UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to

PHH CORPORATION

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

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

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large accelerated filer þ           Accelerated filer o           Non-accelerated filer o

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

     As of March 15, 2007, 53,506,822 shares of common stock were outstanding.

 

 

TABLE OF CONTENTS

Item		Description		Page
		Explanatory Note			2
		Cautionary Note Regarding Forward-Looking Statements			2
		PART I
1		Financial Statements			3
2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
3		Quantitative and Qualitative Disclosures About Market Risk			81
4		Controls and Procedures			84
		PART II
1		Legal Proceedings			88
1A		Risk Factors			88
2		Unregistered Sales of Equity Securities and Use of Proceeds			93
3		Defaults Upon Senior Securities			93
4		Submission of Matters to a Vote of Security Holders			93
5		Other Information			93
6		Exhibits			93
		Signatures			94
		Exhibit Index			95
EX-31.I.1: CERTIFICATION
EX-31.I.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

     Except as expressly indicated or unless the context otherwise requires, the “Company,” “PHH,” “we,” “our” or “us” means PHH Corporation, a Maryland corporation, and its subsidiaries. During 2006, our former parent company, Cendant Corporation, changed its name to Avis Budget Group, Inc. (see Note 18, “Subsequent Events” in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (“Form 10-Q”)); however, within this Form 10-Q, PHH’s former parent company, now known as Avis Budget Group, Inc. (NYSE: CAR) is referred to as “Cendant.”

     During the preparation of our Consolidated Financial Statements for the year ended December 31, 2005, we determined that it was necessary to restate previously issued financial statements to record adjustments for corrections of errors resulting from various accounting matters. As a result, all amounts as of June 30, 2005 and for the three and six months ended June 30, 2005 and comparisons to those amounts reflect the balances and amounts on a restated basis. Accordingly, some of the data set forth in this Form 10-Q is not comparable to the discussions and data in our previously filed Quarterly Report on Form 10-Q for the three months ended June 30, 2005. For additional information about the effects of the restatement adjustments on the Condensed Consolidated Financial Statements included in this Form 10-Q, see Note 15, “Prior Period Adjustments” in the Notes to Condensed Consolidated Financial Statements included herein. For additional information about the effects of the restatement adjustments on our Consolidated Financial Statements for the year ended December 31, 2005, see the “Explanatory Note” and Note 2, “Prior Period Adjustments” in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”).

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Form 10-Q 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. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors and were derived utilizing numerous important assumptions that may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

     Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and are not historical facts. Forward-looking statements in this Form 10-Q include, but are not limited to, the following: (i) the beliefs regarding the increasing competition in the mortgage industry and the contraction of margins and volumes in the industry and our intention to take advantage of this environment by leveraging our existing mortgage origination services platform to enter into new outsourcing relationships; (ii) the expected level of savings in 2007 from cost-reducing initiatives implemented in our Mortgage Production and Mortgage Servicing segments; (iii) the expectation that any existing legal claims or proceedings other than the several class actions filed against us as discussed in this Form 10-Q will not have a material adverse effect on our financial position, results of operations or cash flows and our intent to vigorously defend against the several class actions filed against us as discussed in this Form 10-Q; (iv) the expectation that our agreements and arrangements with Cendant and Realogy Corporation (“Realogy”) will continue to be material to our business; (v) the expectation that our sources of liquidity are adequate to fund operations for the next twelve months; (vi) the expectations regarding the impact of the adoption of recently issued accounting pronouncements on our financial statements and (vii) the expectation that fees and expenses relating to the preparation of our financial results in 2007 will be significantly higher than historical fees and expenses.

     The factors and assumptions discussed below and the risks and uncertainties described in “Item 1A. Risk Factors” could cause actual results to differ materially from those expressed in such forward-looking statements:

	§		the material weaknesses that we identified in our internal control over financial reporting and the ineffectiveness of our disclosure controls and procedures;
	§		the outcome of civil litigation pending against us, our Directors, Chief Executive Officer, and former Chief Financial Officer and whether our indemnification obligations for such Directors and executive officers will be covered by our Directors and officers insurance;
	§		our ability to meet the extended deadlines for the delivery of our quarterly and annual financial statements under our waivers under financing agreements and, if not, our ability to obtain additional waivers under our financing agreements and to satisfy our obligations under certain of our contractual and regulatory requirements for the delivery of our quarterly and annual financial statements;
	§		the effects of environmental, economic or political conditions on the international, national or regional economy, the outbreak or escalation of hostilities or terrorist attacks and the impact thereof on our businesses;
	§		the effects of a decline in the volume or value of U.S. home sales, due to adverse economic changes or otherwise, on our mortgage services business;

	§		the effects of changes in current interest rates on our Mortgage Production and Mortgage Servicing segments and on our financing costs;
	§		the effects of changes in spreads between mortgage rates and swap rates, option volatility and the shape of the yield curve, particularly on the performance of our risk management activities;
	§		our ability to develop and implement operational, technological and financial systems to manage growing operations and to achieve enhanced earnings or effect cost savings;
	§		the effects of competition in our existing and potential future lines of business, including the impact of competition with greater financial resources and broader product lines;
	§		the impact of the proposed merger on our business and the price of our Common stock, including our ability to satisfy the conditions required to consummate the merger, the impact of the announcement of the merger on our business relationships and operating results and the impact of costs, fees and expenses related to the merger;
	§		our ability to quickly reduce overhead and infrastructure costs in response to a reduction in revenue;
	§		our ability to implement fully integrated disaster recovery technology solutions in the event of a disaster;
	§		our ability to obtain financing on acceptable terms to finance our growth strategy, to operate within the limitations imposed by financing arrangements and to maintain our credit ratings;
	§		our ability to establish and maintain a functional corporate structure and to operate as an independent organization;
	§		our ability to implement changes to our internal control over financial reporting in order to remediate identified material weaknesses and other control deficiencies;
	§		our ability to maintain our relationships with our existing clients;
	§		a deterioration in the performance of assets held as collateral for secured borrowings, a downgrade in our credit ratings below investment grade or any failure to comply with certain financial covenants could negatively impact our access to the secondary market for mortgage loans and our ability to act as servicer for mortgage loans sold into the secondary market; and
	§		changes in laws and regulations, including changes in accounting standards, mortgage- and real estate-related regulations and state, federal and foreign tax laws.

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

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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PHH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share data)

		Three Months								Six Months
		Ended June 30,								Ended June 30,
						2005								2005
						As								As
		2006				Restated				2006				Restated
Revenues
Mortgage fees		$	35			$	51			$	65			$	95
Fleet management fees			38				37				78				74
Net fee income			73				88				143				169
Fleet lease income			385				355				753				696
Gain on sale of mortgage loans, net			69				56				126				115
Mortgage interest income			94				71				170				122
Mortgage interest expense			(69	)			(46	)			(129	)			(88	)
Mortgage net finance income			25				25				41				34
Loan servicing income			124				117				254				241
Amortization and provision for impairment of mortgage servicing rights			—				(362	)			—				(352	)
Change in fair value of mortgage servicing rights			(3	)			—				65				—
Net derivative (loss) gain related to mortgage servicing rights			(106	)			279				(286	)			251
Amortization and valuation adjustments related to mortgage servicing rights, net			(109	)			(83	)			(221	)			(101	)
Net loan servicing income			15				34				33				140
Other income			22				26				42				47
Net revenues			589				584				1,138				1,201
Expenses
Salaries and related expenses			89				105				176				199
Occupancy and other office expenses			20				19				40				39
Depreciation on operating leases			304				295				610				586
Fleet interest expense			49				31				92				62
Other depreciation and amortization			9				10				18				20
Other operating expenses			94				100				177				194
Spin-Off related expenses			—				—				—				41
Total expenses			565				560				1,113				1,141
Income from continuing operations before income taxes and minority interest			24				24				25				60
Provision for income taxes			22				6				35				29
Income (loss) from continuing operations before minority interest			2				18				(10	)			31
Minority interest in income of consolidated entities, net of income taxes of $(1)			1				—				—				—
Income (loss) from continuing operations			1				18				(10	)			31
Loss from discontinued operations, net of income taxes of $0			—				—				—				(1	)
Net income (loss)		$	1			$	18			$	(10	)		$	30
Basic earnings (loss) per share:
Income (loss) from continuing operations		$	0.01			$	0.34			$	(0.19	)		$	0.59
Loss from discontinued operations			—				—				—				(0.02	)
Net income (loss)		$	0.01			$	0.34			$	(0.19	)		$	0.57
Diluted earnings (loss) per share:
Income (loss) from continuing operations		$	0.01			$	0.34			$	(0.19	)		$	0.58
Loss from discontinued operations			—				—				—				(0.02	)
Net income (loss)		$	0.01			$	0.34			$	(0.19	)		$	0.56

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share data)

		June 30,				December 31,
		2006				2005
ASSETS
Cash and cash equivalents		$	106			$	107
Restricted cash			649				497
Mortgage loans held for sale, net			2,761				2,395
Accounts receivable, net			464				471
Net investment in fleet leases			4,144				3,966
Mortgage servicing rights, net			2,192				1,909
Investment securities			37				41
Property, plant and equipment, net			69				73
Goodwill			86				87
Other assets			520				419
Total assets		$	11,028			$	9,965
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses		$	503			$	565
Debt			7,677				6,744
Deferred income taxes			806				790
Other liabilities			490				314
Total liabilities			9,476				8,413
Commitments and contingencies (Note 11)			—				—
Minority interest			33				31
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued or outstanding at June 30, 2006 or December 31, 2005			—				—
Common stock, $0.01 par value; 100,000,000 shares authorized; 53,506,822 shares issued and outstanding at June 30, 2006; 53,408,728 shares issued and outstanding at December 31, 2005			1				1
Additional paid-in capital			957				983
Retained earnings			546				556
Accumulated other comprehensive income			15				12
Deferred compensation			—				(31	)
Total stockholders’ equity			1,519				1,521
Total liabilities and stockholders’ equity		$	11,028			$	9,965

See Notes to Condensed Consolidated Financial Statements.

PHH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2006
(Unaudited)
(In millions, except share data)

																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-In				Retained				Comprehensive				Deferred				Stockholders’
		Shares				Amount				Capital				Earnings				Income				Compensation				Equity
Balance at December 31, 2005			53,408,728			$	1			$	983			$	556			$	12			$	(31	)		$	1,521
Effect of adoption of SFAS No. 123(R)			—				—				(31	)			—				—				31				—
Net loss			—				—				—				(10	)			—				—				(10	)
Other comprehensive income, net of income taxes of $0			—				—				—				—				3				—				3
Stock compensation expense			—				—				5				—				—				—				5
Stock options exercised, net of income taxes of $0			65,520				—				1				—				—				—				1
Restricted stock award vesting, net of income taxes of $0			32,574				—				(1	)			—				—				—				(1	)
Balance at June 30, 2006			53,506,822			$	1			$	957			$	546			$	15			$	—			$	1,519

See Notes to Condensed Consolidated Financial Statements.

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

		Six Months
		Ended June 30,
						2005
						As
		2006				Restated
Cash flows from operating activities of continuing operations:
Net (loss) income		$	(10	)		$	30
Adjustment for discontinued operations			—				1
(Loss) income from continuing operations			(10	)			31
Adjustments to reconcile (Loss) income from continuing operations to net cash provided by (used in) operating activities of continuing operations:
Stock option expense related to the Spin-Off			—				4
Capitalization of originated mortgage servicing rights			(218	)			(162	)
Amortization and provision for impairment of mortgage servicing rights			—				352
Net unrealized loss (gain) on mortgage servicing rights and related derivatives			221				(251	)
Vehicle depreciation			610				586
Other depreciation and amortization			18				20
Origination of mortgage loans held for sale			(17,211	)			(17,107	)
Proceeds on sale of and payments from mortgage loans held for sale			16,858				15,994
Other adjustments and changes in other assets and liabilities, net			(24	)			(3	)
Net cash provided by (used in) operating activities of continuing operations			244				(536	)
Cash flows from investing activities of continuing operations:
Investment in vehicles			(1,413	)			(1,365	)
Proceeds on sale of investment vehicles			637				574
Purchase of mortgage servicing rights, net			(8	)			(14	)
Cash paid on derivatives related to mortgage servicing rights			(12	)			(277	)
Net settlement proceeds for derivatives related to mortgage servicing rights			(212	)			548
Purchases of property, plant and equipment			(13	)			(6	)
Net assets acquired, net of cash acquired and acquisition-related payments			(2	)			(4	)
(Increase) decrease in Restricted cash			(152	)			374
Other, net			9				4
Net cash used in investing activities of continuing operations			(1,166	)			(166	)
Cash flows from financing activities of continuing operations:
Net increase in short-term borrowings			—				485
Proceeds from borrowings			11,436				3,184
Principal payments on borrowings			(10,512	)			(3,260	)
Issuances of Company Common stock			1				—
Purchases of Company Common stock			—				(3	)
Capital contribution from Cendant			—				100
Other, net			(5	)			(1	)
Net cash provided by financing activities of continuing operations		$	920			$	505

See Notes to Condensed Consolidated Financial Statements.

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

		Six Months
		Ended June 30,
						2005
						As
		2006				Restated
Effect of changes in exchange rates on Cash and cash equivalents of continuing operations		$	1			$	—
Cash provided by (used in) discontinued operations:
Operating activities			—				184
Investing activities			—				(30	)
Financing activities			—				(242	)
Net cash used in discontinued operations			—				(88	)
Net decrease in Cash and cash equivalents			(1	)			(285	)
Cash and cash equivalents at beginning of period:
Continuing operations			107				257
Discontinued operations			—				88
Total Cash and cash equivalents at beginning of period			107				345
Cash and cash equivalents at end of period:
Continuing operations			106				60
Discontinued operations			—				—
Total Cash and cash equivalents at end of period		$	106			$	60

See Notes to Condensed Consolidated Financial Statements.

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

     Throughout these Notes to Condensed Consolidated Financial Statements, all referenced amounts as of June 30, 2005, for the three and the six months ended June 30, 2005 and comparisons to those amounts reflect the balances and amounts on a restated basis. For information on the restatement, see Note 15, “Prior Period Adjustments” included herein and the “Explanatory Note” and Note 2, “Prior Period Adjustments” in the Notes to Consolidated Financial Statements included in PHH Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”).

1. Summary of Significant Accounting Policies

Basis of Presentation

     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:

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

     As of December 31, 2004, PHH was a wholly owned subsidiary of Cendant Corporation that provided homeowners with mortgages, serviced mortgage loans, facilitated employee relocations and provided vehicle fleet management and fuel card services to commercial clients. During 2006, Cendant Corporation changed its name to Avis Budget Group, Inc. (see Note 18, “Subsequent Events”); however, within these Notes to Condensed Consolidated Financial Statements, PHH’s former parent company, now known as Avis Budget Group, Inc. (NYSE: CAR) is referred to as “Cendant.” On February 1, 2005, PHH began operating as an independent, publicly traded company pursuant to a spin-off from Cendant (the “Spin-Off”). During 2005, prior to the Spin-Off, 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. STARS was previously a wholly owned subsidiary of PHH until it was distributed, in the form of a dividend, to a wholly owned subsidiary of Cendant not within the PHH ownership structure on December 31, 2002. Cendant then owned STARS through its subsidiaries outside of PHH from December 31, 2002 until it contributed STARS to PHH as part of the internal reorganization discussed above.

     The Condensed Consolidated Financial Statements include the accounts and transactions of PHH and its subsidiaries, as well as entities in which the Company directly or indirectly has a controlling interest. PHH Home Loans, LLC (the “Mortgage Venture”) is consolidated within PHH’s Condensed Consolidated Financial Statements and Realogy Corporation’s ownership interest is presented as Minority interest in the Condensed Consolidated Balance Sheets and Minority interest in income of consolidated entities, net of income taxes in the Condensed Consolidated Statement of Operations. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” Cendant’s contribution of STARS to PHH was accounted for as a transfer of net assets between entities under common control. Accordingly, the financial position and results of operations for STARS are included in the Condensed Consolidated Financial Statements in continuing operations for all periods presented. Pursuant to 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 17, “Discontinued Operations” for more information).

     The 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

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

pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In management’s opinion, the unaudited Condensed Consolidated Financial Statements contain all 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 2005 Form 10-K.

     During the preparation of the Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2006, the Company identified and corrected errors related to prior periods. The effect of correcting these errors on the Condensed Consolidated Statement of Operations for the six months ended June 30, 2006 was to reduce Net loss by $3 million (net of income taxes of $2 million). The corrections included an adjustment for franchise tax accruals previously recorded during the years ended December 31, 2002 and 2003 and certain other miscellaneous adjustments related to the year ended December 31, 2005. The Company evaluated the impact of the adjustments and determined that they are not material, individually or in the aggregate, to the six months ended June 30, 2006 or the years ended December 31, 2006, 2005, 2003 or 2002.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Changes in Accounting Policies

     Share-Based Payments. In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which eliminates the alternative to measure stock-based compensation awards using the intrinsic value approach permitted by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and 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” (“SFAS No. 148”), the Company was allocated compensation expense upon Cendant’s issuance of stock-based awards 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 (“SAB”) No. 107, “Share-Based Payment” (“SAB 107”). SAB 107 summarizes the views of the staff regarding the interaction between SFAS No. 123(R) 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. 123(R) so that each registrant that is not a small business issuer will be required to prepare financial statements in accordance with SFAS No. 123(R) 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 adopted SFAS No. 123(R) effective January 1, 2006 using the modified prospective application method. The modified prospective application method applies to new awards and to awards modified, repurchased or cancelled after the effective date. Compensation cost for the portion of outstanding awards of stock-based compensation for which the requisite service has not been rendered as of the effective date of SFAS No. 123(R) is recognized as the requisite service is rendered based on their grant-date fair value under SFAS No. 123. Compensation cost for stock-based awards granted after the effective date will be based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).

     The Company previously recognized the effect of forfeitures on compensation expense in the period that the forfeitures occurred. SFAS No. 123(R) requires the accrual of compensation cost based on the estimated number of instruments for which the requisite service is expected to be rendered. In addition, the Company previously

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

presented tax benefits in excess of the value recognized for financial reporting purposes related to equity instruments issued under stock-based payments arrangements as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows. SFAS No. 123(R) requires the cash flows from these excess tax benefits to be classified as cash inflows from financing activities.

     The Company previously reported the entire fair value of its restricted stock unit (“RSU”) awards within Stockholders’ equity as an increase to Additional paid-in capital with an offsetting increase to Deferred compensation, a contra-equity account, at the date of grant. With the adoption of SFAS No. 123(R), the Company records increases to Additional paid-in capital for grants of RSUs as compensation cost is recognized. As of the effective date of adopting SFAS No. 123(R), the Deferred compensation related to the unrecognized compensation cost for RSUs was eliminated against Additional paid-in capital in accordance with the modified prospective application method.

     The adoption of SFAS No. 123(R) did not have a significant effect on any line item of the Company’s Condensed Consolidated Statement of Operations for the six months ended June 30, 2006. Additionally, the adoption of SFAS No. 123(R) did not have a significant effect on the Company’s Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2006. In accordance with the transition provisions of SFAS No. 123(R)’s modified prospective application method of adoption, the Company’s Condensed Consolidated Financial Statements for prior periods have not been restated.

     Accounting Changes and Error Corrections. In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which replaces APB No. 20, “Accounting Changes.” SFAS No. 154 changes the accounting for, and reporting of, a change in accounting principle. SFAS No. 154 requires retrospective application to prior period financial statements when voluntary changes in accounting principles are adopted and upon adopting changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 on January 1, 2006 did not impact the Company’s Condensed Consolidated Financial Statements.

     Servicing of Financial Assets. In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS No. 156”). SFAS No. 156: (i) clarifies when a servicing asset or servicing liability should be recognized; (ii) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; (iii) subsequent to initial measurement, permits an entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets or servicing liabilities and (iv) at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights.

     SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements for any period of that fiscal year. The Company adopted SFAS No. 156 effective January 1, 2006. As a result of adopting SFAS No. 156, servicing rights created through the sale of originated loans are recorded at the fair value of the servicing right on the date of sale whereas prior to the adoption, the servicing rights were recorded based on the relative fair values of the loans sold and the servicing rights retained. The Company services residential mortgage loans, which represent its single class of servicing rights and has elected the fair value measurement method for subsequently measuring these servicing rights. The election of the fair value measurement method will subject the Company’s earnings to increases and decreases in the value of its servicing assets. Previously, servicing rights were (i) carried at the lower of cost or fair value based on defined strata, (ii) amortized in proportion to estimated net servicing income and (iii) evaluated for impairment at least quarterly. The effects of measuring servicing rights at fair value after the adoption of SFAS No. 156 are recorded in Change in fair value of mortgage servicing rights in the Company’s Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2006. The effects of carrying servicing rights at the lower of cost or fair value prior to the adoption of SFAS No. 156 are recorded in

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

Amortization and provision for impairment of mortgage servicing rights in the Company’s Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2005.

     The adoption of SFAS No. 156 on January 1, 2006 did not have a material impact on the Company’s Condensed Consolidated Financial Statements as all of the servicing asset strata were impaired as of December 31, 2005.

2. Recently Issued Accounting Pronouncements

     Accounting for Hybrid Instruments. In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”). SFAS No. 155 permits an entity to elect fair value measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would have required bifurcation, clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS No. 155 is effective January 1, 2007. The Company is currently evaluating the impact of adopting SFAS No. 155 on its Consolidated Financial Statements.

     Uncertainty in Income Taxes. In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must presume the tax position will be examined by the relevant tax authority and determine whether it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective January 1, 2007. The cumulative effect of applying the provisions of FIN 48 represents a change in accounting principle and shall be reported as an adjustment to the opening balance of Retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its Consolidated Financial Statements.

     Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The provisions of SFAS No. 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for certain financial instruments which require retrospective application as of the beginning of the fiscal year of initial application (a limited form of retrospective application). The transition adjustment, measured as the difference between the carrying amounts and the fair values of those financial instruments at the date SFAS No. 157 is initially applied, should be recognized as a cumulative-effect adjustment to the opening balance of Retained earnings. The Company is currently evaluating the impact of adopting SFAS No. 157 on its Consolidated Financial Statements and whether to adopt its provisions prior to the required effective date.

     Defined Benefit Pension and Other Postretirement Plans. In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of

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

financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income, net of income taxes. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The recognition provisions of SFAS No. 158 are effective on December 31, 2006, and the requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Prospective application is required. The Company does not expect the adoption of SFAS No. 158 to have a significant impact on its Consolidated Financial Statements.

     Effects of Prior Year Misstatements. In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 permits public companies to initially apply its provisions either by (i) restating prior year financial statements or (ii) recording the cumulative effect as adjustments to the carrying values of assets and liabilities with an offsetting adjustment recorded to the opening balance of Retained earnings. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect the adoption of SAB 108 to have a significant impact on its Consolidated Financial Statements.

     Fair Value Option. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). Unrealized gains and losses on items for which the Fair Value Option has been elected are reported in earnings. The Fair Value Option is applied instrument by instrument (with certain exceptions), is irrevocable (unless a new election date occurs) and is applied only to an entire instrument. The effect of the first remeasurement to fair value is reported as a cumulative-effect adjustment to the opening balance of Retained earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 with earlier application permitted, subject to certain conditions. The Company is currently evaluating the impact of adopting SFAS No. 159 on its Consolidated Financial Statements and whether to adopt its provisions prior to the required effective date.

3. Earnings (Loss) Per Share

     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 calculation of diluted loss per share for the six months ended June 30, 2006 does not include 558,569 and 337,234 weighted-average shares of common stock potentially issuable for stock options and RSUs, respectively, because the effect would be anti-dilutive.

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

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
						2005								2005
		2006				As Restated				2006				As Restated
		(In millions, except share and per share data)
Income (loss) from continuing operations		$	1			$	18			$	(10	)		$	31
Weighted-average common shares outstanding — basic			53,613,684				52,787,541				53,547,500				52,702,843
Effect of potentially dilutive securities:
Stock options			529,358				453,936				—				391,979
RSUs			291,431				232,086				—				273,036
Weighted-average common shares outstanding — diluted			54,434,473				53,473,563				53,547,500				53,367,858
Basic earnings (loss) per share from continuing operations		$	0.01			$	0.34			$	(0.19	)		$	0.59
Diluted earnings (loss) per share from continuing operations		$	0.01			$	0.34			$	(0.19	)		$	0.58

4. Mortgage Loans Held for Sale

     Mortgage loans held for sale, net consisted of:

		June 30,				December 31,
		2006				2005
		(In millions)
Mortgage loans held for sale (“MLHS”)		$	2,503			$	2,091
Home equity lines of credit			101				156
Construction loans			125				116
Net deferred loan origination fees and expenses			32				32
Mortgage loans held for sale, net		$	2,761			$	2,395

     At June 30, 2006, the Company pledged $1.9 billion of Mortgage loans held for sale, net as collateral in asset-backed debt arrangements.

5. Mortgage Servicing Rights

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

		Six Months
		Ended June 30,
		2006				2005
		(In millions)
Balance, beginning of period		$	145,827			$	138,494
Additions			16,070				15,947
Payoffs and curtailments			(14,932	)			(16,842	)
Balance, end of period		$	146,965			$	137,599

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

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

		Six Months
		Ended June 30,
						2005(2)
		2006(1)				As Restated
		(In millions)
Mortgage Servicing Rights:
Balance, beginning of period		$	2,152			$	2,173
Effect of adoption of SFAS No. 156			(243	)			—
Additions			226				176
Changes in fair value due to:
Realization of expected cash flows			(200	)			—
Changes in market inputs or assumptions used in the valuation model			265				—
Sales and deletions			(8	)			(2	)
Amortization			—				(212	)
Other-than-temporary impairment			—				(93	)
Balance, end of period			2,192				2,042
Valuation Allowance:
Balance, beginning of period			(243	)			(567	)
Effect of adoption of SFAS No. 156			243				—
Provision for impairment			—				(140	)
Other-than-temporary impairment			—				93
Balance, end of period			—				(614	)
Mortgage servicing rights, net		$	2,192			$	1,428

     The significant assumptions used in estimating the fair value of MSRs at June 30, 2006 and 2005 were as follows (in annual rates):

		June 30,
		2006				2005
Prepayment speed				16%				23%
Discount rate				10%				11%
Volatility				13%				19%

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
						2005								2005
						As								As
		2006				Restated				2006				Restated
		(In millions)
Net service fee revenue		$		120		$		115		$		242		$		231
Late fees				5				4				10				9
Other ancillary servicing revenue				4				4				9				7

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

     As of June 30, 2006, the Company’s MSRs had a weighted-average life of approximately 5.4 years. Approximately 69% of the MSRs associated with the loan servicing portfolio as of June 30, 2006 were restricted from sale without prior approval from the Company’s private label clients or investors.

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

		Six Months
		Ended June 30,
		2006				2005
Initial capitalization rate of additions to MSRs				1.41%				1.10%

		June 30,
		2006				2005
Capitalized servicing rate (based on fair value)				1.49%				1.04%
Capitalized servicing multiple (based on fair value)				4.7				3.2
Weighted-average servicing fee (in basis points)				32				32

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
						2005								2005
						As								As
		2006				Restated				2006				Restated
		(In millions)
Amortization of mortgage servicing rights		$	—			$	(110	)		$	—			$	(212	)
Provision for impairment of mortgage servicing rights			—				(252	)			—				(140	)
Changes in fair value of mortgage servicing rights due to:
Realization of expected cash flows			(116	)			—				(200	)			—
Changes in market inputs or assumptions used in the valuation model			113				—				265				—
Net derivative (loss) gain related to mortgage servicing rights (See Note 7)			(106	)			279				(286	)			251
Amortization and valuation adjustments related to mortgage servicing rights, net		$	(109	)		$	(83	)		$	(221	)		$	(101	)

6. Loan Servicing Portfolio

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

Portfolio Activity

		Six Months
		Ended June 30,
		2006				2005
		(In millions)
Balance, beginning of period (1)		$	154,843			$	143,056
Additions (2)			18,478				18,173
Payoffs and curtailments (2)			(16,176	)			(17,113	)
Addition of certain subserviced home equity loans as of June 30, 2006 (1)			2,130				—
Balance, end of period(1)		$	159,275			$	144,116

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

Portfolio Composition

		June 30,
		2006				2005
		(In millions)
Owned servicing portfolio		$	150,644			$	141,446
Subserviced portfolio			8,631				5,211
Total servicing portfolio		$	159,275			$	146,657
Fixed rate		$	101,614			$	83,033
Adjustable rate			57,661				63,624
Total servicing portfolio		$	159,275			$	146,657
Conventional loans		$	147,958			$	135,269
Government loans			7,034				7,301
Home equity lines of credit			4,283				4,087
Total servicing portfolio		$	159,275			$	146,657
Weighted-average interest rate(3)			6.0%				5.6%

Portfolio Delinquency ^{(4) (5)}

		June 30,
		2006								2005
		Number				Unpaid				Number				Unpaid
		of Loans				Balance				of Loans				Balance
30 days			1.70	%			1.43	%			1.87	%			1.47	%
60 days			0.32	%			0.25	%			0.35	%			0.24	%
90 or more days			0.30	%			0.22	%			0.38	%			0.24	%
Total delinquency			2.32	%			1.90	%			2.60	%			1.95	%
Foreclosure/real estate owned/bankruptcies			0.84	%			0.58	%			0.96	%			0.56	%

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

7. Derivatives and Risk Management Activities

     The Company’s principal market exposure is to interest rate risk, specifically long-term U.S. Treasury (“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 variable-rate lease assets. The Company uses various financial instruments, including 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”), MLHS, MSRs and debt:

     Interest Rate Lock Commitments. IRLCs represent an agreement to extend credit to a mortgage loan applicant whereby the interest rate on the loan is set prior to funding. The loan commitment binds the Company (subject to the loan approval process) to lend funds to a potential borrower at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. The Company’s loan commitments generally range between 30 and 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 the IRLC 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, as amended by SFAS No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). 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 Condensed Consolidated Balance Sheets with changes in their fair values recorded as a component of Gain on sale of mortgage loans, net in the Condensed Consolidated Statements of Operations.

     Mortgage Loans Held for Sale. The Company is subject to interest rate and price risk on its MLHS from the loan funding date until the date the loan is sold into the secondary market. The Company 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 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 Operations. Changes in the 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 Company uses forward loan sales commitments, Treasury futures and options on Treasury securities in its risk management activities related to its IRLCs and MLHS.

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

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

		Three Months								Six Months
		Ended June 30,								Ended June 30,
						2005								2005
						As								As
		2006				Restated				2006				Restated
		(In millions)
Change in value of IRLCs		$	(32	)		$	27			$	(52	)		$	21
Change in value of MLHS			(3	)			8				(5	)			(1	)
Total change in value of IRLCs and MLHS			(35	)			35				(57	)			20
Mark-to-market of derivatives designated as hedges of MLHS			—				(7	)			(1	)			(10	)
Mark-to-market of freestanding derivatives(1)			52				(57	)			96				(32	)
Net gain (loss) on derivatives			52				(64	)			95				(42	)
Net gain (loss) on hedging activities (2)		$	17			$	(29	)		$	38			$	(22	)

     Mortgage Servicing Rights. The Company’s MSRs are subject to substantial interest rate risk as the mortgage notes underlying the MSRs permit the borrowers to prepay the loans. Therefore, the value of the MSRs 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 uses a combination of derivative instruments to offset potential adverse changes in the fair value of its MSRs that could affect reported earnings. The gain or loss on derivatives is intended to react in the opposite direction of the change in the fair value of MSRs. The MSRs derivatives generally increase in value as interest rates decline and decrease in value as interest rates rise. 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 Condensed Consolidated Balance Sheets with changes in their fair values recorded in Net derivative gain (loss) related to mortgage servicing rights in the Condensed Consolidated Statements of Operations.

     The Company uses interest rate swap contracts, interest rate futures contracts, interest rate forward contracts, mortgage forward contracts, options on forward contracts, options on futures contracts, options on swap contracts and principal-only swaps in its risk management activities related to its MSRs.

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

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

		Six Months
		Ended June 30,
						2005
						As
		2006				Restated
		(In millions)
Net balance, beginning of period		$	44	(1)		$	60	(2)
Additions			12				277
Changes in fair value			(286	)			251
Net settlement proceeds			212				(548	)
Net balance, end of period		$	(18	)(3)		$	40	(4)

     Debt. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed- and variable-rate assets and liabilities. Derivative instruments used in these hedging strategies include swaps, interest rate caps and instruments with purchased option features. To more closely match the characteristics of the related assets, including the Company’s net investment in variable-rate lease assets, the Company either issues variable-rate debt or fixed-rate debt, which may be swapped to variable LIBOR-based rates. The derivatives used to manage the risk associated with the Company’s fixed-rate debt include instruments that were designated as fair value hedges as well as instruments that were not designated as fair value hedges. The terms of the derivatives that were designated as fair value hedges match those of the underlying hedged debt resulting in no net impact on the Company’s results of operations during the three months and six months ended June 30, 2006 and 2005, except to create the accrual of interest expense at variable rates. Losses recognized during the three months ended June 30, 2006 related to instruments which do not qualify for hedge accounting treatment pursuant to SFAS No. 133 were not significant and were recorded in Mortgage interest expense in the Condensed Consolidated Statement of Operations. The Company recognized losses of $1 million during the six months ended June 30, 2006 related to instruments which do not qualify for hedge accounting treatment pursuant to SFAS No. 133, which were recorded in Mortgage interest expense in the Condensed Consolidated Statement of Operations. The Company recognized gains of $3 million related to instruments which do not qualify for hedge accounting treatment pursuant to SFAS No. 133 for the three months ended June 30, 2005, which were recorded in Mortgage interest expense in the Condensed Consolidated Statement of Operations. Losses recognized during the six months ended June 30, 2005 related to instruments which do not qualify for hedge accounting treatment pursuant to SFAS No. 133 were not significant and were recorded in Mortgage interest expense in the Condensed Consolidated Statement of Operations.

     From time to time, the Company uses derivatives that convert variable cash flows to fixed cash flows to manage the risk associated with its variable-rate debt and net investment in variable-rate lease assets. Such derivatives may include freestanding derivatives and derivatives designated as cash flow hedges. The Company recognized net losses of $1 million during both the three and six months ended June 30, 2006 related to instruments that were not designated as cash flow hedges, which were included in Fleet interest expense in the

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

Condensed Consolidated Statements of Operations. Net gains related to instruments that were not designated as cash flow hedges for the three and six months ended June 30, 2005 were not significant and were recorded in Fleet interest expense in the Condensed Consolidated Statements of Operations.

8. Vehicle Leasing Activities

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

		June 30,				December 31,
		2006				2005
		(In millions)
Operating Leases:
Vehicles under open-end operating leases		$	6,782			$	6,588
Vehicles under closed-end operating leases			284				221
Vehicles under operating leases			7,066				6,809
Less: Accumulated depreciation			(3,309	)			(3,273	)
Net investment in operating leases			3,757				3,536
Direct Financing Leases:
Lease payments receivable			158				132
Less: Unearned income			(19	)			(15	)
Net investment in direct financing leases			139				117
Off-Lease Vehicles:
Vehicles not yet subject to a lease			243				306
Vehicles held for sale			14				16
Less: Accumulated depreciation			(9	)			(9	)
Net investment in off-lease vehicles			248				313
Net investment in fleet leases		$	4,144			$	3,966

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

9.  Debt and Borrowing Arrangements

     The following tables summarize the components of the Company’s indebtedness at June 30, 2006 and December 31, 2005:

		June 30, 2006
		Vehicle				Mortgage
		Management				Warehouse
		Asset-Backed				Asset-Backed				Unsecured
		Debt				Debt				Debt				Total
		(In millions)
Term notes		$	—			$	800			$	1,045			$	1,845
Variable funding notes			3,472				569				—				4,041
Subordinated debt			—				101				—				101
Commercial paper			—				173				527				700
Borrowings under credit facilities			—				155				770				925
Other			14				38				13				65
		$	3,486			$	1,836			$	2,355			$	7,677

		December 31, 2005
		Vehicle				Mortgage
		Management				Warehouse
		Asset-Backed				Asset-Backed				Unsecured
		Debt				Debt				Debt				Total
		(In millions)
Term notes		$	1,318			$	800			$	1,136			$	3,254
Variable funding notes			1,700				247				—				1,947
Subordinated debt			367				101				—				468
Commercial paper			—				84				747				831
Borrowings under credit facilities			—				181				—				181
Other			21				38				4				63
		$	3,406			$	1,451			$	1,887			$	6,744

Asset-Backed Debt

     Vehicle Management Asset-Backed Debt

     As of December 31, 2005, vehicle management asset-backed debt primarily represented variable-rate term notes and variable funding notes issued by Chesapeake Funding LLC, a wholly owned subsidiary. Variable-rate term notes and variable funding notes outstanding under this arrangement as of December 31, 2005 aggregated $3.0 billion. As of December 31, 2005, subordinated notes issued by Terrapin Funding LLC (“Terrapin”), a consolidated entity, aggregated $367 million. This debt was issued to support the acquisition of vehicles used by the Fleet Management Services segment’s leasing operations.

     On March 7, 2006, Chesapeake Funding LLC changed its name to Chesapeake Finance Holdings LLC (“Chesapeake Finance”), and it and Terrapin redeemed all of their outstanding term notes, variable funding notes and subordinated notes (with aggregate outstanding principal balances of $1.1 billion, $1.7 billion and $367 million, respectively) and terminated the agreements associated with those borrowings. Concurrently, Chesapeake Funding LLC (“Chesapeake”), a newly formed wholly owned subsidiary, issued variable funding notes under Series 2006-1, with capacity of $2.7 billion, and Series 2006-2, with capacity of $1.0 billion, to fund the redemption of this debt and provide additional committed funding for the Fleet Management Services operations. The Company recorded a $4 million loss on the extinguishment of the Chesapeake Finance and Terrapin debt that was included in Other operating expenses in the Condensed Consolidated Statement of Operations for the six months ended June 30, 2006.

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

     As of June 30, 2006, variable funding notes outstanding under this arrangement aggregated $3.5 billion and were issued to redeem the Chesapeake Finance and Terrapin debt and support the acquisition of vehicles used by the Fleet Management Services segment’s leasing operations. The debt issued as of June 30, 2006 was collateralized by approximately $4.1 billion of leased vehicles and related assets, which are primarily included in Net investment in fleet leases in the Condensed Consolidated Balance Sheet and 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 operating and direct financing lease agreements. As of June 30, 2006, the agreements governing the Series 2006-1 and Series 2006-2 notes were scheduled to expire on March 6, 2007 and December 1, 2006, respectively (the “Scheduled Expiry Dates”). These agreements are renewable on or before the Scheduled Expiry Dates, subject to agreement by the parties. If the agreements are not renewed, monthly repayments on the notes are required to be made as certain cash inflows are received relating to the securitized vehicle leases and related assets beginning in the month following the Scheduled Expiry Dates and ending up to 125 months after the Scheduled Expiry Dates. The weighted-average interest rate of vehicle management asset-backed debt arrangements was 5.6% and 4.8% as of June 30, 2006 and December 31, 2005, respectively.

     As of June 30, 2006, the total capacity under vehicle management asset-backed debt arrangements was approximately $3.7 billion, and the Company had $228 million of unused capacity available. See Note 18, “Subsequent Events” for a discussion of modifications made to vehicle management asset-backed debt arrangements after June 30, 2006.

     Mortgage Warehouse Asset-Backed Debt

     Bishop’s Gate Residential Mortgage Trust (“Bishop’s Gate”) is a consolidated bankruptcy remote special purpose entity that is utilized to warehouse mortgage loans originated by the Company prior to their sale into the secondary market. The activities of Bishop’s Gate are limited to (i) purchasing mortgage loans from the Company’s mortgage subsidiary, (ii) issuing commercial paper, senior term notes, subordinated certificates and/or borrowing under a liquidity agreement to effect such purchases, (iii) entering into interest rate swaps to hedge interest rate risk and certain non-credit-related market risk on the purchased mortgage loans, (iv) selling and securitizing the acquired mortgage loans to third parties and (v) engaging in certain related transactions. As of both June 30, 2006 and December 31, 2005, the Bishop’s Gate term notes (the “Bishop’s Gate Notes”) issued under the Base Indenture dated as of December 11, 1998 (the “Bishop’s Gate Indenture”) between The Bank of New York as Indenture Trustee (the “Bishop’s Gate Trustee”) and Bishop’s Gate aggregated $800 million. The Bishop’s Gate Notes are variable-rate instruments and, as of June 30, 2006, were scheduled to mature between September 2006 and November 2008. The weighted-average interest rate on the Bishop’s Gate Notes as of June 30, 2006 and December 31, 2005 was 5.5% and 4.7%, respectively. As of both June 30, 2006 and December 31, 2005, the Bishop’s Gate subordinated certificates (the “Bishop’s Gate Certificates”) aggregated $101 million. As of June 30, 2006, the Bishop’s Gate Certificates were primarily variable-rate instruments and were scheduled to mature between September 2006 and May 2008. The weighted-average interest rate on the Bishop’s Gate Certificates as of June 30, 2006 and December 31, 2005 was 6.3% and 5.8%, respectively. As of June 30, 2006 and December 31, 2005, the Bishop’s Gate commercial paper, issued under the Amended and Restated Liquidity Agreement, dated as of December 11, 1998, as further amended and restated as of December 2, 2003, among Bishop’s Gate, certain banks listed therein and JPMorgan Chase Bank, as Agent (the “Bishop’s Gate Liquidity Agreement”), aggregated $173 million and $84 million, respectively. As of June 30, 2006, the capacity under the Bishop’s Gate Liquidity Agreement was $1.5 billion. The Bishop’s Gate commercial paper are fixed-rate instruments and, as of June 30, 2006, were scheduled to mature in July 2006. The weighted-average interest rate on the Bishop’s Gate commercial paper as of June 30, 2006 and December 31, 2005 was 5.3% and 4.3%, respectively. As of June 30, 2006, the debt issued by Bishop’s Gate was collateralized by approximately $1.1 billion of underlying mortgage loans and related assets, primarily recorded in Mortgage loans held for sale, net in the Condensed Consolidated Balance Sheet. See Note 18, “Subsequent

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

Events” for a discussion of modifications made to Bishop’s Gate’s mortgage warehouse asset-backed debt arrangements after June 30, 2006.

     The Company also maintains a $500 million committed mortgage repurchase facility (the “Mortgage Repurchase Facility”) that is used to finance mortgage loans originated by PHH Mortgage Corporation (“PHH Mortgage”), a wholly owned subsidiary of the Company. 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 June 30, 2006 and December 31, 2005, borrowings under this variable-rate facility were $283 million and $247 million, respectively. The Mortgage Repurchase Facility was collateralized by underlying mortgage loans of $318 million, included in Mortgage loans held for sale, net in the Condensed Consolidated Balance Sheet as of June 30, 2006, and is funded by a multi-seller conduit. As of June 30, 2006 and December 31, 2005, borrowings under the Mortgage Repurchase Facility bore interest at 5.4% and 4.3%, respectively. The Mortgage Repurchase Facility was scheduled to expire on January 12, 2007. See Note 18, “Subsequent Events” for a discussion of modifications made to the Mortgage Repurchase Facility after June 30, 2006.

     On June 1, 2006, the Mortgage Venture entered into a $350 million repurchase facility (the “Mortgage Venture Repurchase Facility”) with Bank of Montreal and Barclays Bank PLC as Bank Principals and Fairway Finance Company, LLC and Sheffield Receivables Corporation as Conduit Principals. Borrowings outstanding under the Mortgage Venture Repurchase Facility were $286 million and were collateralized by underlying mortgage loans and related assets of $349 million, primarily included in Mortgage loans held for sale, net in the Condensed Consolidated Balance Sheet as of June 30, 2006. The cost of the facility is based upon the commercial paper issued by the Conduit Principals plus a program fee of 30 bps, which was 5.3% as of June 30, 2006. In addition, the Mortgage Venture pays an annual liquidity fee of 20 bps on 102% of the program size. The maturity date for this facility is June 1, 2009, subject to annual renewals of certain underlying conduit liquidity arrangements.

     The Mortgage Venture maintains a secured line of credit agreement with Barclays Bank PLC, Bank of Montreal and JPMorgan Chase Bank, N.A. that is used to finance mortgage loans originated by the Mortgage Venture. During the second quarter of 2006, the capacity of this line of credit was reduced from $350 million to $200 million following the execution of the Mortgage Venture Repurchase Facility. Borrowings outstanding under this line of credit were $142 million and $177 million as of June 30, 2006 and December 31, 2005, respectively, and, as of June 30, 2006, were collateralized by underlying mortgage loans and related assets of $158 million, primarily included in Mortgage loans held for sale, net in the Condensed Consolidated Balance Sheet. This variable-rate credit agreement was scheduled to expire on October 5, 2006 and bore interest at 6.2% and 5.2% on June 30, 2006 and December 31, 2005, respectively. See Note 18, “Subsequent Events” for a discussion of modifications made to the Mortgage Venture’s $200 million secured line of credit agreement after June 30, 2006.

     As of June 30, 2006, the total capacity under mortgage warehouse asset-backed debt arrangements was approximately $3.5 billion, and the Company had approximately $1.7 billion of unused capacity available.

Unsecured Debt

     Term Notes

     The outstanding carrying value of term notes at June 30, 2006 and December 31, 2005 consisted of $1.0 billion and $1.1 billion, respectively, of medium-term notes (the “MTNs”) publicly issued under the Indenture, dated as of November 6, 2000 (as amended and supplemented, the “MTN Indenture”) by and between PHH and J.P. Morgan Trust Company, N.A., as successor trustee for Bank One Trust Company, N.A. (the “MTN Indenture Trustee”) that mature between January 2007 and April 2018. The effective rate of interest for the MTNs outstanding as of June 30, 2006 and December 31, 2005 was 6.7% and 6.8%, respectively. See Note 18, “Subsequent Events” for a discussion of repurchases of the MTNs and modifications made to the Company’s MTN Indenture after June 30, 2006.

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

     Commercial Paper

     The Company’s policy is to maintain available capacity under its committed credit facilities (described below) to fully support its outstanding unsecured commercial paper. The Company had unsecured commercial paper obligations of $527 million and $747 million as of June 30, 2006 and December 31, 2005, respectively. This commercial paper is fixed-rate and matures within 270 days of issuance. The weighted-average interest rate on outstanding unsecured commercial paper as of June 30, 2006 and December 31, 2005 was 5.6% and 4.7%, respectively.

     Credit Facilities

     As of December 31, 2005, the Company was party to a $1.25 billion Three Year Competitive Advance and Revolving Credit Agreement (the “Credit Facility”), 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. On January 6, 2006, the Company entered into the Amended and Restated Competitive Advance and Revolving Credit Agreement (the “Amended Credit Facility”), among PHH Corporation, a group of lenders and JPMorgan Chase Bank, N.A., as administrative agent, which increased the capacity of the Credit Facility from $1.25 billion to $1.30 billion, extended the termination date from June 28, 2007 to January 6, 2011 and created a $50 million United States dollar equivalent Canadian sub-facility, which is available to the Company’s Fleet Management Services operations in Canada. Pricing under the Amended Credit Facility is based upon the Company’s senior unsecured long-term debt ratings. If the ratings on the Company’s senior unsecured long-term debt assigned by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings are not equivalent to each other, the second highest credit rating assigned by them determines pricing under the Amended Credit Facility. Borrowings under the Amended Credit Facility bore interest at LIBOR plus a margin of 38 basis points (“bps”) as of June 30, 2006. The Amended Credit Facility also requires the Company to pay utilization fees if its usage exceeds 50% of the aggregate commitments under the Amended Credit Facility and per annum facility fees. As of June 30, 2006, the per annum utilization and facility fees were 10 bps and 12 bps, respectively. Borrowings under the Amended Credit Facility were $370 million as of June 30, 2006. There were no borrowings under the Credit Facility as of December 31, 2005.

     On April 6, 2006, the Company entered into a $500 million unsecured revolving credit agreement (the “Supplemental Credit Facility”) with a group of lenders and JPMorgan Chase Bank, N.A., as administrative agent, that expires on April 5, 2007. Borrowings under the Supplemental Credit Facility were $400 million as of June 30, 2006. Pricing under the Supplemental Credit Facility is based upon the Company’s senior unsecured long-term debt ratings. If the ratings on the Company’s senior unsecured long-term debt assigned by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings are not equivalent to each other, the second highest credit rating assigned by them determines pricing under the Supplemental Credit Facility. Borrowings under the Supplemental Credit Facility bore interest at LIBOR plus a margin of 38 bps as of June 30, 2006. The Supplemental Credit Facility also requires the Company to pay per annum utilization fees if its usage exceeds 50% of the aggregate commitments under the Supplemental Credit Facility and per annum facility fees. As of June 30, 2006, the per annum utilization and facility fees were 10 bps and 12 bps, respectively. The Company was also required to pay an additional facility fee of 10 bps against the outstanding commitments under the facility as of October 6, 2006.

     The Company maintains other unsecured credit facilities in the ordinary course of business as set forth in “Debt Maturities” below. See Note 18, “Subsequent Events” for a discussion of modifications made to the Company’s unsecured credit facilities and changes in the Company’s senior unsecured long-term debt ratings after June 30, 2006.

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

Debt Maturities

     The following table provides the contractual maturities of the Company’s indebtedness at June 30, 2006 except for the Company’s vehicle management asset-backed notes, where estimated payments have been used assuming the underlying agreements were not renewed (the indentures related to vehicle management asset-backed notes require principal payments based on cash inflows relating to the securitized vehicle leases and related assets if the indentures are not renewed on or before the Scheduled Expiry Dates):

		Asset-Backed				Unsecured				Total
		(In millions)
Within one year		$	1,774			$	958			$	2,732
Between one and two years			1,477				433				1,910
Between two and three years			985				—				985
Between three and four years			518				7				525
Between four and five years			252				370				622
Thereafter			316				587				903
		$	5,322			$	2,355			$	7,677

     As of June 30, 2006, available funding under the Company’s asset-backed debt arrangements and unsecured committed credit facilities consisted of:

						Utilized				Available
		Capacity(1)				Capacity				Capacity
		(In millions)
Asset-Backed Funding Arrangements
Vehicle management		$		3,714		$		3,486		$		228
Mortgage warehouse				3,504				1,836				1,668
Unsecured Committed Credit Facilities (2)				1,801				1,299				502

     Beginning on March 16, 2006, access to the Company’s shelf registration statement for public debt issuances was no longer available due to the Company’s non-current filing status with the SEC.

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, liens, liquidations and sale and leaseback transactions. The Amended Credit Facility and the Supplemental Credit Facility require that the Company maintain: (i) on the last day of each fiscal quarter, net worth of $1.0 billion plus 25% of net income, if positive, for each fiscal quarter ended after December 31, 2004 and (ii) at any time, a ratio of indebtedness to tangible net worth no greater than 10:1. The MTN Indenture requires that the Company maintain a debt to tangible equity ratio of not more than 10:1. The MTN Indenture also restricts the Company from paying dividends if, after giving effect to the dividend, the debt to equity ratio exceeds 6.5:1. At June 30, 2006, the Company was in compliance with all of its financial covenants related to its debt arrangements.

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

     Under many of the Company’s financing, servicing, hedging and related agreements and instruments (collectively, the “Financing Agreements”), the Company is required to provide consolidated and/or subsidiary- level audited annual financial statements, unaudited quarterly financial statements and related documents. The delay in completing the 2005 audited financial statements, the restatement of financial results for periods prior to the quarter ended December 31, 2005 and the delay in completing the unaudited quarterly financial statements for 2006 created the potential for breaches under certain of the Financing Agreements for failure to deliver the financial statements and/or documents by specified deadlines, as well as potential breaches of other covenants.

     On March 17, 2006, the Company obtained waivers under its Amended Credit Facility and its Bishop’s Gate Liquidity Agreement which extended the deadlines for the delivery of the 2005 annual audited financial statements, the unaudited financial statements for the quarter ended March 31, 2006 and related documents to June 15, 2006 and waived certain other potential breaches.

     On May 26, 2006, the Company obtained waivers under its Supplemental Credit Facility and its Amended Credit Facility which extended the deadlines for the delivery of the 2005 annual audited financial statements, the unaudited financial statements for the quarters ended March 31, 2006 and June 30, 2006 and related documents to September 30, 2006 and waived certain other potential breaches.

     See Note 18, “Subsequent Events” for a discussion of additional debt waivers obtained by the Company which extended the deadlines for the delivery of financial statements and related documents under certain of the Financing Agreements.

     Under certain of the Financing Agreements, the lenders or trustees have the right to notify the Company if they believe it has breached a covenant under the operative documents and may declare an event of default. If one or more notices of default were to be given, the Company believes it would have various periods in which to cure such events of default. If it does not cure the events of default or obtain necessary waivers within the required time periods or certain extended time periods, the maturity of some of its debt could be accelerated and its ability to incur additional indebtedness could be restricted. In addition, events of default or acceleration under certain of the Company’s Financing Agreements would trigger cross-default provisions under certain of its other Financing Agreements. See Note 18, “Subsequent Events” for a further discussion of potential events of default under the Financing Agreements.

10. Income Taxes

     The Company records its interim tax provisions by applying a projected full-year effective income tax rate to its quarterly Income from continuing operations before income taxes and minority interest for results that it deems to be reliably estimable in accordance with FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods.” Certain results dependent on fair value adjustments of the Company’s Mortgage Production and Mortgage Servicing segments are considered not to be reliably estimable and therefore the Company records discrete year-to-date income tax provisions on those results.

     During the three months ended June 30, 2006, the Provision for income taxes was $22 million and was significantly impacted by a $9 million increase in income tax contingency reserves. In addition, the Company recorded state income tax expense of $6 million. Due to the Company’s year-to-date and projected full-year mix of income and loss from its operations by entity and state income tax jurisdiction in 2006, there was a significant change in the 2006 state income tax effective rate in comparison to 2005.

     During the three months ended June 30, 2005, the Provision for income taxes was $6 million and was significantly impacted by a decrease in valuation allowances of $3 million for state net operating losses (“NOLs”), which adjusted the valuation allowances recorded during the three months ended March 31, 2005 to the revised full-year projections of the associated NOLs deferred tax assets.

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

     During the six months ended June 30, 2006, the Provision for income taxes was $35 million and was significantly impacted by a $24 million increase in income tax contingency reserves and a $1 million increase in valuation allowances for state NOLs generated during the six months ended June 30, 2006 for which the Company believes it is more likely than not that the NOLs will not be realized. In addition, the Company recorded a state income tax expense of $2 million. Due to the Company’s year-to-date and projected full-year mix of income and loss from its operations by entity and state income tax jurisdiction in 2006, there was a significant change in the 2006 state income tax effective rate in comparison to 2005.

     During the six months ended June 30, 2005, the Provision for income taxes was $29 million and was significantly impacted by a net deferred income tax charge related to the Spin-Off of $5 million representing the change in estimated deferred state income taxes for state apportionment factors.

11. Commitments and Contingencies

     Tax Contingencies

     In connection with the Spin-Off, the Company and Cendant entered into a tax sharing agreement dated January 31, 2005, which was amended on December 21, 2005 (the “Amended Tax Sharing Agreement”). The Amended Tax Sharing Agreement governs the allocation of liabilities 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 Amended 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 income tax returns. 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. Certain of the effects of future adjustments relating to years the Company was included in Cendant’s income tax returns that change the tax basis of assets, liabilities and net operating loss and tax credit carryforward amounts may be recorded in equity rather than as an adjustment to the tax provision.

     Also, pursuant to the Amended Tax Sharing Agreement, the Company and Cendant have agreed to indemnify each other for certain liabilities and obligations. The Company’s indemnification obligations could be significant in certain circumstances. For example, the Company is required to indemnify Cendant for any taxes incurred by it and its affiliates as a result of any action, misrepresentation or omission by the Company or its affiliates that causes the distribution of the Company’s Common stock by Cendant or the internal reorganization transactions relating thereto to fail to qualify as tax-free. In the event that the Spin-Off or the internal reorganization transactions relating thereto do not qualify as tax-free for any reason other than the actions, misrepresentations or omissions of Cendant or the Company or its respective subsidiaries, then the Company would be responsible for 13.7% of any taxes resulting from such a determination. This percentage was based on the relative pro forma net book values of Cendant and the Company as of September 30, 2004, without giving effect to any adjustments to the book values of certain long-lived assets that may be required as a result of the Spin-Off and the related transactions. The Company cannot determine whether it will have to indemnify Cendant or its affiliates for any substantial obligations in the future. The Company also has no assurance that if Cendant or any of its affiliates is required to indemnify the Company for any substantial obligations, they will be able to satisfy those obligations.

     Cendant and its subsidiaries are the subject of an Internal Revenue Service (“IRS”) audit for the tax years ended December 31, 2003 through 2006. The Company, since it was a subsidiary of Cendant through January 31, 2005, is included in this IRS audit of Cendant. Under certain provisions of the IRS regulations, the Company and its subsidiaries are subject to several liability to the IRS (together with Cendant and certain of its affiliates (the “Cendant Group”) prior to the Spin-Off) for any consolidated federal income tax liability of the Cendant Group arising in a taxable year during any part of which they were members of the Cendant Group. Cendant disclosed in its Annual Report on Form 10-K for the year ended December 31, 2006 (filed on March 1, 2007 under Avis Budget Group, Inc.) that it settled the IRS audit for the taxable years 1998 through 2002 that included the Company. As provided in the Amended Tax Sharing Agreement, Cendant is responsible for and required to pay to the IRS all taxes required to be reported on the consolidated federal returns for taxable periods ended on or before January 31, 2005. Pursuant to the Amended Tax Sharing Agreement, Cendant is solely responsible for separate state taxes on a significant number of the Company’s income tax returns for years 2003 and prior. In addition, Cendant is solely responsible for paying tax deficiencies arising from adjustments to the Company’s federal income tax returns and for the Company’s state and local income tax returns filed on a consolidated, combined or unitary basis with Cendant for taxable periods ended on or before the Spin-Off, except for those taxes which might be attributable to the Spin-Off or internal reorganization transactions relating thereto, as more fully discussed above. The Company will be solely responsible for any tax deficiencies arising from adjustments to separate state and local income tax returns for taxable periods ending after 2003 and for adjustments to federal and all state and local income tax returns for periods after the Spin-Off.

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

     The June 1999 disposition of the fleet businesses by Cendant was structured as a tax-free reorganization by Cendant pursuant to the IRS guidance at the time of the transaction. Accordingly, no income tax expense was recorded on a majority of the gain from this transaction. 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 by the IRS on the tax-free structure of this transaction could create a tax benefit to the Company, and the Company would be required to pay Cendant any tax benefits that are realized by the Company as a result of such ruling. Any cash payments that would be made for federal or state taxes in connection with an adverse ruling are not expected to be significant.

     Legal Contingencies

     The Company is party to various claims and legal proceedings from time to time related to contract disputes and other commercial, employment and tax matters. Except as disclosed below, the Company is not aware of any legal proceedings that it believes could have, individually or in the aggregate, a material adverse effect on its financial position, results of operations or cash flows.

     In March and April 2006, several class actions were filed against the Company, its Chief Executive Officer and its former Chief Financial Officer in the United States District Court for the District of New Jersey. The plaintiffs purport to represent a class consisting of all persons (other than the Company’s officers and Directors and their affiliates) who purchased the Company’s Common stock during certain time periods beginning March 15, 2005 in one case and May 12, 2005 in the other cases and ending March 1, 2006 (the “Class Period”). The plaintiffs allege, among other things, that the defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Additionally, two derivative actions were filed in the United States District Court for the District of New Jersey against the Company, its former Chief Financial Officer and each member of its Board of Directors. One of these derivative actions has since been voluntarily dismissed by the plaintiffs. The remaining derivative action alleges breaches of fiduciary duty and related claims based on substantially the same factual allegations as in the class action suits. See Note 18, “Subsequent Events” for additional discussion of legal contingencies.

     Due to the inherent uncertainties of litigation, and because these actions are at a preliminary stage, the Company cannot accurately predict the ultimate outcome of these matters at this time. The Company intends to vigorously defend against the alleged claims in each of these matters. The ultimate resolution of these matters could have a material adverse effect on the Company’s financial position, results of operations or cash flows.

     Loan Servicing Portfolio

     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 Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”) programs. Such

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

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 Government National Mortgage Association (“Ginnie Mae”) programs. These government loans are either insured against loss by the Federal Housing Administration 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 in which 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 $3.9 billion as of June 30, 2006. In addition, the outstanding balance of loans sold with recourse by the Company was $628 million as of June 30, 2006.

     As of June 30, 2006, the Company had a liability of $32 million, recorded in Other liabilities in the Condensed Consolidated Balance Sheet, for probable losses related to the Company’s loan servicing portfolio.

     Mortgage Reinsurance

     Through the Company’s wholly owned mortgage reinsurance subsidiary, Atrium Insurance Corporation, the Company has entered into contracts with several primary mortgage insurance companies to provide mortgage reinsurance on certain mortgage loans in the Company’s loan servicing portfolio. Through these contracts, the Company is exposed to losses on mortgage loans pooled by year of origination. Loss rates on these pools are determined based on the unpaid principal balance of underlying loans. The Company indemnifies the primary mortgage insurers for loss rates that fall between a stated minimum and maximum. In return for absorbing this loss exposure, the Company is contractually entitled to a portion of the insurance premium from the primary mortgage insurers. As of June 30, 2006, the Company provided such mortgage reinsurance for approximately $11.0 billion of mortgage loans in its servicing portfolio. As stated above, the Company’s contracts with the primary mortgage insurers limit its maximum potential exposure to reinsurance losses, which was $745 million as of June 30, 2006. The Company is required to hold securities in trust related to this potential obligation, which were included in Restricted Cash in the Condensed Consolidated Balance Sheet as of June 30, 2006. As of June 30, 2006, a liability of $17 million was recorded in Other liabilities in the Condensed Consolidated Balance Sheet for estimated losses associated with the Company’s mortgage reinsurance activities.

     Loan Funding Commitments

     As of June 30, 2006, the Company had commitments to fund mortgage loans with agreed-upon rates or rate protection amounting to $6.1 billion. Additionally, as of June 30, 2006, the Company had commitments to fund open home equity lines of credit of $2.7 billion and construction loans of $102 million.

     Forward Delivery Commitments

     Commitments to sell loans generally have fixed expiration dates or other termination clauses and may require the 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 $3.7 billion of forward delivery commitments as of June 30, 2006 generally will be settled within 90 days of the individual commitment date.

     Indemnification of Cendant

     In connection with the Spin-Off, the Company entered into a separation agreement with Cendant (the “Separation Agreement”), pursuant to which, the Company has agreed to indemnify Cendant for any losses (other than losses relating to taxes, indemnification for which is provided in the Amended Tax Sharing Agreement) that any party seeks to impose upon Cendant or its affiliates that relate to, arise or result from: (i) any of the

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

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, (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 Amended Tax Sharing Agreement or a transition services agreement the Company entered into in connection with the Spin-Off (the “Transition Services Agreement”); (ii) any breach by the Company or its affiliates of the Separation Agreement, the Amended Tax Sharing Agreement or the Transition Services Agreement and (iii) any liabilities relating to information in the registration statement on Form 8-A filed with the SEC 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, 2005 Form 8-K”) or the investor presentation filed as an exhibit to the January 19, 2005 Form 8-K, other than portions thereof 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.

     Off-Balance Sheet Arrangements and Guarantees

     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 leases of real estate, access to credit facilities and use of derivatives and issuances of debt or equity securities. The guarantees or indemnifications issued are for the benefit of the buyers in sale agreements and sellers in purchase agreements, landlords in lease contracts, financial institutions in credit facility arrangements and derivative contracts and 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 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.

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

12. Accumulated Other Comprehensive Income

     The components of comprehensive income (loss) are summarized as follows:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
						2005								2005
						As								As
		2006				Restated				2006				Restated
		(In millions)
Net income (loss)		$	1			$	18			$	(10	)		$	30
Other comprehensive income (loss):
Minimum pension liability, net of income taxes			—				—				—				(5	)
Currency translation adjustments			4				(1	)			4				(2	)
Unrealized gain (loss) on available-for-sale securities, net of income taxes			—				1				(1	)			1
Total other comprehensive income (loss)			4				—				3				(6	)
Total comprehensive income (loss)		$	5			$	18			$	(7	)		$	24