UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission File No. 1-7797

PHH CORPORATION

(Exact name of registrant as specified in its charter)

856-917-1744

(Registrant’s telephone number, including area code)

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

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

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

      As of November 4, 2005, 53,270,561 shares of common stock were outstanding.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

      Forward-looking statements in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (“Form 10-Q”) and our other public filings and statements are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and not historical facts. For example, forward-looking statements in this Form 10-Q include: (a) management’s estimate of the range of unremitted earnings for possible repatriation under the American Jobs Creation Act of 2004, (b) our expectation as to the filing date for our 2005 income tax returns and statements regarding the potential effect Cendant’s future tax returns may have on our tax assets and liabilities, (c) our expectation that we will have adequate state tax net operating losses available to minimize cash outlays in the event of post-filing changes in our taxable income, (d) the expectation that any existing legal claims or proceedings will not have a material adverse effect on our results of operations, financial position or cash flows and our belief that we have valid defenses to such legal claims or proceedings, (e) our anticipated levels of mortgage servicing rights and customer list amortization expense for the remainder of 2005 and the five succeeding fiscal years, (f) our expectations as to the effects the termination of the Mortgage Venture (defined below) might have on our financial condition and results of operations, (g) our expectation that the liability for probable losses in connection with hurricane damage that occurred during the three months ended September 30, 2005 is adequate, (h) our anticipated levels of capital expenditures for 2005, (i) management’s estimates used to prepare the sensitivity analysis of our mortgage and vehicle assets and liabilities, (j) our expectation that our sources of liquidity are adequate to fund operations for at least the next twelve months, (k) our expectation that our agreements and arrangements with Cendant will be material to our business, (l) the anticipated effects on our sources of liquidity and borrowing costs if our credit ratings were ever to drop below “investment grade,” (m) our statements concerning an increase in the capacity under our committed mortgage repurchase facility and (n) our expectation that our mortgage loan originations from our mortgage services segment will be comprised of a similar portion of business from the Mortgage Venture (defined below) with Cendant in the foreseeable future as was derived from NRT (defined below) and Cendant Mobility (defined below) during the twelve months ended December 31, 2004.

      You should understand that the following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:

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

      You should consider that the factors and assumptions discussed above may have an impact on the continued accuracy of any forward-looking statements that we make, and you should also consider the risks and uncertainties described in Exhibit 99 attached hereto and titled “Risk Factors Affecting Our Business and Future Results” when evaluating any forward-looking statements that we make. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

PART I — FINANCIAL INFORMATION

PHH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In millions, except per share data)

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions, except share data)

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2005

(Unaudited)

(In millions, except share data)

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

      As of December 31, 2004, PHH was a wholly-owned subsidiary of Cendant Corporation (NYSE: CD) (“Cendant”) that provided homeowners with mortgages, facilitated employee relocations and provided vehicle fleet management and fuel card services to commercial clients. On February 1, 2005, PHH began operating as an independent, publicly traded company pursuant to a spin-off from Cendant (“Spin-Off”). Prior to the Spin-Off and subsequent to December 31, 2004, PHH underwent an internal reorganization whereby it distributed its former relocation and fuel card businesses to Cendant, and Cendant contributed its former appraisal business, Speedy Title and Appraisal Review Services LLC (“STARS”), to PHH. The accompanying unaudited Condensed Consolidated Financial Statements include the accounts and transactions of PHH and its subsidiaries, as well as entities in which the Company directly or indirectly has a controlling financial interest. Additionally, Cendant’s contribution of STARS to PHH, an entity under common control at the time, has been treated on an “as if” pooling basis and therefore the financial position and results of operations for STARS are included in the accompanying unaudited Condensed Consolidated Financial Statements in continuing operations for all periods presented (see Note 19, “Contribution of Appraisal Business” for more information). Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the financial position and results of operations of the Company’s former relocation and fuel card businesses have been segregated and reported as discontinued operations for all periods presented (see Note 20, “Discontinued Operations” for more information). The Company has made certain other modifications to its financial statement presentation in conjunction with the changes in the composition of the businesses now included in continuing operations. Accordingly, certain reclassifications have been made to prior period amounts to conform to the current period presentation.

      The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In management’s opinion, the accompanying unaudited Condensed Consolidated Financial Statements contain all normal, recurring adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Form 10-K”) and its Current Report on Form 8-K filed on September 7, 2005, which modified and updated the Consolidated Financial Statements and related disclosures in the 2004 Form 10-K to reflect certain discontinued and continuing operations related to the Spin-Off.

      On March 9, 2004, the SEC issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments,” (“SAB 105”). SAB 105 summarizes the views of the SEC staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

instruments. The SEC staff believes that in recognizing a loan commitment, entities should not consider expected future cash flows related to the associated servicing of the loan until the servicing asset has been contractually separated from the underlying loan by sale or securitization of the loan with the servicing retained. The provisions of SAB 105 are applicable to all loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. The adoption of SAB 105 did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows, as the Company’s pre-existing accounting treatment for such loan commitments was consistent with the provisions of SAB 105.

      On January 31, 2005, each holder of Cendant common stock received one share of PHH common stock for every twenty shares of Cendant common stock held on January 19, 2005, the record date for the distribution. The Spin-Off was effective on February 1, 2005.

      In connection with the Spin-Off, PHH and Cendant formed a mortgage venture, PHH Home Loans, LLC (the “Mortgage Venture”), that originates and sells mortgage loans primarily sourced through NRT Incorporated, Cendant’s owned real estate brokerage business (“NRT”), and its owned relocation business, Cendant Mobility Services Corporation (“Cendant Mobility”). The Mortgage Venture commenced operations in the beginning of October 2005. The Company contributed assets and transferred employees that have historically supported originations from NRT and Cendant Mobility to the Mortgage Venture in October 2005. PHH Broker Partner Corporation, a wholly-owned subsidiary of PHH, (“PHH Broker Partner”) owns 50.1% of the Mortgage Venture, and Cendant Real Estate Services Venture Partner, Inc., a wholly-owned subsidiary of Cendant, (“Cendant Venture Partner”) owns the remaining 49.9%. The Mortgage Venture is consolidated within PHH’s consolidated financial statements. Through the Mortgage Venture, PHH is the exclusive recommended provider of mortgages for NRT and Cendant Mobility.

      Also in connection with the Spin-Off, PHH entered into a tax sharing agreement with Cendant, which is more fully described in Note 13, “Commitments and Contingencies”, and the Amended and Restated Limited Liability Company Operating Agreement for PHH Home Loans, LLC, dated as of January 31, 2005 and amended as of May 12, 2005 (the “Mortgage Venture Operating Agreement”) and a transition services agreement, which are more fully described in Note 17, “Related Party Transactions.”

      During the nine months ended September 30, 2005, the Company recognized Spin-Off related expenses of $280 million, primarily consisting of: (1) a goodwill impairment charge of $239 million, more fully described in Note 5, “Goodwill and Other Intangible Assets”; (2) a charge of $37 million resulting from the prepayment of debt, more fully described in Note 10, “Debt and Borrowing Arrangements”; and (3) a charge of $4 million associated with the conversion of Cendant’s stock options held by PHH employees to PHH stock options, more fully described in Note 16, “Stock-Based Compensation.” See Note 12, “Income Taxes”, for additional tax-related charges related to the Spin-Off.

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP No. 109-2”). The American Jobs Creation Act of 2004 (the “Act”), which became effective October 22, 2004, provides a one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. The Company may apply the provision of the Act to qualifying earnings repatriations through December 31, 2005. FSP No. 109-2 provides accounting and disclosure guidance for the repatriation provision. As permitted by FSP No. 109-2, the Company will not complete its evaluation of the repatriation provisions until a reasonable

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

duration following the publication of clarifying language on key elements of the Act by Congress or the Treasury Department. Accordingly, the Company has not recorded any income tax expense or benefit for amounts that may be repatriated under the Act. The range of unremitted earnings for possible repatriation under the Act is estimated to be between $0 and $55 million, which would result in additional estimated income tax expense of $0 to $12 million. Currently, the Company does not record deferred income tax liabilities on unremitted earnings of its foreign subsidiaries, as these undistributed earnings are considered indefinitely invested and determination of the amount is not practical to compute.

      In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), which eliminates the alternative to measure stock-based compensation awards using the intrinsic value approach permitted by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Prior to the Spin-Off and since Cendant’s adoption on January 1, 2003 of the fair value method of accounting for stock-based compensation provisions of SFAS No. 123 and the transitional provisions of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, the Company was allocated compensation expense upon Cendant’s issuance of common stock options to the Company’s employees. As a result, the Company has been recording stock-based compensation expense since January 1, 2003 for employee stock awards that were granted or modified subsequent to December 31, 2002.

      On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). SAB 107 summarizes the views of the staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. Effective April 21, 2005, the SEC issued an amendment to Rule 4-01(a) of Regulation S-X amending the effective date for compliance with SFAS No. 123R so that each registrant that is not a small business issuer will be required to prepare financial statements in accordance with SFAS No. 123R beginning with the first interim or annual reporting period of the registrant’s first fiscal year beginning on or after June 15, 2005. The Company has not yet completed its assessment of adopting SFAS No. 123R or the related SEC views.

      Basic earnings (loss) per share was computed by dividing net earnings (loss) during the period by the weighted-average number of shares outstanding during the period. Diluted earnings (loss) per share was computed by dividing net earnings (loss) by the weighted-average number of shares outstanding, assuming all potentially dilutive common shares were issued. The number of weighted-average shares outstanding for each of the three and nine months ended September 30, 2005 and 2004 reflects a 52,684-for-one stock split effected January 28, 2005, in connection with and in order to consummate the Spin-Off (see Note 14, “Stock-Related Matters”). The calculation of diluted loss per share for the nine months ended September 30, 2005 does not include 480,459 and 212,928 weighted-average shares of common stock potentially issuable for options and stock awards, respectively, because the effect would be anti-dilutive. The effect of potentially dilutive common shares related to Cendant’s stock options and restricted stock units that were exchanged for the Company’s stock options and restricted stock units at the time of the Spin-Off were included in the computation of diluted earnings per share for all periods prior to the Spin-Off.

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

      In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company assesses the carrying value of its goodwill annually, or more frequently if circumstances indicate impairment may have occurred. In performing this assessment, the Company compares the carrying value of its reporting units to their fair value. When determining fair value, the Company utilizes various assumptions, including projections of future cash flows.

      In connection with the Spin-Off, there was a change to the Company’s reporting unit structure. This resulted in the reallocation of goodwill from the Company to other Cendant entities. Due to the change in reporting units and reallocation of goodwill, the Company performed a goodwill impairment assessment for its reporting units in the first quarter of 2005. The impairment assessment resulted in a non-cash impairment charge for the Fleet Management Services reporting unit of $239 million, which is included in Spin-Off related expenses in the accompanying Condensed Consolidated Statements of Income for the nine months ended September 30, 2005.

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes the activity associated with goodwill during the nine months ended September 30, 2005:

      Other intangible assets as of September 30, 2005 and December 31, 2004 of $55 million and $57 million, respectively, are included in Other assets in the Company’s Condensed Consolidated Balance Sheets. Other intangible assets primarily consist of customer lists and trademarks. Customer lists of $36 million and $38 million, net of accumulated amortization of $10 million and $8 million, at September 30, 2005 and December 31, 2004, respectively, are amortized over a 9- to 20-year period. Amortization expense was not significant during the three months ended September 30, 2005 and 2004. Amortization expense recorded during each of the nine months ended September 30, 2005 and 2004 was $2 million. The Company expects customer list amortization expense to be insignificant for the remainder of 2005 and $3 million for each of the five succeeding fiscal years. Trademark assets of $17 million at September 30, 2005 and December 31, 2004 are not amortized.

      The activity in the Company’s loan servicing portfolio associated with its capitalized mortgage servicing rights, net (“MSRs”) consisted of:

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

      As of September 30, 2005, the Company’s MSRs had a weighted-average life of approximately 4.4 years. The estimated fair values of MSRs were $1.7 billion as of September 30, 2005 and 2004. Approximately 69% of the MSRs associated with the loan servicing portfolio as of September 30, 2005 are restricted from sale without prior approval from the Company’s private label clients or investors.

      The Company’s capitalized servicing rate at September 30, 2005 was 1.22% based upon the book value of $1.7 billion and related capitalized loan servicing portfolio of $138.0 billion. The Company’s servicing multiple at September 30, 2005 was 3.8 times the weighted-average service fee of 32 basis points (“bps”). As of September 30, 2004, the Company had a capitalized servicing rate of 1.21% based upon the book value of $1.7 billion and related capitalized loan servicing portfolio of $137.0 billion. The Company’s servicing multiple at September 30, 2004 was 3.7 times the weighted-average service fee of 32 bps.

      During the nine months ended September 30, 2005, $314 million was added to the MSRs at an initial capitalization rate of 1.17% related to $26.7 billion of additions to the capitalized loan servicing portfolio. During the same period in 2004, $401 million was added to the MSRs at an initial capitalization rate of 1.18% related to $33.9 billion of additions to the capitalized loan servicing portfolio. The initial capitalization rate is driven by the relationship between the weighted-average note rate and overall interest rates during the period.

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The net impact to the Company’s Condensed Consolidated Statements of Income resulting from changes in the fair value of the Company’s MSRs, amortization, and related derivatives was as follows:

      Based upon the composition of the portfolio as of September 30, 2005, the Company expects MSRs amortization expense for the remainder of 2005 and the five succeeding fiscal years to approximate $100 million, $370 million, $280 million, $220 million, $180 million and $140 million, respectively. This projection was developed using the assumptions made by the Company in its September 30, 2005 valuation of MSRs. The assumptions underlying this projection may be affected as market conditions and portfolio composition and behavior change, which could cause actual and projected amortization expense to change over time. Therefore, these estimates may change in a manner and amount not presently determinable by management.

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

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The Company’s principal market exposure is to interest rate risk, specifically long-term U.S. Treasury and mortgage interest rates due to their impact on mortgage-related assets and commitments. The Company also has exposure to the London Interbank Offered Rate (“LIBOR”) and commercial paper interest rates due to their impact on variable rate borrowings, other interest rate sensitive liabilities and net investment in floating rate lease assets. The Company uses various financial instruments, particularly swap contracts, forward delivery commitments, futures and options contracts to manage and reduce this risk.

      The following is a description of the Company’s risk management policies related to interest rate lock commitments (“IRLCs”), mortgage loans held for sale (“MLHS”), MSRs and debt:

      Interest Rate Lock Commitments. Interest rate lock commitments represent an agreement to extend credit to a mortgage loan applicant whereby the interest rate on the loan is set prior to funding. The loan commitment binds the Company (subject to the loan approval process) to lend funds to a potential borrower

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. The Company’s loan commitments generally range between 30-90 days; however, the borrower is not obligated to obtain the loan. As such, the Company’s outstanding IRLCs are subject to interest rate risk and related price risk during the period from interest rate lock commitment through the loan funding date or expiration date. In addition, the Company is subject to fallout risk, which is the risk that an approved borrower will choose not to close on the loan. The Company uses a combination of forward delivery commitments and option contracts to manage these risks. The Company considers historical commitment-to-closing ratios to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs.

      IRLCs are defined as derivative instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, (“SFAS No. 133”). Because IRLCs are considered derivatives, the associated risk management activities do not qualify for hedge accounting under SFAS No. 133. Therefore, the IRLCs and the related derivative instruments are considered freestanding derivatives and are classified as Other assets or Other liabilities in the Company’s Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of Gain on sale of mortgage loans, net in the Condensed Consolidated Statements of Income.

      Mortgage Loans Held for Sale. The Company is subject to interest rate and price risk on its mortgage loans held for sale from the loan funding date until the date the loan is sold into the secondary market. The Company uses mortgage forward delivery commitments to hedge these risks. These forward delivery commitments fix the forward sales price that will be realized in the secondary market and thereby reduce the interest rate and price risk to the Company. Such forward delivery commitments are designated and classified as fair value hedges to the extent they qualify for hedge accounting under SFAS No. 133. Forward delivery commitments that do not qualify for hedge accounting are considered freestanding derivatives. The forward delivery commitments are included in Other assets or Other liabilities in the Company’s Condensed Consolidated Balance Sheets. Changes in the fair value of all forward delivery commitments are recorded as a component of Gain on sale of mortgage loans, net in the Condensed Consolidated Statements of Income. Changes in fair value of MLHS are recorded as a component of Gain on sale of mortgage loans, net to the extent they qualify for hedge accounting under SFAS No. 133. Changes in the fair value of MLHS are not recorded to the extent the hedge relationship is deemed to be ineffective under SFAS No. 133.

      The following table provides a summary of the changes in fair value of the IRLCs and MLHS and related derivatives:

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Mortgage Servicing Rights. The Company’s MSRs are subject to substantial interest rate risk as the mortgage notes underlying the asset permit the borrowers to prepay the loans. Therefore, the value of the MSRs tends to diminish in periods of declining interest rates (as prepayments increase) and increase in periods of rising interest rates (as prepayments decrease). The Company primarily uses a combination of derivative instruments to offset potential adverse changes in fair value of its MSRs that could affect reported earnings. As such, the gain or loss on derivatives will react in the opposite direction of the MSRs valuation. The MSRs derivatives generally increase in value as interest rates decline and decrease in value as interest rates rise. For all periods presented, all of the derivatives associated with the MSRs were freestanding derivatives and were not designated in a hedge relationship pursuant to SFAS No. 133. These derivatives are classified as Other assets or Other liabilities in the Company’s Condensed Consolidated Balance Sheets with changes in fair value recorded as a component of Amortization and valuation adjustments related to mortgage servicing rights, net in the Condensed Consolidated Statements of Income.

      The net activity in the Company’s derivatives related to MSRs consisted of:

      Debt. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include swaps, interest rate caps, and instruments with purchased option features. To more closely match the characteristics of the related assets, including the Company’s net investment in floating rate lease assets, the Company either issues floating rate debt or fixed rate debt, which may be swapped to floating LIBOR-based rates. The derivatives used to manage the risk associated with the Company’s fixed rate debt were designated as fair value hedges. The terms of such derivatives match those of the underlying hedged debt resulting in no net impact on the Company’s results of operations during the three months and the nine months ended September 30, 2005 and 2004, except to create the accrual of interest expense at variable rates. During 2003, the Company terminated certain of its fair value hedges, which resulted in cash gains of $24 million. Such gains were deferred and were being recognized over future periods as a component of interest expense. On February 9, 2005, the Company prepaid $443 million aggregate principal amount of its outstanding senior notes (see Note 10, “Debt and Borrowing Arrangements”). As a result, the unamortized

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

balance of this deferred swap gain was recognized as a reduction to the prepayment charge incurred in connection with the debt prepayment, which is included in Spin-Off related expenses in the accompanying Condensed Consolidated Statements of Income. Amortization recorded during the nine months ended September 30, 2005 prior to the prepayment was not significant. For the three and nine months ended September 30, 2004, the Company recorded $1 million and $4 million of amortization, respectively.

      From time to time, the Company uses derivatives to manage the risk associated with its floating rate debt and net investment in floating rate lease assets. Such derivatives may include freestanding derivatives and derivatives designated as cash flow hedges. The amount of gains or losses reclassified from Accumulated other comprehensive income to earnings resulting from ineffectiveness or from excluding a component of the derivatives’ gain or loss from the effectiveness calculation for cash flow hedges during the three and nine months ended September 30, 2005 and 2004 was not significant. The amount of gains or losses the Company expects to reclassify from Accumulated other comprehensive income to earnings during the next twelve months is not significant. The total net gain or loss recorded in the Company’s Condensed Consolidated Statements of Income for these freestanding derivatives for each of the three and nine months ended September 30, 2005 and 2004 was not significant.

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

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following tables summarize the components of the Company’s indebtedness at September 30, 2005 and December 31, 2004:

Asset-Backed Debt

      Vehicle management asset-backed debt primarily represents amounts issued under a domestic financing facility, Chesapeake Funding LLC, the Company’s wholly-owned subsidiary, (“Chesapeake”) that provides for the issuance of variable rate term notes and variable funding notes to unrelated third parties and the issuance of subordinated preferred membership interests to a related party, Terrapin Funding LLC, which is not consolidated per FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities”. As of September 30, 2005 and December 31, 2004, variable rate term notes and variable funding notes outstanding under this arrangement aggregated $2.8 billion. As of September 30, 2005 and December 31, 2004, subordinated preferred membership interests outstanding aggregated $398 million. Variable rate term notes, variable funding notes and subordinated preferred membership interests were issued to support the acquisition of vehicles used by the Company’s Fleet Management Services segment’s leasing operations. The debt issued is collateralized by approximately $3.8 billion of leased vehicles and related assets, primarily included in Net investment in fleet leases in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2005, which are not available to pay the Company’s general obligations. The titles to all the vehicles collateralizing the debt issued by Chesapeake are held in a bankruptcy remote trust, and the Company acts as a servicer of all such leases. The bankruptcy remote trust also acts as lessor under both

PHH CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

operating and direct financing lease agreements. The holders of the notes and membership interests receive cash flows from lease and other related receivables, as well as receipts from the sale of vehicles. The debt issued under this arrangement primarily represents floating rate instruments for which the weighted-average interest rate was 3.8% and 2.0% during the nine months ended September 30, 2005 and 2004, respectively.

      On July 15, 2005, Chesapeake entered into the Series 2005-1 Indenture Supplement (the “Supplement”) to the Base Indenture dated June 30, 1999, as amended, pursuant to which Chesapeake issued $100 million of variable funding notes (the “Notes”). On August 8, 2005, Chesapeake amended the Supplement (the “Amended Supplement”) to permit the issuance of up to an additional $600 million of Notes, bringing the total capacity of the Amended Supplement to $700 million. This additional asset-backed debt capacity will generally be used to support the acquisition of vehicles used by PHH Vehicle Management Services, LLC, doing business as PHH Arval (“PHH Arval”), a wholly-owned subsidiary of the Company, in its fleet leasing operations and may also be used to retire outstanding notes. Subsequent to the execution of the Amended Supplement, Chesapeake retired the $120 million outstanding note balance of Series 2002-1.

      The parties to the Amended Supplement include Chesapeake as issuer, PHH Arval as administrator, JPMorgan Chase Bank, National Association as administrative agent and indenture trustee, and certain other commercial paper conduit purchasers, funding agents and banks. The Amended Supplement is scheduled to expire on July 14, 2006, subject to any extensions made thereto. The terms and conditions of the Notes are substantially similar to those of Chesapeake’s existing variable funding notes.

      As of September 30, 2005, the total capacity under vehicle management asset-backed debt arrangements was approximately $3.6 billion, and the Company had $365 million of unused capacity available.

      Bishop’s Gate Residential Mortgage Trust (“Bishop’s Gate”) is a consolidated bankruptcy remote special purpose entity (“SPE”) that is utilized to warehouse mortgage loans originated by the Mortgage Services segment prior to their sale into the secondary market, which is a customary practice in the mortgage industry. The debt issued by Bishop’s Gate was collateralized by approximately $1.3 billion of underlying mortgage loans and related assets at September 30, 2005. The mortgage loans are serviced by the Company and recorded as Mortgage loans held for sale, net in the accompanying Condensed Consolidated Balance Sheets. The activities of Bishop’s Gate are limited to (a) purchasing mortgage loans from the Company’s mortgage subsidiary, (b) issuing commercial paper, senior term notes, subordinated variable rate certificates and/or borrowing under a liquidity agreement to effect such purchases, (c) entering into interest rate swaps to hedge interest rate risk and certain non-credit related market risk on the purchased mortgage loans, (d) selling and securitizing the acquired mortgage loans to third parties and (e) engaging in certain related transactions. The debt issued by Bishop’s Gate primarily represents term notes, commercial paper and certificates for which the weighted-average interest rate was 3.6% and 1.6% during the nine months ended September 30, 2005 and 2004, respectively.

      The Company also maintains a committed mortgage repurchase facility that is used to finance mortgage loans originated by PHH Mortgage Corporation. On June 30, 2005, the Company amended its committed mortgage repurchase facility by executing the Fourth Amended and Restated Mortgage Loan Repurchase and Servicing Agreement (the “Amended Agreement”) dated as of June 30, 2005 among Sheffield Receivables Corporation, as Purchaser, Barclays Bank PLC, New York Branch, as Administrative Agent, PHH Mortgage Corporation, as Seller and Servicer, and PHH Corporation, as Guarantor. The Amended Agreement increased the capacity of the committed mortgage repurchase facility from $150 million to $500 million and eliminated certain restrictions on the eligibility of underlying mortgage loan collateral. This repurchase facility is collateralized by underlying mortgage loans of $503 million, included in Mortgage loans held for sale, net in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2005, and is funded by a multi-seller conduit. As of September 30, 2005, this repurchase facility had unused capacity of $75 million.

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This repurchase facility has a one year term that is renewable on an annual basis, subject to agreement by both parties. Depending on anticipated mortgage loan origination volume, the Company may increase the capacity under this repurchase facility subject to agreement with the lender. The Company generally uses this facility to supplement the capacity of Bishop’s Gate and unsecured borrowings used to fund the Company’s mortgage warehouse needs.

      As of September 30, 2005, the total capacity under mortgage warehouse asset-backed debt arrangements was approximately $2.9 billion, and the Company had approximately $1.2 billion of unused capacity available.

Unsecured Debt

      On February 9, 2005, the Company prepaid $443 million aggregate principal amount of outstanding privately-placed senior notes in cash at an aggregate prepayment price of $497 million, including accrued and unpaid interest. The prepayment was made due to the Company’s concerns regarding debt covenant compliance caused by the reduction in the Company’s Stockholders’ equity resulting from the Spin-Off. The prepayment price included an aggregate make-whole amount of $44 million. During the nine months ended September 30, 2005, the Company recorded a net charge of $37 million in connection with this prepayment of debt, which consisted of the $44 million make-whole payment and a write-off of unamortized deferred financing costs of $1 million, partially offset by net interest rate swap gains of $8 million. This charge is included in Spin-Off related expenses in the accompanying Condensed Consolidated Statements of Income.

      The outstanding carrying value of term notes at September 30, 2005 consisted of $1.2 billion of publicly-issued medium-term notes. The outstanding carrying value of term notes at December 31, 2004 consisted of (a) $1.4 billion of publicly-issued medium-term notes and (b) $453 million ($443 million principal amount) of privately-placed senior notes. The effective rate of interest for the publicly-issued medium term notes was 6.7% and 6.9% during the nine months ended September 30, 2005 and 2004, respectively. The effective rate of interest for the privately-placed senior notes was 7.4% during the nine months ended September 30, 2004.

      The Company’s policy is to maintain available capacity under its committed revolving credit facility (described below) to fully support its outstanding commercial paper. The weighted-average interest rate on outstanding commercial paper, which matures within 270 days from issuance, was 4.1% and 2.0% during the nine months ended September 30, 2005 and 2004, respectively. The Company had outstanding commercial paper obligations of $764 million and $130 million as of September 30, 2005 and December 31, 2004, respectively.

      The Company is party to a $1.25 billion Three Year Competitive Advance and Revolving Credit Agreement, dated as of June 28, 2004 and amended as of December 21, 2004, among PHH Corporation, a group of lenders and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Facility”). Pricing under the Credit Facility is based upon the Company’s credit ratings. Borrowings under the Credit Facility mature in June 2007 and, as of September 30, 2005, bear interest at LIBOR plus a margin of 60 bps. The Credit Facility also requires the Company to pay a per annum facility fee of 15 bps and a per annum utilization fee of approximately 12.5 bps if the Company’s usage exceeds 33% of the aggregate commitments under the Credit Facility. In the event that the Company’s credit ratings are downgraded, the margin over LIBOR would become 70 bps for the first downgrade and up to 125 bps for subsequent downgrades, and the facility fee would become 17.5 bps for the first downgrade and up to 25 bps for subsequent downgrades. There were no borrowings outstanding under the Credit Facility as of September 30, 2005 and December 31, 2004.

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The weighted-average interest rate on borrowings under the Credit Facility during the nine months ended September 30, 2005 was 4.2%. The Credit Facility was undrawn during the nine months ended September 30, 2004. The Company maintains other unsecured revolving credit facilities in the ordinary course of business as described in “Debt Maturities” below.

Debt Maturities

      The following table provides the contractual maturities of the Company’s indebtedness at September 30, 2005 (except for the Company’s vehicle management asset-backed notes, where the indentures require payments based on cash inflows relating to the securitized vehicle leases and related assets and for which estimates of repayments have been used):

      As of September 30, 2005, available funding under the Company’s asset-backed debt arrangements and committed credit facilities consisted of:

      As of September 30, 2005, the Company also had $874 million of availability for public debt issuances under a shelf registration statement.

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Debt Covenants

      Certain of the Company’s debt arrangements require the maintenance of certain financial ratios and contain restrictive covenants, including, but not limited to, restrictions on indebtedness of material subsidiaries, mergers, limitations on liens, liquidations, and sale and leaseback transactions. The Credit Facility requires that the Company maintain: (a) net worth of $1.0 billion plus 25% of net income, if positive, for each fiscal quarter after December 31, 2004 and (b) a ratio of debt to net worth no greater than 8:1. The indentures pursuant to which the publicly issued medium-term notes have been issued require that the Company maintain a debt to tangible equity ratio of not more than 10:1. These indentures also restrict the Company from paying dividends if, after giving effect to the dividend, the debt to equity ratio exceeds 6.5:1. At September 30, 2005, the Company was in compliance with all of its financial covenants related to its debt arrangements.

      Prior to the Company’s Spin-Off, Cendant sponsored a domestic non-contributory defined benefit pension plan, which covered certain eligible employees. Under the plan, benefits were based on an employee’s years of credited service and a percentage of final average compensation, or as otherwise described by the plan. The Company also maintains an other post employment benefits (“OPEB”) plan for retiree health and welfare for certain eligible employees. Both the defined benefit pension plan and the OPEB plan are inactive plans, wherein the plans only accrue benefits for a very limited number of the Company’s longtime employees.

      In conjunction with the Spin-Off, the Company’s obligations associated with these defined benefit pension and OPEB plans were modified. Subsequent to the Spin-Off, the Company is responsible only for the obligations under both of these plans related to its current employees of the businesses covered under these plans included in the Spin-Off, while Cendant is responsible for the current and future obligations of the Company’s retirees as of January 31, 2005.

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      The measurement date for all of the Company’s benefit obligations and plan assets is December 31; however, due to the Spin-Off, these obligations and assets were measured at January 31, 2005.

      The following table provides a reconciliation of the Company’s benefit obligations, plan assets, and funded status at January 31, 2005:

      The Company made a voluntary contribution of $6 million to its defined benefit pension plan in March 2005. The Company is not required and does not expect to make another contribution in 2005. The Company made no contributions to its defined benefit pension plan in 2004.

      The Company recorded expense of $1 million and $2 million for the Company’s defined benefit pension and OPEB plans during the three months ended September 30, 2005 and 2004, respectively. The Company recorded expense of $2 million and $5 million for the Company’s defined benefit pension and OPEB plans during the nine months ended September 30, 2005 and 2004, respectively.

      In connection with the Spin-Off, the Company entered into a tax sharing agreement with Cendant, more fully described in Note 13, “Commitments and Contingencies”. For the tax periods prior to the Spin-Off, the Company will be included in Cendant’s consolidated federal and state income tax filings. For the tax periods subsequent to the Spin-Off, the Company will file its own consolidated federal and state income tax returns.

      During the nine months ended September 30, 2005, the Company recorded the following charges that significantly impacted its effective tax rate: (1) a non-cash goodwill impairment charge of $239 million, as more fully described in Note 5, “Goodwill and Other Intangible Assets,” $233 million of which is not deductible for federal and state income tax purposes; (2) a non-cash income tax charge of $24 million related to modifications of the STARS legal entity structure and PHH’s internal reorganization prior to the Spin-Off whereby Cendant contributed STARS to PHH; and (3) a net deferred income tax charge related to the Spin-Off of $4 million representing the change in estimated deferred state income taxes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table provides the Company’s effective tax rate adjusted for the items described above:

      In connection with the Spin-Off, the Company entered into a tax sharing agreement with Cendant governing the allocation of liability for taxes between Cendant and the Company, indemnification for certain tax liabilities and responsibility for preparing and filing tax returns and defending tax contests, as well as other tax-related matters (the “Tax Sharing Agreement”). The Tax Sharing Agreement contains certain provisions relating to the treatment of the ultimate settlement of Cendant tax contingencies that relate to audit adjustments due to taxing authorities’ review of prior income tax returns previously filed and any effects of income tax returns not yet filed. The Company’s tax basis in certain assets may be adjusted in the future and the Company may be required to remit tax benefits ultimately realized by the Company to Cendant in certain circumstances.

      The Company will file its income tax returns for the fiscal year ended December 31, 2004 and the short period ended on the effective date of the Spin-Off as part of the Cendant consolidated federal return, and certain Cendant consolidated state returns. The Company will file a consolidated federal return and state returns, as required, for the remainder of 2005 on which will be reported only its taxable income and the taxable income of those corporations which were its subsidiaries subsequent to the Spin-Off. The Company’s estimated income tax assets and liabilities are based upon estimated taxable income and the associated estimated differences between the book and tax basis of the assets and liabilities for the Company and for Cendant for the fiscal years ended December 31, 2004 and 2005. Once the actual income tax returns for these periods are finalized, filed and reconciled to tax asset and liability estimates, the Company’s tax assets and liabilities will be adjusted to reflect actual amounts. It is expected that final income tax returns will be filed by September 2006.

      Cendant and its subsidiaries are the subject of an Internal Revenue Service (“IRS”) audit for the tax years ended December 31, 1998 through 2002 and the Company, while a subsidiary of Cendant, was included in this audit. The Company will continue to be included in the Cendant IRS audit following the Spin-Off. Any subsequent audits of Cendant for the tax years ended December 31, 2003 through 2005 would also include the Company. Resulting changes to the Company’s income tax liabilities for periods in which it was consolidated with Cendant could change the Company’s income tax assets or liabilities. Cendant will pay taxes or receive tax refunds for any changes made to the Company’s taxable income for federal and consolidated state income tax returns filed while the Company was one of Cendant’s subsidiaries. These changes to income taxes could potentially change the Company’s deferred income tax assets or liabilities. The Company will pay taxes or receive refunds for any changes to the separate state tax returns for this period. The Company currently

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

estimates that it will have adequate state tax net operating losses available for use to minimize any cash outlay should there be changes to the Company’s taxable income for its separately filed state tax returns.

      The June 1999 disposition of the fleet businesses by Cendant was structured as a tax-free reorganization by Cendant and, accordingly, no income tax expense was recorded on a majority of the gain. However, pursuant to an interpretive ruling, the IRS has subsequently taken the position that similarly structured transactions do not qualify as tax-free reorganizations under the Internal Revenue Code Section 368(a)(1)(A). An adverse ruling for Cendant could create a tax benefit to the Company, which in accordance with the Tax Sharing Agreement, would require the Company to pay Cendant for all such benefits as realized by the Company. Any cash payments that would be made in connection with this charge for federal or state tax are not expected to be significant.

      The Company is involved in claims and legal proceedings related to contract disputes and other commercial, employment and tax matters. The Company does not believe such matters will have a material adverse effect on its results of operations, financial position or cash flows. However, litigation is inherently unpredictable and, although the Company believes that it has valid defenses in these matters, unfavorable resolutions could occur, which could have a material adverse effect on the Company’s financial position, results of operations or cash flows in a particular reporting period.

      The Company sells a majority of its loans on a non-recourse basis. The Company also provides representations and warranties to purchasers and insurers of the loans sold. In the event of a breach of these representations and warranties, the Company may be required to repurchase a mortgage loan or indemnify the purchaser, and any subsequent loss on the mortgage loan may be borne by the Company. If there is no breach of a representation and warranty provision, the Company has no obligation to repurchase the loan or indemnify the investor against loss. The Company’s owned servicing portfolio represents the maximum potential exposure related to representations and warranty provisions.

      Conforming conventional loans serviced by the Company are securitized through Fannie Mae or Freddie Mac programs. Such servicing is performed on a non-recourse basis, whereby foreclosure losses are generally the responsibility of Fannie Mae or Freddie Mac. The government loans serviced by the Company are generally securitized through Ginnie Mae programs. These government loans are either insured against loss by the FHA or partially guaranteed against loss by the Department of Veterans Affairs. Additionally, jumbo mortgage loans are serviced for various investors on a non-recourse basis.

      While the majority of the mortgage loans serviced by the Company were sold without recourse, the Company has a program where it provides credit enhancement for a limited period of time to the purchasers of mortgage loans by retaining a portion of the credit risk. The retained credit risk, which represents the unpaid principal balance of the loans, was $5.2 billion as of September 30, 2005. In addition, the Company has $539 million of recourse on specific mortgage loans that have been sold as of September 30, 2005.

      During the three months ended September 30, 2005, Hurricane Katrina damage affected the Company’s mortgage loans held for sale and loan servicing portfolio. The Company’s exposure is limited to mortgage loans held for sale and recourse loans serviced as of September 30, 2005. Based upon the Company’s current analysis of the type of loan, insurance coverage, location and indication of damage, the liability for probable losses in the Company’s mortgage loans held for sale and loan servicing portfolio has been increased by $3 million. The Company estimates that probable losses in the Company’s mortgage loans held for sale and loan servicing portfolio as a result of damage from Hurricanes Rita and Wilma will not be significant.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      As of September 30, 2005, the Company has a liability of $24 million, recorded in Other liabilities in the Condensed Consolidated Balance Sheets, for probable losses related to the Company’s loan servicing portfolio.

      As of September 30, 2005, the Company had commitments to fund loans with agreed-upon rates or rate protection amounting to $6.5 billion. Additionally, as of September 30, 2005, the Company had commitments to fund open home equity lines of credit of $2.1 billion and construction loans of $107 million.

      Commitments to sell loans generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company can settle the forward delivery commitments on a net basis; therefore, the commitments outstanding do not necessarily represent future cash obligations. The Company’s $5.4 billion of forward delivery commitments will be settled generally within 90 days of the individual commitment date.

      Pursuant to the separation agreement, the Company has agreed to indemnify Cendant for any losses (other than losses relating to taxes, indemnification for which is provided in the Tax Sharing Agreement) that any party seeks to impose upon Cendant or its affiliates that relate to, arise or result from: (1) any of the Company’s liabilities, including, among other things: (a) all liabilities reflected in the Company’s pro forma balance sheet as of September 30, 2004 or that would be, or should have been, reflected in such balance sheet, (b) all liabilities relating to the Company’s business whether before or after the date of the Spin-Off, (c) all liabilities that relate to, or arise from any performance guaranty of Avis Group Holdings, Inc. in connection with indebtedness issued by Chesapeake, a wholly-owned subsidiary of the Company, (d) any liabilities relating to the Company’s or its affiliates’ employees, and (e) all liabilities that are expressly allocated to the Company or its affiliates, or which are not specifically assumed by Cendant or any of its affiliates, pursuant to the separation agreement, the Tax Sharing Agreement or the transition services agreement; (2) any breach by the Company or its affiliates of the separation agreement, the Tax Sharing Agreement or the transition services agreement; and (3) any liabilities relating to information in the registration statement on Form 8-A filed with the Securities and Exchange Commission on January 18, 2005, the Information Statement filed by the Company as an exhibit to its Current Report on Form 8-K filed on January 19, 2005 (the “January 19 Form 8-K”) or the investor presentation filed as an exhibit to the January 19 Form 8-K, other than portions provided by Cendant.

      There are no specific limitations on the maximum potential amount of future payments to be made under this indemnification, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under this indemnification, if any, as the triggering events are not subject to predictability.

      In the ordinary course of business, the Company enters into numerous agreements that contain standard guarantees and indemnities whereby the Company indemnifies another party for breaches of representations and warranties. Such guarantees or indemnifications are granted under various agreements, including those governing (a) leases of real estate, (b) access to credit facilities and use of derivatives, and (c) issuances of debt or equity securities. The guarantees or indemnifications issued are for the benefit of the (1) buyers in sale agreements and sellers in purchase agreements, (2) landlords in lease contracts, (3) financial institutions in credit facility arrangements and derivative contracts, and (4) underwriters in debt or equity security issuances. While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of

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limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these guarantees, and the Company is unable to develop an estimate of the maximum potential amount of future payments to be made under these guarantees, if any, as the triggering events are not subject to predictability. With respect to certain of the aforementioned guarantees, such as indemnifications of landlords against third party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates any potential payments to be made.