- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

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

For the transition period from: to

Commission File Number: 1-35431

Home Loan Servicing Solutions, Ltd.

(Exact name of registrant as specified in its charter)

Cayman Islands

98-0683664

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

Home Loan Servicing Solutions, Ltd.

c/o Intertrust Corporate Services (Cayman) Limited

87 Mary Street

George Town, Grand Cayman KY1-9005

Cayman Islands

(Address of principal executive offices) (Zip Code)

(345) 943-3100

(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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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


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

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

Number of Ordinary Shares, $0.01 par value, outstanding as of October 18, 2012: 30,584,718 shares.

HOME LOAN SERVICING SOLUTIONS, LTD.

FORM 10-Q

IN DEX



	PAGE

Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)		2

Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011		2

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011		3

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2012 and 2011		4

Condensed Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2012 and 2011		5

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011		6

Notes to Interim Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3. Quantitative and Qualitative Disclosures About Market Risk		37

Item 4. Controls and Procedures		38

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		38

Item 1A. Risk Factors		38

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds		38

Item 3. Defaults Upon Senior Securities		38

Item 4. Mine Safety Issues		38

Item 5. Other Information		38

Item 6. Exhibits		38

Signatures		39

PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM CONDENSED CONSOLIDAT ED FINANCIAL STATEMENTS (Unaudited)

HOME LOAN SERVICING SO LUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)


	September 30, 2012			December 31, 2011
Assets
Cash	$	33,750		$	283
Match funded advances		1,446,091			—
Notes receivable – Rights to MSRs		177,730			—
Other assets		45,334			2,860

Total assets	$	1,702,905		$	3,143


Liabilities and Equity
Liabilities
Match funded liabilities	$	1,250,912		$	—
Dividends payable		3,058			—
Other liabilities		30,948			3,134

Total liabilities		1,284,918			3,134


Commitments and Contingencies (See Note 14)

Equity
Equity – Ordinary shares, $.01 par value; 200,000,000 and 5,000,000 shares authorized; 30,584,718 and 20,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		306			—
Additional paid-in capital		415,155			300
Retained earnings (accumulated deficit)		3,889			(291	)
Accumulated other comprehensive income (loss)		(1,363	)		—

Total equity		417,987			9

Total liabilities and equity	$	1,702,905		$	3,143

The accompanying notes are an integral part of these condensed consolidated financial statements.

HOME LOAN S ERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except share data)


For the periods ended September 30,	Three Months					Nine Months
	2012		2011			2012		2011
Revenue
Interest income – notes receivable – Rights to MSRs	$	14,017	$	—		$	27,542	$	—
Interest income – other		146		—			283		—

Total interest income		14,163		—			27,825		—
Other revenue		669		—			1,664		—

Total revenue		14,832		—			29,489		—


Operating expenses
Compensation and benefits		1,257		—			2,682		—
General and administrative expenses		679		38			1,625		82

Total operating expenses		1,936		38			4,307		82


Income (loss) from operations		12,896		(38	)		25,182		(82	)


Other expense
Interest expense		6,252		—			12,507		—

Total other expense		6,252		—			12,507		—

Income (loss) before income taxes		6,644		(38	)		12,675		(82	)
Income tax expense		72		—			149		—

Net income (loss)	$	6,572	$	(38	)	$	12,526	$	(82	)


Earnings (loss) per share
Basic	$	0.37	$	(1.90	)	$	1.04	$	(4.08	)

Diluted	$	0.37	$	(1.90	)	$	1.04	$	(4.08	)


Weighted average ordinary shares outstanding
Basic		17,581,593		20,000			12,008,394		20,000
Diluted		17,581,593		20,000			12,008,394		20,000
Dividends declared per share	$	0.34	$	0.00		$	0.94	$	0.00

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)


For the periods ended September 30,	Three Months						Nine Months
	2012			2011			2012			2011

Net income (loss)	$	6,572		$	(38	)	$	12,526		$	(82	)

Other comprehensive income(loss), net of tax:

Change in the value of designated cash flow hedges (1)		(798	)		—			(1,363	)		—

Total other comprehensive income(loss), net of tax		(798	)		—			(1,363	)		—


Comprehensive income (loss)	$	5,774		$	(38	)	$	11,163		$	(82	)

(1)	Because the associated derivative financial instruments are held in an entity that is not subject to income tax, there is no income tax on the change in the value of the designated cash flow hedges.

The accompanying notes are an integral part of these condensed consolidated financial statements.

HOME LOAN SERVICING S OLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Dollars in thousands)


	Ordinary Shares		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2011	$	—	$	300		$	(291	)	$	—		$	9
Net income		—		—			12,526			—			12,526
Other comprehensive loss, net of tax										(1,363	)		(1,363	)

Total comprehensive income													11,163

Issuance of ordinary shares, net of costs		306		417,791			—			—			418,097
Declaration of cash dividends		—		(2,936	)		(8,346	)		—			(11,282	)

Balance at September 30, 2012	$	306	$	415,155		$	3,889		$	(1,363	)	$	417,987


	Ordinary Shares		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Total
Balance at December 31, 2010	$	—	$	300		$	(18	)	$	—		$	282
Net loss		—		—			(82	)		—			(82	)
Other comprehensive income, net of tax										—			—

Total comprehensive income													(82	)

Issuance of ordinary shares, net of costs		—		—			—			—			—
Declaration of cash dividends		—		—			—			—			—

Balance at September 30, 2011	$	—	$	300		$	(100	)	$	—		$	200

The accompanying notes are an integral part of these condensed consolidated financial statements.

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)


For the nine months ended September 30,	2012			2011
Cash flows from operating activities
Net income (loss)	$	12,526		$	(82	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of debt issuance costs		3,980			—
Changes in assets and liabilities:
Decrease in match funded advances		55,788			—
(Increase) decrease in other assets		(9,968	)		47
Increase in other liabilities		28,387			31

Net cash provided by (used in) operating activities		90,713			(4	)


Cash flows from investing activities
Purchase of notes receivable – Rights to MSRs		(184,285	)		—
Reduction in notes receivable – Rights to MSRs		6,555			—
Acquisition of advances and other assets (net of liabilities assumed) in connection with the purchase of notes receivable – Rights to MSRs		(1,175,156	)		—

Net cash used in investing activities		(1,352,886	)		—


Cash flows from financing activities
Proceeds from match funded liabilities		892,577			—
Payment of debt issue costs		(6,810	)		—
Proceeds from issuance of ordinary shares		422,783			—
Payment of offering costs		(4,686	)		—
Payment of dividends to shareholders		(8,224	)		—

Net cash provided by financing activities		1,295,640			—


Net increase (decrease) in cash		33,467			(4	)
Cash at beginning of period		283			300

Cash at end of period	$	33,750		$	296

The accompanying notes are an integral part of these condensed consolidated financial statements.

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

NOTES TO INTERIM CONDENS ED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands unless otherwise stated, except share data)

1.	Summary of Significant Accounting Policies

Organization

Home Loan Servicing Solutions, Ltd. was incorporated on December 1, 2010 as a Cayman Islands exempted company formed for the purpose of acquiring mortgage servicing assets, including mortgage servicing rights and related servicing advances. Home Loan Servicing Solutions, Ltd. conducts these operations through its wholly owned subsidiaries, HLSS Holdings, LLC and HLSS Management, LLC. Unless otherwise stated, all references to “HLSS,” “us,” “our,” “we,” the “Company” and similar designations refer to Home Loan Servicing Solutions, Ltd. and its consolidated subsidiaries. HLSS is headquartered in the Cayman Islands and has offices in Atlanta, Georgia and West Palm Beach, Florida.

Our business strategy focuses on acquiring mortgage servicing assets. We do not originate or purchase mortgage loans, and as a result, we are not subject to the risk of loss related to the origination or ownership of mortgage loans. Because we have not received the necessary approvals and consents (the “Required Third Party Consents”) to become the named servicer of the mortgage servicing rights, we instead acquired from Ocwen Loan Servicing, LLC, a wholly-owned subsidiary of Ocwen Financial Corporation (collectively “Ocwen”), the rights to receive the servicing fees which we refer to as “Rights to MSRs”. Accordingly, Ocwen will continue to service the mortgage loans and will receive compensation from us for its servicing activities. Upon receipt of the Required Third Party Consents, Ocwen will transfer legal ownership of the mortgage servicing rights to us without any additional payment. We intend to pursue the Required Third Party Consents for our initial portfolio and for future acquisitions. Whether we acquire mortgage servicing rights or Rights to MSRs, we also acquire servicing advances and other associated assets. We do not believe that whether we directly own mortgage servicing rights or the related Rights to MSRs materially affects our business strategy or economic performance.

On March 5, 2012, we completed an initial public offering (“IPO”) and a concurrent private placement of our ordinary shares from which we raised cash of $184,300 (the “Offerings”). Immediately thereafter, on March 5, 2012, we used $149,798 to acquire certain assets, net of assumed liabilities, from Ocwen (the “Initial Acquisition”). The acquired assets related to mortgage servicing rights with respect to 116 pooling and servicing agreements with unpaid principal balance (“UPB”) of approximately $15.2 billion as of March 5, 2012 (the “Initial Mortgage Servicing Rights”). After closing, the purchase price paid was adjusted to $138,792 as further described in Note 2.

On September 12, 2012, we completed a follow on offering of our ordinary shares from which we raised cash of $236,034. Immediately thereafter, on September 13, 2012 and September 28, 2012; we used the proceeds to acquire certain assets from Ocwen in two separate transactions. The acquired assets related to “Acquired Mortgage Servicing Rights” with respect to 182 and 191 pooling and servicing agreements with UPB of approximately $21.1 and $6.7 billion as of September 12, 2012 and September 28, 2012; respectively. The Initial Mortgage Servicing Rights and Acquired Mortgage Servicing Rights can be collectively thought of as “Mortgage Servicing Rights” and are referred to as such throughout the remainder of this filing. Refer to Note 2 for further discussion.

Prior to our IPO, the Company was a development stage enterprise. Because we commenced operations on March 5, 2012, the condensed consolidated statement of cash flows for the nine months ended September 30, 2012 do not include nine full months of operating activities. Accordingly, our cash flows for the nine months ended September 30, 2012 are not necessarily indicative of the results to expect for a full nine month period or for the entire year ending December 31, 2012.

Basis of Presentation

We prepared the accompanying unaudited Interim Consolidated Financial Statements in conformity with the instructions of the Securities and Exchange Commission (“SEC”) to Form 10-Q and SEC Regulation S-X, Article 10, Rule 10-01 for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In our opinion, the accompanying unaudited financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The results of operations and other data for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to expect for any other interim period or for the entire year ending December 31, 2012. A user of the unaudited Condensed Interim Consolidated Financial Statements presented herein should read them in conjunction with the audited Consolidated Financial Statements and related notes thereto included in our final prospectus dated September 6, 2012. We derived December 31, 2011 condensed balance sheet data from audited financial statements, but within this filing do not include all disclosures required by GAAP. The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements

and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Material estimates that are particularly significant relate to our fair value measurements of Notes receivable – Rights to MSRs.

Principles of Consolidation

Our financial statements include the accounts of Home Loan Servicing Solutions, Ltd. and its wholly owned subsidiaries, as well as a variable interest entity (“VIE”) of which we are the primary beneficiary. We eliminate intercompany accounts and transactions in consolidation.

Variable Interest Entities

We evaluate each special purpose entity (“SPE”) for classification as a VIE. When an SPE meets the definition of a VIE and we determine that HLSS is the primary beneficiary, we include the SPE in our Interim Condensed Consolidated Financial Statements.

Our servicing advances are in an SPE along with related Match funded liabilities. We determined that this SPE is a VIE of which we are the primary beneficiary. The accounts of this SPE are included in our Interim Condensed Consolidated Financial Statements.

Match funded advances on loans serviced for others result from our transfers of residential loan servicing advances to an SPE in exchange for cash. This SPE issues debt supported by collections on the transferred advances. We made these transfers under the terms of our advance facility agreements. These transfers do not qualify for sales accounting because we retain control over the transferred assets. As a result, we account for these transfers as financings and classify the transferred advances on our Interim Condensed Consolidated Balance Sheet as Match funded advances and the related liabilities as Match funded liabilities. We use collections on the advances pledged to the SPE to repay principal and to pay interest and the expenses of the entity. Holders of the debt issued by this entity can look only to the assets of the entity itself for satisfaction of the debt and have no recourse against HLSS.

The following table summarizes the assets and liabilities of the SPE formed in connection with our current match funded advance facility, at the dates indicated:


	September 30, 2012		December 31, 2011
Match funded advances	$	1,446,091	$	—
Other assets (1)		39,291		—

Total assets	$	1,485,382	$	—

Match funded liabilities	$	1,250,912	$	—
Other liabilities		1,964		—

Total liabilities	$	1,252,876	$	—

(1)	Other assets principally include debt service accounts, prepaid lender fees and debt issuance costs. See Note 5 for more information about our other assets.

Cash

Cash includes both interest-bearing and non-interest-bearing demand deposits with financial institutions with original maturities of 90 days and less. There were no restrictions on the use of the cash balance as of September 30, 2012 and December 31, 2011.

Servicing Activities and Advances

Residential mortgage loan servicers manage the billing, collections and loss mitigation activities associated with mortgage loans that are originated by banks or other lenders. Servicers send borrowers monthly account statements, collect monthly mortgage payments, remit such payments to the owner of the mortgage loan, answer customer service inquiries and maintain custodial accounts to hold borrower payments of principal and interest and amounts received from borrowers to pay real estate taxes and insurance with respect to the properties securing the mortgage loans and pay such real estate taxes and insurance premiums from the custodial accounts. A servicer will also remit collections on the mortgage loans from the custodial accounts to the trustee of the applicable securitization trust to make payments on the related mortgage-backed securities, and prepare and deliver monthly and annual reports to the trustee. A servicer may also be required to advance its own funds to cover shortfalls in collections of principal and interest from borrowers, to pay property and casualty insurance premiums and real estate taxes on a property and to cover the costs associated with protecting or foreclosing on a property.

If borrowers become delinquent on loans, the servicer generally may conduct loss mitigation activities to reduce loan delinquencies and losses by working with borrowers to collect payments and modify loans or enforce the lenders’ remedies, which may include initiating foreclosure procedures and selling the properties.

Servicing Advances

Servicing advances generally fall into one of three categories:

•

“Principal and Interest Advances” are cash payments made by the servicer to the owner of the mortgage loan to cover scheduled payments of principal and interest on a mortgage loan that have not been paid on a timely basis by the borrower.

•

“Taxes and Insurance Advances” are cash payments made by the servicer to third parties on behalf of the borrower for real estate taxes and insurance premiums on the property that have not been paid on a timely basis by the borrower.

•

“Corporate Advances” are cash payments made by the servicer to third parties for the costs and expenses incurred in connection with the foreclosure, preservation and sale of the mortgaged property, including attorneys’ and other professional fees.

Servicing advances are usually reimbursed from amounts received with respect to the related mortgage loan, including payments from the borrower or amounts received from the liquidation of the property securing the loan, which is referred to as “loan level recovery.” Servicers generally have the right to cease making servicing advances on a loan if they determine that advances are not recoverable at the loan level. With respect to the Rights to MSRs that we own, Ocwen makes this determination in accordance with its stop advance policy. In the event that loan level recovery is not sufficient to reimburse the servicer in full for servicing advances made with respect to a mortgage loan, our pooling and servicing agreements provide that the servicer is entitled to be reimbursed from collections received with respect to other loans in the same securitized mortgage pool, which is referred to as “pool level recovery.” We do not receive interest on servicing advances.

We are obligated to purchase the servicing advances made by Ocwen during the period of time prior to the transfer of legal ownership of the Mortgage Servicing Rights to us, and when a Mortgage Servicing Right is transferred to us, we will become directly obligated to the related trustee to make any servicing advances required pursuant to the related pooling and servicing agreements. Servicing advances serve as collateral under the terms of the Advance Facility.

We record a charge to earnings to the extent that we believe advances are uncollectible under the provisions of each servicing contract taking into consideration the projected collections under the applicable loan or pool relative to the advances outstanding and the projected future advances. However, the servicer is generally only obligated to advance funds to the extent that it believes the advances are recoverable from expected proceeds from the loan. We assess collectability using proprietary cash flow projection models which incorporate a number of different factors, depending on the characteristics of the mortgage loan or pool, including, for example, time to a foreclosure sale, estimated costs of foreclosure action, future property tax payments and the value of the underlying property net of carrying costs, commissions and closing costs.

Notes Receivable—Rights to MSRs and Interest Income

We structured the purchase of the Rights to MSRs to convey to HLSS all the rights and rewards of ownership of MSRs absent the necessary approvals and allow us to become the named servicer under the applicable pooling and servicing agreements; however, until we receive the Required Third Party Consents, Ocwen will remain the named servicer of the related mortgage servicing rights. Accounting Standards Codification (“ASC”) 860, Transfers and Servicing , specifically prohibits accounting for a transfer of servicing rights as a sale if legal title to such servicing rights has not passed to the purchaser. As a result, prior to receiving the Required Third Party Consents related to the Mortgage Servicing Rights, we are required to account for the purchase of the Rights to MSRs as a financing. We initially recorded the Notes receivable -Rights to MSRs at the purchase price of the Rights to MSRs. We amortize the Notes receivable -Rights to MSRs using the prospective interest method of accounting. At each reporting date, we calculate the present value of the net cash flows related to the then outstanding UPB of the underlying Mortgage Servicing Rights and adjust the carrying value of the Notes receivable -Rights to MSRs to this amount. The change in the carrying value of the Notes receivable -Rights to MSRs reduces the net servicing fees received by us with respect to the Mortgage Servicing Rights and the servicing fees paid to Ocwen with respect to the Mortgage Servicing Rights. We record the resulting amount as Interest income. Interest income is our primary source of income prior to receiving the Required Third Party Consents. See Note 9 for more information about how we calculate Interest income -notes receivable – Rights to MSRs.

Other than transfer of legal title, we believe we meet all the other sales treatment criteria under ASC 860 for the transfer of the Mortgage Servicing Rights. If we obtain the Required Third Party Consents and become the legal owner of any Mortgage Servicing Right:

•

we will be contractually obligated to service the mortgage loans underlying such Mortgage Servicing Right in accordance with the related pooling and servicing agreement;

•

Ocwen will be contractually obligated to us pursuant to the subservicing agreement between HLSS and Ocwen to perform substantially all of the servicing functions it currently performs on our behalf relating to such Mortgage Servicing Right, other than maintaining custodial accounts, remitting amounts from the custodial accounts and funding servicing advances pursuant to the terms of the related pooling and servicing agreement, which are functions for which we will be responsible and

•

we will account for the remaining balance of the Notes receivable – Rights to MSRs related to such Mortgage Servicing Right as mortgage servicing rights to the extent we have received the Required Third Party Consents to transfer legal ownership of such mortgage servicing rights to us and will begin recording Servicing Fee Revenue related to the mortgage servicing right rather than Interest income -notes receivable – Rights to MSRs.

Servicing Fees, Base Fees, Ancillary Income and Performance Based Incentive Fees

Since we are not the named servicer for the mortgage loans underlying the Rights to MSRs, Ocwen will continue to be the named servicer for these loans and will receive the servicing fee associated with the Mortgage Servicing Rights; however, Ocwen pays these servicing fees to us under the terms of the Purchase Agreement and related sale supplements described in Note 2. We pay Ocwen a monthly base fee equal to 12% of the servicing fees collected each month. The monthly base fee payable to Ocwen varies from month to month based on the level of collections of principal and interest for the mortgage loans serviced. In addition to the monthly base fee, Ocwen retains any ancillary income (excluding investment income earned on any custodial accounts) payable to the servicer pursuant to the related pooling and servicing agreements. Ocwen also receives a performance based incentive fee to the extent the Servicing Fee Revenue that it collects for any given month exceeds the sum of the monthly base fee and the retained fee.

The amount, as expressed in terms of basis points of the average UPB of the mortgage loans serviced, used to calculate the retained fee is a contractually agreed upon amount. If we do not receive an amount equal to the retained fee in any given month, as expressed in terms of basis points of the average UPB of the mortgage loans serviced, this creates a shortfall in our targeted gross servicing margin percentage. Should this occur, Ocwen will not earn a performance based incentive fee for any month that there is such a shortfall, or in any subsequent month, until we have recovered such shortfall from amounts that would otherwise be available to pay future performance based incentive fees to Ocwen.

The performance based incentive fee payable in any month will be reduced by an amount equal to 6.5% per annum of the amount of any such excess servicing advances if the advance ratio exceeds a predetermined level for that month.

Derivative Financial Instruments

We are party to interest rate swap agreements that we recognize on our Interim Condensed Consolidated Balance Sheet at fair value within other liabilities. On the date we entered into the interest rate swap agreements, we designated and documented them as hedges of the variable cash flows payable for floating rate interest expense on our borrowings (cash flow hedge). To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the hedged exposure. In addition, the documentation must include the risk management objective and strategy. We assess and document quarterly the derivatives’ effectiveness and expected effectiveness in offsetting the changes in the fair value or the cash flows of the hedged items. To assess effectiveness, we use statistical methods, such as regression analysis, as well as nonstatistical methods including dollar-offset analysis. For a cash flow hedge, to the extent that it is effective, we record changes in the estimated fair value of the derivative in other comprehensive income. We subsequently reclassify these changes in estimated fair value to net income in the same period, or periods, that the hedged transaction affects earnings and in the same financial statement category as the hedged item.

If a derivative instrument in a cash flow hedge is terminated or the hedge designation is removed, we reclassify related amounts in accumulated other comprehensive income(loss) into earnings in the same period or periods during which the cash flows that were hedged affect earnings. In a period where we determine that it is probable that a hedged forecasted transaction will not occur, such as variable-rate interest payments on debt that has been repaid in advance, any related amounts in accumulated other comprehensive income are reclassified into earnings in that period.

See Note 8 for additional information regarding our interest rate swap agreements.

Match Funded Liabilities

The Advance Facility currently finances all of the outstanding advances associated with our Notes Receivable – Rights to MSRs. Match funded liabilities are a form of non-recourse debt that are collateralized by the servicing advances. Our match funded liability balance is driven primarily by the level of servicing advances and the advance borrowing rate, which is defined as the collateral value of servicing advances divided by total servicing advances. The advance borrowing rates, which are different for each type of six advance types, were set at levels that enabled each class of notes issued pursuant to the advance financing facility to meet ratings criteria as determined by Standard & Poor’s. In addition, we are able to pledge deferred servicing fees as collateral for our Match funded liabilities.

Under the terms of the related indenture, the SPE created in connection with the Advance Facility are subject to various qualitative and quantitative covenants. We believe that we are currently in compliance with these covenants.

•

Restrictions on future investments and indebtedness;

•

Restrictions on sale or assignment of Match funded advances and

•

Monitoring and reporting of various specified transactions or events, including specific reporting on defined events affecting collateral underlying the indenture.

See Note 6 for additional information regarding our match funded liabilities.

Interest Income - Other

Interest income – Other includes interest earned on mortgage loan payments and payoff collections not yet remitted either to the securitization trust that owns the mortgage loan or to pay real estate taxes and insurance premiums with respect to the related mortgaged properties. Mortgage loan payments are usually due from the borrower between the first and fifteenth days of the month. Remittance to the securitization trust typically occurs between the eighteenth and twenty-fourth days of each month. Until remitted to the securitization trust, these payments reside in interest bearing custodial accounts controlled by the servicer and we invest these amounts in accordance with the pooling and servicing agreements and our investment policy. Pursuant to the Purchase Agreement, we are entitled to receive from Ocwen any custodial account earnings related to the Rights to MSRs even though we will not have custody of those accounts until legal ownership of the related Mortgage Servicing Rights is transferred to us.

Other Revenue

Other revenue consists of amounts due to us from Ocwen under the terms of the Ocwen Professional Services Agreement. Under the Ocwen Professional Services Agreement, we receive revenue for providing certain services to Ocwen, which include valuation analysis of mortgage servicing rights, treasury management and other similar services. See Note 13 for more information regarding our related party transactions.

Operating Expenses

Our operating expenses consist largely of compensation and benefits for our employees and fees payable to members of our Board of Directors. In addition, we incur expenses for facilities, technology, communication and other expenses typical of public companies, including audit, legal and other professional fees. Altisource Portfolio Solutions, S.A. (“Altisource”) provides some of these administrative services pursuant to the Altisource Administrative Services Agreement. General and administrative expenses also include expenses related to the services we provide to Ocwen, and the services provided by Ocwen to us, under the Ocwen Professional Services Agreement. See Note 13 for more information regarding our related party transactions.

Organization Costs

Until the closing of the Offerings we were a development stage enterprise, and we classified our expenses as “Organization costs.” These organization costs include legal and accounting fees, registration fees and other costs incurred during the development stage to establish Home Loan Servicing Solutions, Ltd. and its subsidiaries. We expensed these costs as incurred. Organization costs were approximately $123 and $82 for the nine months ended September 30, 2012 and 2011, respectively, and are included in General and administrative expenses. We did not incur additional organization costs after the Offerings, so there were no incremental organization costs in the three months ended September 30, 2012 ($38 for the comparable 2011 period).

Interest Expense

We primarily finance servicing advances with match funded liabilities that accrue interest. Interest expense also includes amortization of deferred financing costs, non-use fees and any hedge related costs.

Interest expense is sensitive to the Match funded advance balance which is driven primarily by the delinquency rates and amount of UPB serviced. The speed at which delinquent loans are resolved affects our interest expense. For example, slower resolution of delinquencies will result in higher servicing advance balances and higher interest expense. In order to mitigate the interest expense impact of higher servicing advance balances, we reduce the performance based servicing fee payable to Ocwen in any month in which the advance ratio exceeds a predetermined level for that month. Additionally, we executed a hedging strategy designed to largely neutralize the impact of changes in interest rates over time. Our objective is to utilize hedges in an amount equal to our net exposure to interest rate increases on our Match funded liabilities, which bear interest at floating interest rates, after taking into account our expected interest earning account balances, which partially offset the impact of rising interest rates. If interest rates decline, the value of our hedges would decline. Should our hedging strategy prove ineffective or if we are not able to hedge all of our interest rate risk, rising interest rates would lead to higher interest expense.

Income Taxes

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation; however, our U.S.-based subsidiary, HLSS Management, LLC, is subject to U.S. taxation.

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. As of September 30, 2012, we had no deferred tax assets or liabilities.

Basic and Diluted Earnings per Share

We calculate basic earnings per share by dividing net income or loss by the weighted average ordinary shares outstanding for the period. For the three and nine months ended September 30, 2012 and 2011, there were no ordinary share equivalents or other securities that could potentially dilute basic earnings per share.

Dividends

When our Board of Directors declares cash dividends, we record a payable and charge retained earnings for the total amount of the dividends declared. If we lack sufficient retained earnings to pay the full amount of dividends declared we charge the excess amount to additional paid-in capital.

Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) 2011-04 (ASC 820, Fair Value Measurement): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs . The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and prescribe certain additional disclosures about fair value measurements, including: for fair value measurements within Level 3 of the fair value hierarchy, disclosing the valuation process used and the sensitivity of fair value measurement to changes in unobservable inputs; and for items not carried at fair value but for which fair value must be disclosed, categorization by level of the fair value hierarchy. Our adoption of this standard effective January 1, 2012 did not have a material impact on our Interim Condensed Consolidated Financial Statements. See Note 3 for our fair value disclosures.

ASU 2011-05 (ASC 220, Comprehensive Income): Presentation of Comprehensive Income. Previously U.S. GAAP allowed reporting entities three alternatives for presenting other comprehensive income and its components in financial statements. One of those presentation options is to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This ASU eliminates that option. This ASU also requires consecutive presentation of the statement of net income and other comprehensive income and requires that an entity present reclassification adjustments from other comprehensive income to net income by component on the face of both the statement in which net income is presented and the statement in which other comprehensive income is presented. Issued on December 23, 2011, ASU 2011-12 defers indefinitely the provision regarding the presentation of reclassification adjustments. Our adoption of this standard effective January 1, 2012 did not have a material impact on our Interim Condensed Consolidated Financial Statements.

2.	ASSETS ACQUIRED AND LIABILITIES ASSUMED

On March 5, 2012, we used a portion of the net proceeds from the Offerings to purchase the following:

•

the contractual right to receive the servicing fees and investment earnings on the custodial accounts related to mortgage servicing rights with respect to 116 pooling and servicing agreements with UPB of approximately $15.2 billion and the right to automatically obtain legal ownership, without any additional payment to Ocwen, of each Mortgage Servicing Right upon the receipt of the Required Third Party Consents (these rights constitute the “Rights to MSRs” with respect to the Mortgage Servicing Rights);

•

the outstanding servicing advances associated with the related pooling and servicing agreements; and

•

other assets related to the foregoing (collectively, the forgoing represent the “Initial Purchased Assets”).

We completed the Initial Acquisition pursuant to a master servicing rights purchase agreement (the “Purchase Agreement”) and a related sale supplement, each dated February 10, 2012. Pursuant to the Advance Facility, we also assumed a related match funded servicing advance financing facility from Ocwen effective upon the closing of the Initial Acquisition. At closing on March 5, 2012, HLSS paid cash of $149,798 to Ocwen for the estimated purchase price of the Initial Purchased Assets (net of assumed liabilities), subject to certain closing adjustments. The purchase price for the Rights to MSRs was based on the value of such assets at the time HLSS entered into the Purchase Agreement and the estimated outstanding UPB of the underlying mortgage loans at closing. The purchase price for the associated servicing advances and other assets was equal to the net consolidated book value, which approximated fair value, as of the purchase date of all assets and liabilities of the special purpose entities established in connection with the advance financing facility that owns these servicing advances. HLSS paid Barclays Bank PLC, an affiliate of Barclays Capital Inc., a conversion fee of $3,989 related to our assumption of the existing advance financing facility.

On March 31, 2012, HLSS and Ocwen, pursuant to the terms of the Purchase Agreement, agreed to a final purchase price of $138,792 for the Initial Purchased Assets (net of assumed liabilities of $359,176), reflecting post-closing adjustments of $11,006 that principally resulted from declines in Match funded advances. See Note 13 for more information regarding our related party transactions.

We recorded the assets acquired and liabilities assumed which approximates their fair value, as follows:


Fair value of assets acquired:
Notes receivable – Rights to MSRs	$	62,458
Match funded advances		413,374
Other assets		22,136

		497,968

Fair value of liabilities assumed:
Matched funded liabilities		(358,335	)
Other liabilities		(841	)

		(359,176	)


Purchase price, as adjusted	$	138,792
Amount paid by Ocwen for post-closing adjustments		11,006

Cash paid at closing	$	149,798

On May 1, 2012, we completed an acquisition from Ocwen of additional mortgage servicing assets (“Flow One”). A summary of the purchase price and sources of funding follows below:

•

the contractual right to receive the servicing fees and investment earnings on the custodial accounts related to mortgage servicing rights with respect to 14 pooling and servicing agreements with UPB of approximately $2.9 billion and the right to automatically obtain legal ownership, without any additional payment to Ocwen, of each mortgage servicing right upon the receipt of the Required Third Party Consents (these rights constitute the “Rights to MSRs” with respect to the Flow One Mortgage Servicing Rights) and

•

the outstanding servicing advances associated with the related pooling and servicing agreements.

We completed the Flow One purchase pursuant to the Purchase Agreement, and an additional sale supplement, dated May 1, 2012. The initial purchase price for the transaction was $103,826. To finance that amount, we used $25,940 in cash and borrowed $77,886 under an existing servicing advance facility with Barclays Bank PLC against the $92,593 in servicing advances associated with the Rights to MSRs.

The final purchase price was $103,458 which reflected a $368 adjustment to the match funded advance balance.

We recorded the assets acquired, which approximates their fair value, as follows:


Fair value of assets acquired:
Notes receivable – Rights to MSRs	$	11,233
Match funded advances		92,593

	$	103,826

Sources of funding:
Cash on-hand	$	25,940
Matched funded liabilities		77,886

	$	103,826

On August 1, 2012; we completed an acquisition from Ocwen of additional mortgage servicing assets (“Flow Two”). A summary of the purchase price and sources of funding follows below:

•

the contractual right to receive the servicing fees and investment earnings on the custodial accounts related to mortgage servicing rights with respect to 18 pooling and servicing agreements with UPB of approximately $2.1 billion and the right to automatically obtain legal ownership, without any additional payment to Ocwen, of each mortgage servicing right upon the receipt of the Required Third Party Consents (these rights constitute the “Rights to MSRs” with respect to the Flow Two Mortgage Servicing Rights) and

•

the outstanding servicing advances associated with the related pooling and servicing agreements.

We completed the Flow Two purchase pursuant to the Purchase Agreement and an additional sale supplement, dated August 1, 2012. The cash paid at closing for the transaction was $74,725. To finance that amount, we used $18,602 in cash and borrowed $56,123 under an existing servicing advance facility with Barclays Bank PLC.

The final purchase price was $76,251 which reflected a $1,526 adjustment for updated Match funded advances and Notes receivable – Rights to MSRs balances. We recorded the assets acquired, which approximates their fair value, as follows:


Fair value of assets acquired:
Notes receivable – Rights to MSRs	$	8,077
Match funded advances		68,174

	$	76,251

Sources of funding:
Cash on-hand	$	18,602
Matched funded liabilities		56,123
Amount paid to Ocwen for post-closing adjustments		1,526

	$	76,251

On September 13, 2012; we completed an acquisition from Ocwen of additional mortgage servicing assets (“Follow on Offering” purchase). A summary of the purchase price and sources of funding follows below:

•

the contractual right to receive the servicing fees and investment earnings on the custodial accounts related to mortgage servicing rights with respect to 182 pooling and servicing agreements with UPB of approximately $21.1 billion and the right to automatically obtain legal ownership, without any additional payment to Ocwen, of each mortgage servicing right upon the receipt of the Required Third Party Consents (these rights constitute the “Rights to MSRs” with respect to the Follow on Offering Mortgage Servicing Rights) and

•

the outstanding servicing advances associated with the related pooling and servicing agreements.

We completed the first Follow on Offering purchase pursuant to the Purchase Agreement and an additional sale supplement, dated September 13, 2012. The initial purchase price for the transaction was $792,968. To finance that amount, we used $202,549 in cash and borrowed $590,419 under an amended and restated servicing advance financing facility against the $707,445 in servicing advances associated with the Rights to MSRs.

The final purchase price was $788,239 which reflected a $4,729 adjustment for revised Match funded advance balances.

We recorded the assets acquired, which approximates their fair value, as follows:


Fair value of assets acquired:
Notes receivable – Rights to MSRs	$	85,523
Match funded advances		702,716
Due from Ocwen for post-close adjustments		4,729

	$	792,968

Sources of funding:
Cash on-hand	$	202,549
Matched funded liabilities		590,419

	$	792,968

On September 28, 2012 we completed an acquisition from Ocwen of additional mortgage servicing assets making use of the proceeds from the underwriters’ overallotment exercise of our shares and available borrowing capacity. A summary of the purchase price and sources of funding follows below:

•

the contractual right to receive the servicing fees and investment earnings on the custodial accounts related to mortgage servicing rights with respect to 191 pooling and servicing agreements with UPB of approximately $6.7 billion and the right to automatically obtain legal ownership, without any additional payment to Ocwen, of each mortgage servicing right upon the receipt of the Required Third Party Consents (these rights constitute the “Rights to MSRs” with respect to the acquired Mortgage Servicing Rights) and

•

the outstanding servicing advances associated with the related pooling and servicing agreements.

We completed the September 28, 2012 purchase pursuant to the Purchase Agreement and an additional sale supplement, dated September 28, 2012. The cash paid at closing for the transaction was $238,124. To finance that amount, we used $30,644 in cash and borrowed $207,480 under our current servicing advance facility.

The final purchase price was $242,384 which reflected a $4,260 adjustment for updated Match funded advances and Notes receivable – Rights to MSRs balances.

We recorded the assets acquired, which approximates their fair value, as follows:


Fair value of assets acquired:
Notes receivable – Rights to MSRs	$	16,994
Match funded advances		225,390

	$	242,384

Sources of funding:
Cash on-hand	$	30,644
Matched funded liabilities		207,480
Amount due to Ocwen for post-closing adjustments		4,260

		$ 242,384

The cash used to purchase the Match funded advances is presented, net of liabilities, within the “Acquisition of advances and other assets (net of liabilities assumed) in connection with the purchase of notes receivable – Rights to MSRs” of the condensed consolidated statement of cash flows.

3.	FAIR VALUE OF FINANCIAL INSTRUMENTS

We estimate fair value based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels and gives the highest priority to Level 1 inputs and the lowest to Level 3 inputs.

The three broad categories are:

•

Level 1: Quoted prices in active markets for identical assets or liabilities.

•

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3: Unobservable inputs for the asset or liability.

Where available, we utilize quoted market prices or observable inputs rather than unobservable inputs to determine fair value. We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement.

The carrying amounts and the estimated fair values of our financial instruments are as follows at the dates indicated:


	September 30, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Cash	$	33,750	$	33,750	$	283	$	283
Notes receivable – Rights to MSRs		177,730		177,730		—		—
Other assets		31,160		31,160		—		—

Total financial assets		242,640		242,640		283		283

Financial liabilities:
Derivative financial instruments		1,363		1,363		—		—

Total financial liabilities		1,363		1,363		—		—

We describe the methodologies that we use and key assumptions that we make to estimate the fair value of instruments in more detail below:

Cash

The carrying amount reported for cash approximates fair value due to the short-term nature of this asset.

Notes Receivable – Rights to MSRs

We established the value of the Notes Receivable – Rights to MSRs based on an appraisal prepared with the assistance of an independent valuation firm. This appraisal is prepared on a quarterly basis. Significant inputs into the valuation include the following:

•

Discount rates reflecting the risk of earning the future income streams from the Notes receivable – Rights to MSRs ranging from 14% to 22%.

•

Interest rate used for calculating the cost of servicing advances of 1-Month LIBOR + 4%.

•

Mortgage loan prepayment projections ranging from 12% to 25% of the related mortgage lifetime projected prepayment rate.

•

Delinquency rate projections ranging from 15% to over 35% of the aggregate unpaid balance of the underlying mortgage loans.

and performance comparisons utilized were the voluntary prepayment performance, delinquency and foreclosure performance, operational cost comparison, average loan balance, weighted average coupon and note rate distribution, loan product type classification, geographic distribution and servicing advance behavior.

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

Other Assets

Other assets include debt service accounts and cash collateral held by the counterparty to our interest rate swap agreements. The debt service accounts represent cash and cash equivalents held by the trustee of our advance funding facility. The carrying amount reported for these other assets at September 30, 2012 approximates fair value due to the short-term nature of these assets.

Derivative Financial Instruments

Our derivatives are not exchange-traded and therefore quoted market prices or other observable inputs are not available. The fair value of our interest rate swap agreements are based on certain information provided by third-party pricing sources. Third-party valuations are derived from proprietary models based on inputs that include yield curves and contractual terms such as fixed interest rates and payment dates. We have not adjusted the information obtained from the third-party pricing sources, we review this information to ensure that it provides a reasonable basis for estimating fair value. Our review is designed to identify information that appears stale, information that has changed significantly from the prior period, and other indicators that the information may not be accurate. See Note 8 for additional information on our derivative financial instruments.

The following table presents assets and liabilities measured at fair value categorized by input level within the fair value hierarchy:


	Fair value		Level 1		Level 2		Level 3
At September 30, 2012:
Measured at fair value on a recurring basis:
Assets:
Cash	$	33,750	$	33,750	$	—	$	—
Notes receivable – Rights to MSRs		177,730		—		—		177,730
Other assets		31,160		31,160		—		—

Total assets	$	242,640	$	64,910	$	—	$	177,730

Liabilities:
Derivative financial instruments		1,363		—				1,363

Total liabilities	$	1,363	$	—	$	—	$	1,363


	Fair value		Level 1		Level 2		Level 3
At December 31, 2011:
Measured at fair value on a recurring basis:
Assets:
Cash	$	283	$	283	$	—	$	—

Total assets	$	283	$	283	$	—	$	—

Total liabilities	$	—	$	—	$	—	$	—

We held no Level 3 assets or liabilities prior to the Initial Acquisition, on March 5, 2012. The following tables present reconciliations of the changes in fair value of our Level 3 assets, which we measure at fair value on a recurring basis:


For the three months ended September 30, 2012:	Note receivable – Rights to MSRs		Derivative Financial Instruments

Beginning balance	$	70,175	$	(565	)

Purchases and reductions:
Purchases		110,594		—
Reductions		3,039		—

		177,730		(565	)

Changes in fair value :
Included in net income		—		—
Included in other comprehensive income (loss)		—		(798	)

		—		(798	)

Transfers in or out of Level 3		—		—

Ending balance	$	177,730	$	(1,363	)


For the nine months ended September 30, 2012:	Note receivable – Rights to MSRs		Derivative Financial Instruments

Beginning balance	$	—	$	—

Purchases and reductions:
Purchases		184,285		—
Reductions		6,555		—

		177,730		—


Changes in fair value :
Included in net income		—		—
Included in other comprehensive income (loss)		—		(1,363	)

		—		(1,363	)

Transfers in or out of Level 3		—		—

Ending balance	$	177,730	$	(1,363	)

4.	Match Funded Advances

Match funded advances on residential loans we service for others, as more fully described in Note 1—Principles of Consolidation – Variable Interest Entities , are comprised of the following at the dates indicated:


	September 30, 2012		December 31, 2011
Principal and interest	$	563,960	$	—
Escrow advances		642,347		—
Corporate advances		239,784		—

	$	1,446,091	$	—

5.	OTHER ASSETS

Other assets consisted of the following at the dates indicated:


	September 30, 2012		December 31, 2011
Debt service accounts (1)	$	28,530	$	—
Receivables from related parties(2)		3,232		—
Prepaid expenses and debt issuance costs, net (3)		10,942		—
Interest-earning collateral deposits (4)		2,630		—
Other (5)		—		2,860

	$	45,334	$	2,860

(1)

Under our advance funding facility, we are contractually required to remit collections on pledged advances to the trustee within two days of receipt. We do not use the collected funds to reduce the related match funded debt until the payment dates specified in the indenture. The balance also includes amounts that we set aside to provide for possible shortfalls in the funds available to pay certain expenses and interest.

(2)	See Note 13 for more information regarding our related party transactions.

(3)	Costs at September 30, 2012 relate to match funded liabilities. We amortize these costs to the earlier of the scheduled amortization date, contractual maturity date or prepayment date of the debt.

(4)	Represents cash collateral held by the counterparty to our interest rate swap agreement as of September 30, 2012.

(5)

At December 31, 2011, Other primarily included $2,777 of deferred offering costs. When we completed the IPO in March 2012, and the subsequent over-allotment exercise, we charged these costs (along with additional deferred offering costs of $1,154 incurred in 2012) to additional paid-in capital reducing the gross proceeds from the IPO to an amount net of offering costs.

6.	MATCH FUNDED LIABILITIES

Match funded liabilities, as more fully described in Note 1—Principles of Consolidation – Variable Interest Entities , are comprised of the following at:


						Unused Borrowing Capacity (3)		Balance Outstanding
Borrowing Type	Interest Rate (1)	Maturity (2)		Amortization Date (2)		Unused Borrowing Capacity (3)		September 30, 2012		December 31, 2011
Class A Term Note	1-Month LIBOR + 225 bps		Aug. 2043		Aug. 2013	$	—	$	496,494	$	—
Class B Term Note	1-Month LIBOR + 525 bps		Aug. 2043		Aug. 2013		—		52,176		—
Class C Term Note	1-Month LIBOR + 625 bps		Aug. 2043		Aug. 2013		—		26,457		—
Class D Term Note	1-Month LIBOR + 725 bps		Aug. 2043		Aug. 2013		—		24,873		—
Class A Variable Funding Note	1-Month LIBOR + 250 bps		Aug. 2043		Aug. 2013		23,074		295,882		—
Class B Variable Funding Note	1-Month LIBOR + 550 bps		Aug. 2043		Aug. 2013		9,702		30,969		—
Class C Variable Funding Note	1-Month LIBOR + 650 bps		Aug. 2043		Aug. 2013		5,107		15,730		—
Class D Variable Funding Note	1-Month LIBOR + 750 bps		Aug. 2043		Aug. 2013		4,705		14,831		—
Class A Term Money Market Fund Note	65 bps		Sep. 2013		Sep. 2012		—		244,615		—
Class B Term Money Market Fund Note	275 bps		Sep. 2044		Sep. 2014		—		28,500		—
Class A Draw Money Market Fund Note	1-Month LIBOR + 200 bps		Sep. 2044		Sep. 2014		—		20,385		—

						$	42,588	$	1,250,912	$	—

(1)	The weighted average interest rate at September 30, 2012 was 2.90%. We pay interest monthly.

(2)

The amortization date is the date on which the revolving period ends under each Advance Facility note and repayment of the outstanding balance must begin if the note is not renewed or extended. The maturity date is the due date for all outstanding balances. After the amortization date, all collections that represent the repayment of advances pledged to the facility must be applied to reduce the balance of the note outstanding, and any new advances are ineligible to be financed.

(3)

Our unused borrowing capacity is available to us if we have additional eligible collateral to pledge and meet other borrowing conditions. We pay a 0.75% fee on the unused borrowing capacity. As of September 30, 2012, there were not sufficient eligible servicing advances available to support any additional borrowings under this facility.

On April 26, 2012, we executed an amendment to the Advance Facility providing us with the ability to add and remove designated servicing agreements from the facility.

On September 13, 2012, HLSS Holdings amended and restated its outstanding servicing advance financing facility with Barclays Bank PLC through the execution of the following agreements:

•

a second amended and restated indenture (the “Base Indenture”) by and between HLSS Servicer Advance Receivables Trust (“Issuer”), Deutsche Bank National Trust Company (“DB”), HLSS Holdings, Ocwen Loan Servicing, LLC (“OLS”), Barclays Bank PLC (“Barclays”) and Wells Fargo Securities, LLC (“Wells Fargo”),

•

a series 2012-VF1 indenture supplement to the Base Indenture by and between the Issuer, DB, HLSS Holdings, OLS and Barclays,

•

a series 2012-T1 indenture supplement to the Base Indenture by and between the Issuer, DB, HLSS Holdings, OLS and Barclays,

•

a series 2012-MM1 indenture supplement to the Base Indenture by and between the Issuer, DB, HLSS Holdings, OLS, Barclays and Wells Fargo,

•

a second amended and restated receivables pooling agreement with HLSS Servicer Advance Facility Transferor, LLC (“Transferor”) and the Issuer, and

•

a second amended and restated receivables sale agreement with HLSS Holdings, OLS and Transferor.

These agreements are substantially similar to those described in “The Business – Description of Servicing Advance Facility Agreements and Advance Financing Facility” in our Prospectus dated September 6, 2012, with the following additional material features:

•

The Base Indenture is structured to allow the issuance of multiple series of notes with varying maturity dates and credit ratings ranging from AAA to BBB;

•

Pursuant to the series 2012-MM1 indenture supplement, a $265,000 Rule 2a-7 money market eligible note with a one-year term and a fixed interest rate per annum of 0.65% has been issued; and

•

A “Class A” draw note with an expected two-year term and a variable interest rate of one month LIBOR + 200 bps.

On September 28, 2012, in connection with our second Follow-On purchase, a $28,500 “Class B” note was issued.

7.	ORDINARY SHARES

Initial Public Offering

On March 5, 2012, we closed the IPO resulting in the issuance of 13,333,333 of our ordinary shares. The public offering price of the shares sold in the offering was $14.00 per share. The total gross proceeds from the offering to HLSS were $186,667. After deducting underwriting discounts and commissions and offering expenses payable by HLSS, the aggregate net proceeds we received totaled $170,486.

Private Placement

On March 5, 2012, simultaneously with the IPO, William C. Erbey, the founder of our company and the Chairman of the Board of Directors, purchased 714,285 of our ordinary shares at a price per share equal to the IPO price in a private placement. The total proceeds from the private placement to HLSS were $10,000. We did not incur underwriting discounts or commissions in respect of these shares.

Issuance of Additional Ordinary Shares under the IPO

On April 2, 2012, we issued 129,600 additional ordinary shares to the underwriters in connection with the exercise of their over-allotment option under the IPO. The total gross proceeds from the issuance of these additional shares to HLSS were $1,814. After deducting underwriting discounts, commissions and expenses payable by HLSS, the aggregate net proceeds we received were $1,577.

Follow on Offering

On September 12, 2012 we issued 16,387,500 of our ordinary shares, 2,137,500 of which went to the underwriters in connection with the exercise of their over-allotment option. The total gross proceeds from the issuance of these additional shares to HLSS were $249,909. After deducting underwriting discounts, commissions and expenses payable by HLSS, the aggregate net proceeds we received were $236,034.

8.	DERIVATIVE FINANCIAL INSTRUMENTS

Because our current derivative agreements are not exchange-traded, we are exposed to credit loss in the event of nonperformance by the counterparty to the agreement. We control this risk through credit monitoring procedures including financial analysis, dollar limits and other monitoring procedures. The notional amounts of our contracts do not represent our exposure to credit loss.

Interest Rate Management

We executed a hedging strategy aimed to mitigate the impact of changes in variable interest rates on the excess of interest rate sensitive liabilities over interest rate sensitive assets. We entered into interest rate swaps to hedge against the effects of a change in 1-Month LIBOR.

The following table provides information about our interest rate swaps at September 30, 2012:


Purpose	Date Opened	Effective Date (1)	Maturity	We Pay	We Receive	Notional Amount		Fair Value
Designated as hedges:

Hedge the effects of changes in 1-Month LIBOR (2)	March 2012	March 2012	March 2016	0.6325%	1-Month LIBOR	$	172,670	$	(904	)
Hedge the effects of changes in 1-Month LIBOR (2)	May 2012	May 2012	May 2016	0.6070%	1-Month LIBOR		52,460		(214	)
Hedge the effects of changes in 1-Month LIBOR (2)	September 2012	September 2012	August 2017	0.5188%	1-Month LIBOR		234,864		(245	)

Total designated as hedges							459,994		(1,363	)

Total						$	459,994	$	(1,363	)

(1)	The effective date of the swap is the date from which monthly settlements begin to be computed.

(2)

Projected net settlements for the next twelve months total approximately $748 of payments to the counterparty. We designate these swaps as cash flow hedges and report them at fair value as a component of other liabilities. Unrealized losses of $798 and $1,363 related to our interest rate swaps are included in accumulated other comprehensive loss for the three and nine months ended September 30, 2012, respectively. There were no unrealized gains or losses attributable to derivatives for the three and nine months ended September 30, 2011. Given the current and expected effectiveness of our hedging arrangements, we do not expect any reclassifications from other comprehensive income into earnings associated with these hedging arrangements during the next twelve months.

The following table summarizes the use of derivatives during the nine months ended September 30, 2012:


	Interest Rate Swaps
Notional balance at December 31, 2011	$	—
Additions		534,946
Maturities		—
Terminations		—
Amortization		74,952

Notional balance at September 30, 2012	$	459,994

9.	INTEREST INCOME – NOTES RECEIVABLE – RIGHTS TO MSRs

Our primary source of revenue is the fees we are entitled to receive in connection with the servicing of mortgage loans. We account for these fees within interest income.

The following table shows how we calculated Interest income -notes receivable – Rights to MSRs for the periods ended September 30:


	Three Months				Nine Months
	2012		2011		2012		2011
Servicing fees collected	$	27,689	$	—	$	57,190	$	—
Subservicing fee payable to Ocwen		10,633		—		23,093		—

Net servicing fees retained by HLSS		17,056		—		34,097		—
Reduction in notes receivable – Rights to MSRs		3,039		—		6,555		—

	$	14,017	$	—	$	27,542	$	—

10.

INTEREST EXPENSE

The following table presents the components of interest expense for the periods ended September 30:


	Three Months				Nine Months
	2012		2011		2012		2011
Match funded liabilities	$	4,090	$	—	$	7,793	$	—
Amortization of debt issuance costs		1,901		—		4,172		—
Interest rate swaps		261		—		542		—

	$	6,252	$	—	$	12,507	$	—

11.

INCOME TAXES

Income taxes have been provided for based upon the tax laws and rates in countries in which we conduct operations and earn related income. The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation.

For the three and nine month periods ended September 30, 2012, our effective income tax rate was 1% (0%, for the three and nine month periods ended September 30, 2011). Our effective tax rate differs from the Federal and state combined rate of 38% primarily because only the earnings of our wholly owned subsidiary, HLSS Management, LLC, are subject to U.S. Federal and state income taxes.

12.

BUSINESS SEGMENT REPORTING

Our business strategy focuses on acquiring mortgage servicing assets consisting of mortgage servicing rights, rights to fees and other income from servicing mortgage loans, and associated servicing advances. As of September 30, 2012, we operate a single reportable business segment that owns Rights to MSRs.

13.

RELATED PARTY TRANSACTIONS

We entered into various agreements with Ocwen and Altisource in connection with the Initial Acquisition. William C. Erbey, our founder and the Chairman of our Board of Directors, is also the Chairman of the Board of Directors and largest shareholder of Ocwen and the Chairman of the Board of Directors and largest shareholder of Altisource.

Purchase Agreement

The Purchase Agreement, in conjunction with the initial sale supplement dated February 10, 2012, the Flow One sale supplement dated May 1, 2012, the Flow Two sale supplement dated August 1, 2012 and the first Follow on Offering purchase sale supplements dated September 13, 2012 and September 28, 2012 set forth the terms of our purchase of the assets from Ocwen as described in Notes 1 and 2. So long as the Required Third Party Consents have not been obtained with respect to the transfer of legal ownership of any Mortgage Servicing Right, Ocwen remains obligated to perform as servicer under the related pooling and servicing agreements, and we are required to pay Ocwen a monthly fee for the servicing activities it performs. We are also required to purchase any servicing advances that Ocwen is required to make pursuant to such pooling and servicing agreements.

The following table summarizes our transactions, beginning March 5, 2012, with Ocwen under the Purchase Agreement for the periods ended September 30, 2012:


	Three Months		Nine Months
Servicing fees collected	$	27,689	$	57,190
Subservicing fee payable to Ocwen		10,633		23,093

Net servicing fees retained by HLSS		17,056		34,097
Reduction in notes receivable – Rights to MSRs		3,039		6,555

	$	14,017	$	27,542


Servicing advances purchased from Ocwen	$	331,228	$	639,966

At September 30, 2012, Ocwen owed us $1,909 for servicing fees collected but not remitted to us, and we owed Ocwen $4,055 for the subservicing fee earned by Ocwen in September 2012. In addition, at September 30, 2012, we owed Ocwen $17,196 for servicing advances that we purchased.

Ocwen Professional Services Agreement

This agreement requires HLSS to provide certain services to Ocwen and for Ocwen to provide certain services to us for an initial term of six years, subject to renewal, with pricing terms intended to reflect market rates. Services provided by us under this agreement include valuation analysis of mortgage servicing rights, treasury management and other similar services. Services provided by Ocwen under this agreement include legal, licensing and regulatory compliance support services, risk management services and other similar services. The services provided by the parties under this agreement are on an as-needed basis, and the fees represent actual costs incurred plus an additional markup of 15%.

At September 30, 2012, Ocwen owed us $669 and we owed Ocwen $10 for professional services provided pursuant to the Ocwen Professional Services Agreement. During the three and nine months ended September 30, 2012, we earned fees of $669 and $1,664, respectively, for services provided to Ocwen pursuant to the Professional Services Agreement. Additionally, during the three and nine months ended September 30, 2012, we incurred fees of $30 and $70, respectively, for services received from Ocwen pursuant to the Ocwen Professional Services Agreement.

Altisource Administrative Services Agreement

This agreement requires Altisource to provide certain administrative services to us for an initial term of six years, subject to renewal, with pricing terms intended to reflect market rates. Services provided to us under this agreement include human resources administration (benefit plan design, recruiting, hiring and training and compliance support), legal and regulatory compliance support services, general business consulting, corporate services (facilities management, security and travel services), finance and accounting support services (financial analysis, financial reporting and tax services), risk management services, vendor management and other related services. The services Altisource provides to us under this agreement are on an as-needed basis, and the fees we pay Altisource are based on the actual costs incurred by them plus an additional markup of 15%. During the three and nine months ended September 30, 2012, we paid Altisource $177 and $408, respectively, for services provided to us pursuant to the Altisource Administrative Services Agreement.

Subleases

During the three and nine months ended September 30, 2012, we paid Altisource $21 and $48, respectively, for the rental of office space under two sublease agreements.

Receivables from and Payables to Related Parties

The following table summarizes amounts receivable from and payable to related parties at the dates indicated:


	September 30, 2012		December 31, 2011
Servicing fees collected (1)	$	1,909	$	—
Professional services (2)		669		—
Other		654		—

Receivables from Ocwen	$	3,232	$	—

Subservicing fees payable (3)	$	4,055	$	—
Professional services (2)		10		—
Advance purchases (4)		17,196		—
Other (5)		4,988		1,478

Payables to Ocwen	$	26,249	$	1,478

Payables to Altisource	$	65	$	9

(1)

Ocwen is required to remit to us servicing fees it collects on our behalf within two business days. The amount due from Ocwen at September 30, 2012 represents servicing fees collected but not remitted at the end of the month. We record servicing fees we collect less the subservicing fee we pay to Ocwen as Interest income as shown in Note 9.

(2)	The respective amounts are for professional services provided from March 2012 through September 2012.

(3)	The base fee and performance fee, if any, that comprise the servicing fee expense are calculated and paid to Ocwen within three business days following the end of the month.

(4)	This represents the amount due to Ocwen for servicing advances that HLSS is obligated to purchase under the terms of the Purchase Agreement as of September 30, 2012.

(5)

At September 30, 2012 we owed Ocwen for certain purchase price adjustments pertaining to the September 28, 2012 Follow On Offering purchase ($4,260). At December 31, 2011, we owed Ocwen $1,478 for offering costs associated with our IPO. Ocwen made certain of these payments on our behalf, which we reimbursed in March 2012 after the completion of our IPO.

14.

COMMITMENTS AND CONTINGENCIES

We may be party to various claims, legal actions, and complaints arising in the ordinary course of business. We monitor our legal matters, including advice from external legal counsel, and periodically perform assessments of these matters for potential loss accrual and disclosure. There are currently no probable matters outstanding that, in the opinion of management, will have a material effect on our Interim Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows. There are also currently no reasonably possible matters outstanding that, in the opinion of management, will have a material effect on our Interim Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows.

15.

SUBSEQUENT EVENTS

On October 10, 2012, we paid cash dividends of $3,058 or $0.10 per ordinary shares. On October 1, 2012, we declared the following dividends:


Record Date	Payment Date	Amount per Ordinary Share

October 31, 2012	November 12, 2012	$0.11

November 30, 2012	December 10, 2012	$0.11

December 31, 2012	January 10, 2013	$0.11

On October 17, 2012, we completed the issuance of $250,000 of one-year and $450,000 of three-year term notes secured by servicing advance receivables at a weighted average interest spread over LIBOR of 1.55%. The proceeds were used to repay $600,000 in Class A through D term notes and to reduce borrowings on our Class A through D variable funding notes with a weighted average interest spread of 2.93%. Below is a schedule of the term notes by class:


Borrowing Type	Amount		Maturity	Amortization Date	Interest Rate (Yield)
Class A-1 Term Note	$	215,067	October 2043	October 2013	135 bps
Class B-1 Term Note		17,807	October 2043	October 2013	175 bps
Class C-1 Term Note		8,903	October 2043	October 2013	325 bps
Class D-1 Term Note		8,223	October 2043	October 2013	400 bps
Class A-2 Term Note		387,121	October 2045	October 2015	200 bps
Class B-2 Term Note		32,053	October 2045	October 2015	250 bps
Class C-2 Term Note		16,026	October 2045	October 2015	400 bps
Class D-2 Term Note		14,800	October 2045	October 2015	500 bps

ITEM 2.

MA NAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands unless otherwise stated, except share data)

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this report including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.

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

•

estimates regarding prepayment speeds, delinquency rates, servicing advances, amortization of mortgage servicing assets, custodial account balances, interest income and other drivers of our results;

•

assumptions related to sources of liquidity, our ability to fund servicing advances and the adequacy of our financial resources;

•

our ability to obtain the Required Third Party Consents;

•

our ability to pay monthly dividends;

•

assumptions about the availability of additional portfolios of subprime and Alt-A mortgage servicing rights and our ability to acquire additional mortgage servicing assets from Ocwen and others;

•

the performance of Ocwen as mortgage servicer and our ability to add new mortgage servicing assets on terms consistent with our business and economic model;

•

assumptions about the effectiveness of our hedging strategy;

•

expectations regarding incentive fees in our servicing contract and the stability of our gross servicing margin;

•

the susceptibility of our mortgage servicing assets to impairment charges;

•

our competitive position;

•

uncertainty related to future government regulation;

•

assumptions regarding the availability of refinancing options for subprime and Alt-A borrowers;

•

general economic and market conditions;

•

assumptions regarding amount and timing of additional equity offerings and

•

assumptions regarding amount and timing of additional purchases of servicing assets from Ocwen.

Further information on the risks specific to our business is detailed within this report and our other reports and filings with the SEC including our final prospectus dated September 6, 2012. Forward-looking statements speak only as of the date they were made and should not be relied upon. Home Loan Servicing Solutions, Ltd. undertakes no obligation to update or revise forward-looking statements.

INTRODUCTION

The following discussion of our results of operations, change in financial condition and liquidity should be read in conjunction with our Interim Condensed Consolidated Financial Statements and the related notes, all included elsewhere in this report on Form 10-Q and with our final prospectus dated September 6, 2012.

OVERVIEW

Strategic Priorities

On March 5, 2012, we launched operations using proceeds from our IPO and a concurrent private placement with our founder and chairman of our board of directors to acquire mortgage servicing assets related to a portfolio with $15.2 billion of UPB from Ocwen. Specifically, we purchased:

•

the contractual right to receive the servicing fees and investment earnings on the custodial accounts related to Mortgage Servicing Rights and the right to automatically obtain legal ownership, without any additional payment to Ocwen, of each Mortgage Servicing Right upon the receipt of the Required Third Party Consents;

•

the outstanding servicing advances associated with the related pooling and servicing agreements and

•

other assets related to the foregoing.

We also assumed a related match funded servicing advance financing facility from Ocwen effective upon the closing of the Initial Acquisition (which was subsequently amended on September 13, 2012). At closing on March 5, 2012, HLSS paid cash of $149,798 to Ocwen for the estimated purchase price of the Initial Purchased Assets (net of assumed liabilities), subject to certain closing adjustments. The purchase price for the Rights to MSRs was based on the value of such assets at the time HLSS entered into the Purchase Agreement and the estimated outstanding UPB of the underlying mortgage loans at closing. The purchase price for the associated servicing advances and other assets was equal to the net consolidated book value, which approximated fair value, as of the purchase date of all assets and liabilities of the subsidiary and special purpose entity established in connection with the advance financing facility that owns these servicing advances. On March 31, 2012, HLSS and Ocwen, pursuant to the terms of the Purchase Agreement, agreed to a final purchase price of $138,792 for the Initial Purchased Assets (net of assumed liabilities of $359,176), reflecting post-closing adjustments of $11,006 that principally resulted from declines in match funded advances.

Having achieved our business and financial objectives in the first quarter, on May 1, 2012 we purchased additional assets from Ocwen that are substantially similar to our initial portfolio under substantially similar terms. This purchase was funded primarily from excess proceeds from the Offerings and cash generated in excess of our dividend. The final purchase price for the transaction was $103,428 (initially $103,826; but was subsequently adjusted). To finance that amount, we used $25,940 in cash and borrowed $77,886 under an existing servicing advance facility with Barclays Bank PLC against the $92,593 in servicing advances associated with the Rights to MSRs.

During the current quarter, we made three additional asset purchases from Ocwen: the Flow Two and first Follow on Offering purchases. The Flow Two purchase price of $76,251 was funded from our servicing advance facility ($56,123), cash on hand ($18,602) and an amount due to Ocwen for post-closing adjustments ($1,526). We subsequently settled the $1,526 due to Ocwen balance. This purchase allowed us to grow serviced UPB by $2.1b. The Follow on Offering purchase was in two parts; the first purchase cost $792,968 and was funded from our servicing facility ($590,419) and cash raised from our equity offering during the quarter ($202,549). The second purchase of $242,384 was funded from available borrowing capacity ($207,480), cash raised from our equity offering ($30,644) and an amount due to Ocwen of $4,260. These three purchases in the aggregate allowed us to grow serviced UPB by $29.9b; total UPB serviced as a result of all the purchases noted above was $46.5b as of September 30, 2012.

On September 13, 2012, in connection with the closing of the first of the Follow on Offering purchases, HLSS Holdings amended and restated its outstanding servicing advance financing facility with Barclays Bank PLC. These agreements are substantially similar to those described in “The Business – Description of Servicing Advance Facility Agreements and Advance Financing Facility” in our Prospectus dated September 6, 2012 with the following additional material features:

•

The Base Indenture is structured to allow the issuance of multiple series of notes with varying maturity dates and credit ratings ranging from AAA to BBB;

•

Pursuant to the series 2012-MM1 indenture supplement, a $265,000 Rule 2a-7 money market eligible note with a one-year term and a fixed interest rate per annum of 0.65% has been issued; and

•

A “Class A” draw note with an expected two-year term and a variable interest rate of one month LIBOR + 200 bps.

On September 28, 2012, in connection with the closing of the second of the Follow on Offering purchases, we issued a $28,500 “Class B” note with a two-year term and a fixed interest rate per annum of 2.75%.

Earnings for the quarter ended on September 30, 2012 exceeded dividends declared for the period by $674. Earnings included a $593 benefit from reduced amortization due to the deferral of certain modifications as Ocwen tested delinquent loans for HAMP 2 eligibility, and ending the quarter on a Sunday delayed the receipt of certain loan payoffs. These factors combined to reduce the annualized prepayment rate to 12.6% from 15.2% in the second quarter. We are seeing increased loan modifications and payoff collections in October, and, accordingly, we expect to see a rebound in the prepayment rate in the fourth quarter. From an operational perspective, the transactions between HLSS and Ocwen were completed as planned, and we believe that all servicing requirements under the pooling and servicing agreements were met in all material respects.

We intend to continue to acquire additional substantially similar servicing assets from Ocwen in the near term in two ways:

•

In order to remain fully invested and to offset the impact of prepayments in our servicing portfolio, we expect to continue to utilize cash flow from operations in excess of our dividend to purchase servicing assets that are substantially similar to our initial portfolio from Ocwen under substantially similar terms. We will refer to such transactions as flow transactions, which we expect to take place at regular intervals. Certain terms of such flow transactions—including the servicing incentive fee and advance ratio targets—will vary from transaction to transaction. We expect to be able to maintain or moderately grow the size of our servicing portfolio over time through these transactions.

•

In order to increase the scale of our business we will look for opportunities to issue additional equity in the form of ordinary shares to allow us to execute larger purchases of mortgage servicing assets substantially similar to our initial portfolio from Ocwen under substantially similar terms. These follow-on purchases will be subject to equity market conditions and will likely require that additional advance financing capacity be arranged in advance or concurrent with each transaction in order to maintain leverage similar to our current level.

Ocwen stated that as of September 30, 2012 it has servicing assets with approximately $65 billion of UPB that are substantially similar to the assets that HLSS purchased in the transactions described above. In connection with Ocwen’s announced acquisition of Homeward Residential Holdings, Inc. (“Homeward”) from WL Ross and Co. LLC, Ocwen will acquire rights to service over $55 billion of UPB that are substantially similar to those in our current portfolio. We believe the existing Ocwen servicing assets as well as the expected Homeward assets potentially provide a strong servicing assets pipeline, one which could help grow our servicing portfolio. We believe that Ocwen perceives that it has benefited from the transfer of Rights to MSRs to us. Although we cannot guarantee that future transactions will occur, we believe that Ocwen will benefit from such transactions and will,therefore, continue to sell mortgage servicing assets to us in this manner which will allow us to grow the UPB of our servicing portfolio.

HLSS remains open to purchasing assets from third parties other than Ocwen, but given the large amount of servicing assets remaining at Ocwen, we do not view initiating purchases from other third parties as a near-term priority. Considering this and our ability to meet our financial and business objectives for some time without purchasing assets from other third parties we will not engage in a discussion of the competitive dynamics driving the current market for the acquisition of servicing assets at this time. Should Ocwen be unwilling or unable to sell mortgage servicing assets to us in the near future, we expect that there will continue to be opportunities to purchase mortgage servicing assets from other parties.

A continued strategic priority for HLSS is to receive the consents necessary for us to become the named servicer for the securitizations where we currently own Rights to MSRs and the associated servicing advances. Based on our current dialogue with consent parties, our near term goal in pursuit of such consents is to establish an operating history that demonstrates a continued capability to perform the servicing requirements, specifically our obligation to fund servicing advances and to make principal and interest remittances in conformity with all requirements of the pooling and servicing agreements.

Our results for the periods ended September 30, 2012 are discussed in more detail below.

Changes in Results of Operations Summary

The following table summarizes our consolidated operating results for the periods ended September 30, 2012 and 2011, which includes the periods prior to March 5, 2012 when we were a development stage enterprise.


	Three Months					Nine Months
	2012		2011			2012		2011
Consolidated:
Revenue	$	14,832	$	—		$	29,489	$	—
Operating expenses		1,936		38			4,307		82

Income (loss) from operations		12,896		(38	)		25,182		(82	)
Interest expense		6,252		—			12,507		—

Income (loss) before income taxes		6,644		(38	)		12,675		(82	)
Income tax expense		72		—			149		—

Net income (loss)	$	6,572	$	(38	)	$	12,526	$	(82	)

Three Months and Nine Months Ended September 2012 versus September 2011. Revenue in 2012 primarily includes interest income recorded on Notes receivable – Rights to MSRs using the prospective interest method. Because we currently do not satisfy all of the requirements necessary to record the rights to MSRs as MSRs, this transaction was accounted for as a financing. Also included in revenue for the three and nine months ended September 30, 2012 are the amounts billed to Ocwen for services we provide under the Ocwen Professional Services Agreement and interest earned on custodial accounts and corporate account balances.

Operating expenses for the three and nine months ended September 30, 2012 increased primarily due to compensation and benefits and professional services associated with our first months of full operations. Additionally, interest expense increased significantly in both periods due to outstanding Match funded liabilities drawn on in connection with our asset purchases during 2012.

Income tax expense was $72 and $149 for the three and nine months ended September 30, 2012. There was no income tax expense for the three or nine months ended September 30, 2011.

Our effective tax rate was 1% for the three and nine months ended September 30, 2012. We base income tax provisions for interim periods on estimated annual income taxes calculated separately from the effect of significant, infrequent or unusual items. We are a Cayman Islands exempted company, and the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation. Our subsidiary, HLSS Management, LLC, is the employer of all of our U.S. based employees and is a corporation for U.S. federal income tax purposes. We computed income tax expense by applying the Federal and state combined rate of 38% to the earnings of HLSS Management, LLC that are subject to U.S. federal and state income taxes.

Summary Operating Information

We operate the business as a single reportable segment. For purposes of our internal management reporting, we separately report the components of Interest income – notes receivable – Rights to MSRs, which include Servicing Fee Revenue, Servicing Expense and Amortization Expense for MSRs. We provide a reconciliation of our reported results to our internal management reporting for the three and nine months ended September 30, 2012 in the following table. We did not provide reconciliations for the three and nine months ended September 30, 2011 because we were a development stage enterprise during that period, and our operations were limited to raising capital to complete the Initial Acquisition. Operating items during that period consisted primarily of start-up costs and are not comparable to the three and nine months ended September 30, 2012.

We executed our agreements with Ocwen with the intent that we would receive the total amount of the servicing fees collected and that we would pay Ocwen a subservicing fee that is determined based on its collections and advance ratio performance. We evaluate our operating performance and manage our business considering servicing fees collected and subservicing fees paid and maintain our internal management reporting on this basis. The following table presents our condensed consolidated results of operations in accordance with U.S. GAAP reconciled to our internally reported financial results.

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


For the three months ended September 30, 2012:	Condensed Consolidated Results (GAAP)		Adjustments			Management Reporting (Non-GAAP)
Servicing fee revenue (1)	$	—	$	27,689		$	27,689
Interest income—notes receivable – Rights to MSRs (4)		14,017		(14,017	)		—
Professional services		669		—			669
Interest income – other		146		—			146

Total revenue		14,832		13,672			28,504

Operating expenses
Compensation and benefits		1,257		—			1,257
Servicing expense (2)		—		10,633			10,633
Amortization of MSRs (3)		—		3,039			3,039
General and administrative expenses		679		—			679

Total operating expenses		1,936		13,672			15,608

Income from operations	$	12,896	$	—		$	12,896

(1)	Servicing fee revenue reflects $27,689 of servicing fees received under the agreements with Ocwen.

(2)	Servicing expense reflects the fee we paid under the agreements with Ocwen.

(3)	Amortization of MSRs reflects $3,039 reduction in the value of the Notes receivable – Rights to MSRs.

(4)

Interest income – notes receivable – Rights to MSRs represents the net amount of servicing fees received less servicing fees paid and amortization of the Notes receivable – Rights to MSRs. We exclude this interest income from our management reporting and instead report the contractual components including Servicing Fee Revenue, Servicing Expense and Amortization of MSRs.


For the nine months ended September 30, 2012:	Condensed Consolidated Results (GAAP)		Adjustments			Management Reporting (Non-GAAP)
Servicing fee revenue (1)	$	—	$	57,190		$	57,190
Interest income—notes receivable – Rights to MSRs (4)		27,542		(27,542	)		—
Professional services		1,664		—			1,664
Interest income – other		283		—			283

Total revenue		29,489		29,648			59,137

Operating expenses
Compensation and benefits		2,682		—			2,682
Servicing expense (2)		—		23,093			23,093
Amortization of MSRs (3)		—		6,555			6,555
General and administrative expenses		1,625		—			1,625

Total operating expenses		4,307		29,648			33,955

Income from operations	$	25,182	$	—		$	25,182

(1)	Servicing Fee Revenue reflects $57,190 of servicing fees received under the agreements with Ocwen.

(2)	Servicing Expense reflects the fee we paid under the agreements with Ocwen.

(3)	Amortization of MSRs reflects $6,555 reduction in the value of the Notes receivable – Rights to MSRs.

(4)

Three months and nine months ended September 2012 versus 2011. Servicing Fee Revenue increased due to our asset purchases during 2012. Servicing Fee Revenue is a function of principal and interest collected during the period and the contractual servicing fee rate. In accordance with the rates set forth in the sale supplements for the Initial Acquisition, the Flow One, Flow Two and first Follow On Offering purchases, our gross servicing margin (Servicing Fee Revenue less Servicing Expense) was 28.3 and 30.0 basis points of average UPB for the three and nine months ended September 30, 2012, respectively. We also earned income from professional services provided to Ocwen under the Ocwen Professional Services Agreement. We did not earn revenue in 2011 associated with these arrangements given we were a development stage organization.

Operating expenses increased for both periods because we began operations at the completion of the Offerings and Initial Acquisition on March 5, 2012. Operating expenses in 2012 are primarily comprised of servicing fees paid to Ocwen for servicing the Rights to MSRs, salaries and wages and professional services. The servicing fees paid to Ocwen include $3,323 and $6,863 for the base fee and $7,310 and $16,230 in incentive fees for the three and nine months ended periods, respectively. Amortization Expense relates to reductions in the UPB due to portfolio run-off. Our average headcount for the three months ended and nine months ended periods were twelve and eleven, respectively. Most of our employees transferred to HLSS from Ocwen at the time of closing the Offerings and the Initial Acquisition on March 5, 2012. Expenses during the three and nine months ended September 2011 were primarily related to organization costs associated with starting our business.

The following table provides selected portfolio statistics as of September 30:


(in thousands, except for loan count data)	2012			2011 (1)			% Change

Residential Assets Serviced
Unpaid principal balance:
Performing loans (2)	$	36,257,325		$	35,389,646			2	%
Non-performing loans		9,204,862			8,008,571			15
Non-performing real estate		1,061,446			2,230,531			(52	)

Total residential assets serviced	$	46,523,633		$	45,628,748			2


Percent of total UPB:
Servicing portfolio		100.0	%		100.0	%		0
Non-performing residential assets serviced		22.1	%		22.4	%		(2	)

Number of:
Performing loans (2)		264,904			256,757			3
Non-performing loans		47,283			40,059			18
Non-performing real estate		5,546			10,584			(48	)

Total number of residential assets serviced		317,733			307,400			3

Percent of total number:
Non-performing residential assets serviced		16.6	%		16.5	%		1

The following table provides selected portfolio statistics for the three months ended September 30:


(in thousands, except for loan count data)	2012			2011 (1)			% Change

Average residential assets serviced	$	22,797,355		$	29,186,605			(22	%)
Prepayment speed (average CPR)		12.6	%		16.1	%		(19	)
Average number of residential assets serviced		182,332			186,269			(2	)

The following table provides selected portfolio statistics for the nine months ended September 30:


(in thousands, except for loan count data)	2012			2011 (1)			% Change
Average residential assets serviced	$	16,806,681		$	22,181,336			(24	%)
Prepayment speed (average CPR)		14.2	%		15.4	%		(8	)
Average number of residential assets serviced		127,907			136,921			(7	)

(1)

The data related to the Mortgage Servicing Rights as of (and for the periods ended) September 30, 2011 is shown for comparative purposes only. HLSS acquired Mortgage Servicing Rights during 2012 and had no Mortgage Servicing Rights during 2011. 2011 data excludes servicing information for which Ocwen does not have historical information. Performing loans include those loans that are current or have been delinquent for less than 90 days in accordance with their original terms and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing.

(2)

Performing loans include those loans that are current or have been delinquent for less than 90 days in accordance with their original terms and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing.

The following table provides information regarding changes in our portfolio of residential assets serviced during the quarter:


(in thousands, except for loan count data)	UPB			Loan Count
Servicing portfolio at June 30, 2012	$	17,294,385			109,890
Additions		29,860,255			210,175
Runoff		(631,007	)		(2,332	)

Servicing portfolio at September 30, 2012	$	46,523,633			317,733

The following table provides information regarding changes in our portfolio of residential assets serviced during 2012 from the time of the initial acquisition of mortgage servicing rights (March 5, 2012) to September 30, 2012:


(in thousands, except for loan count data)	UPB			Loan Count
Servicing portfolio at March 5, 2012	$	15,227,283			96,162
Additions		32,807,544			227,089
Runoff		(1,511,194	)		(5,518	)

Servicing portfolio at September 30, 2012	$	46,523,633			317,733

Change in Financial Condition Summary

The overall increase in total assets of $1,699,762 and total liabilities of $1,281,784 during the nine months ended September 30, 2012 primarily resulted from:

•

The completion of the Initial and first Follow-On Offerings: we raised cash of $418,097;

•

The completion of five acquisitions: we acquired assets of $1,713,397 and had associated increases in Match funded liabilities of $1,290,243 and

•

Advance facility activity: we received $55,788 in Match funded advance remittances and paid down $39,331 of outstanding Match funded liability balances.

The assets acquired in our asset acquisitions included Notes receivable – Rights to MSRs which had a balance of $177,730 representing 10.4% of total assets at September 30, 2012. Notes receivable – Rights to MSRs are carried at fair value, which is determined based on an appraisal prepared with the assistance of an independent valuation firm and requires the use of significant unobservable inputs. The most significant assumptions used in the appraisal are:

•

Discount rates reflecting the risk of earning the future income streams ranging from 14% to 22%.

•

Interest rate used for calculating the cost of servicing advances of 1-Month LIBOR + 4%.

•

Mortgage loan prepayment projections ranging from 12% to 25% of the related mortgage lifetime projected prepayment rate.

•

Delinquency rate projections ranging from 15% to over 35% of the aggregate unpaid balance of the underlying mortgage loans.

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

Total equity amounted to $417,987 at September 30, 2012 as compared to $9 at December 31, 2011. This increase of $417,978 is primarily due to the proceeds of equity offerings less share issuance costs of $418,097, net income of $12,526, offset by dividends declared of $11,282. In addition, we recorded $1,363 of unrealized losses in other comprehensive loss on interest rate swaps that we designated as cash flow hedges.

LIQUIDITY AND CAPITAL RESOURCES

We define liquidity as unencumbered cash balances plus unused, collateralized advance financing capacity. Our liquidity as of September 30, 2012, as measured by cash and available credit, was $33,750, an increase of $33,467 from December 31, 2011. At September 30, 2012, our cash position was $33,750 compared to $283 at December 31, 2011, and we were fully borrowed on our advance financing facility based on the collateral pledged at September 30, 2012. Regarding the investment of cash, our investment policies emphasize principal preservation and availability by limiting the investment to demand deposit accounts.

Investment policy and funding strategy.

Our primary sources of funds for near-term liquidity are:

•

Interest income -notes receivable – Rights to MSRs and

•

proceeds from match funded liabilities.

An expected long-term source of liquidity is the proceeds from the issuance of equity capital.

Our primary uses of funds are:

•

payments for advances in excess of collections on our existing servicing portfolio;

•

payments of interest and operating costs;

•

purchases of MSRs and related servicing advances and

•

repayments of borrowings.

In managing our liquidity position, our primary focus is on maintaining sufficient cash and unused borrowing capacity to meet our advancing obligations, pay expenses and purchase additional assets. We regularly monitor and project our cash position and borrowing capacity and consider this in sizing asset purchases.

At September 30, 2012, $42,588 of our total maximum borrowing capacity remained unused. We maintain unused borrowing capacity for two reasons:

•

as a protection should advances increase due to increased delinquencies and

•

to provide capacity for the acquisition of additional servicing rights.

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

Debt financing summary. On March 5, 2012, we assumed an existing advance financing facility from Ocwen in connection with the Initial Acquisition. On September 13, 2012, in connection with the closing of the first of the Follow on Offering purchases, we amended and restated our servicing advance financing facility as well as issued a $265,000 Rule 2A-7 money market note and an additional draw note. On September 28, 2012, we issued a $28,500 note in connection with the closing of the second of the Follow on Offering purchases.

As of September 30, 2012, we had $42,588 of unused borrowing capacity. Our ability to continue to pledge collateral under our advance facility depends on the performance of the collateral. Currently, the large majority of our collateral qualifies for financing. The debt covenants for our Advance Facility require that we maintain minimum levels of liquid assets. Failure to comply with these covenants could result in restrictions on new borrowings or the early termination of our Advance Facility. We believe we are in compliance with these covenants and do not expect them to restrict our activities.

Liquidity Risk. We are exposed to liquidity risk should the cash required to make new advances pursuant to servicing contracts and our agreements with Ocwen exceed the amount of advance repayments. In general, we finance our operations through operating cash flows and have an advance financing facility in place with sufficient capacity to cover the majority of cash required to make new advances. However, our advance financing facility contains borrowing conditions, which, if not met, could affect our ability to borrow on new advances and affect our liquidity.

Cash flows for the periods ended September 30.

The following table presents a summary of our cash flows for the periods ended September 30:


	Nine Months
	2012			2011
Net income (loss)	$	12,526		$	(82	)
Adjustments for non-cash items		3,980			—
Change in working capital accounts		74,207			78

Cash flow from operating activities		90,713			(4	)
Cash flow from investing activities		(1,352,886	)		—
Cash flow from financing activities		1,295,640			—

Net increase (decrease) in cash		33,467			(4	)
Cash at beginning of period		283			300

Cash at end of period	$	33,750		$	296

Nine months ended September 30, 2012. Our operating activities provided $90,713 of cash. Components of operating cash flow included amounts provided by reductions in servicing advances of $55,788 and by our net income of $12,526, adjusted for amortization of debt issuance costs of $3,980. Additional cash flows were used by increases in other assets of $9,968 and generated from increases in other liabilities of $28,387.

Our investing activities used $1,352,886 of cash during the nine months ended September 30, 2012 to acquire Rights to MSRs, advances and other related assets net of liabilities assumed in connection with our acquisitions during the year. We paid $184,285 to Ocwen for Notes receivable – Rights to MSRs and $1,175,156 for Match funded advances and other assets, net of liabilities assumed. Lastly, we had a reduction in Notes receivable – Rights to MSRs of $6,555.

Our financing activities provided $1,295,640 of cash. The Offerings provided $418,097 of cash, net of offering expenses. We borrowed $931,908 on our servicing advance financing facility related to the asset purchases from Ocwen. This amount was offset by repayments to the facility of $39,331 and payments of debt issue costs totaling $6,810. Additionally, we paid dividends equal to $8,224.

Nine months ended September 30, 2011 . We were a development stage enterprise until the date of the completion of the Offerings and Initial Acquisition on March 5, 2012. We used $4 of cash for operating activities during the nine months ended September 30, 2011 which consisted of a net loss of $82; the net loss was offset by an increase in other liabilities of $31 and decrease in other assets of $47.

DIVIDENDS

Over time, we intend to distribute at least 90 percent of our earnings in the form of monthly cash dividends. During 2012, we declared the following dividends:


Record Date	Payment Date	Amount per Ordinary Share

March 30, 2012	April 10, 2012	$0.08

April 30, 2012	May 10, 2012	$0.10

May 31, 2012	June 10, 2012	$0.10

June 29, 2012	July 10, 2012	$0.10

July 31, 2012	August 10, 2012	$0.10

August 31, 2012	September 10, 2012	$0.10

September 28, 2012	October 10, 2012	$0.10

October 31, 2012	November 12, 2012	$0.11

November 30, 2012	December 10, 2012	$0.11

December 31, 2012	January 10, 2013	$0.11

For further information about our equity and our dividend policy, see “Dividend Policy,” “Description of Share Capital” and “Material Cayman Islands and United States Federal Income Tax Considerations” in our final prospectus dated September 6, 2012.

CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND OTHER MATTERS

Contractual Obligations

We believe that we have adequate resources to fund all unfunded commitments to the extent required and meet all contractual obligations as they come due. Such contractual obligations include our interest payments and operating leases. The following table sets forth certain information regarding amounts we owe to others under contractual obligations as of September 30, 2012:


	Remainder of 2012		2013 through 2014		2015 through 2016		After 2016		Total
Operating leases	$	20	$	148	$	—	$	—	$	168

Total contractual cash obligations	$	20	$	148	$	—	$	—	$	168

We sub lease office space from Altisource in Atlanta, Georgia and West Palm Beach, Florida in the aggregate of $7 per month. The leases terminate on October 31, 2014.

We exclude match funded liabilities from the contractual obligation table above because it represents non-recourse debt that has been collateralized by Match funded advances which are not available to satisfy general claims against HLSS. Holders of the notes issued by the SPE have no recourse against any assets other than the match funded advances that serve as collateral for the securitized debt. Actual interest on Match funded liabilities was $4,090 and $7,793 during the three and nine months ended September 30, 2012, respectively. Future interest expense may vary depending on utilization, changes in LIBOR and spreads and the execution of hedging strategies.

Off-Balance Sheet Arrangements

In the normal course of business, we may engage in transactions with a variety of financial institutions and other companies that we do not reflect on our Interim Condensed Consolidated Balance Sheet. We are subject to potential financial loss if the counterparties to our off-balance sheet transactions are unable to complete an agreed upon transaction. We seek to limit counterparty risk through financial analysis, dollar limits and other monitoring procedures. We have also entered into non-cancelable operating leases principally for our office facilities.

Derivatives . We record all derivative transactions at fair value on our Interim Condensed Consolidated Balance Sheet. We use these derivatives primarily to manage our interest rate risk. The notional amounts of our derivative contracts do not reflect our exposure to credit loss.

Involvement with an SPE . We use an SPE in the financing of our servicing advances. We use a match funded securitization facility to finance our servicing advances. The SPE to which the advances are transferred in the securitization transaction is included in our Interim Condensed Consolidated Financial Statements because we are the primary beneficiary of the SPE which is also a VIE. The holders of the debt of this SPE can look only to the assets of the SPE for satisfaction of the debt and have no recourse against HLSS.

VIEs . If we determine that we are the primary beneficiary of a VIE, we report the VIE in our Interim Condensed Consolidated Financial Statements. As of September 30, 2012, we have no VIEs other than our advance financing SPE.

Related Parties

We entered into various agreements at market rates with Ocwen and Altisource in connection with the Initial Acquisition. William C. Erbey, our founder and the Chairman of our Board of Directors, is also the Chairman of the Board of Directors and largest shareholder of Ocwen and the Chairman of the Board of Directors and largest shareholder of Altisource. We use actual costs incurred plus a 15% mark-up as a proxy for market rates.

For the three and nine months ended September 30, 2012, pursuant to the purchase agreements and related sales supplements with Ocwen, we retained net servicing fees of $17,056 and $34,097, respectively. We recorded $14,017 and $27,542 as Interest income – notes receivable – Rights to MSRs and $3,039 and $6,555 as a reduction of Notes receivable – Rights to MSRs, for the three and nine months ended September 30, 2012, respectively. During the same periods, we acquired servicing advances made by Ocwen of $331,228 and $639,966, respectively. Ocwen billed us $30 and $70, respectively, under the Ocwen Professional Services Agreement during these same periods. We billed Ocwen $669 and $1,664 under the Ocwen Professional Services Agreement during these same periods. Revenue from the Ocwen Professional Services Agreement is included in other revenue.

Altisource billed us $177 and $408 for services provided to us during the three and nine months ended September 30, 2012 under the Altisource Administrative Services Agreement. We reported this amount as a component of General & administrative expenses for each period then ended.

On March 5, 2012, simultaneously with the IPO, William C. Erbey, the founder of our company and the Chairman of the Board of Directors, purchased 714,285 of our ordinary shares at $14 per share in a private placement. During the current quarter, Mr. Erbey purchased 128,103 of our ordinary shares on the open market at a weighted average share price of $15.57.

CRITICAL ACCOUNTING POLICIES

The need to estimate the impact or outcome of future events influences our ability to measure and report our operating results and financial position. Our critical accounting policies relate to the estimation and measurement of these risks. Because they inherently involve significant judgments and uncertainties, an understanding of these policies is fundamental to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. The following is a summary of our more subjective and complex accounting policies as they relate to our overall business strategy.

Valuation of Notes Receivable – Rights to MSRs and Recognition of Interest Income

Accounting Standards Codification (“ASC”) 860, Transfers and Servicing , specifically prohibits accounting for a transfer of servicing rights as a sale if legal title to such servicing rights has not passed to the purchaser. As a result, during the period before we receive the Required Third Party Consents related to Mortgage Servicing Rights, we are required to account for the purchase of the Rights to MSRs as a financing. We initially recorded the Notes receivable—Rights to MSRs at the purchase price of the Rights to MSRs. We amortize the Notes receivable—Rights to MSRs using the prospective interest method of accounting. At each reporting date, we calculate the present value of the net cash flows related to the then outstanding UPB of the underlying Mortgage Servicing Rights and adjust the carrying value of the Notes receivable—Rights to MSRs to this amount. We deduct the change in the carrying value of the Notes receivable—Rights to MSRs from the net servicing fees received by us with respect to the Mortgage Servicing Rights and the servicing fees paid to Ocwen with respect to the Mortgage Servicing Rights, and record the resulting amount as Interest income. Interest income is our primary source of income prior to receiving the Required Third Party Consents.

Other than transfer of legal title, we believe we meet all the other criteria under ASC 860 for the transfer of the Mortgage Servicing Rights for sales treatment.

We established the value of the Notes receivable – Rights to MSRs based on an appraisal prepared with the assistance of an independent valuation firm. We summarize the most significant assumptions used in the appraisal below:

•

Discount rates reflecting the risk of earning the future income streams from the Notes receivable – Rights to MSRs ranging from 14% to 22%.

•

Interest rate used for calculating the cost of servicing advances of 1-Month LIBOR + 4%.

•

Mortgage loan prepayment projections ranging from 12% to 25% of the related mortgage lifetime projected prepayment rate.

•

Delinquency rate projections ranging from 15% to over 35% of the aggregate unpaid balance of the underlying mortgage loans.

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

RECENT ACCOUNTING DEVELOPMENTS

Recent Accounting Pronouncements

ASU 2011-05 (ASC 220, Comprehensive Income): Presentation of Comprehensive Income. Current U.S. GAAP allows reporting entities three alternatives for presenting other comprehensive income and its components in financial statements. One of those presentation options is to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This ASU eliminates that option. This ASU also requires consecutive presentation of the statement of net income and other comprehensive income and requires that an entity present reclassification adjustments from other comprehensive income to net income by component on the face of both the statement of net income and the statement of other comprehensive income. ASU 2011-12, issued on December 23, 2011, defers indefinitely the provision regarding the presentation of reclassification adjustments. Our adoption of this standard effective January 1, 2012 did not have a material impact on our Interim Condensed Consolidated Financial Statements.

ITEM 3. QUANTIT ATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (DOLLARS IN THOUSANDS)

Market risk includes liquidity risk and interest rate risk. Market risk also reflects the risk of decline in the valuation of financial instruments and the collateral underlying loans. Our Investment Committee reviews significant transactions that may impact market risk and is authorized to utilize a wide variety of techniques and strategies to manage market risk including, in particular, interest rate risk.

Liquidity Risk

See the Liquidity and Capital Resources sections for additional discussion of liquidity and related risks.

Interest Rate Risk

Interest rate risk is a function of (i) the timing and (ii) the dollar amount of assets and liabilities that re-price at various points in time. We are exposed to interest rate risk to the extent that our interest rate sensitive liabilities mature or re-price at different speeds, or different bases, than our interest-earning assets.

We executed a hedging strategy aimed to mitigate the impact of changes in variable interest rates within a certain period based on the projected excess of interest rate sensitive liabilities over assets. Future variances between the projected excess of interest rate sensitive liabilities over assets and actual results could cause us to become over-hedged or under-hedged.

If interest rates increase by 1% on our variable-rate advance financing and interest earning account balances, we estimate a net negative impact of approximately $1,782 resulting from an increase of $3,396 in annual interest income compared to an increase of $5,178 in annual interest expense based on September 30, 2012 balances. The reduced effect on interest expense is due in large part to our hedging activities.


	September 30, 2012
Variable-rate borrowings outstanding	$	977,797
Fixed-rate borrowings outstanding		273,115
Custodial account balances (excluded from our Interim Condensed Consolidated Balance Sheet)		303,206
Notional balance of interest rate swap (1)		459,994

(1)	Relates to the interest rate swaps entered into to hedge our exposure to rising interest rates on our variable-rate borrowings with an outstanding balance of $977,797 at September 30, 2012.

Our Interim Condensed Consolidated Balance Sheet at September 30, 2012 included interest-earning assets totaling $36,380. Interest-earning assets include $33,750 of interest-earning cash accounts and $2,630 of interest-earning collateral accounts.

ITEM 4. CONTROLS AND PROCEDURES

Our management, under the supervision of and with the participation of our President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of September 30, 2012. Based on this evaluation, our President and Chief Financial Officer concluded that as of September 30, 2012 our disclosure controls and procedures (1) were designed and functioning effectively to ensure that material information relating to HLSS, including its consolidated subsidiaries, is made known to our President and Chief Financial Officer by others within those entities particularly during the period in which this report was being prepared and (2) were operating effectively in that they provided reasonable assurance that information required to be disclosed by HLSS in the reports that it files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including the President or Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We may be party to various claims, legal actions, and complaints arising in the ordinary course of business. There are currently no probable matters outstanding that, in the opinion of management, will have a material effect on our Interim Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows. There are also currently no reasonably possible matters outstanding that, in the opinion of management, will have a material effect on our Interim Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows.

ITEM 1A. RISK FACTORS

We include a discussion of the principal risks and uncertainties that affect or could affect our business operations on pages 19 through 46 of our final prospectus dated September 6, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Index



10.1		Series 2012-T2 Indenture Supplement, dated as of October 17, 2012, by and between HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, and Barclays Bank PLC. (1)

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

101.INS		XBRL Instance Document (2)

101.SCH		XBRL Taxonomy Extension Schema Document (2)

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (2)

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (2)

101.LAB		XBRL Taxonomy Extension Label Linkbase Document (2)

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (2)

(1)	Filed with Home Loan Servicing Solution’s Quarterly Report on Form 10-Q filed on October 18, 2012 for the period ended September 30, 2012.

(2)	Furnished herewith.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


				HOME LOAN SERVICING SOLUTIONS, LTD.

Date: October 18, 2012				By: /s/ James E. Lauter
				James E. Lauter
				Chief Financial Officer and Chief Accounting Officer (On behalf of the Registrant and as its principal financial officer)