Registered number: CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2016

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1 Registered number: CARRINGTON HOLDING COMPANY, LLC AND SUBSIDIARIES ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2016

2 TABLE OF CONTENTS DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS... 3 MANAGEMENT REPORT... 6 STATEMENT OF MANAGEMENT S RESPONSIBILITIES CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS REPORT CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS INTERESTS/(DEFICIT) CONSOLIDATED STATEMENTS OF CASH FLOWS

3 DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Statements made in this Annual Report that are not statements of historical fact are forward looking statements. In addition, from time to time, we and our representatives may make statements that are forward looking. All forward looking statements involve risks and uncertainties. This section provides you with cautionary statements identifying important factors that could cause our actual results to differ materially from those contained in forward looking statements made in this Annual Report or otherwise made by us or on our behalf. You can identify these forward looking statements by the use of forward looking words such as outlook, believes, expects, potential, continues, may, will, should, could, seeks, approximately, predicts, intends, plans, estimates, anticipates, target, projects, contemplates or the negative version of those words or other comparable words. Any forward looking statements contained in this Annual Report are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The Company s forward looking statements speak only as of the time that they are made and may not necessarily reflect the Company s outlook at any other point in time. Except as required by law or regulation, the Company undertakes no obligation to update any forward looking statements, whether as a result of new information, future events, or for any other reason. Such forward looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to: our ability to maintain or grow the size of our servicing portfolio and realize our significant investments in personnel and our technology platform by successfully identifying attractive acquisition opportunities, including mortgage servicing rights ( MSRs ), subservicing contracts, servicing and lending operating divisions; our ability to grow the size of our servicing portfolio, including through MSR acquisitions, due to inquiries or restrictions by certain state and federal regulators of a number of bank and non bank servicers in the industry, or receipt of any required approvals from government entities and government sponsored enterprises ( Government Agencies or GSEs ); changes to our capitalization and capital ratio requirements; increased legal proceedings, regulatory examinations or investigations and related costs, including, but not limited to, any adverse judgments, findings, settlements or orders resulting from such actions; the potential future deterioration of the residential mortgage market, adverse economic conditions, decrease in property values and increase in delinquencies and defaults; our ability to efficiently originate and service loans under specific Government Agency Guidelines and other programs administered by government entities, or significant changes in such guidelines; our ability to compete successfully in the mortgage lending industry; the delay in our foreclosure proceedings due to inquiries by certain state Attorneys General, court administrators and state and federal government agencies; our ability to scale up appropriately to service and realize the anticipated benefits of prior and future MSR acquisitions; our ability to obtain sufficient capital to meet our financing and debt service requirements; 3

4 the decision by one or more of our lenders providing warehouse facilities used to fund single family residential mortgage loans and early buy outs of delinquent Government Loans to exit the market or reduce its exposure; our ability to negotiate favorable economic terms with investors and counterparties; our ability to maintain the financial covenants required by our lenders and regulators; our ability to grow our loan origination volume; the termination of any of our servicing rights or subservicing contracts; changes to federal, state and local laws and regulations concerning loan servicing, loan origination, loan modification or the licensing of entities that engage in these activities; the suspension or loss of any of our licenses or Government Agency approvals; delays in our ability to collect or be reimbursed for servicing advances; changes in our business relationships with Government National Mortgage Association ( GNMA or Ginnie Mae ), Federal Home Loan Mortgage Corporation ( FHLMC or Freddie Mac ), Federal National Mortgage Association ( Fannie Mae ) and others that facilitate the issuance of residential mortgage backed securities; changes to the nature of the guarantees of Federal Housing Administration ( FHA ), United States Department of Veterans Affairs ( VA ), or United States Department of Agriculture ( USDA ) and the market implications of such changes; errors in our financial models or changes in assumptions; requirements to write down the value of certain assets; changes in prevailing interest rates; our ability to successfully mitigate our market risks through hedging strategies; changes to our servicer ratings; the accuracy and completeness of information about borrowers and counterparties; our ability to maintain our technology systems and our ability to adapt such systems for future operating environments; failure of our internal information security measures or breach of our privacy protections; failure of our vendors to comply with servicing criteria; the loss of the services of any of our senior managers; changes to our income tax status; failure of our asset manager to maintain current investors or attract new investors; damage to our brand and reputation, and certain actions of our employees and agents; transfer of property ownership risks under property management contracts; failure to attract and retain a highly skilled work force; changes in accounting standards. 4

5 These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Annual Report. The forward looking statements made in this Annual Report relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update or review any forward looking statement except as required by law, whether as a result of new information, future developments or otherwise. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we may have expressed or implied by these forwardlooking statements. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. You should specifically consider the principal risks and uncertainties identified in this Annual Report that could cause actual results to differ from what we have expressed or implied by these forward looking statements. Accordingly, we caution you that any such forwardlooking statements are subject to various risks and uncertainties. 5

6 MANAGEMENT REPORT Carrington Holding Company, LLC (the Company ) presents its Annual Financial Report and the audited consolidated financial statements of the Company and its subsidiaries for the years ended December 31, 2016 and Principal activities The Company is a holding company whose primary businesses include asset management, mortgage, real estate transactions, and real estate logistics. The mortgage business is comprised of three operating units: mortgage servicing, mortgage lending, and resolution services. Collectively, the businesses are vertically and horizontally integrated and provide a broad range of real estate services that encompass nearly all aspects of single family residential real estate transactions in the U.S. Consequently, the Company is uniquely positioned to execute on various opportunities throughout the full lifecycle of residential real estate based upon market conditions. The Company has been managing assets since 2004, servicing mortgage loans since 2007, originating mortgage loans since 2010, and providing real estate services since The Company is headquartered in Old Greenwich, Connecticut and Aliso Viejo, California. As of December 31, 2016, the Company had approximately 5,200 full time employees and independent agents across 105 offices. The Company is one of a few non bank financial services companies focused on the U.S. residential mortgage and real estate markets whose affiliated businesses support and enhance each other. The asset management operating division sources revenue opportunities for the benefit of one or more affiliated operating divisions. It benefits from expertise provided by other operating divisions in management of capital for re performing or distressed debt. The Company s mortgage servicing operating unit generates revenue for its mortgage lending operating unit by providing a sustainable source of refinance opportunities to its customers. The mortgage lending operating unit generates a steady source of new loans to expand or replenish the servicing portfolio as loans liquidate. The Company s real estate transactions and real estate logistics operating divisions are supported in part by the mortgage and asset management operating divisions. 6

7 Business and Financial Review Set forth below is a description of the financial performance of the consolidated Company and its operating divisions for the years ended. Year end Results The following table presents condensed statement of operations for the periods indicated. For the Years Ended December 31, $ change % change ($ in thousands) Revenues $ 494,374 $ 336,593 $ 157, % Operating expenses 452, ,101 93, Income/(loss) from operations 42,252 (22,508) 64,760 NM* Other income/(expense): Interest income 17,036 11,085 5, Interest expense (43,850) (30,399) (13,451) (44) Change in fair value of mortgage servicing rights 15,975 75,289 (59,314) (79) Change in fair value of long term debt 52,087 8,470 43, Net income before income taxes $ 83,500 $ 41,937 $ 41, % * NM Not meaningful Comparison of Consolidated Results for the Years Ended Revenues for the year ended December 31, 2016 were $494.4 million, an increase of $157.8 million, or 47%, from $336.6 million for the year ended December 31, The increase was primarily due to higher revenue from the Company s mortgage operating division. Operating expenses for the year ended December 31, 2016 were $452.1 million, an increase of $93.0 million, or 26%, from $359.1 million for the year ended December 31, The increase was primarily driven by expansion of the mortgage servicing and lending platforms that resulted in higher compensation and benefits expenses related to increased staffing levels, origination activities, loan servicing, origination activities, occupancy, and general and administrative expenses. Interest income was $17.0 million for the year ended December 31, 2016, an increase of $6.0 million, or 54%, from $11.1 million for the year ended December 31, 2015 as a result of higher mortgage loan originations. Interest expense was $43.9 million for the year ended December 31, 2016, an increase of $13.5 million, or 44%, from $30.4 million for the year ended December 31, The increase was primarily due to additional borrowings on our warehouse facilities related to higher loan originations and a rate increase on our long term debt. The change in fair value of our MSRs was $16.0 million for the year ended December 31, 2016, a decrease of $59.3 million or 79%, from $75.3 million for the year ended December 31, The decrease in fair value was primarily due to changes in valuation assumptions reflective of current market conditions and prepayments. The change in fair value of long term debt was $52.1 million for the year ended December 31, 2016, compared to $8.5 million for the year ended December 31, As of December 31, 2016 the fair value of the long term debt decreased to $313.3 million from $365.4 million as of December 31, 2015, resulting in income for the year ended December 31,

8 Consolidated securitization trust (the Trust ) income offset expense for the year ended December 31, 2016 and The trust activity is excluded in the table above and presented separately in the Consolidated Statements of Operations. Operating Division Results Our business is divided into four operating divisions: asset management, mortgage (inclusive of the mortgage lending, mortgage servicing, and resolution services operating units), real estate transactions, and real estate logistics. Certain shared service functions such as human resources, finance and accounting, information technology, legal, risk management, and executive administration are included in corporate support. Asset Management Operating Division The Company s asset management operating division conducts business as Carrington Capital Management, LLC ( CCM ). CCM provides alternative asset management services focused on investments in the U.S. real estate, mortgage, and fixed income markets. CCM offers investment strategies that utilize its experience in assessing and evaluating property value, as well as its established infrastructure in advising on the management and disposition of delinquent and defaulted mortgage loans. The asset management operating division has been managing capital invested in the residential mortgage market since 2004 and has developed several scalable investment strategies and vehicles by leveraging the expertise of its management team and the capabilities of its other operating divisions. The investment vehicles and strategies include utilization of managed accounts or funds formed to aggregate and invest capital into residential mortgage loans and other investments in the U.S. housing market. CCM is a registered investment adviser with the U.S. Securities and Exchange Commission ( SEC ). As of December 31, 2016, CCM had offices in Old Greenwich, Connecticut; Aliso Viejo, California; Brentwood, Tennessee; and Oceanside, California. As of December 31, 2016, CCM had $99.3 million of discretionary fund assets on which the Company earns advisory fees. In addition, CCM oversees assets of $4.3 billion inclusive of $2.6 billion of securitized mortgage trust assets and $1.7 billion of separately managed non discretionary capital. CCM also manages acquisitions of MSRs and sales of excess servicing rights ( ESRs ) for the Company s affiliated mortgage operating division. MSRs acquired and ESRs sold during the year ended December 31, 2016 were $12.5 billion and $3.6 billion of unpaid principal balance ( UPB ), respectively. Our affiliated operating divisions including mortgage, real estate transactions, and real estate logistics provide integrated life of loan management services for invested capital. The following table summarizes the operating results from the asset management operating division for the periods indicated. For the Years Ended December 31, $ change % change Revenues: ($ in thousands) Revenues $ 11,889 $ 7,441 $ 4, % Intercompany and other 1,964 1 $ 1,963 NM Total Asset Management Operating Division Revenue 13,853 7,442 6, Operating expenses 6,568 6,631 (63) (1) Income from operations 7, , Other income/(expense): Interest income, net (15) (4) Asset Management Operating Division Income $ 7,642 $ 1,183 $ 6, % 8

9 Comparison of Asset Management Operating Division Results for the Years Ended Asset management operating division revenues for the year ended December 31, 2016 were $13.9 million, an increase of $6.4 million, or 86%, from $7.4 million for the year ended December 31, Operating expenses for the years ended remained at $6.6 million. Mortgage Operating Division The Company s mortgage operating division is comprised of two companies that provide mortgage servicing, lending, and collections services, Carrington Mortgage Services, LLC ( CMS ) and Carrington Resolution Services, LLC ( CRS ). Carrington Mortgage Services is comprised of both the Company s mortgage servicing ( MSD ) and mortgage lending operating units ( MLD ). Mortgage Servicing Operating Unit The Company s mortgage servicing operating unit is a fully integrated mortgage servicing company with capabilities to service agency and non agency loans that are both performing and non performing. Agency loans are guaranteed or insured by Government Agencies that include the FHA, VA, or USDA. Non agency loans are loans primarily originated to investor guidelines. The Company services loans for large financial institutions including banks, Government Agencies, and private investors. The mortgage servicing operating unit seeks to enable borrowers to maintain homeownership through loss mitigation and foreclosure prevention efforts while also seeking to maximize return on assets for its investors. The Company also services Government Agency loans originated for sale through its mortgage lending operating unit and subserviced loans for other investors. The Company is licensed to service loans in all 50 states and is ranked as a top ten FHA servicer based on loan count. CMS was rated by Fitch Ratings in December 2016 as a U.S. residential primary servicer for subprime product at RPS3, Outlook Stable, and as a special servicer at RSS3, Outlook Stable. The servicing portfolio grew significantly through MSR acquisitions of $12.5 billion and $25.4 billion of UPB for the years ended, respectively. The Company also expanded its servicing portfolio through the addition of $5.7 billion of loans originated by the Company. The acquired MSR portfolios consist primarily of Government Agency loans, some of which were distressed or significantly delinquent. As of December 31, 2016, the mortgage servicing operating unit serviced approximately 420,000 residential mortgage loans with aggregate UPB of $51.3 billion. CMS is a Ginnie Mae approved issuer, a Freddie Mac approved seller/servicer and a Fannie Mae approved seller/servicer. As of December 31, 2016, MSD had primary offices located in Anaheim, California; Westfield, Indiana; and Plano, Texas. 9

10 The following table indicates the servicing portfolio stratification by source and loan amount as of the periods indicated As of December 31, UPB % of Total UPB % of Total $ change ($ in thousands) Acquired government agency loans $ 27,241, % $ 25,842, % $ 1,399,492 5 % Originated government loans 10,156, ,512, ,644, Securitized non prime loans 5,119, ,746, (626,416) (11) Subserviced loans 4,738, ,466, (1,727,704) (27) Other acquired and originated loans 4,064, ,282, ,782, % change Total Loan Amount $ 51,321, % $ 44,848, % $ 6,472, % 2015 The following table presents key loan characteristics and performance metrics of our servicing portfolio as of the periods indicated. As of December 31, change % change ($ in thousands) Loan count servicing 419, ,163 68, % Ending unpaid principal balance $ 51,321,481 $ 44,848,720 $ 6,472, % Average unpaid principal balance $ 122 $ 128 $ (6) (5) % Average original loan amount $ 141 $ 144 $ (3) (2) % Average coupon 5.09% 5.11% (0.02) (0) % Average FICO credit score % 60+ day delinquent [1] 2.65% 2.29% % Bankruptcy [1] 2.90% 2.56% % Foreclosure [1] 5.62% 6.73% (1.11) (16) % REO [1] 0.72% 0.41% % [1] % based on loan count. The following table is a servicing roll forward of UPB and loan count as of the periods indicated. For the Year Ended December 31, 2016 UPB Count ($ in thousands) Beginning Balance, December 31, 2015 $ 44,848, ,163 Acquisitions [1] 12,040, ,945 Originations 5,682,888 32,888 Payoffs (8,732,895) (65,234) Principal reductions and other [2] (1,687,910) Servicing transfers to others (830,186) (5,153) Ending Balance, December 31, 2016 $ 51,321, ,609 [1] Acquisitions exclude previously subserviced loans that were in the prior reported balance. [2] Loans in the principal reductions and other category do not impact the portfolio loan count due to the nature of the transactions. The loans are included in other line items in the table. The mortgage operating unit provides loan servicing, special servicing and subservicing for Company and investor owned loans. Revenue is primarily comprised of servicing fees, but also includes loan modification incentive fees, repool gains, late fees, insufficient fund fees, and other ancillary income collected during the normal course of business. 10

11 Mortgage servicing revenue consists of certain select items (excluding intercompany transactions between affiliated operating divisions) presented in the following table as of the periods indicated: For the Years Ended December 31, ($ in thousands) Servicing fees $ 98,982 $ 74,125 Modification re pool gains 77,376 22,586 Late charges 21,017 16,494 Modification fees 4,419 4,929 Servicing claims provision (8,709) (494) Other fees 18,590 14,845 Total Servicing Revenue $ 211,675 $ 132,485 When a non agency mortgage loan becomes delinquent and during the period of delinquency and/or default, the Company does not collect a servicing fee until that mortgage loan becomes current or the underlying property is foreclosed upon and sold or otherwise liquidated. These deferred service fees are subject to the performance of the legacy portfolios and do not relate to agency portfolios the Company services. These uncollected servicing fees are not recorded as servicing revenue until collected. Uncollected servicing fees for delinquent loans and foreclosed real estate totaled approximately $23.8 million and $26.5 million as of, respectively. As part of its loss mitigation efforts on government loans, the Company has the right, but not the obligation, to repurchase loans that are more than 90 days delinquent. Subsequent to loan repurchase, the Company may be able to cure, modify, or re pool loans that have made a specified number of consecutive payments. As of the years ended, the Company modified loan amounts in the aggregate of $888.3 million and $556.9 million, and repooled loans in the aggregate of $1.3 billion and $253.0 million, respectively. The following table summarizes the operating results from our mortgage servicing operating unit for the periods indicated. For the Years Ended December 31, $ change % change Revenues: ($ in thousands) Revenues $ 211,675 $ 132,485 $ 79, % Intercompany and other (619) 8,963 (9,582) (107) Total Mortgage Servicing Operating Unit Revenue 211, ,448 69, Operating expenses 117,629 95,199 22, Income from operations 93,427 46,249 47, Other income/(expense): Interest expense, net (3,455) (4,708) 1, Change in fair value of mortgage servicing rights 15,975 75,289 (59,314) (79) Mortgage Servicing Operating Unit Income $ 105,947 $ 116,830 $ (10,883) (9) % Comparison of Mortgage Servicing Operating Unit Results for the Years Ended Mortgage servicing operating unit revenues for the year ended December 31, 2016 were $211.1 million, an increase of $69.6 million, or 49%, from $141.4 million for the year ended December 31, This increase was primarily driven by increased gains on sales of repooled loans and higher servicing fee income as a result of our portfolio growth. 11

12 Operating expenses for the year ended December 31, 2016 were $117.6 million, an increase of $22.4 million, or 24%, from $95.2 million for the year ended December 31, This increase was primarily due to higher loan servicing costs and compensation and benefits expenses related to increase in staffing levels due to the portfolio growth. Net interest expense was $3.5 million for the year ended December 31, 2016, a decrease of $1.3 million, or 27% as compared with $4.7 million for the year ended December 31, The change in fair value of our MSRs was $16.0 million, as compared to $75.3 million for the year ended December 31, The decrease in fair value from the prior year was primarily due to changes in valuation assumptions reflective of current market conditions and prepayments. Carrington Resolution Services Operating Unit CRS is a specialized debt resolution provider focusing on the management and collection of charged off debt for servicers, including MSD, and other financial institutions. CRS develops and implements individualized settlement and repayment plans based on each consumer's specific circumstances. As of December 31, 2016, CRS's portfolio consisted of approximately 1,000 accounts with UPB of approximately $129.6 million. Due to improvement in the residential real estate market and corresponding revenue decline, the Company will continue to provide services for its existing customers but will not seek to acquire new business in the near term. The change in activity is not expected to have a material impact on the Company. Mortgage Lending Operating Unit The Company s mortgage lending operating unit is part of the mortgage services operating division. MLD is a residential wholesale and retail loan originator, licensed to originate loans in 45 states, the U.S. Virgin Islands, District of Columbia, and Puerto Rico. CMS is an approved Ginnie Mae issuer, a Freddie Mac approved seller/servicer and a Fannie Mae approved seller/servicer. MLD originates primarily government insured and conventional agency residential mortgage loans through multiple lending channels. The Company is one of a limited number of non bank originators with fully integrated servicing and real estate services operating divisions. 12

13 The following table provides detail of the origination channels used to originate mortgage loans for the periods indicated. For the Years Ended December 31, 2016 % of Total 2015 % of Total $ Change % Change ($ in thousands) Retail $ 3,730, % $ 2,202, % $ 1,528, % Wholesale 1,952, ,296, , Total $ 5,682, % $ 3,499, % $ 2,183, % Purchase $ 1,177, % $ 936, % $ 241, % Refinance 4,504, ,562, ,942, Total $ 5,682, % $ 3,499, % $ 2,183, % Government $ 5,411, % $ 3,377, % $ 2,033, % Conventional 271, , , Total $ 5,682, % $ 3,499, % $ 2,183, % For the year ended December 31, 2016, the mortgage lending operating unit originated $5.7 billion in loan volume, an increase of approximately $2.2 billion, or 62%, versus $3.5 billion for the year ended December 31, The mix of origination volume from purchase versus refinance transactions was 21% versus 79% for the year ended December 31, 2016 compared to 27% and 73% purchase versus refinance transactions for the year ended December 31, The increase in refinance origination volume was driven by refinance activity from MSR acquisitions, the government s reduction in FHA mortgage insurance premiums, and the favorable interest rate environment. MLD s origination volume is primarily originated by its retail and wholesale channels. For the year ended, the channel mix was 66% retail and 34% wholesale versus 63% retail and 37% wholesale, respectively. The increase in retail channel volume was a result of significant growth in origination activity related to refinance activity driven by MSR acquisitions conducted by the Company. MLD provides mortgage products to borrowers across the credit spectrum and specializes in originating government loans to borrowers with FICO scores below 640, a strategy referred by the Company as Serving the Underserved. The Company believes it is uniquely qualified to serve this market as it has the infrastructure to support this unique market, including a team of underwriters specifically trained in manual underwriting. Further, these loans will generally be retained and serviced by the Company s mortgage servicing operating unit which has experience in high touch servicing necessary to service this type of portfolio. MLD s wholesale channel utilizes a vast network of independent mortgage brokers to source loans. MLD s retail channel is comprised of 42 branch offices located in 18 states with a highly trained sales force. All loans are underwritten through a centralized operations team that includes pre funding audits and incorporates callrecording for compliance and quality assurance. As of December 31, 2016, the mortgage lending operating unit s headquarters were located in Anaheim, California, with fulfillment centers in Anaheim, California; Plano, Texas; Westfield, Indiana; Windsor, Connecticut; and Jacksonville, Florida. Carrington Mortgage UK Limited is a residential mortgage protection broker with offices in Glenrothes, Stonehaven, Fraserburgh, Anstruther, Edinburgh, Glasgow and Norwich. 13

14 The following table summarizes the operating results from our mortgage lending operating unit for the periods indicated. For the Years Ended December 31, $ change % change Revenues: ($ in thousands) Revenues $ 201,735 $ 130,357 $ 71, % Intercompany and other (1,174) (7,567) 6,393 (84) Total Mortgage Lending Operating Division Revenue 200, ,790 77, Operating expenses 169, ,719 46, Income from operations 31, ,383 NM Other (expense): Interest expense, net (3,685) (473) (3,212) (679) Mortgage Lending Operating Division Income $ 27,769 $ (402) $ 28,171 NM % Comparison of Mortgage Lending Operating Unit Results for the Years Ended Mortgage lending revenues for the year ended December 31, 2016 were $200.6 million, an increase of $77.8 million or 63% from $122.8 million for the year ended December 31, This increase was driven primarily by higher origination volume of $5.7 billion for the year ended December 31, 2016, an increase of $2.2 billion or 62% from $3.5 billion for the year ended December 31, Operating expenses for the year ended December 31, 2016 were $169.1 million, an increase of $46.4 million, or 38% from $122.7 million for the year ended December 31, This increase was primarily due to higher compensation and benefits expense related to an increase in staffing levels, origination costs, occupancy and other general and administrative expenses associated with expansion of the lending platform. Interest income, net of expense, resulted in net expense of $3.7 million, an increase in expense of $3.2 million for the year ended December 31, 2016, from an expense of $0.5 million for the year ended December 31, This increase in expense was primarily due to an increase in origination volume of loans held for sale. Real Estate Transactions Operating Division The Company s real estate transactions operating division is comprised of our brokerage, settlement, and portfolio services operating units and is an integrated provider of residential services to the institutional and retail markets. Collectively, the three operating units, including real estate brokerage services, real estate settlement services and portfolio services provide a single source for clients, who are interested in purchasing or selling single family residential real estate properties. The synergies between these businesses and the Company s affiliate operating divisions, including mortgage services and real estate logistics may assist retail clients in simplifying the home purchase and sale process, and aid institutional investors in efficiently managing their residential portfolios. 14

15 Carrington Real Estate Brokerage Services Operating Unit Carrington Real Estate Services, LLC and its subsidiaries ( CRES ) offer a full service real estate brokerage operation that utilizes its company owned network of licensed real estate brokers and sales associates to manage the sale or purchase of residential real estate properties. CRES offers residential brokerage services in 23 states and the District of Columbia and has 48 branch locations. As of December 31, 2016, CRES had approximately 2,000 independent sales associates. CRES was founded in 2008 during the height of the distressed real estate market specializing in the disposition of Real Estate Owned ( REO ) assets as well as traditional residential real estate sales. In addition, the real estate brokerage services operating unit has a network called the Carrington Property Network ( CPN ), comprised of brokerage companies capable of performing purchase and sale transitions in geographic locations where CRES does not operate. For the year ended December 31, 2016, CRES had $2.0 billion in total property sales or approximately 10,700 closing sides, of which $645.4 million or 33% was derived from our institutional clients, $1.2 billion or 60% was generated by our network of independent sales associates and $136.0 million or 7% from CPN. Carrington Settlement Services Operating Unit The Company s settlement services business is comprised of a title agency, Carrington Title Services, LLC ( CTS ), and an escrow company, Carrington Escrow, Inc. ( CEI ). These companies assist with the closing of real estate transactions by providing title and settlement (i.e. closing and escrow) services to borrowers and real estate companies, inclusive of the Company s affiliates: real estate brokerage, CRES, MSD, and MLD. Since 2014, the settlement services business has diversified significantly with a majority of the business in refinance and the remainder divided between purchase, conveyance title and foreclosure related search products such as property abstract reports. The escrow, title, and settlement services business leverages its advanced technology and diverse product menu to provide cost efficient and service driven solutions for clients. In addition, they provide non insurance products including property abstract reports in all states, and services to examine and prepare property summaries for foreclosure attorneys to help expedite the default process for the Company s mortgage servicing operating unit and third party customers. For the year ended December 31, 2016, CTS assisted in approximately 64,000 transactions including, foreclosure abstracts, title policies and closings, and recorded revenue of $15.8 million. CEI performed approximately 1,200 closings and recorded revenue of $0.8 million for the year ended December 31, Carrington Portfolio Services Operating Unit The portfolio services business is comprised of Carrington Foreclosure Services, LLC and Carrington Document Services, LLC. This group of businesses provides a variety of services to the Carrington family of companies, including our mortgage operating division as well as third party clients. These services include foreclosure trustee services in California, Nevada, Texas and Arizona and document preparation services. By having these businesses under one roof, the Company seeks to provide more efficient and expedited services to customers. For the year ended December 31, 2016, the portfolio services business assisted on approximately 12,400 new transactions and recorded revenue of $3.6 million. 15

16 Comparison of Real Estate Transactions Operating Division Results for the Years ended December 31, 2016 and 2015 For the Years Ended December 31, $ change % change Revenues: ($ in thousands) Revenues $ 39,508 $ 36,421 $ 3,087 8 % Intercompany and other (15) (1,088) 1,073 (99) Total Real Estate Transactions Operating Division Revenue 39,493 35,333 4, Operating expenses 27,802 25,019 2, Income from operations 11,691 10,314 1, Other expense: Interest income/(expense), net Real Estate Transactions Operating Division Income $ 11,691 $ 10,314 $ 1, % The real estate transactions operating division revenue was $39.5 million for the year ended December 31, 2016, an increase of $4.2 million or 12% from $35.3 million for the year ended December 31, The increase was primarily due to growth in the settlement services operating unit attributable to higher refinance production sourced from our mortgage lending operating unit as well as from several new third party clients. Operating expenses in the real estate transactions operating division were $27.8 million, for the year ended December 31, 2016, an increase of $2.8 million, or 11%, from $25.0 million for the year ended December 31, The increase was primarily driven by higher compensation and benefit expense resulting from growth in personnel in connection with the growth in production in the settlement services operating unit. Real Estate Logistics Operating Division The real estate logistics operating division is comprised of affiliated companies that provide resolution strategies, property management, and field services to holders of single family residential properties. The real estate logistics businesses include Carrington Property Services, LLC ( CPS ), Carrington Home Solutions, L.P. ( CHS ), Carrington Development Company, LLC ( CDC ), and Azure Home, LLC ( Azure ). 16

17 Carrington Property Services Operating Unit CPS is a property asset management company, managing approximately 4,300 properties as of December 31, 2016 and recorded revenue of $13.8 million for the year ended December 31, CPS provides property asset management and marketing services that can be customized to meet the needs of its customers. Unlike traditional property management companies, which focus exclusively on the disposition of REO assets, CPS is qualified to work with customers across the entire default lifecycle providing information and analytics at both the pre and post foreclosure stage of the process to help customers determine optimal asset resolution. CPS offers services designed to help holders of single family residential real estate properties manage their assets. These services include: Property assessment/inspections; Property valuations; Property resolution services, including cash for keys, short sale, deed in lieu, deed for lease and tenantin place strategies; Marketing; Disposition; and Rental management. CPS customers include mortgage servicers (including CMS), financial institutions, Government Agencies, and holders of residential real estate portfolios. These customers engage CPS to manage the disposition of their assets in the loan default life cycle through a variety of strategies to help them maximize resolution proceeds. CPS managed approximately 2,700 and 1,500 properties for disposition as of, respectively. CPS developed proprietary technology and a rental management sub operating unit to provide property management services to clients with single family portfolios. The CPS client base includes GSEs and servicers. In 2016, the rental management portfolio declined consistent with collateral value improvement in the residential real estate market. As of December 31, 2016, CPS had approximately 1,700 rental properties under management. In August 2016, Morningstar Credit Ratings, LLC ( Morningstar ) reaffirmed CPS s ranking of MOR RV 1 ( Exceeds Prudent Standards ) in an assessment of CPS operational infrastructure and client driven performance as a residential REO asset manager and residential single family rental property manager. Morningstar also assigned CPS a forecast of Stable. 17

18 Carrington Home Solutions Operating Unit CHS offers a range of property preservation, maintenance, and repair services to lenders, mortgage servicers (including CMS), and asset managers, as well as institutional clients, private real estate investors, real estate agents and retail home owners. The range of products and services include: Vacant property registration; Utility management; Inspection services; Preservation services; Property maintenance; and Property repairs and rehabilitation. CHS offers nationwide coverage through its network of experienced professionals who seek to provide prompt, responsive, reliable, and quality services to preserve and enhance property values. In addition, CHS has a dedicated field staff, including licensed contractors and trade professionals. For the year ended December 31, 2016, CHS recorded revenue of $15.7 million. Azure Home specialized in luxury residential real estate market services that include brokerage services for acquisition, disposition and rental of properties through ongoing residential care and maintenance. The Company has discontinued the Azure Home business in the first quarter of Real estate logistics opportunities for CPS and CHS are sourced in part by the Company s mortgage services and asset management operating divisions. For the year ended December 31, 2016, 72% of the gross revenues of our real estate logistics operating division came from referrals from the mortgage servicing operating unit and asset management operating division. Comparison of Real Estate Logistics Operating Division Results for the Years ended The following table summarizes the operating results from our real estate logistics operating division for the periods indicated. For the Years Ended December 31, $ change % change Revenues: ($ in thousands) Revenues $ 29,567 $ 29,889 $ (322) (1) % Intercompany and other (156) (309) 153 (50) Total Real Estate Logistics Operating Division Revenue 29,411 29,580 (169) (1) Operating expenses 23,388 21,338 2, Income from operations 6,023 8,242 (2,219) (27) Other expense: Interest expense, net (2) (7) 5 Real Estate Logistics Operating Division Income $ 6,021 $ 8,235 $ (2,214) (27) % The real estate logistics operating division revenue was $29.4 million for the year ended December 31, 2016, a decrease of $0.2 million or 1% from $29.6 million for the year ended December 31, The decrease was primarily due to lower revenues in the property services operating unit due to a decline in the rental management portfolio. 18

19 Operating expenses in the real estate logistics operating division were $23.4 million, an increase of $2.1 million or 10% from $21.3 million for the year ended December 31, The increase was related to higher staffing levels and expansion of the home solutions operating unit related to new preservation services, which was partially offset by lower personnel expenses in the property services operating unit. Corporate Support Our corporate support consists of centralized services including human resources, finance and accounting, information technology, legal, risk management and executive administration that provide support services to all of our operating divisions. Operating expenses within the corporate support functions increased by 22% to $107.6 million for the year ended December 31, 2016 from $88.2 million for the year ended December 31, Liquidity Cash and cash equivalents consisted of the following at the dates indicated. As of December 31, ($ in thousands) Operating cash $ 36,039 $ 17,347 Clearing accounts 174, ,354 $ 210,169 $ 157,701 The Company s cash flows from operating, investing, and financing activities were as follows for the periods indicated. For the Years Ended December 31, $ change % change ($ in thousands) Operating activities $ (58,678) $ (109,014) $ 50,336 (46) % Less trust related activity 44,418 42,990 1,428 3 Operating activities excluding trust $ (103,096) $ (152,004) $ 48,908 (32) % Investing activities $ 250,715 $ 262,022 $ (11,307) (4) % Less trust related activity 255, ,264 3,809 2 Investing activities excluding trust $ (4,358) $ 10,758 $ (15,116) (141) % Financing activities $ (139,569) $ (92,742) $ (46,827) (50) % Less trust related activity (299,491) (294,254) (5,237) (2) Financing activities excluding trust $ 159,922 $ 201,512 $ (41,590) (21) % Operating activities Net cash used by operating activities, excluding Trust activity, was $103.1 million for the year ended December 31, 2016, as compared to net cash used by operating activities of $152.0 million in the same period from the prior year. The $48.9 million decrease in cash used for operating activities, excluding Trust activity, during the year ended December 31, 2016, was primarily due to an increase in proceeds from sales of, and principal payments from, mortgage loans held for sale, partially offset by an increase in costs associated with an increase in originated loans. 19

20 Investing activities Net cash used by investing activities, excluding Trust activity, was $4.4 million for the year ended December 31, 2016, as compared to net cash provided by investing activities of $10.8 million for the same period in the prior year. The $15.1 million increase in net cash used by investing activities, excluding Trust activity, during the year ended December 31, 2016, was primarily due to the payments for acquired MSRs partially offset by cash received from the sale of ESRs. Financing activities Net cash provided by financing activities, excluding Trust activity, was $159.9 million for the year ended December 31, 2016, as compared to $201.5 million of net cash provided by financing activities for the year ended December 31, The $41.6 million decrease in cash provided by financing activities during the year ended December 31, 2016 was primarily due to decrease in the cash proceeds received from the Company s credit facilities compared to the prior year period, partially offset by cash contributions from the Company s noncontrolling interest during the fourth quarter of Refer to Note 14, for additional discussion regarding the Company s non controlling interest. Trust related activity had no net effect on the cash flows for the years ended. Financing Facilities We maintain financing facilities that support our mortgage servicing and lending businesses in their daily operations. Warehouse Facilities Our mortgage lending operating unit maintained origination and FHA buyout warehouse facilities with aggregate line limits of $821.1 million and advance limits ranging from 70% to 99%. As of December 31, 2016, the outstanding balance across the seven lines was $543.6 million. Maximum Available Balance Outstanding December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 ($ in thousands) Agreement I [1] Warehouse $ 155,000 $ 200,000 $ 74,342 $ 189,214 Agreement II [1] Warehouse/FHA Buyout 325, , , ,140 Agreement III [2] Warehouse 160, ,368 Agreement IV [3] FHA Buyout 110, ,000 49,366 38,455 Agreement V Warehouse 6,100 6,100 6,100 6,100 Agreement VI FHA Buyout 20,000 20,000 16,074 8,366 Agreement VII [4] FHA Buyout 45,000 $ 821,100 $ 661,100 $ 543,583 $ 441,275 [1] In September 2016, the Company renewed two of its warehouse facilities with a maturity date occurring in September [2] In April 2016, a new warehouse facility was issued with a line limit of $110.0 million and a maturity date occurring in April In August 2016, the Company received a temporary line limit increase to $160.0 million through November 28, 2016 from $110.0 million to accommodate elevated levels of production. In November 2016, this temporary line limit increase was extended through February [3] In February 2017, the Company renewed one of its FHA buy out warehouse facilities with a maturity date occurring in April [4] In July 2016, the Company increased one of its servicing advance facilities to $50.0 million with the ability to use $30.0 million to fund early buyouts of single family residential loans and extended the related maturity date occurring in October In September 2016, the Company amended the servicing advance facility to $65.0 million with a sublimit of $45.0 million which may be used to buy out FHA loans. In October 2016, the facility was renewed with a maturity date occurring in October

21 Servicing Advance Facilities As of December 31, 2016, the Company had two servicing advance facilities with a total committed amount of $140.0 million, of which $45.0 million of one facility may be used as a warehouse facility to fund early buyouts on single family residential loans (See Agreement VII in the Warehouse Facilities section above). The two servicing advance facilities have an outstanding balance of $78.5 million as of December 31, The weighted average advance rate of the two facilities as of December 31, 2016 was 79%. In comparison, as of December 31, 2015, the Company had a total committed amount of $75.0 million, an outstanding balance of $63.2 million and a weighted average advance rate of 80%. These facilities include customary covenants, of which the Company was in compliance as of. The facilities are subject to a margin call if the principal balance exceeds the underlying fair value of the collateral determined by the third party lender and confirmed by the Company. As of December 31, 2016, the fair value of the collateral exceeded the UPB. Future Developments The Company s four operating divisions provide a comprehensive platform for revenue generation throughout the lifecycle of residential real estate transactions. Because of the synergies among the operating divisions, the Company is able to perform in various market cycles. The Company expects to drive future growth in the following ways: increase and diversification of lending activities; expand residential mortgage servicing; grow the asset management business; diversify the real estate transactions and logistics operating divisions; and meet evolving needs of the residential mortgage and U.S. housing industries. Management believes that the Company s integrated approach, together with the strength, diversity and independence of each of the Company s operating divisions, positions it to take advantage of the developments in the U.S. housing market and the major structural changes occurring across the mortgage industry. Significant Events On January 1, 2016, the Company entered into a MSRs purchase and sale agreement with Ginnie Mae, pursuant to which the Company purchased MSRs related to U.S. residential mortgage loans originated through Ginnie Mae loan programs with approximately $2.1 billion in UPB. Prior to the closing date, CMS had been subservicing approximately 20,000 of these loans for Ginnie Mae under a Master Sub servicer Agreement. The purchase price of $16.6 million was financed by an unrelated third party, who contemporaneously acquired the ESR from CMS. Pursuant to the agreements, CMS sold to the third party the right to receive the excess cash flow generated from the servicing fee after receipt of a fixed basic servicing fee per mortgage loan for $16.6 million. This transaction, managed by the Company s asset management operating division, was settled in January