or able to hear original actions brought in the Cayman Islands against us or our directors and officers

25


predicated upon the securities laws of the U.S. or any state. As a result of the difficulty associated with enforcing a judgment against us, you may not be able to collect any damages awarded by a U.S. court.

The Company and certain of its current and former officers and directors were named as parties in class action and derivative lawsuits, which could be costly, protracted, divert management’s attention and harm our business.

Three putative class action lawsuits have been filed against the Company and certain of its current and former officers and directors in the United States District Court for the Southern District of New York entitled: (i) Oliveira v. Home Loan Servicing Solutions, Ltd., et al., No. 15-CV-652 (S.D.N.Y.), filed on January 29, 2015; (ii) Berglan v. Home Loan Servicing Solutions, Ltd., et al., No. 15-CV-947 (S.D.N.Y.), filed on February 9, 2015; and (iii) W. Palm Beach Police Pension Fund v. Home Loan Servicing Solutions, Ltd., et al., No. 15-CV-1063 (S.D.N.Y.), filed on February 13, 2015. These three lawsuits are collectively referred to as the “New York Actions.”

The New York Actions name as defendants HLSS, former HLSS Chairman William C. Erbey, HLSS Director, President, and Chief Executive Officer John P. Van Vlack, and HLSS Chief Financial Officer James E. Lauter. The New York Actions assert causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on certain public disclosures made by the Company relating to our relationship with Ocwen. These actions allege that HLSS misled investors by failing to disclose, among other things, the extent of HLSS’s dependence on Ocwen, information regarding governmental investigations of Ocwen’s business practices, and the Company’s own purportedly inadequate internal controls. The Company intends to vigorously defend the New York Actions.

Two shareholder derivative actions have been filed purportedly on behalf of Ocwen Financial Corporation naming as defendants the Company and certain current and former directors and officers of Ocwen, including former HLSS Chairman William C. Erbey, entitled (i) Sokolowski v. Erbey, et al., No. 9:14-CV-81601 (S.D. Fla.), filed on December 24, 2014 (the “Sokolowski Action”), and (ii) Mocavage v. Faris, et al., No. 2015CA003244 (Fla. Palm Beach Cty. Ct.), filed on March 20, 2015 (collectively, with the Sokolowski Action, the “Ocwen Derivative Actions”). The original complaint in the Sokolowski Action named as defendants certain current and former directors and officers of Ocwen, including former HLSS Chairman William C. Erbey. On February 11, 2015, plaintiff in the Sokolowski Action filed an amended complaint naming additional defendants, including HLSS. The Ocwen Derivative Actions assert a cause of action for aiding and abetting certain alleged breaches of fiduciary duty under Florida law against HLSS and others, and claim that HLSS (i) substantially assisted Ocwen’s alleged wrongful conduct by purchasing Ocwen’s mortgage servicing rights and (ii) received improper benefits as a result of its business dealings with Ocwen due to Mr. Erbey’s purported control over both HLSS and Ocwen. Additionally, the Sokolowski Action asserts a cause of action for unjust enrichment against HLSS and others. The Company intends to vigorously defend the Ocwen Derivative Actions.

On March 11, 2015, plaintiff David Rattner filed a shareholder derivative action purportedly on behalf of the Company entitled Rattner v. Van Vlack, et al., No. 2015CA002833 (Fla. Palm Beach Cty. Ct.) (the “HLSS Derivative Action”). The lawsuit names as defendants HLSS directors John P. Van Vlack, Robert J. McGinnis, Kerry Kennedy, Richard J. Lochrie, and David B. Reiner (collectively, the “Director Defendants”), New Residential Investment Corp., and Hexagon Merger Sub, Ltd. The HLSS Derivative Action alleges that the Director Defendants breached their fiduciary duties of due care, diligence, loyalty, honesty, and good faith, and the duty to act in the best interests of the Company under Cayman law and claims that the Director Defendants approved a proposed merger with New Residential Investment Corp. that (i) provided inadequate consideration to the Company’s shareholders, (ii) included unfair deal protection devices, (iii) and was the result of an inadequate process due to conflicts of interest. The Company intends to vigorously defend the HLSS Derivative Action.

Risks Related to Taxation

We expect to be treated as a PFIC for U.S. federal income tax purposes which could subject U.S. taxpayers to adverse U.S. federal income tax consequences.

We expect that we and our subsidiary, Luxco 1B , have been and will be treated as PFICs for U.S. federal income tax purposes. A PFIC generally is a foreign corporation if either at least (i) 75% of its gross income is “passive income,” or (ii) 50% of the gross value of its assets is attributable to assets that produce, or are held for the production of, passive income. The determination whether any corporation was, or will be, a PFIC for a taxable year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. In addition, whether any corporation will be a PFIC for any taxable year depends on the assets and income of such corporation over the course of each such taxable year and, as a result, generally cannot be determined until the close of the taxable year in question. Accordingly there can be no assurance that the U.S. Internal Revenue Service (“IRS”) will not challenge any determination made by us or one of our subsidiaries concerning

26


its PFIC status. If the IRS were to successfully assert that any of our foreign subsidiaries other than Luxco 1B had been PFICs, then the U.S. federal income tax consequences of the disposition of your indirect ownership interest in such foreign subsidiary would be similar to the consequences described below with respect to your indirect ownership of Luxco 1B.

Subject to the discussion below regarding the mark-to-market election with respect to our ordinary shares, if you are a U.S. taxpayer and have not had a Qualified Electing Fund (“QEF”) election in effect for your entire holding period with respect to us and/or Luxco 1B, you may be subject to adverse U.S. federal income tax consequences, including (1) deferred tax at ordinary income tax rates, and interest charges, with respect to certain distributions on our ordinary shares, any gain realized on a disposition of our ordinary shares or your indirect interest in Luxco 1B (including as a result of the Asset Sale) and certain other events and (2) a capital loss with respect to the disposition of our ordinary shares (including pursuant to the New Merger Agreement or the Liquidation Plan). The effect of these adverse U.S. federal income tax consequences could be material to you.

If you are a U.S. taxpayer and made a valid, timely QEF election for us and Luxco 1B, you will not be subject to the foregoing adverse U.S. federal income tax consequences, but you could recognize taxable income as a result of the Asset Sale, or by reason of certain actions taken by NRZ or its affiliates following the consummation of the Asset Sale, that increase our or Luxco 1B’s earnings for the taxable year of the Asset Sale. Such taxable income may not be able to be offset by any corresponding capital loss with respect to your disposition of our ordinary shares (including pursuant to the New Merger Agreement or the Liquidation Plan), because of differences in the character of such income or gain and/or the potential for the recognition of such loss for U.S. federal income tax purposes to be delayed beyond the close of the taxable year in which the Asset Sale occurs. We (or, following the New Merger, NRZ) will provide or cause to be provided such information to all electing shareholders needed to make or maintain a QEF election with respect to us and Luxco 1B. Prior to the consummation of the New Merger, the Purchase Agreement requires that NRZ provide us with information necessary for us to continue providing such information.

If you are a U.S. taxpayer and made a valid, timely mark-to-market election with respect to our ordinary shares, you will recognize as ordinary income or loss in each year that we are a PFIC an amount equal to the difference between your basis in our ordinary shares and the fair market value of the ordinary shares, thus also possibly giving rise to phantom income and a potential out-of-pocket tax liability. Ordinary loss generally is recognized only to the extent of net mark-to-market gains previously included in income. The mark-to-market election is not available with respect to your indirect interest in Luxco 1B.

Distributions that we pay to individual U.S. taxpayers will not be eligible for taxation at reduced rates.

Distributions made to a U.S. taxpayer that is an individual will not be eligible for taxation at reduced tax rates generally applicable to dividends paid by certain U.S. corporations and “qualified foreign corporations.” We intend for distributions to our shareholders of the proceeds of the Asset Sale and the disposition of the NRZ Shares to be treated as amounts received in respect of a sale of exchange of their interest in our ordinary shares stock; however, there is no assurance that the IRS will respect such treatment.

If our ownership of servicing rights were treated as engaged in a trade or business in the United States, we would become subject to U.S. federal income taxation which could adversely affect our business and result in decreased cash available for distribution to our shareholders.

The IRS could assert that we are engaged in a U.S. trade or business pertaining to the ownership of mortgage servicing rights. If, contrary to our expectations, our ownership of mortgage servicing rights is treated as being engaged in a trade or business in the United States, we would be subject to additional U.S. federal income taxation on a substantial portion of our Net income, which would adversely affect our business and result in decreased cash available for distribution to our shareholders. More specifically, if we are treated as engaged in a trade or business in the United States, the portion of our Net income, if any, that was “effectively connected” with such trade or business would be subject to U.S. federal income taxation at a maximum rate of 35% as opposed to our expectation that only the income of our U.S. subsidiaries will be subject to U.S. federal income tax. In such case, gain recognized by us pursuant to the Asset Sale could be subject to such treatment. In addition, we would be subject to the U.S. federal branch profits tax on our effectively connected earnings and profits at a rate of 30%.

We may become subject to taxation in the Cayman Islands.

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. Dividend payments are not subject to withholdings tax in the Cayman Islands. There are no other taxes likely to be material to our company levied by the government of the Cayman Islands except for stamp duties that may be applicable on instruments executed in, or after execution brought

27


within the jurisdiction of, the Cayman Islands. The tax treatment of our business in the Cayman Islands is subject to change. Thus, we may become subject to Cayman Islands taxation in the future.

Changes to foreign tax treaties upon which we rely or adverse decisions or actions by tax authorities could result in additional tax liabilities in the U.S. or abroad, which would reduce our profitability.

Certain of our subsidiaries are subject to U.S. or foreign income taxes. Judgment is required in determining the likelihood of a tax authority upholding our tax position and in calculating our provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we engage tax specialists to develop our corporate tax strategy, a U.S. or foreign tax authority may make an adverse determination in relation to our positions and may levy additional taxes, impose interest or penalties or bring litigation against us.

In accordance with U.S. GAAP, we recognize income tax benefits, net of required valuation allowances. Although we believe our tax estimates are reasonable, the final determination of any tax audits or any related litigation arising from such an audit could be materially different than that which is reflected in historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit or litigation, an adverse effect could impact our income tax provision and Net income in the period or periods for which that determination is made.

ITEM 1B.
 
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
 
PROPERTIES

Our registered offices are located in the Cayman Islands c/o Intertrust Corporate Services (Cayman) Limited, 190 Elgin Avenue, George Town, Grand Cayman KY1-9005, Cayman Islands. We lease office space from Ocwen. We occupy the following locations, for which we are in the process of negotiating new leases: 1661 Worthington Road, West Palm Beach, Florida 33409, and 1525 South Belt Line Road, Coppell, Texas 75019.

ITEM 3.
 
LEGAL PROCEEDINGS

See Part II, Item 8, “Financial Statements and Supplementary Data – Note 18, Commitments and Contingencies," for information regarding legal contingencies.

ITEM 4.
 
MINE SAFETY DISLCOSURES

Not applicable.

PART II


28


ITEM 5.
 
MARKET FOR REGISTRANT'S ORDINARY SHARES, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of the Company’s Ordinary Shares

The ordinary shares of Home Loan Servicing Solutions, Ltd. began trading on The NASDAQ Global Select Market on February 29, 2012, and are traded under the symbol “HLSS”. The following tables set forth the high and low closing sales prices for our ordinary shares for the periods indicated:
2014
  
High
 
Low
First Quarter
  
$
23.08

 
$
19.47

Second Quarter
  
$
23.10

 
$
21.03

Third Quarter
  
$
23.38

 
$
20.38

Fourth Quarter
  
$
22.01

 
$
17.29


2013
  
High
 
Low
First Quarter
  
$
24.06

  
$
19.00

Second Quarter
  
$
24.37

  
$
22.20

Third Quarter
  
$
25.41

  
$
22.00

Fourth Quarter
  
$
23.90

  
$
21.50


2012
  
High
 
Low
First Quarter
  
$
14.00

  
$
12.80

Second Quarter
  
$
14.00

  
$
13.18

Third Quarter
  
$
16.50

  
$
13.29

Fourth Quarter
  
$
19.82

  
$
16.33


The closing price of our ordinary shares on April 2, 2015 was $17.32.


29


The following graph compares the cumulative total return on the ordinary shares of HLSS since the time our shares started trading, February 29, 2012, with the cumulative total return on the stocks included in the Russell 2000 Market Index and S&P 500 Diversified Financials Market Index.

Purchases of Ordinary Shares by the Issuer and Affiliates

We did not purchase any of our ordinary shares during 2014, 2013 or 2012.

Number of Holders of Ordinary Shares

At March 2, 2015, 71,016,771 shares of our ordinary shares were outstanding and held by approximately 16,170 holders of record.

Dividend Policy

Concurrently with the execution of the NRZ Purchase Agreement, our Board of Directors adopted and approved the Liquidation Plan, pursuant to which we will (1) cease our business activities other than such activities that are necessary to carry out the provisions of the Liquidation Plan, (2) pay or make adequate provision for operating expenses expected to be incurred through the completion of the Liquidation Plan, and (3) distribute to our shareholders in one or more distributions, (a) the cash received by the Company in the Asset Sale and the net proceeds from the sale of NRZ common stock received by the Company in the Asset Sale, less (b) amounts used to pay the liabilities of the Company and less a reserve in the amount of $50 million that will be held by the Company at the discretion of the Board to ensure that the Company will be able to meet known and unknown liabilities up to the date of the consummation of the transactions contemplated by the New Merger or, if the transactions contemplated by the New Merger are not consummated, the date of the final liquidating distribution after settlement of the liabilities and to ensure that the Company has available resources in the event that it is necessary to enforce against third parties any contractual or other rights of the Company or its officers or directors. If the New Merger is consummated, our shares will be converted automatically into the right to the Merger Consideration.  If the New Merger is not consummated and post-closing expenses and liabilities do not exceed $50 million, it is anticipated that a further cash distribution will be made to shareholders.

30



Cash Dividends Paid

During 2014 we paid an aggregate of $139,193 in cash dividends or $1.96 per ordinary share. During 2014 we declared the following dividends:
 
Record Date
Payment Date
Amount per Ordinary Share
January 31, 2014
February 10, 2014
$0.15
February 28, 2014
March 10, 2014
$0.15
March 31, 2014
April 10, 2014
$0.15
April 30, 2014
May 12, 2014
$0.16
May 30, 2014
June 10, 2014
$0.16
June 30, 2014
July 10, 2014
$0.16
July 31, 2014
August 11, 2014
$0.16
August 29, 2014
September 10, 2014
$0.18
September 30, 2014
October 10, 2014
$0.18
October 31, 2014
November 10, 2014
$0.18
November 28, 2014
December 10, 2014
$0.18
December 31, 2014
January 12, 2015
$0.18

During 2013 we paid an aggregate of $107,436 in cash dividends or $1.67 per ordinary share. During 2013 we declared the following dividends:
 
Record Date
Payment Date
Amount per Ordinary Share
January 31, 2013
February 11, 2013
$0.12
February 28, 2013
March 11, 2013
$0.13
March 29, 2013
April 10, 2013
$0.13
April 30, 2013
May 10, 2013
$0.14
May 31, 2013
June 10, 2013
$0.14
June 28, 2013
July 10, 2013
$0.14
July 31, 2013
August 12, 2013
$0.15
August 30, 2013
September 10, 2013
$0.15
September 30, 2013
October 10, 2013
$0.15
October 31, 2013
November 12, 2013
$0.15
November 29, 2013
December 10, 2013
$0.15
December 31, 2013
January 10, 2014
$0.15


31


During 2012 we paid an aggregate of $18,317 in cash dividends or $0.91 per ordinary share. During 2012 we declared the following dividends:

Record Date
Payment Date
Amount per Ordinary Share
March 30, 2012
April 10, 2012
$0.08
April 30, 2012
May 10, 2012
$0.10
May 31, 2012
June 11, 2012
$0.10
June 29, 2012
July 10, 2012
$0.10
July 31, 2012
August 10, 2012
$0.10
August 31, 2012
September 10, 2012
$0.10
September 28, 2012
October 10, 2012
$0.10
October 31, 2012
November 12, 2012
$0.11
November 30, 2012
December 10, 2012
$0.12
December 31, 2012
January 10, 2013
$0.12

ITEM 6.
 
SELECTED FINANCIAL DATA

The following tables present selected consolidated financial information of HLSS and its subsidiaries at the dates and for the years indicated. Our historical balance sheet and operations data at and for the five years ended December 31 are derived from our audited financial statements. The selected consolidated financial information should be read in conjunction with the information we provided in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the related notes included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

Selected Balance Sheet Data

At December 31,
  
2014
  
2013
 
2012
 
2011
 
2010
Cash
  
$
210,009

 
$
87,896

  
$
76,048

  
$
283

  
$
300

Match funded advances
  
6,121,595

 
6,387,781

  
3,098,198

  

  

Notes receivable – Rights to MSRs
  
614,465

 
633,769

  
296,451

  

  

Loans held for investment
 
815,663

 

 

 

 

Other assets
  
376,367

 
201,226

  
107,362

  
2,860

  
14

     Total assets
  
$
8,138,099

 
$
7,310,672

  
$
3,578,059

  
$
3,143

  
$
314

 
  
 
 
 
 
 
 
 
 
 
Match funded liabilities
  
$
5,624,088

 
$
5,715,622

  
$
2,690,821

  
$

  
$

Other borrowings
  
1,182,328

 
343,386

  

  

  

Dividends payable
  
12,783

 
10,653

  
6,706

  

  

Other liabilities
  
27,621

 
24,564

  
7,153

  
3,134

  
32

     Total liabilities
  
6,846,820

 
6,094,225

  
2,704,680

  
3,134

  
32

 
  
 
 
 
 
 
 
 
 
 
     Total equity
  
1,291,279

 
1,216,447

  
873,379

  
9

  
282

 
  
 
 
 
 
 
 
 
 
 
     Total liabilities and equity
  
$
8,138,099

 
$
7,310,672

  
$
3,578,059

  
$
3,143

  
$
314



32


Selected Operations

For the years ended December 31,
  
2014
 
2013
 
2012
 
2011
 
2010
Revenue:
  
 
 
 
 
 
 
 
 
 
     Interest income – notes receivable – Rights
to MSRs
  
$
361,060

 
$
235,826

  
$
47,445

  
$

  
$

     Interest income – other
  
36,446

 
2,195

  
109

  

  

     Related party revenue
  
1,843

 
1,811

  
2,316

  

  

     Other revenue
 
402

 

 

 

 

          Total revenue
  
399,751

 
239,832

  
49,870

  

  

 
  
 
 
 
 
 
 
 
 
 
Operating expenses
  
18,453

 
11,870

  
6,150

  
273

  
18

 
  
 
 
 
 
 
 
 
 
 
Income (loss) from operations
  
381,298

 
227,962

  
43,720

  
(273
)
 
(18
)
 
  
 
 
 
 
 
 
 
 
 
Other expense
  
 
 
 
 
 
 
 
 
 
     Interest expense
  
163,698

 
110,071

  
24,057

  

  

          Total other expense
  
163,698

 
110,071

  
24,057

  

  

 
  
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
  
217,600

 
117,891

  
19,663

  
(273
)
 
(18
)
     Income tax expense
  
636

 
234

  
46

  

  

          Net income (loss)
  
$
216,964

 
$
117,657

  
$
19,617

  
$
(273
)
 
$
(18
)
 
  
 
 
 
 
 
 
 
 
 
Earnings (loss) per share
  
 
 
 
 
 
 
 
 
 
     Basic
  
3.05

 
1.83

  
1.14

  
(13.66
)
 
(13.18
)
 
  
 
 
 
 
 
 
 
 
 
     Diluted
  
3.05

 
1.83

  
1.14

  
(13.66
)
 
(13.18
)
 
  
 
 
 
 
 
 
 
 
 
Weighted average ordinary shares outstanding
  
 
 
 
 
 
 
 
 
 
     Basic
  
71,016,771

 
64,132,383

  
17,230,858

  
20,000

  
1,334

     Diluted
  
71,020,808

 
64,132,383

  
17,230,858

  
20,000

  
1,334

 
 
 
 
 
 
 
 
 
 
 
Dividends declared per share
  
1.99

 
1.70

  
1.45

  

  


ITEM 7.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data and unless otherwise indicated)

Introduction

The following discussion of our results of operations, changes in financial condition and liquidity should be read in conjunction with our Consolidated Financial Statements and the related notes included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

Recent Developments

Ocwen has been and is subject to certain federal and state regulatory matters and other challenges and uncertainties associated with its business.

We are dependent on Ocwen as the subservicer for the Notes receivable – Rights to MSRs, and Ocwen’s servicing practices may impact the value of certain of our assets. We may be adversely impacted:

By regulatory actions taken against Ocwen;
By a default by Ocwen under its debt agreements;
By further downgrades in Ocwen's servicer rating;
If Ocwen fails to ensure its servicing advances comply with the terms of its PSAs;
If Ocwen were terminated as servicer under certain PSAs;
If Ocwen becomes subject to a bankruptcy proceeding; or

33


If Ocwen fails to meet its obligations or is deemed to be in default under the indenture governing Notes issued by the HSART Trust, including the allegations of certain events of default related to the Ocwen servicer downgrade and other regulatory matters by BlueMountain.

A summary of such matters, the related impact on our business and the Company's plan to address such matters are as follows.

Ocwen Regulatory Matters

Ocwen has publicly announced that, on December 19, 2013, Ocwen reached an agreement involving the CFPB, various state attorneys general and other agencies that regulate the mortgage servicing industry, which agreement was approved by consent judgment by the U.S. District Court for the District of Columbia on February 26, 2014. According to Ocwen's disclosure, the key elements of the agreement are as follows:

A commitment by Ocwen to service loans in accordance with specified servicing guidelines and to be subject to oversight by an independent national monitor for three years;
A payment of $127.3 million to a consumer relief fund to be disbursed by an independent administrator to eligible borrowers. In May 2014, Ocwen satisfied this obligation with regard to the consumer relief fund, $60.4 million of which is the responsibility of former owners of certain servicing portfolios acquired by Ocwen pursuant to indemnification and loss sharing provisions in the applicable agreements; and
A commitment by Ocwen to continue its principal forgiveness modification programs to delinquent and underwater borrowers in an aggregate amount of $2.0 billion over three years.

On December 22, 2014, Ocwen announced that it had reached a settlement agreement with the NY DFS related to investigations into Ocwen's mortgage servicing practices in the State of New York. According to Ocwen's disclosure, the key elements of the agreement are as follows:

Payment of $100 million to the NY DFS to be used by the State of New York for housing, foreclosure relief and community redevelopment programs;
Payment of $50 million as restitution to certain New York borrowers;
Installation of a NY DFS Operations Monitor to review and assess the adequacy and effectiveness of Ocwen's operations for a period of two years, which may be extended another twelve months at the option of the NY DFS;
Requirements that Ocwen will not share any common officers or employees with any related party and will not share risk, internal audit or vendor oversight functions with any related party;
Requirements that certain Ocwen employees, officers and directors be recused from negotiating or voting to approve certain transactions with a related party;
Resignation of Ocwen's Chairman of the Board from the Board of Directors of Ocwen and at related companies, including HLSS; and
Restrictions on Ocwen's ability to acquire new mortgage servicing rights.

On January 23, 2015, Ocwen announced that it had reached a settlement agreement with the CA DBO in relation to an action dated October 3, 2014, in the State of California. According to Ocwen's disclosure, the key elements of the agreement are as follows:

Payment of $2.5 million;
Engagement of an independent auditor to assess Ocwen’s compliance with laws and regulations impacting California borrowers for a period of at least two years; and
Prevention of Ocwen from acquiring additional mortgage servicing rights for loans secured in the State of California until the CA DBO is satisfied that Ocwen can satisfactorily respond to the requests for information and documentation made in the course of a regulatory exam.

According to Ocwen's public disclosure, on April 28, 2014, Ocwen received a letter from the staff of the New York Regional Office of the SEC informing Ocwen that the SEC was conducting an investigation relating to Ocwen and making a request for voluntary production of documents and information relating to the April 22, 2014 surrender of certain options to purchase its common stock by Mr. Erbey, its former Executive Chairman, including the 2007 Equity Incentive Plan and the related option grant and surrender documents. On June 12, 2014, Ocwen received a subpoena from the SEC requesting production of various documents relating to its business dealings with HLSS, Altisource, Altisource Asset Management Corporation AAMC and Residential and the interests of its directors and executive officers in these companies. Ocwen has also disclosed that it received

34


an additional subpoena from the SEC related to its amendments to its Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

Other Ocwen Matters

S&P, Moody’s, Fitch and Morningstar rate Ocwen as a mortgage servicer. Each of these rating agencies has downgraded Ocwen’s servicer rating within the last six months. On January 29, 2015, Moody’s downgraded Ocwen’s SQ assessment from “SQ3+” to “SQ3-” as a primary servicer of subprime residential loans and as a special servicer of residential mortgage loans. During February 2015, Fitch downgraded Ocwen's residential primary servicer rating for subprime products from “RPS3” to “RPS4,” and Morningstar downgraded its rating to “MOR RS3.” Three of these rating agencies currently have Ocwen’s ratings outlook as “negative” or “on review for downgrade.” Additionally, Ocwen is subject to quantitative and qualitative agency servicer rating criteria which may have subjective interpretations. Certain of our advance financing facilities require that our servicers or subservicers maintain specified servicer ratings, and failure by our servicers or subservicers to maintain the minimum rating could result in adverse adjustments to our advance rates, liquidity and profitability. Failure to maintain minimum or specified ratings could adversely affect dealings with contractual counterparties, including GSEs and regulators. In addition, some PSAs also require that the servicer or subservicer maintain specified servicer ratings. The failure to maintain the specified rating could result in the termination of the servicer under such PSAs. If Ocwen is terminated as servicer, and if Ocwen is unable to make any applicable indemnification payments owed to us, we could lose a substantial portion or all of the value of the related Notes receivable – Rights to MSRs (see discussion of the BlueMountain allegations that follow).

During February and March 2015, Ocwen received two notices of servicer termination affecting four separate PSAs underlying our Notes receivable – Rights to MSRs due to servicer rating downgrades. While we believe the financial impact of the termination of servicing under these four PSAs would be immaterial to our overall financial condition, Ocwen could be subject to further terminations as a result of its failure to maintain required minimum servicer ratings, which could have an adverse effect on our business, financing activities, financial condition and results of operations.

Additionally, if Ocwen fails to ensure its servicing advances comply with the terms of the PSAs, then any such improperly made servicing advances may not be eligible for financing under our advance financing facilities and/or may not be reimbursable by the related securitization trusts or other owners of the mortgage loans. Ocwen may be unwilling or unable to make indemnification payments for losses we incur related to unrecoverable advances.

Our advance financing facilities and certain Other borrowings have cross default provisions to Ocwen’s senior secured term facility, and there may occur an event of default under Ocwen's senior secured debt facility.

If Ocwen becomes subject to a bankruptcy proceeding, our business could be materially and adversely impacted by potential court rulings or other actions or events, including, but not limited to, the following:

A sale of Residential Mortgage Assets or other assets could be re-characterized in an Ocwen bankruptcy proceeding as a financing secured by such Residential Mortgage Assets. If such a recharacterization occurs, the validity or priority of our security interest in the Residential Mortgage Assets or other assets could be challenged in a bankruptcy proceeding of Ocwen. If the sale of Residential Mortgage Assets or other assets is recharacterized as a secured financing, payments made by Ocwen to us prior to Ocwen commencing its bankruptcy proceeding could be challenged and subject to recovery as preferential transfers;
Payments made to us by Ocwen, or obligations incurred by Ocwen to us, could be challenged as fraudulent conveyances;
The Purchase Agreement could be rejected in an Ocwen bankruptcy proceeding;
A bankruptcy court could stay a transfer of servicing to another servicer;
Ocwen could discontinue servicing;
The automatic stay under the United States Bankruptcy Code may prevent the ongoing receipt of servicing fees or other amounts due; or
A bankruptcy of Ocwen defaults our advance financing facilities and negatively impacts our ability to continue to purchase servicing advances.

In addition, Ocwen has disclosed that certain of its debt facilities will mature during 2015. If Ocwen is not able to repay or refinance these obligations as they come due, Ocwen may become the subject of a bankruptcy proceeding.

Any of the foregoing events could have a material adverse effect on our financial condition and operating results.


35


On January 23, 2015, counsel to BlueMountain, which has represented that it is the investment manager of funds that hold certain of the Notes sent a letter to HLSS Holdings, the HSART Trust, Ocwen and the Indenture Trustee, asserting certain alleged events of default under the indenture governing Notes issued by the HSART Trust. BlueMountain has publicly stated that it has taken a “short position” on behalf of certain funds in the stock of HLSS and Ocwen. On February 20, 2015, counsel to BlueMountain sent another letter asserting certain alleged events of default under the indenture governing Notes issued by the HSART Trust. The alleged defaults are related to the Ocwen servicer downgrade and other regulatory matters described above. An event of default under the HSART Trust could result in the revolving facilities within HSART Trust to cease revolving, which would impact our ability to fund the purchase of advances.

On February 17, 2015, HLSS Holdings and the Depositor, entered into the Agreement with the Indenture Trustee. Pursuant to the Agreement, the parties agreed, among other things, that during the term of the Agreement the Indenture Trustee will not commence a judicial proceeding to seek judicial guidance regarding the allegations made in the BlueMountain letter prior to April 15, 2015, and HLSS Holdings and the Depositor agreed to allow the Indenture Trustee to withhold from distribution certain excess funds that would otherwise be distributable to the Depositor in an amount up to the Interest Accrual Differential for the related interest accrual period under the HSART Trust indenture. The “Interest Accrual Differential” means, with respect to any interest accrual period under the HSART Trust indenture beginning with the interest accrual period relating to the February 17, 2015 monthly payment date thereunder and any class of HSART Trust notes issued prior to January 17, 2014, an amount equal to the excess of (a) the Non-FAE Rate plus 3.00% per annum over (b) the related interest accrual for such class of notes at the Non-FAE Rate. The Depositor and HLSS Holdings subsequently agreed to allow the Indenture Trustee to withhold on the same basis with respect to HSART Trust notes issued on or after January 17, 2014. The effect of this agreement will be to increase the amount deposited and held in Debt service accounts by approximately $11.8 million per month.

Management's Plan

On February 22, 2015, we entered into the Old Merger Agreement with NRZ and Merger Sub, pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub would merge with and into us.

During the month of February 2015, our management developed a management plan that included the following elements:

Entering into the Old Merger Agreement with NRZ;
Negotiating certain commitments from various lenders for replacement advance financing, though never consummated;
Selling our entire portfolio of RPLs for an immaterial gain and concurrently repaying the related borrowings in full;
Marketing our GNMA EBO loan portfolios and extending the maturity of the related borrowings to allow for continued marketing;
Working closely with our legal counsel to address BlueMountain’s allegations of default, which we believe are without merit, and any potential impact of such allegations on our advance financing facilities; and
Amending our senior secured term loan facility agreement to extend the deadline to furnish annual financial statements to April 10, 2015, to amend certain terms of cross default to our advance financing facilities and to permit an amendment to the Ocwen Subservicing Agreement.

On March 3, 2015, we filed a Form 12b-25 indicating that additional time to complete our Annual Report on Form 10-K for the year ended December 31, 2014 was necessary in order to complete the assessment of recent events related to our business and determine the impact on our financial statements and related disclosures.

On March 18, 2015, we filed a Form 8-K indicating that we required additional time to prepare information related to our ability to operate as a going concern and to provide such information to our auditors for the purposes of their audit of our financial statements for the year ended December 31, 2014.

On April 6, 2015, HLSS, HLSS Holdings and Ocwen entered into an amendment to the Purchase Agreement and the sale supplements (effective upon completion of the Asset Sale described below) to, among other things, (i) obtain Ocwen's consent to the assignment by HLSS of its interest under the Purchase Agreement and each sale supplement, (ii) provide that HLSS Holdings will not become the named servicer in connection with any Rights to MSRs, or direct the replacement of Ocwen as named servicer, before April 6, 2017 except under certain limited circumstances, (iii) extend the scheduled term of Ocwen's servicing appointment under each sale supplement until the earlier of 8 years from the date of such sale supplement and April 30, 2020, and (iv) provide that Ocwen will reimburse HLSS Holdings for certain increased financing costs resulting from servicer rating downgrades of Ocwen. In addition, under such amendment (x) Ocwen agrees to exercise any “clean-up call” rights under any servicing agreement related to Rights to MSRs only at the direction of HLSS and to sell to HLSS, on an “as-is” basis, the

36


economic beneficial interest in the right to purchase the mortgage loans and other assets in the trust for each designated servicing agreement pursuant to such clean-up call rights and (y) HLSS agrees to pay to Ocwen a fee equal to 0.50% of  the outstanding balance of the performing mortgage loans purchased in connection with any such exercise and to pay Ocwen’s related costs and expenses of exercise.

On April 6, 2015, to best address concerns relating to our ability to operate as a going concern and the associated impact on our business on an expedited basis, we agreed with NRZ and Merger Sub to terminate the Old Merger Agreement and immediately complete the Asset Sale. The Asset Sale was made in accordance with the terms and conditions of the NRZ Purchase Agreement. In connection with the Asset Sale, among other things, (i) HLSS MSR-EBO acquired substantially all of the assets of the Company (including all of the issued share capital of Luxco 1B) and (ii) HLSS Advances acquired all of the issued share capital of Luxco 1A and assumed substantially all of the liabilities of the Company, including certain post-closing liabilities of the Company. In exchange, the Company received an amount in cash equal to $1.0 billion plus 28,286,980 newly issued shares of NRZ common stock with a par value $0.01 per share. In conjunction with the Asset Sale, our senior secured term loan facility was retired.

Concurrently with the execution of the NRZ Purchase Agreement, our Board of Directors adopted and approved the Liquidation Plan, pursuant to which we will (1) cease our business activities other than such activities that are necessary to carry out the provisions of the Liquidation Plan, (2) pay or make adequate provision for operating expenses expected to be incurred through the completion of the Liquidation Plan and (3) distribute to our shareholders in one or more distributions, (a) the cash received by the Company in the Asset Sale and the net proceeds from the sale of NRZ common stock received by the Company in the Asset Sale, less (b) amounts used to pay the liabilities of the Company and less a reserve in the amount of $50 million that will be held by the Company at the discretion of the Board to ensure that the Company will be able to meet known and unknown liabilities up to the date of the consummation of the transactions contemplated by the New Merger or, if the transactions contemplated by the New Merger are not consummated, the date of the final liquidating distribution after settlement of the liabilities and to ensure that the Company has available resources in the event that it is necessary to enforce against third parties any contractual or other rights of the Company or its officers or directors. If the New Merger is consummated, our shares will be converted automatically into the right to the Merger Consideration.  If the New Merger is not consummated and post-closing expenses and liabilities do not exceed $50 million, it is anticipated that a further cash distribution will be made to shareholders.

Immediately following the closing of the Asset Sale contemplated by the NRZ Purchase Agreement, we entered into: (i) the New Merger Agreement with NRZ and Merger Sub, pursuant to which, among other things, the Company will be merged with and into Merger Sub, with the Company ceasing its corporate existence and Merger Sub surviving the New Merger, (ii) a Services Agreement, pursuant to which HLSS Advances Acquisition Corp. will provide us with certain services following the consummation of the Asset Sale, including, among other things, handling (including defending, prosecuting or resolving) all claims, disputes or controversies (including any litigation, arbitration, governmental investigations or inquiries or any other proceedings or negotiations) in which the Company is a party or may otherwise be involved and (iii) a Registration Rights Agreement to memorialize certain rights relating to the registration of shares of NRZ common stock to be held by the Company upon the closing of the Asset Sale. On the terms and subject to the conditions set forth in the New Merger Agreement, at the Effective Time each of the Company Shares issued and outstanding immediately prior to the Effective Time (other than Company Shares owned by any direct or indirect wholly-owned subsidiary of NRZ (other than Merger Sub) or of Merger Sub and Company Shares as to which dissenters’ rights have been properly exercised) will be converted automatically into the right to receive the Merger Consideration. The parties’ obligations to consummate the New Merger are subject to certain closing conditions, including approval of the New Merger by the requisite vote of the shareholders, the absence of any legal restraints that would prohibit the consummation of the New Merger and other conditions customary for a transaction of this type. Each of us, NRZ and Merger Sub has made certain customary representations, warranties and covenants in the New Merger Agreement, including, among other things, covenants related to the conduct of our business during the interim period between the execution of the New Merger Agreement and the consummation of the New Merger. The New Merger Agreement provides for certain termination rights for both us and NRZ, including, if approval of the New Merger by the requisite vote of the shareholders is not obtained or if the New Merger is not consummated by the nine month anniversary of the date of the New Merger Agreement.

Other Recent Developments

On September 15, 2014, the Company received a subpoena from the SEC requesting that it provide certain information related to the Company’s prior accounting conventions for and valuations of our Notes receivable – Rights to MSRs that resulted in the restatement of our consolidated financial statements for the years ended December 31, 2013 and 2012 and for the quarter ended March 31, 2014 during August 2014. On December 22, 2014, the Company received a subpoena from the SEC requesting that it provide information related to certain governance documents and transactions and certain communications regarding the same. The Company is cooperating with the SEC in these matters.

37



As a result of Ocwen’s settlement agreement with the NY DFS, on January 16, 2015, William C. Erbey stepped down as non-executive Chairman of the Board of Directors of the Company, Ocwen, Altisource, AAMC and Residential. Concurrently, Robert J. McGinnis was appointed as non-executive Chairman of HLSS.

On January 14, 2015, our Moody's credit rating was downgraded to B3/Negative and on January 16, 2015, S&P affirmed its credit rating of B+ but downgraded our outlook from Stable to Negative. On February 24, 2015, Moody’s announced that it would review our credit rating for potential upgrade subsequent to our announcement of the Old Merger Agreement on February 22, 2015.

On March 18, 2015, we received notification from Nasdaq stating that the Company is no longer in compliance with Nasdaq Listing Rule 5250(c)(1) for continued listing due to the Company not having timely filed its Annual Report on Form 10-K for the year ended December 31, 2014.

On March 23, 2015, the Company received a subpoena from the SEC requesting that it provide information concerning communications between the Company and certain investment advisors and hedge funds. The SEC also requested documents relating to the Company’s structure, certain governance documents and any investigations or complaints connected to trading in the Company’s securities. The Company is cooperating with the SEC in this matter.

OVERVIEW (PRIOR TO ASSET SALE)

Strategic Priorities

Now in our fourth year of operations, we continue to execute upon our chief objective, which is to acquire Residential Mortgage Assets. During the current year, we expanded our Residential Mortgage Asset portfolio by acquiring GNMA EBO loans from Ocwen and a third party seller, by financing additional servicing advances for Ocwen and by acquiring RPLs from a third party seller. We have also expanded our operations to include another mortgage servicer. In addition to our current asset classes, we continue to explore opportunities for investments in new classes of Residential Mortgage Assets that align with our business model and that we believe will provide an attractive risk-adjusted yield.

We expect to finance future asset acquisitions in two ways:

Invest cash flow from operations in excess of our dividend; and
Issue additional debt or equity to allow us to execute larger purchases.

In the event that suitable assets are not available for purchase or to the extent that we are not successful in acquiring suitable assets, we may invest cash generated in excess of our dividend in the repurchase of our ordinary shares pursuant to the share repurchase program (the "Share Repurchase Program") authorized by our Board of Directors on December 4, 2014. Under the Share Repurchase Program, we may, from time to time, purchase our ordinary shares for an aggregate purchase price not to exceed $150 million.

Changes in Results of Operations Summary

The following table summarizes our consolidated operating results for the years ended December 31, 2014, 2013, and 2012.

 
2014
 
2013
 
2012
Consolidated:
 
 
 
 
 
   Revenue
$
399,751

 
$
239,832

 
$
49,870

   Operating expenses
18,453

 
11,870

 
6,150

   Income from operations
381,298

 
227,962

 
43,720

   Interest expense
163,698

 
110,071

 
24,057

   Income before income taxes
217,600

 
117,891

 
19,663

   Income tax expense
636

 
234

 
46

   Net income
$
216,964

 
$
117,657

 
$
19,617



38


Year Ended December 31, 2014 versus 2013. Revenue primarily includes interest income recorded on Notes receivable – Rights to MSRs. Our 2014 Interest income exceeds 2013 Interest income because our average UPB for the years ended December 31, 2014 and 2013, was $170.7 billion and $134.4 billion, respectively. In addition, lower prepayment speeds for the UPB tied to our Notes receivable – Rights to MSRs contributed to greater Interest income during 2014. Average prepayment speeds declined from 12.9% during 2013 to 10.5% during 2014. In addition, we recorded an increase in interest income of $50,062 for the year ended December 31, 2014, compared to a decrease of $10,037 for the year ended December 31, 2013, as a result of changes in the fair value of our Notes receivable – Rights to MSRs. Lastly, the interest earned on our Loans held for investment during the year ended December 31, 2014 of $28.7 million contributed to the increase in interest income as they represent a new class of Residential Mortgage Assets for 2014.

Operating expenses increased period over period primarily because the scale of our business significantly increased as a result of various Residential Mortgage Asset purchases. Operating expenses are primarily comprised of Compensation and benefits, Related party expenses and General and administrative expenses.

For the years ended December 31, 2014 and 2013, Compensation and benefits increased primarily due to relocation assistance and incentives in conjunction with employee relocations from the United States to our Cayman Islands office and the adoption of the 2013 Equity Incentive Plan in May 2014.

Related party expenses result from the Ocwen Professional Services Agreement and the Altisource Administrative Services Agreement. The slight decrease in Related party expenses is primarily related to decreased use of services under the Ocwen Professional Services Agreement.

The increase in General and administrative expenses is primarily related to bank fees associated with our custodial accounts, tax and legal expenses related to our research and pursuit of new investment opportunities and costs associated with the restatement of previously issued financial statements on August 18, 2014.

Increases in interest expense period over period were primarily due to increases in average Match funded liabilities outstanding. For the years ended December 31, 2014 and 2013, interest expense increased by $53,627 due to increases in the average outstanding Match fund liabilities to $5.7 billion from $4.0 billion, respectively, and due to increases in the weighted average interest rates on those liabilities to 1.89% from 1.83%, respectively. Additionally for the year ended December 31, 2014, we incurred interest expense on our EBO Facility, RPL Facility and Note Facility, which were new liabilities within our Other borrowings during 2014.

Our tax expense for both periods was largely impacted by our status as a Cayman Islands exempted company. The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation. Our total income tax expense increased year over year due to increased taxable income in our Luxembourg subsidiaries, increasing our effective tax rate to 0.3% for 2014 compared to 0.2% in 2013.

Year Ended December 2013 versus December 2012. Our Interest income increased year over year, primarily because our average UPB for the years ended December 31, 2013 and 2012, was $134.4 billion and $27.7 billion. An additional $119.7 billion of UPB in Rights to MSRs purchased from Ocwen during 2013 contributed to the increased 2013 average UPB balances. We also recognized a decrease in our interest income of $10,037 and $7,254 for the years ended December 31, 2013 and 2012, respectively, as a result of a corresponding decrease in the fair value of our Notes receivable – Rights to MSRs. Lastly, lower prepayment speeds for the UPB tied to our Notes receivable – Rights to MSRs contributed to greater interest income during 2013. Average prepayment speeds declined from 14.2% during 2012 to 12.9% during 2013.

Operating expenses increased year over year primarily because the scale of our business significantly increased from 2012 to 2013 as a result of additional acquisitions of Rights to MSRs. Operating expenses were primarily comprised of salaries and wages, Related party expenses and General and administrative expenses. Our average headcount for the year ended December 31, 2013 as compared to December 31, 2012 increased from twelve to seventeen, which primarily contributed to the increase in the Compensation and benefits portion of operating expenses. Related party expenses were related to the Ocwen Professional Services Agreement and the Altisource Administrative Services Agreement. The increase in Related party expenses primarily related to increased use of business strategy, tax and legal services as part of the Ocwen Professional Services Agreement. The increase in General and administrative expenses was primarily related to tax and legal expenses related to our research and pursuit of new investment opportunities. Lastly, we had twelve full months of operations during 2013 compared to ten months of operations during the comparable 2012 period, which contributed to higher expense levels for all income statement line items.


39


The most significant contributor to the Interest expense increase was from our Match funded liabilities. Larger average Match funded liability balances contributed $150,910 to the year over year increase in Interest expense, which was partially offset by a decrease in Interest expense attributable to lower effective interest rates of $73,954. In addition, Other borrowings contributed $9,058 to the increase in Interest expense, $431 of which was attributable to the amortization of debt issuance costs and the remainder was attributable to accrued interest on our outstanding balance.

Income tax expense increased year over year due to increased earnings in 2013 compared to 2012. However, our effective tax rate year over year remained flat at 0.2% for 2013 compared to 0.2% in 2012.

Summary Operating Information

We operate the business as a single reportable segment: Residential Mortgage Assets. For purposes of our internal management reporting, we separately report the components of Interest income – notes receivable – Rights to MSRs, which include Servicing fee revenue, Servicing expense, Amortization of Notes receivable – Rights to MSRs and Change in fair value of Notes receivable – Rights to MSRs. We provide a reconciliation of our reported results to our internal management reporting for the year ended ended December 31, 2014 and December 31, 2013, in the following tables.

We executed our agreements relative to our Notes receivable – Rights to MSRs with Ocwen with the intent that we would receive the total amount of the servicing fees collected and that we would pay Ocwen a subservicing fee that is determined based on its collections and advance ratio performance. We evaluate our operating performance and manage our business considering servicing fees collected, subservicing fees paid, amortization of Notes receivable – Rights to MSRs and changes in fair value of Notes receivable – Rights to MSRs, and we maintain our internal management reporting on this basis. The following table presents our consolidated income from operations in accordance with GAAP reconciled to our internally reported financial results.

Our total revenue, total operating expenses and income from operations as presented in our Management Reporting shown below should be considered in addition to, and not as a substitute for, total revenue, total operating expenses and income from operations determined in accordance with GAAP.

 
Condensed Consolidated Results (GAAP)
 
Adjustments
 
Management Reporting (Non-GAAP)
For the year ended December 31, 2014
 
 
 
 
 
Revenue
 
 
 
 
 
Servicing fee revenue (1)
$

 
$
736,123

 
$
736,123

Interest income – notes receivable – Rights to MSRs (2)
361,060

 
(361,060
)
 

Interest income – other
36,446

 

 
36,446

Related party revenue
1,843

 

 
1,843

Other revenue
402

 

 
402

Total revenue
399,751

 
375,063

 
774,814

Operating expenses
 
 
 
 
 
Compensation and benefits
6,351

 

 
6,351

Servicing expense (3)

 
357,747

 
357,747

Amortization of Notes receivable – Rights to MSRs (4)

 
67,378

 
67,378

Change in fair value of Notes receivable – Rights to MSRs (5)

 
(50,062
)
 
(50,062
)
Related party expenses
2,349

 

 
2,349

General and administrative expenses
9,753

 

 
9,753

Total operating expenses
18,453

 
375,063

 
393,516

Income from operations
$
381,298

 
$

 
$
381,298



40


 
Condensed Consolidated Results (GAAP)
 
Adjustments
 
Management Reporting (Non-GAAP)
For the year ended December 31, 2013
 
 
 
 
 
Revenue
 
 
 
 
 
Servicing fee revenue (1)
$

 
$
633,377

 
$
633,377

Interest income – notes receivable – Rights to MSRs (2)
235,826

 
(235,826
)
 

Interest income – other
2,195

 

 
2,195

Related party revenue
1,811

 

 
1,811

Total revenue
239,832

 
397,551

 
637,383

Operating expenses
 
 
 
 
 
Compensation and benefits
5,825

 

 
5,825

Servicing expense (3)

 
317,702

 
317,702

Amortization of Notes receivable – Rights to MSRs (4)

 
69,812

 
69,812

Change in fair value of Notes receivable – Rights to MSRs (5)

 
10,037

 
10,037

Related party expenses
1,400

 

 
1,400

General and administrative expenses
4,645

 

 
4,645

Total operating expenses
11,870

 
397,551

 
409,421

Income from operations
$
227,962

 
$

 
$
227,962


 
Condensed Consolidated Results (GAAP)
(Restated)
 
Adjustments
 
Management Reporting (Non-GAAP)
For the year ended December 31, 2012
 
 
 
 
 
Revenue
 
 
 
 
 
Servicing fee revenue (1)
$

 
$
117,789

 
$
117,789

Interest income – notes receivable – Rights to MSRs (2)
47,445

 
(47,445
)
 

Interest income – other
109

 

 
109

Related party revenue
2,316

 

 
2,316

Total revenue
49,870

 
70,344

 
120,214

Operating expenses
 
 
 
 
 
Compensation and benefits
3,751

 

 
3,751

Servicing expense (3)

 
50,173

 
50,173

Amortization of Notes receivable – Rights to MSRs (4)

 
12,917

 
12,917

Change in fair value of Notes receivable – Rights to MSRs (5)

 
7,254

 
7,254

Related party expenses
755

 

 
755

General and administrative expenses
1,644

 

 
1,644

Total operating expenses
6,150

 
70,344

 
76,494

Income from operations
$
43,720

 
$

 
$
43,720


(1)
Servicing fee revenue reflects servicing fees received under our agreements with Ocwen.
(2)
Interest income – notes receivable – Rights to MSRs represents the net amount of servicing fees received less servicing fees paid, amortization of the Notes receivable – Rights to MSRs and changes in the fair value of Notes receivable – Rights to MSRs. We exclude this interest income from our Management Reporting and instead report the individual components, including Servicing fee revenue, Servicing expense, Amortization of Notes receivable – Rights to MSRs and Change in fair value of Notes receivable – Rights to MSRs.
(3)
Servicing expense reflects the fee we incurred under the agreements with Ocwen.

41


(4)
Amortization of Notes receivable – Rights to MSRs reflects reductions in the value of the Notes receivable – Rights to MSRs based on the run-off of the portfolio.
(5)
Our methodology of determining the fair value of Notes receivable – Rights to MSRs is described in Part II, Item 8, "Financial Statements and Supplementary Data – Note 3, Fair Value of Financial Instruments." In our Consolidated Statements of Operations, we record changes in fair value as a component of Interest income – notes receivable – Rights to MSRs.

Year ended December 31, 2014 versus 2013. Servicing fee revenue increased year over year because we owned Rights to MSRs for significantly greater average UPB during 2014. Servicing fee revenue is a function of principal and interest collected during the period and the contractual servicing fee rate. Average UPB for the year ended December 31, 2014 was $170.7 billion compared to $134.4 billion for the preceding year.

The servicing expense paid to Ocwen during the year ended December 31, 2014 included base fees of $88,335 and incentive fees of $269,413. The servicing expense paid to Ocwen during 2013 included base fees of $75,970 and incentive fees of $241,732. The difference is primarily attributable to increased average UPB period over period and to incentive fee reductions in 2014 as a result of excess servicing advances. We are compensated for the cost of excess servicing advances because the performance-based incentive fee payable to Ocwen in any month is reduced by an amount equal to 1-Month LIBOR plus 275 bps per annum of the amount of any such excess servicing advances when the advance ratio exceeds a predetermined level for that month. Amortization of Notes receivable – Rights to MSRs relates to reduction in UPB due to portfolio run-off and is greater during 2014 due to larger average UPB. Lastly, there was an increase in the fair value of the Notes receivable – Rights to MSRs for the year ended December 31, 2014 of $50,062 compared to a decrease of $10,037 for the year ended December 31, 2013.

Year ended December 2013 versus 2012. Servicing fee revenue increased year over year because we owned Rights to MSRs for significantly greater average UPB during 2013. Servicing fee revenue is a function of principal and interest collected during the period and the contractual servicing fee rate. Average UPB for the year ended December 31, 2013 was $134.4 billion, compared to $27.7 billion for the preceding year.

The servicing expense paid to Ocwen during the year ended December 31, 2013 included $75,970 for the base fee and $241,732 in incentive fees. The servicing expense paid to Ocwen during the 2012 included $14,135 for the base fee and $36,038 in incentive fees. The difference is primarily attributable to increased average UPB year over year. Amortization of MSRs relates to reduction in UPB due to portfolio run-off and is greater during 2013 due to larger average UPB. Also, there was a decrease in the fair value of the Notes receivable – Rights to MSRs for the year ended December 31, 2014 of $10,037 compared to a decrease of $7,254 for the year ended December 31, 2012.


42


In evaluating our performance, our management considers our Core earnings, which is a non-GAAP financial measure. In calculating Core earnings, we remove the impact of changes in the fair value of our Notes receivable – Rights to MSRs from Net income. We believe that Core earnings provides a meaningful measure of our profitability by removing the non-cash impacts of changes in the fair value of our Notes receivable – Rights to MSRs from Net income, which improves comparability of our results of operations from period to period. The following table reconciles our Net income and EPS to our Core earnings and Core earnings per share for the years ended December 31:

For the year ended December 31:
 
2014
 
2013
 
2012
Net income
 
$
216,964

 
$
117,657

 
$
19,617

Adjustments
 
 
 
 
 
 
     Change in fair value of Notes receivable – Rights to MSRs
 
(50,062
)
 
10,037

 
7,254

Core earnings (Non-GAAP)
 
$
166,902

 
$
127,694

 
$
26,871

 
 
 
 
 
 
 
Basic Earnings per Share
 
$
3.05

 
$
1.83

 
$
1.14

Adjustments
 
 
 
 
 
 
     Change in fair value of Notes receivable – Rights to MSRs
 
(0.70
)
 
0.16

 
0.42

Basic Core Earnings per Share (Non-GAAP)
 
$
2.35

 
$
1.99

 
$
1.56

 
 
 
 
 
 
 
Diluted Earnings per Share
 
$
3.05

 
$
1.83

 
$
1.14

Adjustments
 
 
 
 
 
 
     Change in fair value of Notes receivable – Rights to MSRs
 
(0.70
)
 
0.16

 
0.42

Diluted Core Earnings per Share (Non-GAAP)
 
$
2.35

 
$
1.99

 
$
1.56


Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes certain items does not represent the amount that effectively accrues directly to shareholders (i.e., these items are included in earnings and shareholders’ equity).

The following table presents the components of our Interest income - notes receivable - Rights to MSRs in both dollars and as a percentage of average UPB:
 
 
2014
 
2013
 
2012
 
 
Dollars
 
Basis Points of Average UPB
 
Dollars
 
Basis Points of Average UPB
 
Dollars
 
Basis Points of Average UPB
Servicing fees collected
 
$
736,123

 
43.12

 
$
633,377

 
47.13

 
$
117,789

 
42.47

Subservicing fees payable to Ocwen
 
(357,747
)
 
(20.96
)
 
(317,702
)
 
(23.64
)
 
(50,173
)
 
(18.09
)
Net servicing fees retained by HLSS
 
378,376

 
22.16

 
315,675

 
23.49

 
67,616

 
24.38

Amortization of Notes receivable –
   Rights to MSRs (1)
 
(67,378
)
 
(3.95
)
 
(69,812
)
 
(5.19
)
 
(12,917
)
 
(4.66
)
Change in fair value of Notes
   receivable – Rights to MSRs (2)
 
50,062

 
2.93

 
$
(10,037
)
 
(0.75
)
 
$
(7,254
)
 
(2.62
)
 
 
$
361,060

 
21.14

 
$
235,826

 
17.55

 
$
47,445

 
17.10


(1)
Amortization of Notes receivable – Rights to MSRs reflects reductions in the value of the Notes receivable – Rights to MSRs based on the run-off of the portfolio.
(2)
Our methodology of determining the fair value of Notes receivable – Rights to MSRs is described in Part II, Item 8, "Financial Statements and Supplementary Data – Note 3, Fair Value of Financial Instruments." In our Consolidated Statements of Operations, we record changes in fair value as a component of Interest income – notes receivable – Rights to MSRs.


43


Year Ended December 2014 versus December 2013. Our Servicing fees collected and Subservicing fees payable to Ocwen increased year over year primarily because our average UPB for the years ended December 31, 2014 and 2013, was $170.7 billion and $134.4 billion, respectively. The increases of Servicing fees collected and Subservicing fees payable to Ocwen also decreased in basis points of average UPB due to changes in the mix of the underlying servicing fee arrangements.

Although the average UPB serviced was greater in 2014 over 2013, increases in the Amortization of Notes Receivable – Rights to MSRs, both in total dollars and as a percentage of average UPB, were offset due to average prepayment speeds for the UPB tied to our Notes receivable – Rights to MSRs declining from 12.9% during 2013 to 10.5% during 2014, resulting in lower amortization rates during 2014.

The Changes in the fair value of Notes receivable – Rights to MSRs are based on appraisals prepared by independent valuation firms. Factors that attributed to the increase in fair value during 2014 include adjustments to the assumptions used by the valuation firms, including the discount rates applied ranging from 14% to 22% (2013: 15% to 22%), the interest rate used for calculating the cost of servicing advances of 1-month LIBOR plus 3.50% (2013: 1-month LIBOR plus 3.75%), the prepayment projections over the lifetime of the portfolio ranging from 13% to 29% (2013: 12% to 28%) and the delinquency rate projections of the portfolio ranging from 15% to 35% (2013: 15% to 35%) and changes to the mix of assets underlying our Notes receivable – Rights to MSRs.

Year Ended December 2013 versus December 2012. Our Servicing fees collected and Subservicing fees payable to Ocwen income increased year over year primarily because our average UPB for the years ended December 31, 2013 and 2012, was $134.4 billion and $27.7 billion, respectively. An additional $119.7 billion of UPB in Rights to MSRs purchased from Ocwen during 2013 contributed to the increased 2013 average UPB balances. The increases of Servicing fees collected and Subservicing fees payable to Ocwen also increased in basis points of average UPB due to changes in the total mix of the underlying servicing fee arrangements.

Amortization of Notes receivable – Rights to MSRs increased due to growth in the average UPB serviced during 2013. Amortization as a percent of average UPB increased primarily due to changes in the mix of the assets underlying our Rights to MSRs, which was partially offset by average prepayment speeds for the UPB tied to our Notes receivable – Rights to MSRs declining from 14.2% during 2012 to 12.9% during 2013.

The Changes in the fair value of Notes receivable – Rights to MSRs are based on appraisals prepared by independent valuation firms. The decrease in the fair value during 2013 is driven by the mix of assets underlying our Notes receivable – Rights to MSRs, which is exaggerated by the substantial growth of our servicing portfolio during 2013 over 2012.


44


The following table provides selected statistics related to our Notes receivable – Rights to MSRs as of December 31:
 
 
 
 
 
 
 
 
% Change
(In thousands, except for loan count data)
 
2014
 
2013
 
2012
 
2013 vs. 2014
 
2012 vs. 2013
Residential Assets Serviced
 
 
 
 
 
 
 

 

Unpaid principal balance:
 
 
 
 
 
 
 

 

Performing loans (1)
 
$
131,511,468

 
$
145,658,596

 
$
60,788,667

 
-10
 %
 
140
 %
Non-performing loans
 
25,952,807

 
31,425,514

 
16,714,970

 
-17
 %
 
88
 %
Non-performing real estate
 
3,321,005

 
3,319,098

 
1,857,237

 
0
 %
 
79
 %
Total residential assets serviced
 
$
160,785,280

 
$
180,403,208

 
$
79,360,874

 
-11
 %
 
127
 %
 
 
 
 
 
 
 
 
 
 
 
Percent of total UPB:
 
 
 
 
 
 
 
 
 
 
Non-performing residential assets serviced
 
18.2
%
 
19.3
%
 
23.4
%
 
-6
 %
 
-18
 %
 
 
 
 
 
 
 
 
 
 
 
Number of:
 
 
 
 
 
 
 
 
 
 
Performing loans (1)
 
890,372

 
970,584

 
451,255

 
-8
 %
 
115
 %
Non-performing loans
 
131,844

 
159,327

 
88,534

 
-17
 %
 
80
 %
Non-performing real estate
 
18,272

 
18,282

 
10,160

 
0
 %
 
80
 %
Total number of residential assets serviced
 
1,040,488

 
1,148,193

 
549,949

 
-9
 %
 
109
 %
 
 
 
 
 
 
 
 
 
 
 
Percent of total number:
 
 
 
 
 
 
 
 
 
 
Non-performing residential assets serviced
 
14.4
%
 
15.5
%
 
18
%
 
-7
 %
 
-14
 %
 
(1)
Performing loans include those loans that are current or have been delinquent for less than 90 days in accordance with their original terms and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. Performing loans also include loans for which we have master servicing rights that are reported based on scheduled UPB. We consider all other loans to be non-performing.
    
The following table provides selected portfolio statistics related to our Notes receivable – Rights to MSRs for the year ended December 31:

 
 
 
 
 
 
 
 
% Change
(In thousands, except for loan count data)
 
2014
 
2013
 
2012
 
2013 vs. 2014
 
2012 vs. 2013
Average residential assets serviced
 

$170,714,802

 

$134,385,215

 

$27,736,418

 
27
 %
 
385
 %
Prepayment speed (average CPR) (1)
 
10.5
%
 
12.9
%
 
14.2
%
 
-19
 %
 
-9
 %
Average number of residential assets serviced
 
1,092,499

 
872,782

 
194,157

 
25
 %
 
350
 %

(1)
The conditional prepayment rate ("CPR") is equal to the proportion of the principal of a pool of loans, assumed to be paid off, in each period.


45


The following tables provide information regarding changes in our portfolio of Notes receivable – Rights to MSRs serviced for the year ended December 31:

(In thousands, except for loan count data)
 
UPB
 
Loan Count
Servicing portfolio at December 31, 2011
 
$

 

Additions
 
82,727,374

 
564,006

Runoff
 
(3,366,500
)
 
(14,057
)
Servicing portfolio at December 31, 2012
 
79,360,874

 
549,949

Additions
 
119,652,473

 
686,036

Runoff
 
(18,610,139
)
 
(87,792
)
Servicing portfolio at December 31, 2013
 
180,403,208

 
1,148,193

Additions
 

 

Runoff
 
(18,878,839
)
 
(104,017
)
     Servicing transfers
 
(739,089
)
 
(3,688
)
Servicing portfolio at December 31, 2014
 
$
160,785,280

 
1,040,488


Change in Financial Condition Summary

The overall increase in total assets of $827,427 and total liabilities of $752,595 during the year ended December 31, 2014, compared to December 31, 2013, primarily resulted from:

The completion of the GNMA EBO loan purchase from Ocwen totaling $556,618;
The issuance of the EBO Facility, which increased total liabilities by $472,734;
Financing of servicing advances for Ocwen of $55,702 related to our GNMA EBO acquisition;
Financing of other servicing advances for Ocwen of $20,157;
Acquisitions of RPL loans from an unrelated third party totaling $343,895;
The issuance of the RPL Facility, which increased total liabilities by $275,116;
Acquisitions of GNMA EBO loans, from an unrelated third party seller, with a UPB of $142,532;
Additional draws on the EBO Facility to partially finance our second GNMA EBO loan purchase of $125,073;
An increase in the fair value of our Notes receivable – Rights to MSRs of $50,062; and
Match funded advance remittances of $266,186 and net repayments of Match funded liabilities of $91,534.

The overall increase in total assets of $3,732,613 and total liabilities of $3,389,545 during the year ended December 31, 2013, compared to December 31, 2012, primarily resulted from:
 
The completion of four purchases of Rights to MSRs from Ocwen totaling $4,257,121;
Issuance of 15,132,053 ordinary shares which resulted in net proceeds to us of $333,551;
A new senior secured term loan facility which increased total liabilities by $343,386; and
Match funded advance remittances of $550,371 and net proceeds from Match funded liabilities of $3,024,800.

Our Notes receivable – Rights to MSRs represented 7.6%, 8.7%, and 8.3% of total assets at December 31, 2014, 2013, and 2012, respectively. Notes receivable – Rights to MSRs are carried at fair value, which is determined based on appraisals prepared by independent valuation firms and requires the use of significant unobservable inputs. The most significant assumptions used in the appraisals as of December 31 are:

 
 
2014
 
2013
 
2012
Discount rate (1)
 
14% to 22%
 
15% to 22%
 
15% to 22%
Interest rate (2)
 
1-month LIBOR + 3.50%
 
1-month LIBOR + 3.75%
 
1-month LIBOR + 4.00%
Prepayment rates (3)
 
13% to 29%
 
12% to 28%
 
12% to 27%
Delinquency rates (4)
 
15% to 35%
 
15% to 35%
 
15% to 35%
 
(1)
Discount rates reflecting the risk of earning the future income streams from the Notes receivable – Rights to MSRs;

46


(2)
Interest rate used for calculating the cost of servicing advances;
(3)
Mortgage loan prepayment projections of the related mortgage lifetime projected prepayment rate; and
(4)
Delinquency rate projections of the aggregate UPB of the underlying mortgage loans.

The independent valuation firms reviewed the collateral attributes and the historical payment performance of the underlying mortgage servicing portfolio and compared them with similar mortgage servicing portfolios and with standard industry mortgage performance benchmarks to arrive at the assumptions set forth above. The selected collateral attributes and performance comparisons utilized were the voluntary prepayment performance, delinquency and foreclosure performance, operational cost comparison, average loan balance, weighted average coupon and note rate distribution, loan product type classification, geographic distribution and servicing advance behavior.

The unobservable inputs that have the most significant effect on the fair value of Notes receivable – Rights to MSRs are the mortgage loan prepayment rate projections and delinquency rate projections; however, any significant increase (decrease) in discount rates, interest rates, mortgage loan prepayment projections or delinquency rate projections, each in isolation, would result in a substantially lower (higher) valuation.

We also have unobservable inputs for our derivatives, which are not exchange-traded, and therefore quoted market prices or other observable inputs are not available. The fair value of our interest rate swap agreements are based on certain information provided by third-party pricing sources. Third-party valuations are derived from proprietary models based on inputs that include yield curves and contractual terms such as fixed interest rates and payment dates. We have not adjusted the information obtained from the third-party pricing sources; however, we review this information to ensure that it provides a reasonable basis for estimating fair value. Our review is designed to identify information that appears stale, information that has changed significantly from the prior period, and other indicators that the information may not be accurate. We determined that potential credit and counterparty risks had an immaterial impact on the valuation of our derivatives. As of December 31, 2014, 2013, and 2012, derivative assets were 0.02%, 0.05%, and 0.00%, respectively, of our total assets, and derivative liabilities were 0.00%, 0.01%, and 0.04%, respectively, of our total liabilities.

TOTAL EQUITY

Total equity amounted to $1,291,279 at December 31, 2014, as compared to $1,216,447 at December 31, 2013. This increase of $74,832 is primarily due to net income of $216,964, offset by dividends declared of $141,323 and dividend equivalents payable to vested stock options of $21. In addition, we recorded $243 of share-based compensation expense and $1,031 of unrealized losses (net of tax) on interest rate swaps that we designated as cash flow hedges.

LIQUIDITY AND CAPITAL RESOURCES

On April 6, 2015, to best address concerns relating to our ability to operate as a going concern and the associated impact on our business on an expedited basis, we agreed with NRZ and Merger Sub to terminate the Old Merger Agreement and immediately complete the Asset Sale. The Asset Sale was made in accordance with the terms and conditions of the NRZ Purchase Agreement. In connection with the Asset Sale, among other things, (i) HLSS MSR-EBO acquired substantially all of the assets of the Company (including all of the issued share capital of Luxco 1B) and (ii) HLSS Advances acquired all of the issued share capital of Luxco 1A and assumed substantially all of the liabilities of the Company, including certain post-closing liabilities o