Fair Value Measurements
(i) Mortgage Loans Held for Sale - We have elected to measure newly originated conventional residential mortgage loans held for sale at fair value. We estimate fair value by evaluating a variety of market indicators including recent trades and outstanding commitments to purchase loans, calculated on an aggregate basis.

(ii) Mortgage Loans Held for Investment, Subject to ABS Nonrecourse Debt - We determine the fair value on loans held for investment, subject to ABS nonrecourse debt using internally developed valuation models. These valuation models estimate the exit price we expect to receive in the loan's principal market. Although we utilize and give priority to observable market inputs, such as interest rates and market spreads within these models, we typically are required to utilize internal inputs, such as prepayment speeds, credit losses and discount rates. These internal inputs require the use of our judgment and can have a significant impact on the determination of the loan's fair value. In December 2011, we sold our remaining variable interest in a securitization trust that had been a consolidated VIE since January 1, 2010 and deconsolidated the VIE. Upon deconsolidation of this VIE, we derecognized the securitized mortgage loans held for investment, subject to ABS nonrecourse debt.

(iii) MSRs at Fair Value - We recognize MSRs related to all existing forward residential mortgage loans transferred to a third party in a transfer that meets the requirements for sale accounting. Additionally, we may acquire the rights to service forward residential mortgage loans through the purchase of these rights from third parties. We apply fair value accounting to this class of MSRs, with all changes in fair value recorded as a charge or credit to servicing fee income in the consolidated statement of operations. We estimate the fair value of these MSRs using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates and credit losses.

We use internal financial models that use, wherever possible, market participant data to value these MSRs. These models are complex and use asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. On a periodic basis, a majority of these MSRs are reviewed by an outside valuation expert.
(iv) Derivative Financial Instruments - We utilize certain derivative instruments in the ordinary course of our business to manage our exposure to changes in interest rates. These derivative instruments include forward sales of MBS, forward loan sale commitments and interest rate swaps and caps. We also issue interest rate lock commitments (IRLCs) to borrowers in connection with single family mortgage loan originations we intend to sell. We recognize all derivative instruments on our consolidated statement of financial position at fair value. The estimated fair values of forward sales of MBS and interest rate swaps and caps are based on the exchange price or dealer market price and are recorded as other assets or derivative financial instruments liabilities in the consolidated balance sheet. The initial and subsequent changes in value on forward sales of MBS are a component of gain on mortgage loans held for sale in the consolidated statement of operations and comprehensive income. The estimated fair values of IRLCs, loan purchase commitments (LPCs), and forward sale commitments are based on the fair value of related mortgage loans which is based on observable market date. Fair value amounts of IRLCs are adjusted for expected execution of outstanding loan commitments. IRLCs and LPC's are recorded in other assets and forward sale commitments are recorded as a component of mortgage loans held for sale in the consolidated balance sheet. The initial and subsequent changes in value of IRLCs, LPCs, and forward sale commitments are a component of gain on mortgage loans held for sale in the consolidated statement of operations and comprehensive income.

(v) ABS Nonrecourse Debt - Effective January 1, 2010, accounting guidance related to VIEs eliminated the concept of a qualifying special purpose entity (QSPE), and all existing special purpose entities (SPEs) are subject to the new consolidation guidance. Upon adoption of this new accounting guidance, we identified certain securitization trusts where we, through our affiliates, continued to hold beneficial interests in these trusts. These retained beneficial interests obligate us to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant. In addition, as master servicer on the related mortgage loans, we retain the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE. When it is determined that we have both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, the assets and liabilities of these VIEs are included in our consolidated financial statements. Upon consolidation of these VIEs, we

derecognized all previously recognized beneficial interests obtained as part of the securitization, including any retained investment in debt securities, and any remaining residual interests. In addition, we recognized the securitized mortgage loans as mortgage loans held for investment, subject to ABS nonrecourse debt, and the related asset-backed certificates acquired by third parties as ABS nonrecourse debt on our consolidated balance sheet.
We estimate the fair value of ABS nonrecourse debt based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. In December 2011, we sold our remaining variable interest in a securitization trust that had been a consolidated VIE since January 1, 2010 and deconsolidated the variable interest. Upon deconsolidation of this VIE in 2011, we derecognized the related ABS nonrecourse debt.
(vi) Excess Spread Financing - In conjunction with the acquisition of certain of our MSRs, we enter into a sale and assignment agreements, which we treat as a financing with an affiliated entity of Fortress Investment Group, whereby we sell the right to receive a portion of the excess cash flow generated from a certain underlying MSR portfolio after receipt of a fixed basic servicing fee per loan. We retain all ancillary income associated with servicing the portfolio and the remaining portion of the excess cash flow after receipt of the fixed basic servicing fee. We measure this financing arrangement at fair value to more accurately represent the future economic performance of the acquired MSRs and related excess servicing financing. We estimate the fair value of this financing using a process that combines the use of a discounted cash flow model and analysis of current market data based on the value of the underlying MSRs.

Sale of Mortgage Loans
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered by us. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from us, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and
(iii) we do not maintain effective control over the transferred assets through either (a) an agreement that entitles and obligates us to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return specific assets. Loan securitizations structured as sales as well as whole loan sales are accounted for as sales of mortgage loans and the resulting gains or losses on such sales, net of any accrual for standard representations and warranties, are reported in operating results as a component of gain on mortgage loans held for sale in the consolidated statement of operations during the period in which the securitization closes or the sale occurs. Mortgage Loans Held for Investment, Subject to Nonrecourse Debt We account for the loans that were transferred to held for investment from held for sale during October 2009 in a manner that is required by ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. At the date of transfer, we evaluated such loans to determine whether there was evidence of deterioration of credit quality since acquisition and if it was probable that we would be unable to collect all amounts due according to the loan's contractual terms. The transferred loans were aggregated into separate pools of loans based on common risk characteristics (loan delinquency). We consider expected prepayments, and estimate the amount and timing of undiscounted expected principal, interest, and other cash flows for each aggregated pool of loans. The determination of expected cash flows utilizes internal inputs such as prepayment speeds and credit losses. These internal inputs require the use of judgment and can have a significant impact on the accretion of income and/or valuation allowance. We determine the excess of the pool's scheduled contractual principal and contractual interest payments over all cash flows expected as of the transfer date as an amount that should not be accreted (nonaccretable difference). The remaining amount is accreted into interest income over the remaining life of the pool of loans (accretable yield). The difference between the undiscounted cash flows expected and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan. Increases in expected cash flows subsequent to the transfer are recognized prospectively through an adjustment of the yield on the loans over the remaining life. Decreases in expected cash flows subsequent to transfer are recognized as a valuation allowance.

Valuation of Deferred Tax Asset

Our provision for income taxes is calculated using the liability method, which requires the recognition of deferred income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in the valuation allowance. We provide a valuation allowance against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the adequacy of the valuation allowance, we consider all forms of evidence, including: (1) historic earnings or losses; (2) the ability to realize deferred tax assets through carry back to prior periods;
(3) anticipated taxable income resulting from the reversal of taxable temporary

differences; (4) tax planning strategies; and (5) anticipated future earnings exclusive of the reversal of taxable temporary differences.

Results of Operations
Below is a summarization of our consolidated operating results for the periods indicated. We provide further discussion of our results of operations for each of our reportable segments under "Segment Results" below. Certain income and expenses not allocated to our reportable segments are presented under "Legacy Portfolio and Other" below and discussed in Note 24 - Business Segment Reporting in the accompanying Notes to Consolidated Financial Statements. The following table summarizes our consolidated operating results for the periods indicated (in thousands, except per share amounts).

                                                      For the year ended December 31,
                                                     2012           2011          2010
Revenues:
Servicing fee income                             $   462,495     $ 233,411     $ 167,126
Other fee income                                      34,656        35,294        16,958
Total fee income                                     497,151       268,705       184,084
Gain on mortgage loans held for sale                 487,164       109,136        77,344
Total revenues                                       984,315       377,841       261,428
Expenses and impairments:
Salaries, wages and benefits                         358,455       202,290       149,115
General and administrative                           201,587        82,183        58,913
Provision for loan losses                              2,353         3,537         3,298
Loss on foreclosed real estate and other               2,864         6,833           205
Occupancy                                             16,786        11,340         9,445
Total expenses and impairments                       582,045       306,183       220,976
Other income (expense):
Interest income                                       71,586        66,802        98,895
Interest expense                                    (197,308 )    (105,375 )    (116,163 )
Contract termination fees                             15,600             -             -
Loss on equity method investments                    (14,571 )        (107 )           -
Gain/(loss) on interest rate swaps and caps             (994 )         298        (9,801 )
Fair value changes in ABS securitizations                  -       (12,389 )     (23,297 )
Total other (expense)                               (125,687 )     (50,771 )     (50,366 )
Income (loss) before taxes                           276,583        20,887        (9,914 )
Income tax expense                                    71,296             -             -
Net income / (loss)                                  205,287        20,887        (9,914 )
Other comprehensive income (loss), net of tax:
Change in value of designated cash flow hedges             -        (1,071 )       1,071
Comprehensive income (loss)                      $   205,287     $  19,816     $  (8,843 )
Earnings (loss) per share:
Basic earnings (loss) per share                  $      2.41     $    0.30     $   (0.14 )
Diluted earnings (loss) per share                $      2.40     $    0.30     $   (0.14 )

Comparison of Consolidated Results for the Years Ended December 31, 2012 and 2011
Revenues increased $606.5 million from $377.8 million for the year ended December 31, 2011 to $984.3 million for the year ended December 31, 2012, due to increases in both our total fee income and our gain on mortgage loans held for sale offset by MSR fair value adjustments amounting to $68.2 million for the year ended December 31, 2012, as compared to $39.0 million for the comparable 2011 period. The increase in our total fee income was primarily the result of our higher average forward servicing portfolio balance of $136.4 billion for the year ended December 31, 2012, compared to $81.5 billion for the year ended December 31, 2011, and an increase in modification fees earned from HAMP and other non-HAMP modifications. Also included in our 2012 results was $40.4 million in reverse mortgage service fee income. There was no reverse mortgage service fee income in 2011 and 2010. The increase in the gain on loans held for sale was a result of the $4.5 billion, or 132.4%, increase in the amount of loans originated during the 2012 period compared to the 2011 period and higher margins earned on the sale of residential mortgage loans during the period. Expenses and impairments increased $275.8 million from $306.2 million for the year ended December 31, 2011 to $582.0 million for the year ended December 31, 2012, primarily due to the increase in compensation expenses related to increased staffing levels in order to accommodate our larger servicing portfolio and originations volumes as well as other related increases in general and administrative expenses.
Other expense increased $74.9 million from $50.8 million for the year ended December 31, 2011 to $125.7 million for the year ended December 31, 2012, primarily due to a decrease in our net interest margin resulting from higher average outstanding balances on our outstanding warehouse and advance facilities and the interest expense related to the increase in our unsecured senior notes during 2012. Additionally, we recognized a loss on equity investment of $14.6 million during 2012 compared to $0.1 million in 2011. The increase in the loss relates to the decision to wind down the operation of the underlying entity. (see Note 27 - Related Party Disclosure). These amounts were partially offset by our recording of a $15.6 million contract termination fee related to a potential acquisition of certain assets of a financial services company in bankruptcy. Because we were not the highest bidder in the bankruptcy auction, we earned a break-up fee. We recorded this fee net of the amount we paid our co-investment partner in the potential acquisition.
Income tax expense amounted to $71.3 million for the year ended December 31, 2012 with no corresponding amount for the year ended December 31, 2011. We became a taxable entity during 2012 in conjunction with our initial public offering and reorganization (see Note 15 - Income Taxes).
Comparison of Consolidated Results for the Years Ended December 31, 2011 and 2010
Revenues increased $116.4 million from $261.4 million for the year ended December 31, 2010 to $377.8 million for the year ended December 31, 2011, due to increases in both our total fee income and our gain on mortgage loans held for sale offset by MSR fair value adjustments amounting to $39.0 million for the year ended December 31, 2012, as compared to $16.0 million for the comparable 2010 period. The increase in our total fee income was primarily the result of our higher average servicing portfolio balance of $81.5 billion for the year ended December 31, 2011, compared to $38.7 billion for the year ended December 31, 2010, and an increase in modification fees earned from HAMP and other non-HAMP modifications. The increase in the gain on loans held for sale was a result of the $0.6 billion, or 21.4%, increase in the amount of loans originated during the 2011 period compared to the 2010 period and higher margins earned on the sale of residential mortgage loans during the period. Expenses and impairments increased $85.2 million from $221.0 million for the year ended December 31, 2010 to $306.2 million for the year ended December 31, 2011, primarily due to the increase in compensation expenses related to increased staffing levels in order to accommodate our larger servicing portfolio and originations volumes as well as other related increases in general and administrative expenses.
Other expense increased $0.4 million from $50.4 million for the year ended December 31, 2010 to $50.8 million for the year ended December 31, 2011, primarily due to a decrease in our net interest margin resulting from higher average outstanding balances on our outstanding warehouse and advance facilities. This amount was partially offset by the impact of our fair value mark-to-market losses that were realized on our 2009-ABS interest rate swap for $9.8 million for the year ended December 31, 2010, compared to a $0.3 million gain recognized for the year ended December 31, 2011.

Segment Results

Our primary business strategy is to generate recurring, stable income from managing and growing our servicing portfolio. We operate through two business segments: the Servicing Segment and the Originations Segment, which we refer to collectively as our Operating Segments. We report the activity not related to either operating segment in Legacy Portfolio and Other. Legacy Portfolio and Other includes primarily all subprime mortgage loans (i) originated mostly from April to July 2007 or (ii) acquired from CHEC, and VIEs which were consolidated pursuant to the January 1, 2010 adoption of consolidation guidance related to VIEs. As of December 31, 2011 and thereafter, we had no consolidated VIEs. The accounting policies of each reportable segment are the same as those of the consolidated financial statements except for (i) expenses for consolidated back-office operations and general overhead expenses such as executive administration and accounting, (ii) revenues generated on inter-segment services performed, and (iii) interest expense on unsecured senior notes. Expenses are allocated to individual segments based on the estimated value of services performed, including total revenue contributions, personnel headcount, and the equity invested in each segment. Revenues generated or inter-segment services performed are valued based on similar services provided to external parties. All tables in this section are presented in thousands unless otherwise indicated.

Servicing Segment
The Servicing Segment provides loan servicing on our primary and subservicing
portfolios, including the collection of principal and interest payments and the
generation of ancillary fees related to the servicing of mortgage loans.

The following table summarizes our consolidated pre-tax operating results for
the periods indicated.
                                                    Year ended December 31,
                                               2012          2011          2010
Revenues:
Servicing fee income                        $ 462,001     $ 238,394     $ 175,569
Other fee income                               35,133        17,189         7,273
Total fee income                              497,134       255,583       182,842
Gain on mortgage loans held for sale                -             -             -
Total revenues                                497,134       255,583       182,842
Expenses and impairments:
Salaries, wages and benefits                  195,446       123,655        78,269
General and administrative                    130,727        48,611        24,664
Occupancy                                      11,521         5,664         4,350
Loss on foreclosed real estate and other          463             -             -
Total expenses and impairments                338,157       177,930       107,283
. . .