WALTER INVESTMENT MANAGEMENT CORP – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Historical results and trends which might appear should not be taken as indicative of future operations, particularly in light of our recent acquisition of GTCS Holdings LLC, or Green Tree, discussed below. Our results of operations and financial condition, as reflected in the accompanying statements and related footnotes, are subject to management's evaluation and interpretation of business conditions, changing capital market conditions, and other factors.  

The Company

  We are a fee-based business services provider to the residential mortgage industry. We are a specialty servicer providing residential loan servicing that focuses on credit-sensitive residential mortgage assets located in the United States, or U.S. We are also a mortgage portfolio owner and operate an insurance agency serving residential loan customers.  

Executive Summary

  On July 1, 2011, we acquired Green Tree, a high-touch third-party servicer of credit-sensitive consumer loans, which significantly impacted our Company. As a result of acquiring Green Tree:    

• The number of accounts we service increased from approximately 40,000 one

        year ago to over 1 million at December 31, 2011.    

• The unpaid principal balance of accounts we service for third parties, as

        well as those on our balance sheet, increased from $3.2 billion one year         ago to more than $86.0 billion at year end 2011.    

• Our footprint across the U.S. increased from 70 offices in 16 states to 97

        offices in 27 states.    

• The number of full-time equivalent employees increased from approximately

        350 to over 2,600.    

• Our total assets more than doubled, increasing by $2.2 billion to over $4.0

billion.

   Prior to the acquisition of Green Tree, we operated as a REIT; however, as a result of the acquisition, we no longer qualify as a REIT and, effective January 1, 2011, we are now taxed as a C corporation at the federal corporate rates.  For the year ended December 31, 2011, we reported a net loss of $69.3 million or $2.51 per diluted share. Our net loss was driven primarily by two key items: (1) income tax expense of $63.2 million or $2.29 per diluted share as a result of our change from being a REIT to being taxed as a C corporation, and (2) recognition of transaction and integration-related costs associated with the Green Tree acquisition totaling $19.2 million or $0.70 per diluted share.  We recognized after tax core earnings of $67.0 million or $2.43 per diluted share for the year ended December 31, 2011. Core earnings when compared to our net loss reflect the following key adjustments: (1) depreciation and amortization expense of $42.3 million related to the increase in basis recognized on assets acquired with Green Tree, (2) transaction and integration-related costs of $19.2 million, and (3) the net impact of $6.9 million for the VIEs consolidated as a result of the Green Tree acquisition, which are accounted for at fair value. For a reconciliation of our consolidated loss before income taxes under accounting principles generally accepted in the U.S., or GAAP, to our core earnings, refer to the Business Segment Results section.  Pro Forma Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, was $123.5 million for the year ended December 31, 2011, which when compared to our consolidated loss before income taxes reflects the adjustments noted above for core earnings as well as: (1) total depreciation and                                           35 

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  amortization expense of $53.1 million, which includes amortization of $42.3 million noted as a core earnings adjustment, (2) interest expense of $42.3 million on our corporate debt, and (3) pro forma synergies of $16.8 million. For a reconciliation of our consolidated loss before income taxes under GAAP to our Pro Forma Adjusted EBIDTA, refer to Liquidity and Capital Management.  We generated $108.8 million in cash flow from operating activities during the year ended December 31, 2011 and finished the year with $32.7 million in cash and cash equivalents and $44.7 million in funds available under our senior secured revolving credit facility.  We now manage our Company in four primary business segments: Servicing; Asset Receivables Management, or ARM; Insurance; and Loans and Residuals. Refer to the Business Segment Results section for a presentation and discussion of our financial results by business segment. A description of the business conducted by each of these segments and related key financial highlights are provided below:  Servicing - Our Servicing business segment consists of operations that perform servicing for third-party investors in residential mortgages, manufactured housing and consumer installment loans and contracts, as well as for the Loans and Residuals segment and for the Non-Residual Trusts, which is reported with other corporate items. On the date of acquisition of Green Tree, our Servicing segment added 769,000 accounts and $38.0 billion in unpaid principal balances to our servicing portfolio. Additionally, our Servicing segment added new business of 259,000 accounts and $48.3 billion in unpaid principal balances to our servicing portfolio and recognized $31.3 million in incentive and performance fees, excluding fees associated with our ARM business segment, in addition to $126.6 million in servicing fees during 2011. Substantially all of the new accounts added to the servicing portfolio is new business added by Green Tree. Although delinquent accounts for our third-party investor portfolio have increased since our acquisition of Green Tree, this is due to the addition of new business. Delinquent accounts for Green Tree's legacy portfolio, which consists of manufactured housing loans, have remained stable when compared to Green Tree's pre-acquisition delinquency measures.  ARM - Our ARM business segment performs collections of post charge-off deficiency balances on behalf of securitization trusts and third-party asset owners. Asset recovery income was $14.3 million since our acquisition of Green Tree through year end 2011.  Insurance - Our Insurance business segment provides voluntary and lender-placed hazard insurance for residential loans, as well as other ancillary products, through our insurance agencies for a commission to third parties as well as to our Loans and Residuals segment. Net written premiums were $85.9 million for 2011, of which 89% reflected premiums written by Green Tree since the date of acquisition. Total third-party insurance revenue was $41.7 million for the year ended December 31, 2011 with lender-placed and voluntary net written premiums for 2011 of $45.1 million and $40.8 million, respectively. The number of outstanding policies at December 31, 2011 was 207,000 accounts, of which 94% were written by Green Tree.  Loans and Residuals - Our Loans and Residuals business segment consists of the assets and liabilities of the Residual Trusts, as well as our unencumbered residential loan portfolio and real estate owned. Our net interest margin was 4.55% for the year ended December 31, 2011, down 57 basis points from 2010 due to the monetization of assets in order to fund the acquisition of Green Tree. Total delinquent loans have increased to 5.73% at December 31, 2011 from 4.68% at December 31, 2010; however, the number of real estate owned properties has declined to 867 units at December 31, 2011, down 174 units from one year ago.  

Acquisitions and Other Business Combinations

Acquisition of Green Tree

  On July 1, 2011, we acquired 100% of the outstanding membership interests of Green Tree, or the Acquisition. Green Tree, based in St. Paul, Minnesota, is a fee-based, business services company providing high-touch, third-party servicing of credit-sensitive loans. The purchase price of the Acquisition consisted of cash of approximately $1.0 billion and issuance of common stock with a fair value of $40.2 million. The cash portion of the purchase price was funded by monetizing certain existing assets and by the issuance of corporate debt totaling $765 million. The Acquisition was accounted for under the acquisition method and accordingly, the assets                                           36

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  acquired and liabilities assumed were recorded at their estimated fair values. Net assets with an estimated fair value of $1.1 billion were acquired by us, which included the recognition of estimates of goodwill of $470.3 million and identifiable intangible assets of $150.1 million. The estimated fair values of the assets acquired and liabilities assumed from the Acquisition are presented in Note 4 in the Notes to Consolidated Financial Statements.  Pursuant to the accounting guidance for VIEs, we were required to consolidate, at the acquisition date, ten securitization trusts for which Green Tree performs the servicing. We do not currently own any residual interests in these trusts, and thus, we refer to these trusts as the Non-Residual Trusts. We have elected to account for certain of the assets acquired and liabilities assumed of the Non-Residual Trusts, which consist of residential loans, certain receivables and the mortgage-backed debt, at fair value. We own the residual interests in VIEs that were previously consolidated by us prior to the acquisition of Green Tree. We refer to these trusts as the Residual Trusts.  

Acquisition of Marix

  On November 1, 2010, we acquired 100% of the outstanding membership interests of Marix Servicing, LLC, or Marix, a high-touch specialty mortgage servicer based in Phoenix, Arizona. The purchase price for the acquisition was a cash payment due at closing of less than $0.1 million plus contingent earn-out payments. The earn-out payments are driven by net servicing revenue in Marix's existing business in excess of a base of $3.8 million per quarter. During 2011, no earn-out payments were earned or paid as the servicing revenue targets specified in the purchase agreement were not met in any of the four quarters in 2011. In addition, management estimates that the revenue targets for the remaining two years of the earn-out period will not be met. Refer to Note 4 in the Notes to Consolidated Financial Statements for further information.  

Spin-off from Walter Energy and Merger with Hanover

  In September 2008, Walter Energy, Inc., or Walter Energy, outlined plans to separate its financing business from its core natural resources business through a spin-off to stockholders. On , Walter Investment Management LLC, or WIM, was formed as a wholly-owned subsidiary of Walter Energy and on April 17, 2009, WIM was separated from Walter Energy. Immediately prior to the spin-off, substantially all of the assets and liabilities related to Walter Energy's financing business were contributed by Walter Energy, through a series of transactions to WIM in return for all of WIM's membership units. Immediately following the spin-off, WIM was merged with Hanover Capital Mortgage Holdings, Inc., or Hanover, or the Merger. The merged business, together with its consolidated subsidiaries, was renamed Walter Investment Management Corp. The Merger constituted a reverse acquisition for accounting purposes, and as such, the pre-acquisition financial statements of WIM are treated as the historical financial statements of the Company. Refer to Note 3 in the Notes to Consolidated Financial Statements for further information.                                           37

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Results of Operations - Comparison of Consolidated Results of Operations for the Years Ended December 31, 2011, 2010 and 2009

  We recognized a net loss of $69.3 million for the year ended December 31, 2011 and net income of $37.1 million and $113.8 million for the years ended December 31, 2010 and 2009, respectively. A summary of our consolidated results of operations is provided below (in thousands):                                              For the Years Ended December 31,                           Variance                                         2011              2010           2009           2011 vs. 2010         2010 vs. 2009 Revenues Servicing revenue and fees           $   186,177        $   2,267      $       -       $       183,910       $         2,267 Interest income on loans                 164,794          166,188        175,372                (1,394 )              (9,184 ) Insurance revenue                         41,651            9,163         10,041                32,488                  (878 ) Other revenues                             9,852            2,876          2,929                 6,976                   (53 )  Total revenues                           402,474          180,494        188,342               221,980                (7,848 )  Expenses Interest expense                         136,246           81,729         88,647                54,517                (6,918 ) Salaries and benefits                    117,736           27,495         20,568                90,241                 6,927 Depreciation and amortization             53,078              383            436                52,695                   (53 ) General and administrative                78,597           21,289         21,408                57,308                  (119 ) Provision for loan losses                  6,016            6,526          9,441                  (510 )              (2,915 ) Other expenses, net                       18,073            9,408         10,224                 8,665                  (816 )  Total expenses                           409,746          146,830        150,724               262,916                (3,894 )  Other gains (losses) Net fair value losses                     (1,052 )              -              -                (1,052 )                   - Other                                      2,191            4,681              -                (2,490 )               4,681  Total other gains (losses)                 1,139            4,681              -                (3,542 )               4,681 

Income (loss) before income taxes (6,133 ) 38,345 37,618

               (44,478 )                 727 Income tax expense (benefit)              63,162            1,277        (76,161 )              61,885                77,438  Net income (loss)                    $   (69,295 )      $  37,068      $ 113,779       $      (106,363 )     $       (76,711 )   

Servicing Revenue and Fees

  We recognize servicing revenue and fees on servicing performed for third parties by our Green Tree and Marix subsidiaries. This revenue includes contractual fees earned on the serviced loans, incentive and performance fees earned based on the performance of certain loans or loan portfolios serviced by us and loan modification fees. Servicing revenue and fees also includes asset recovery income, which is included in incentive and performance fees, and ancillary fees such as late fees and prepayment fees. Servicing revenue earned on loans in the consolidated VIEs, which consists of both the Residual and Non-Residual Trusts, is eliminated in consolidation.  

A summary of servicing revenue and fees is provided below (in thousands):

                                                    For the Years Ended                                                      December 31,                                                    2011          2010               Servicing fees                   $    126,610     $   582               Incentive and performance fees         45,596       1,055               Ancillary and other fees               13,971         630                Servicing revenue and fees       $    186,177     $ 2,267                                             38 

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  Included in incentive and performance fees for the year ended December 31, 2011, are incentive fees Green Tree received for exceeding pre-defined performance hurdles in servicing various loan portfolios. These fees may not recur on a regular basis, as they are earned based on the performance of underlying loan pools as compared to comparable pools serviced by others, as well as achievement of certain performance hurdles over time, which may not be achieved on a regular schedule.  

Third-Party Servicing Portfolio

  Provided below is a summary of the activity in our third-party servicing portfolio, which includes accounts serviced for third parties for which we earn servicing revenue and, thus, excludes residential loans and real estate owned that have been recognized on our consolidated balance sheets (dollars in thousands):                                                                      For the Year Ended December 31,                                                                                 2011                                                                                              Sub-Servicing                                         Servicing                Sub-Servicing                  Rights                                     Rights Capitalized         Rights Capitalized         Not Capitalized (1)           Total Unpaid principal balance of accounts serviced for third parties Beginning balance                  $                  -       $                  -       $           1,348,329       $  1,348,329 Acquisition of Green Tree                    20,141,602                 17,860,799                           -         38,002,401 New business added                                    -                          -                  48,300,086         48,300,086 Payoffs, sales and curtailments              (1,424,043 )               (1,558,493 )                (1,384,120 )       (4,366,656 )  Ending balance                     $         18,717,559       $         16,302,306       $          48,264,295       $ 83,284,160                                                                            December 31, 2011 Ending number of accounts serviced for third parties                      402,067                    318,363                     259,100            979,530       

(1) The beginning balance of sub-servicing rights not capitalized of $1.3 billion

consists of accounts acquired through the acquisition of Marix.

Substantially all of the new business noted in the table above was added by Green Tree since its acquisition on July 1, 2011. For further information regarding servicing revenue and our servicing portfolio, refer to the Business Segment Results section.

  Interest Income on Loans  We earn interest income on the residential loans held in the Residual Trusts and on our unencumbered residential loans, which are accounted for at amortized cost. For the year ended December 31, 2011, interest income decreased $1.4 million as compared to 2010 due to the run-off of the portfolio offset in part by a higher average yield on residential loans acquired at the end of 2010 and during the first half of 2011. Interest income decreased $9.2 million for the year ended December 31, 2010 as compared to 2009 due to the run-off of the portfolio. In addition, there was a lower level of voluntary prepayments in 2010 as compared to 2009, which resulted in less discount accretion recognized in 2010 as compared to 2009. Provided below is a summary of the average balances of residential loans at amortized cost and the related interest income and average yields (dollars in thousands):                                          For the Years Ended December 31,                                Variance                                  2011               2010               2009             2011 vs. 2010          2010 vs. 2009

Residential loans at amortized cost Interest income               $   164,794        $   166,188        $   175,372        $        (1,394 )      $        (9,184 ) Average balance                 1,621,540          1,649,700          1,726,326                (28,160 )              (76,626 ) Average yield                       10.16 %            10.07 %            10.16 %                 0.09 %                -0.09 %                                            39 

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Insurance Revenue

  Insurance revenue consists of commission income and fees earned on voluntary and lender-placed insurance policies and other products sold to customers, net of estimated future policy cancellations, as well as premium revenue from captive reinsurers. Commission income is based on a percentage of the price of the insurance policy sold, which varies based on the type of product. Insurance revenue increased $32.5 million for the year ended December 31, 2011 as compared to 2010 due to the acquisition of Green Tree. Insurance revenue decreased slightly for the year ended December 31, 2010 as compared to 2009 due to lower earned premiums. For further information on insurance revenue, refer to Business Segment Results.  Other Revenues 

Other revenues increased $7.0 million for the year ended December 31, 2011 as compared to 2010 due to management fee income and accretion of certain acquisition-related fair value adjustments recognized by Green Tree. Other revenues for the year ended December 31, 2010 were flat as compared to 2009.

Interest Expense

  We incur interest expense on our corporate debt, on the mortgage-backed debt issued by the Residual Trusts, and on our servicing advance liabilities, all of which are accounted for at amortized cost. For the year ended December 31, 2011, interest expense increased $54.5 million as compared to 2010 due largely to the issuance of $765 million in corporate debt and $223.1 million in mortgage-backed debt used to fund the acquisition of Green Tree. Interest expense on mortgage-backed debt declined for the year ended December 31, 2010 as compared to 2009 due primarily to extinguishments of higher cost debt and repayments resulting in a lower average balance of mortgage-backed debt outstanding. This decline in balances was offset by a new securitization in late 2010. Provided below is a summary of the average balances of our corporate debt, the mortgage-backed debt of the Residual Trusts, and the servicing advance liabilities, as well as the related interest expense and average rates (dollars in thousands):                                            For the Years Ended December 31,                                  Variance                                   2011                2010                2009              2011 vs. 2010           2010 vs. 2009 Debt Interest expense               $    42,260         $         -         $         -         $        42,260         $             - Average balance                    386,290                   -                   -                 386,290                       - Average rate                         10.94 %                 -                   -                   10.94 %                     - Mortgage-backed debt at amortized cost Interest expense               $    91,075         $    81,729         $    88,647         $         9,346         $        (6,918 ) Average balance                  1,347,532           1,274,505           1,320,138                  73,027                 (45,633 ) Average rate                          6.76 %              6.41 %              6.71 %                  0.35 %                 -0.30 % Servicing advance liabilities Interest expense               $     2,911         $         -         $         -         $         2,911         $             - Average balance                     55,287                   -                   -                  55,287                       - Average rate                          5.27 %                 -                   -                    5.27 %                     -   Salaries and Benefits  As a result of the acquisition of Green Tree, the number of full-time-equivalent employees increased by approximately 2,000 employees largely causing the increase in salaries and benefits expense of $90.2 million for the year ended December 31, 2011 as compared to 2010. The increase in salaries and benefits during the year ended December 31, 2010 as compared to 2009 was due to the addition of employees to support the growth initiatives of the Company, additional share-based compensation expense, as well as severance costs incurred in 2010.                                           40 

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Depreciation and Amortization

  Depreciation and amortization expense consists of amortization of capitalized servicing rights and intangible assets other than goodwill, as well as depreciation and amortization recognized on premises and equipment, which includes amortization of internally-developed software acquired as part of the acquisition of Green Tree. A summary of depreciation and amortization expense is provided below (in thousands):                                                          For the Years Ended                                                           December 31,                                                     2011       2010      2009             Depreciation and amortization of:             Servicing rights                      $ 28,623     $   -     $   -             Intangible assets                       12,585         -         -             Premises and equipment                  11,870       383       436              Total depreciation and amortization   $ 53,078     $ 383     $ 436    General and Administrative  General and administrative expenses increased $57.3 million during the year ended December 31, 2011 as compared to 2010. The increase was due to the recognition of transaction-related expenses of $12.9 million as well as general and administrative expenses of $40.7 million associated with Green Tree. General and administrative expenses remained flat for the year ended December 31, 2010 as compared to 2009.  Provision for Loan Losses  We recognize a provision for loan losses for our residential loan portfolio accounted for at amortized cost. The provision for loan losses decreased $0.5 million for the year ended December 31, 2011 as compared to 2010, due to a lower number of foreclosures, particularly during the first six months of the current year. The favorable trend in the number of foreclosures has reduced the level required for the allowance for loan losses. The provision for loan losses decreased $2.9 million for the year ended December 31, 2010 as compared to 2009 due to a reduced frequency of foreclosures offset by a modest increase in loss severities. Additionally, as the amount of residential loans decreases and the loans season, credit exposure is reduced, resulting in a decreasing provision.  

Other Expenses, Net

  Other expenses, net consist primarily of real estate owned expenses, net and claims expenses. Other expenses, net increased $8.7 million for the year ended December 31, 2011 as compared to 2010 primarily due to higher charges for the decline in the fair value of real estate owned of $4.0 million and higher claims expense of $3.1 million due primarily to severe wind storm damage claims. Other expenses remained flat for the year ended December 31, 2010 as compared to 2009 reflecting an increase in real estate owned expenses, net offset by a decrease in claims expense as a result of fewer policies and better claims experience.  

Other Gains (Losses)

  We recognized other gains of $1.1 million for the year ended December 31, 2011, which included a gain of $2.1 million from the reversal of the estimated contingent earn-out liability for Marix. Refer to Note 4 in the Notes to Consolidated Financial Statements for further information. Other gains recognized in 2011 also included a gain of $0.1 million on the extinguishment of mortgage-backed debt. These gains were offset by net fair value losses recognized on assets and liabilities accounted for at fair value of $1.1 million, which included a net loss of $0.9 million on the assets and liabilities of the Non-Residual Trusts. Expected accretion, offset by net fair value gains resulting from a decline in the forward London Interbank Offered Rate, or LIBOR, impacted the net fair values of the assets and liabilities of the Non-Residual Trusts. For the year ended December 31, 2010, we recognized a gain of $4.3 million on the extinguishment of $40.5 million in mortgage-backed debt and a gain of $0.4 million on the bargain purchase of Marix.                                           41

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Income Tax Expense

  Income tax expense increased $61.9 million for the year ended December 31, 2011 as compared to 2010. As a result of the acquisition of Green Tree, we no longer qualify as a REIT retroactive to January 1, 2011. The increase in income tax expense is due to the recognition of $65.3 million in provision for current and deferred income taxes as a result of no longer qualifying for REIT status and being taxed as a C corporation. The change in income tax expense for the year ended December 31, 2010 as compared to 2009 was due to the impact of our qualification as a REIT in 2009 in conjunction with the spin-off from Walter Energy and Merger with Hanover.  

Financial Condition - Comparison of Consolidated Financial Condition at December 31, 2011 to December 31, 2010

  The acquisition of Green Tree had a significant impact on our consolidated balance sheet. At December 31, 2011, total assets were $4.1 billion, which was an increase of $2.2 billion from the end of the prior fiscal year. Provided below is a summary of the consolidated balance sheet at December 31, 2011 as compared to December 31, 2010 (in thousands), a brief description of some of the items included in the consolidated balance sheet, and a summary of the significant variances in our assets, liabilities and stockholders' equity at December 31, 2011 as compared to December 31, 2010. Unless otherwise stated, significant variances are the result of the acquisition of Green Tree.                                                    December 31,        December 31,        Increase                                                     2011                2010           (Decrease) Assets Cash and cash equivalents                      $       32,652      $      114,352      $   (81,700 ) Restricted cash and cash equivalents                  332,428              52,289          280,139 Residential loans, net (includes $672,714 and $0 at fair value)                               2,264,578           1,621,485          643,093 Receivables, net (includes $81,782 and $0 at fair value)                                        228,128               3,426          224,702 Servicing rights, net                                 250,329                   -          250,329 Goodwill                                              470,291                   -          470,291 Intangible assets, net                                137,482                   -          137,482 Premises and equipment, net                           130,410               2,286          128,124 Other assets                                          247,289             101,652          145,637  Total assets                                   $    4,093,587      $    1,895,490      $ 2,198,097  Liabilities and stockholders' equity Servicing advance liabilities                         107,039               3,254          103,785 Debt                                                  742,626                   -          742,626 Mortgage-backed debt (includes $811,245 and $0 at fair value)                                   2,224,754           1,281,555          943,199 Other liabilities (includes $21,515 and $0 at fair value)                                        488,534              55,193          433,341 Stockholders' equity                                  530,634             555,488          (24,854 ) 

Total liabilities and stockholders' equity $ 4,093,587$ 1,895,490$ 2,198,097

    Cash and Cash Equivalents  

Cash and cash equivalents decreased $81.7 million from the prior year end primarily due to the use of cash and cash equivalents to acquire Green Tree.

Restricted Cash and Cash Equivalents

  Restricted cash and cash equivalents consist largely of cash collected as a result of our servicing activities that are owed to third parties. Restricted cash and cash equivalents also include $45.0 million being held in escrow pending release to the sellers of Green Tree. An offsetting liability for this amount is included in other liabilities.                                           42

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Residential Loans, Net

  Residential loans, net consists of residential loans held by the Residual Trusts and unencumbered loans, both of which are accounted for at amortized cost, and residential loans held by the Non-Residual Trusts, which are accounted for at fair value. Provided below is a summary of the residential loan portfolio (in thousands):                                                    December 31,         December 31,         Increase                                                     2011                 2010            (Decrease) Carried at amortized cost Unpaid principal balance                       $    1,776,063       $    1,803,758       $   (27,695 ) Unamortized premiums (discounts) and other cost basis adjustments, net(1)                       (170,375 )           (166,366 )          (4,009 ) Allowance for loan losses                             (13,824 )            (15,907 )           2,083  Residential loans at amortized cost                 1,591,864            1,621,485           (29,621 ) Carried at fair value Unpaid principal balance                              907,207                    -           907,207 Fair value adjustment                                (234,493 )             

- (234,493 )

  Residential loans at fair value                       672,714                    -           672,714  Total residential loans, net                   $    2,264,578       $    1,621,485       $   643,093       

(1) Included in unamortized premiums (discounts) and other cost basis

    adjustments, net for residential loans carried at amortized cost is     $15.3 million and $16.0 million in accrued interest receivable at     December 31, 2011 and December 31, 2010, respectively.   During the year ended December 31, 2011, we purchased residential loans carried at amortized cost with an unpaid principal balance of $64.6 million. This increase was offset by principal pay-downs for the year on residential loans carried at amortized cost of $96.1 million.  

Receivables, Net

  Receivables, net consists primarily of insurance premium receivables, receivables related to the Non-Residual Trusts, and servicing fee receivables. The receivables related to the Non-Residual Trusts are carried at fair value and represent the fair value of expected draws under letters of credit, or LOCs, functioning as credit enhancements to certain of the consolidated Non-Residual Trusts.  Servicing Rights, Net  At July 1, 2011, we recognized the fair value of Green Tree's rights to service and sub-service loans with an unpaid principal balance of $38.0 billion. The estimated fair value of these servicing rights at acquisition was $279.0 million and is being accounted for at amortized cost. Since the date of acquisition, we have recognized $28.6 million in amortization expense for these capitalized servicing rights. We evaluated our servicing rights for impairment and determined that these capitalized rights were not impaired at December 31, 2011.  

Goodwill

  As a result of the acquisition of Green Tree, we recognized estimated goodwill of $470.3 million, reflecting the expected future cash flows and growth projected from the Acquisition. We also expect to achieve synergies due to overlapping staff and administrative functions, and duplicate servicing platforms. In addition, we expect to avoid certain other future planned expenditures from cross deployment of proprietary technology. We completed our goodwill impairment test effective October 1, 2011 and determined that the carrying amount of goodwill was not impaired.  

Intangible Assets, Net

  As a result of the acquisition of Green Tree, we recognized estimated identifiable intangible assets of $150.1 million consisting of customer and institutional relationships and contract-based intangibles. The customer and institutional relationship intangibles are being amortized using an economic consumption method and a straight-line method, respectively, over the related expected useful lives. Since the date of acquisition, we have recognized $12.6 million in amortization expense for these intangible assets.                                           43

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Premises and Equipment, Net

  Premises and equipment, net increased $128.1 million from the prior year end due to the acquisition of $132.8 million in premises and equipment of Green Tree. These assets included internally-developed software with an estimated fair value at acquisition of $123.1 million, which is being amortized over an estimated life of seven years. For 2011, we recognized $11.9 million in depreciation and amortization expense on our premises and equipment.  

Other Assets

  Other assets consist primarily of servicer and protective advances, deferred tax asset, real estate owned, and deferred debt issuance costs. Other assets increased $145.6 million from the prior year end due primarily to servicer and protective advances of Green Tree, which were $122.1 million at December 31, 2011, and to deferred debt issuance costs incurred of $27.5 million that are being amortized over the life of the long-term debt issued to fund the Acquisition. For 2011, we recognized $3.1 million in amortization of these deferred debt issuance costs.  

Servicing Advance Liabilities

These liabilities consist of funds owed to third parties under a Servicer Advance Reimbursement Agreement and a Receivables Loan Agreement, which are more fully described in Liquidity and Capital Management.

Debt

  At July 1, 2011, we issued $765 million in corporate debt in order to partially fund the acquisition of Green Tree and obtained a Revolver. We had no cash borrowings outstanding under the Revolver at December 31, 2011. Corporate debt also includes collateralized borrowings totaling $9.6 million at December 31, 2011, which consist of borrowings by Green Tree under a Mortgage Servicing Rights Credit Facility. The debt agreements are more fully described in Liquidity and Capital Management.  

Mortgage-Backed Debt

  Mortgage-backed debt consists of debt issued by the Residual Trusts which is accounted for at amortized cost and the Non-Residual Trusts which is accounted for at fair value. The mortgage-backed debt of the Non-Residual Trusts was recognized on our consolidated balance sheet as a result of the acquisition of Green Tree. Provided below is a summary of the mortgage-backed debt (in thousands):                                                    December 31,         December 31,         Increase                                                     2011                 2010            (Decrease) Carried at amortized cost Unpaid principal balance                       $    1,415,093       $    1,282,354       $   132,739 Discount                                               (1,584 )               (799 )            (785 )  Mortgage-backed debt at amortized cost              1,413,509            1,281,555           131,954 Carried at fair value Unpaid principal balance                              920,761                    -           920,761 Fair value adjustment                                (109,516 )                  -          (109,516 )  Mortgage-backed debt at fair value                    811,245                    -           811,245  Total mortgage-backed debt                     $    2,224,754       $    1,281,555       $   943,199    Mortgage-backed debt carried at amortized cost increased $132.0 million from the prior year end as a result of mortgage-backed debt we issued in order to partially fund the Acquisition. During 2011, we issued $102.0 million in mortgage-backed debt through WIMC Capital Trust 2011-1, or Trust 2011-1, sold $85.1 million of the Class B secured notes of Mid-State Capital Trust 2010-1, or Trust 2010-1, and reissued $36.0 million in various mortgage-backed debt that we previously had extinguished.                                           44 

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Other Liabilities

  Other liabilities consist of payables and accrued liabilities, dividends payable, servicer payables and deferred tax liability. Other liabilities increased $433.3 million from the prior year end due primarily to Green Tree's servicer payables of $213.7 million and payables to insurance carriers of $49.2 million at December 31, 2011. The increase in other liabilities is also due to escrow funds payable of $45.0 million to the sellers of Green Tree and to the recognition of a net deferred tax liability at July 1, 2011 resulting from the loss of our REIT status.  Stockholders' Equity 

Stockholders' equity decreased $24.9 million from the prior year end due primarily to our net loss offset by the issuance of $40.2 million in equity to partly fund the acquisition of Green Tree.

Business Segment Results

  As a result of the acquisition of Green Tree on July 1, 2011, we now manage our Company in four primary business segments: Servicing; ARM; Insurance; and Loans and Residuals. During the fourth quarter of 2011, in conjunction with the preparation of our annual business plan and due to our acquisition of Green Tree, the Company evaluated how our chief operating decision maker reviews financial information for purposes of making resource allocation decisions. As a result of this evaluation, the Company modified the Servicing segment by separating the ARM business into an operating segment apart from the Servicing segment. The Company also made a change to the composition of indirect costs allocated to the business segments. These changes have been reflected in the segment reporting consistently for all periods presented.  We measure the performance of our business segments through the following measures: income (loss) before income taxes, core earnings before income taxes and Pro Forma Adjusted EBITDA. In calculating income (loss) before income taxes, we allocate indirect expenses to our business segments and include those expenses in other expenses, net. We reconcile our income (loss) before income taxes for our business segments to our GAAP consolidated income (loss) before taxes and report the financial results of our Non-Residual Trusts, other operating segments and certain corporate expenses and amounts to eliminate intercompany transactions between segments as other activity. For a reconciliation of our income (loss) before income taxes for our business segments to our GAAP consolidated income (loss) before income taxes, refer to Note 23 in the Notes to Consolidated Financial Statements.  Core earnings before income taxes consists of income before income taxes adjusted primarily for depreciation and amortization of the increased basis in assets acquired with Green Tree, non-cash expenses including share-based compensation and interest, certain transaction charges to acquire Green Tree and combine our companies, and the net impact of the consolidated Non-Residual Trusts. For a description Pro Forma Adjusted EBITDA, refer to the Liquidity and Capital Management section.  

Provided below is a discussion of our financial results for our four primary business segments.

  Servicing  Prior to the acquisition of both Green Tree and Marix, our Servicing business consisted of servicing performed solely for the residential loans held by our Loans and Residuals business segment. Associated intercompany servicing revenue has been eliminated in consolidation. In November 2010, we acquired Marix and began servicing residential loans for third parties. In July 2011, we acquired Green Tree and significantly increased our third-party servicing.                                           45

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  As the nature of our Servicing business has changed significantly over the past three years, the financial results may not be comparable across years. Provided below is a summary statement of operations for our Servicing segment, which also includes core earnings before income taxes and Pro Forma Adjusted EBITDA (in thousands):                                          For the Years Ended December 31,                          Variance                                     2011              2010           2009          2011 vs. 2010         2010 vs. 2009

Servicing revenue and fees Third parties                    $   171,902        $  2,267       $      -       $       169,635       $         2,267 Intercompany                          25,363          19,971         12,053                 5,392                 7,918  Total servicing revenue and fees                                 197,265          22,238         12,053               175,027                10,185 Other income                           2,951             280            286                 2,671                    (6 )  Total revenues                       200,216          22,518         12,339               177,698                10,179 Interest expense                       3,096               -              -                 3,096                     - Depreciation and amortization         46,255             298            283                45,957                    15 Other expenses, net                  131,724          31,289         18,958               100,435                12,331  Total expenses                       181,075          31,587         19,241               149,488                12,346 Net fair value losses                   (607 )             -              -                  (607 )                   -  Income (loss) before income taxes                                 18,534          (9,069 )       (6,902 )              27,603                (2,167 ) Core Earnings Step-up depreciation and amortization                          36,333               -              -                36,333                     - Share-based compensation expense                                3,238           2,046            395                 1,192                 1,651 Non-cash interest expense                607               -              -                   607                     -  Total adjustments                     40,178           2,046            395                38,132                 1,651  Core earnings (loss) before income taxes                          58,712          (7,023 )       (6,507 )              65,735                  (516 ) Pro Forma Adjusted EBITDA Depreciation and amortization          9,922             298            283                 9,624                    15 Pro forma synergies                    8,862               -              -                 8,862                     - Interest expense on debt                 185               -              -                   185                     - Non-cash interest income              (2,339 )             -              -                (2,339 )                   - Other                                    797             362           (135 )                 435                   497  Total adjustments                     17,427             660            148                16,767                   512  Pro Forma Adjusted EBITDA        $    76,139        $ (6,363 )     $ (6,359 )     $        82,502       $            (4 )                                             46 

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  Provided below is a summary of the unpaid principal balance of our servicing portfolio for third parties and for on-balance sheet residential loans and real estate owned for which the Servicing segment receives intercompany servicing fees (in thousands):                                                 December 31,                                  Variance                                  2011            2010            2009          2011 vs. 2010       2010 vs. 2009

Servicing portfolio composition Third parties First lien mortgages         $ 60,267,669     $ 1,342,111     $         -     $    58,925,550     $     1,342,111 Second lien mortgages          11,857,226           6,218               -          11,851,008               6,218 Manufactured housing           11,130,515               -               -          11,130,515                   - Other                              28,750               -               -              28,750                   -  Total third parties            83,284,160       1,348,329               -          81,935,831           1,348,329 On-balance sheet residential loans and real estate owned                    2,749,894       1,882,675       1,898,028             867,219             (15,353 )  

Total servicing portfolio $ 86,034,054$ 3,231,004$ 1,898,028

$ 82,803,050$ 1,332,976

Third-Party Servicing Portfolio

  Since our acquisition of Green Tree on July 1, 2011, we have acquired a significant amount of new servicing business. During the year ended December 31, 2011, we added 259,000 accounts with an unpaid principal balance of $48.3 billion, most of which was added by Green Tree, bringing our total servicing portfolio for third parties to $83.3 billion. Provided below is a roll-forward of the number of accounts and unpaid principal balance of our servicing portfolio for third parties for 2011 (dollars in thousands):                                                      For the Year Ended                                                   December 31, 2011                                            Number                Unpaid                                          of Accounts        Principal Balance       Beginning balance                         5,539      $         1,348,329       Acquisition of Green Tree               769,108               

38,002,401

       New business added                      258,932               

48,300,086

       Payoffs, sales and curtailments         (54,049 )             (4,366,656 )        Ending balance                          979,530      $        83,284,160    Total Servicing Portfolio  Provided below is a summary of the number of accounts, unpaid principal balance, contractual servicing fee rate and past due status of our servicing portfolio for third parties and for on-balance sheet residential loans and real estate owned for which the Servicing segment receives intercompany servicing fees (in thousands):                                                                     December 31, 2011                                   Number           Unpaid Principal          Contractual              30 Days or                                of Accounts             Balance              Servicing Fee          More Past Due (1)

Portfolio composition of accounts serviced for third parties First lien mortgages                341,514       $       60,267,669                  0.21 %                    11.63 % Second lien mortgages               274,912               11,857,226                  0.44 %                     4.63 % Manufactured housing                360,528               11,130,515                  1.08 %                     4.36 % Other                                 2,576                   28,750                  1.00 %                     2.89 %  Total accounts serviced for third parties                   979,530               83,284,160                  0.36 %                     9.66 % On-balance sheet residential loans and real estate owned                         62,027                2,749,894                                             7.36 %  Total servicing portfolio         1,041,557       $       86,034,054                                             9.40 %                                             47 

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(1) Past due status is measured based on the applicable method specified in the

servicing agreement, which consists of the MBA method or the OTS method.

Under the MBA method, a loan is considered past due if its monthly payment is

not received by the end of the day immediately preceding the loan's next due

date. Under the OTS method, a loan is considered past due if its monthly

payment is not received by the loan's due date in the following month.

For 2011, our Servicing segment recognized core earnings of $58.7 million. The primary components of these earnings are described below:

• Servicing revenue and fees from third parties includes $126.6 million of

contractual servicing fees, $31.3 million of incentive and performance fees

and $14.0 million of ancillary and other fees. Included in incentive and

performance fees are fees that we received during the second half of 2011

for exceeding pre-defined performance hurdles. These fees may not recur on

a regular basis, as they are earned based on the performance of the

underlying loan pools as compared to comparable pools serviced by others,

as well as achievement of certain performance hurdles over time, which may

        not be achieved on a regular schedule.         •   Depreciation and amortization expense includes (1) $28.6 million of

amortization of servicing rights capitalized for Green Tree's servicing and

sub-servicing agreements that existed at the date of acquisition, (2) $7.1

million of amortization for the intangible assets recognized at the

acquisition of Green Tree for customer and institutional relationship

        intangibles of the Servicing business, which are being amortized over a         weighted-average life of 7.0 years and 1.3 years, respectively, and         (3) $8.5 million of depreciation of internally-developed software

capitalized with the acquisition of Green Tree, which is being depreciated

        over an estimated useful life of 7.0 years.    

• Other expense, net consists primarily of costs related to salaries and

        benefits, technology and communications, occupancy and general and         administrative expenses as well as allocated corporate expenses. Other         expenses, net increased $100.4 million in 2011 as compared to 2010 due

primarily to $69.7 million in direct costs of Green Tree incurred since the

acquisition date, which includes expenses for additional staffing and

technology to support the new business added. The increase in other

expenses, net is also due to a full year of costs for Marix as opposed to

two months of costs in the prior year, which was an increase of $9.9

million, as well as a higher amount of allocated corporate expenses.

Assets Receivables Management

  Our ARM business, which was acquired as part of the Green Tree acquisition, performs collections of delinquent balances on loans serviced by us for third parties after they have been charged off. This business was acquired as part of the Green Tree acquisition. For 2011, the ARM business recognized revenue of $14.3 million, operating expenses of $12.5 million, income before taxes of $1.7 million and core earnings of $5.7 million</money>. Adjustments to core earnings included an adjustment for step-up depreciation and amortization of $3.8 million related to the amortization of the customer-relationship intangible asset recognized at the acquisition of Green Tree for the ARM business.  

Insurance

  Our Insurance segment consists of our agency business and our reinsurance businesses. The agency business recognizes commission income net of estimated future policy cancellations at the time policies are effective. The reinsurance businesses earn premium revenue over the life of an insurance contract and incur actual costs of property damage claims. With the acquisition of Green Tree, we significantly increased the size of our agency business. However, in conjunction with the acquisition of Green Tree, we have decided to wind down our property reinsurance business. Existing property reinsurance policies have been terminated and no new property reinsurance policies have been entered into beginning January 1, 2012.                                           48 

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  Provided below is a summary statement of operations for our Insurance segment, which also includes core earnings before income taxes and Pro Forma Adjusted EBITDA (dollars in thousands):                                          For the Years Ended December 31,                           Variance                                     2011              2010           2009           2011 vs. 2010         2010 vs. 2009

Insurance revenue Third parties                    $    41,651        $  9,163       $  10,041       $        32,488       $          (878 ) Intercompany                           2,101           2,350           2,777                  (249 )                (427 )  Total insurance revenue               43,752          11,513          12,818                32,239                (1,305 ) Other income                           1,245             322           1,189                   923                  (867 )  Total revenues                        44,997          11,835          14,007                33,162                (2,172 ) Depreciation and amortization          2,893              70             133                 2,823                   (63 ) Other expenses, net                   33,351          17,750          25,338                15,601                (7,588 )  Total expenses                        36,244          17,820          25,471                18,424                (7,651 )  Income (loss) before income taxes                                  8,753          (5,985 )       (11,464 )              14,738                 5,479 Core Earnings Step-up depreciation and amortization                           2,202               -               -                 2,202                     - Share-based compensation expense                                1,252           1,351             879                   (99 )                 472 Non-cash interest expense                513               -               -                   513                     - Other                                      -               -            (760 )                   -                   760  Total adjustments                      3,967           1,351             119                 2,616                 1,232  Core earnings (loss) before income taxes                          12,720          (4,634 )       (11,345 )              17,354                 6,711 Pro Forma Adjusted EBITDA Depreciation and amortization            691              70             133                   621                   (63 ) Pro forma synergies                      596               -               -                   596                     - Non-cash interest income              (1,241 )             -               -                (1,241 )                   - Other                                    347             511             589                  (164 )                 (78 )  Total adjustments                        393             581             722                  (188 )                (141 ) 

Pro Forma Adjusted EBITDA $ 13,113 $ (4,053 ) $ (10,623 ) $ 17,166 $ 6,570

  Net written premiums Lender placed                    $    45,063        $  6,036       $   6,858       $        39,027       $          (822 ) Voluntary                             40,833           5,376           4,858                35,457                   518  Total net written premiums       $    85,896        $ 11,412       $  11,716       $        74,484       $          (304 )                                                   December 31,                                     Variance                                     2011              2010           2009           2011 vs. 2010         2010 vs. 2009 Number of outstanding policies written Lender placed                        108,766           6,188           6,708               102,578                  (520 ) Voluntary                             98,475           7,448           7,735                91,027                  (287 )  Total outstanding policies written                              207,241          13,636          14,443               193,605                  (807 )                                             49 

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  For 2011, total insurance revenue increased $32.2 million due to the recognition of $22.9 million in commission revenue by Green Tree, reflecting an increase in the number of net written premiums of 74,484, or over six times the number written in 2010 as a result of the acquisition of Green Tree. The number of net written premiums for Green Tree during this period include new business from the loans added to our servicing portfolio during this same time period. The increase in revenue was offset by a higher level of other expenses, net attributed to Green Tree and to higher claims expenses.  

Loans and Residuals

  The Loans and Residuals segment primarily consists of the residential loans, real estate owned and mortgage-debt of the Residual Trusts, as well as unencumbered residential loans and real estate owned. Through this business, we seek to earn a spread from the interest income we earn on the residential loans less the credit losses we incur on these loans and the interest expense we pay on the mortgage-backed debt issued to finance the loans.  Provided below is a summary statement of operations for our Loans and Residuals segment, which also includes core earnings before income taxes and Pro Forma Adjusted EBITDA (in thousands):                                        For the Years Ended December 31,                           Variance                                   2011             2010            2009           2011 vs. 2010         2010 vs. 2009 Interest income                $   164,794       $ 166,188       $ 175,372       $        (1,394 )     $        (9,184 ) Interest expense                   (91,075 )       (81,729 )       (88,647 )              (9,346 )               6,918  Net interest income                 73,719          84,459          86,725               (10,740 )              (2,266 ) Provision for loan losses           (6,016 )        (6,526 )        (9,441 )                 510                 2,915  Net interest income after provision for loan losses           67,703          77,933          77,284               (10,230 )                 649 Other gains                          1,060           4,258               -                (3,198 )               4,258 Other income                            42             269             241                  (227 )                  28 Intercompany servicing expense                            (20,445 )       (19,971 )       (12,053 )                (474 )              (7,918 ) Intercompany insurance expense                             (2,101 )        (2,350 )        (2,777 )                 249                   427 Other expenses, net                (14,677 )        (6,560 )        (4,337 )              (8,117 )              (2,223 )  Total other income (expense), net                     (36,121 )       (24,354 )       (18,926 )             (11,767 )              (5,428 )  Income before income taxes          31,582          53,579          58,358               (21,997 )              (4,779 ) Core Earnings Non-cash interest expense            1,901           1,284           1,463                   617                  (179 ) Other                               (1,646 )             -               -                (1,646 )                   -  Total adjustments                      255           1,284           1,463                (1,029 )                (179 )  Core earnings before income taxes                               31,837          54,863          59,821               (23,026 )              (4,958 ) Pro Forma Adjusted EBITDA Residual Trusts cash flows           9,108          24,323          19,627               (15,215 )               4,696 Provision for loan losses            6,016           6,526           9,441                  (510 )              (2,915 ) Non-cash interest income           (13,725 )       (13,493 )       (14,965 )                (232 )               1,472 Pro forma monetized assets         (13,305 )             -               -               (13,305 )                   - Other                                1,872            (768 )         1,567                 2,640                (2,335 )  Total adjustments                  (10,034 )        16,588          15,670               (26,622 )                 918  Pro Forma Adjusted EBITDA      $    21,803       $  71,451       $  75,491       $       (49,648 )     $        (4,040 )                                             50 

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Provided below is a summary of the residential loan portfolio, the mortgage-backed debt and real estate owned of the Loans and Residuals Segment as well as certain ratios (dollars in thousands):

                                                     December 31,                                          Variance                                    2011               2010               2009             2011 vs. 2010          2010 vs. 2009

Residential loans, net of cost basis adjustments $ 1,605,688$ 1,637,392$ 1,662,007 $ (31,704 ) $ (24,615 ) Allowance for loan losses

           (13,824 )          (15,907 )          (17,661 )                2,083                  1,754  Residential loans, net            1,591,864          1,621,485          1,644,346                (29,621 )              (22,861 ) Mortgage-backed debt, net of discounts                      1,413,509          1,281,555          1,267,454                131,954                 14,101 Real estate owned Carrying value                  $    53,651        $    67,629        $    63,124        $       (13,978 )      $         4,505 Number of units                         867              1,041              1,031                   (174 )                   10 Delinquencies 30 days or more past due               5.73 %             4.68 %             5.44 %                 1.05 %                -0.76 % 90 days or more past due               3.99 %             2.65 %             3.37 %                 1.34 %                -0.72 % Allowance as % of residential loans                      0.86 %             0.97 %             1.06 %                -0.11 %                -0.09 %                                          For the Years Ended December 31,                                Variance                                    2011               2010               2009             2011 vs. 2010          2010 vs. 2009 Net charge-offs                 $     8,099        $     8,280        $    10,749        $          (181 )      $        (2,469 ) Charge-off ratio                       0.50 %             0.50 %             0.62 %                  0.0 %                -0.12 % Coverage ratio                       170.69 %           192.11 %           164.30 %               -21.42 %                27.81 %   For the years ended December 31, 2011, 2010 and 2009, we recognized core earnings before income taxes of $31.8 million, $54.9 million and $59.8 million for our Loans and Residuals business segment. These earnings primarily reflect the positive spread we earn on the residuals we hold in the Residual Trusts. Provided below is a summary of the key components of earnings for this segment for the years ended December 31, 2011, 2010 and 2009.  

Net Interest Income

  Net interest income was $73.7 million, $84.5 million and $86.7 million for the years ended December 31, 2011, 2010 and 2009. Net interest income decreased $10.7 million for 2011 as compared to 2010 and $2.3 million for 2010 as compared to 2009, while our net interest margin decreased 57 basis points in 2011 as compared to 2010 and increased 10 basis points in 2010 as compared to 2009. Provided below is a summary of our average yields and rates and the net interest spread and margin on our portfolio (dollars in thousands):                                           For the Years Ended December 31,                                Variance                                   2011               2010               2009             2011 vs. 2010          2010 vs. 2009 Residential loans at amortized cost Interest income                $   164,794        $   166,188        $   175,372        $        (1,394 )      $        (9,184 ) Average balance                  1,621,540          1,649,700          1,726,326                (28,160 )              (76,626 ) Average yield                        10.16 %            10.07 %            10.16 %                 0.09 %                -0.09 %  Mortgage-backed debt at amortized cost Interest expense               $    91,075        $    81,729        $    88,647        $         9,346        $        (6,918 ) Average balance                  1,347,532          1,274,505          1,320,138                 73,027                (45,633 ) Average rate                          6.76 %             6.41 %             6.71 %                 0.35 %                -0.30 %  Net interest income            $    73,719        $    84,459        $    

86,725 $ (10,740 ) $ (2,266 ) Net interest spread(1)

                3.40 %             3.66 %             3.45 %                -0.26 %                 0.21 % Net interest margin(2)                4.55 %             5.12 %             5.02 %                -0.57 %                 0.10 %                                            51 

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   Table of Contents      (1)  Net interest spread is calculated by subtracting the average rate on

mortgage-backed debt at amortized cost from the average yield on residential

     loans at amortized cost.    

(2) Net interest margin is calculated by dividing net interest income by the

average balance of the residential loans at amortized cost.

   For 2011, net interest income and our net interest margin decreased as we securitized unencumbered residential loans in order to partly fund the acquisition of Green Tree, which resulted in the issuance of $102.0 million in mortgage-backed debt by a consolidated securitization trust. In addition in 2011, we issued $85.1 million in mortgage-backed debt that had been held by us and reissued $36.0 million in mortgage-backed debt that had previously been extinguished reducing net interest income and the net interest margin in 2011 as compared to 2010. Our net interest spread for 2011 decreased 26 basis points due to the higher average rate on our mortgage-backed debt of 35 basis points offset in part by higher yielding residential loans acquired at the end of 2010 and in the first half of 2011.  For 2010, our net interest spread increased 21 basis points as compared to 2009 due to a lower average rate on our mortgage-backed debt of 30 basis points as we extinguished $40.5 million of higher cost debt in 2010. The decrease in average rates on the mortgage-backed debt was offset by a lower average yield on our residential loans primarily the result of a lower level of voluntary prepayments and the recognition of less discount accretion. Our net interest margin increased 10 basis points for 2010 as compared to 2009 due primarily to the lower average rate on our mortgage-backed debt. This was offset in part by the securitization in 2010 whereby unencumbered residential loans were securitized and funded by mortgage-backed debt.  

Provision for Loan Losses

  Our provision for loan losses reflects the recognition of incurred credit losses on the residential loans held by the Residual Trusts and our unencumbered residential loan portfolio. Our provision for loan losses decreased by $0.5 million for 2011 as compared to 2010 and decreased $2.9 million for 2010 as compared to 2009. The decrease in our provision for loan losses reflects a lower level of foreclosures in 2011, particularly during the first six months of the year, as compared to 2010 and a lower level of foreclosures offset by a modest increase in loss severities in 2010 as compared to 2009. For 2011, the favorable trend in the number of foreclosures has reduced the level required for the allowance for loan losses. For further information regarding the credit quality of our residential loan portfolio and related trends, refer to the Credit Risk Management section.  Other Gains 

In 2011, we extinguished $1.4 million in mortgage-backed debt and recognized a gain of $0.1 million. In 2010, we extinguished $40.5 million of higher cost mortgage-backed debt and recognized a gain of $4.3 million.

Intercompany Expenses

  Our Loans and Residuals segment is charged a fee from the Servicing segment for performing servicing activities for the residential loans and real estate owned of the Residual Trusts as well as for our unencumbered residential loans and real estate owned. In addition, this segment is charged a commission from the Insurance segment for insurance policies written on real estate owned held by the Loans and Residuals segment.  

Other Expenses, Net

Other expenses, net consists primarily of real estate owned expenses, net, which increased $8.1 million in 2011 as compared to 2010 due primarily to higher charges for declines in the fair value of real estate owned of $4.0 million.

Liquidity and Capital Resources

Overview

  Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay debt and meet the financial obligations of our operations including the funding of servicing advances and other general business needs. We recognize the need to have liquid funds available to operate our business and it                                           52 

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  is our policy to have adequate liquidity at all times. Our liquidity, which is measured as cash and cash equivalents plus borrowing capacity available on our Revolver, is $77.4 million at December 31, 2011.  Our principal sources of liquidity are the cash from our servicing, ARM and insurance businesses, funds obtained from our revolver and servicing advance facilities, cash releases from the Residual Trusts, the principal and interest payments received from unencumbered residential loans, as well as cash proceeds from the issuance of equity and other financing activities.  We believe that, based on current forecasts and anticipated market conditions, our current balances of cash and cash equivalents along with the funds generated from our operating cash flows, loan portfolio, revolver, servicing advance facilities, and other available sources of liquidity will be sufficient to meet anticipated cash requirements to fund operating needs and expenses, servicing advances, planned capital expenditures, and all required debt service obligations. Our operating cash flows and liquidity are significantly influenced by numerous factors, including changes in the mortgage servicing markets, interest rates, continued availability of financing including the renewal of existing servicing advance facilities, access to equity markets, and conditions in the capital markets. We continually monitor our cash flows and liquidity in order to be responsive to these changing conditions.  

Servicing

  Our servicing agreements impose on us various rights and obligations that affect our liquidity. Among the most significant of these obligations is the requirement that we advance our own funds to meet contractual principal and interest payments for certain investors and to pay taxes, insurance and foreclosure costs and various other items that are required to preserve the assets being serviced. In the normal course of business, we borrow money to fund certain of these servicing advances. We rely upon various counterparties to provide us with financing to fund a portion of our servicing advances on a short-term basis or provide for reimbursement within an agreed-upon period. Our ability to fund servicing advances is a significant factor that affects our liquidity and we depend upon our ability to secure these types of arrangements on acceptable terms and to renew or replace existing financing facilities as they expire. The servicing advance financing agreements that support these operations are discussed below.  

Residual and Non-Residual Trusts

  Our securitization trusts are consolidated for financial reporting purposes as required under GAAP. Prior to the acquisition of Green Tree, our consolidated securitization trusts represented those trusts in which we own a residual interest, or the Residual Trusts. Upon the acquisition of Green Tree, we were required under GAAP to consolidate ten additional securitization trusts for which we do not currently own any residual interests, or the Non-Residual Trusts. For further information regarding the basis for consolidating the Residual and Non-Residual Trusts, refer to Note 5 in the Notes to Consolidated Financial Statements. Our results of operations and cash flows include the activity of both the Residual and Non-Residual Trusts.  The cash proceeds from the repayment of the collateral held in the Residual and Non-Residual Trusts are owned by the trusts and serve to only repay the obligations of the trusts unless, for the Residual Trusts, certain overcollateralization or other similar targets are satisfied, in which case, the excess cash is released to us.  The Residual Trusts, with the exception of Trust 2011-1, contain delinquency and loss triggers, that, if exceeded, allocate any excess cash flows to paying down the outstanding mortgage-backed notes for that particular securitization at an accelerated pace. Assuming no servicer trigger events have occurred and the overcollateralization targets have been met, any excess cash from these trusts is released to us. For Trust 2011-1, principal and interest payments are not paid on the subordinate note or residual interests, which are held by us, until all amounts due on the senior notes are fully paid.                                           53

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  Provided below is a table summarizing the actual delinquency and cumulative loss rates in comparison to the trigger rates for our Residual Trusts at December 31, 2011 and 2010:                                                       Delinquency Rate    Cumulative     Cumulative Loss Rate                                    Delinquency    at December 31,        Loss          at December 31,                                      Trigger       2011       2010     Trigger        2011          2010 Mid-State Trust IV                     (1)          -          -        10.00%       4.29%         4.25% Mid-State Trust VI                    8.00%       2.36%      1.43%      8.00%        5.14%         5.09% Mid-State Trust VII                   8.50%       1.89%      1.55%      1.50%        0.04%         0.87% Mid-State Trust VIII                  8.50%       2.07%      2.08%      1.50%        -0.20%        0.85% Mid-State Trust X                     8.00%       3.05%      2.07%      8.00%        7.19%         6.86% Mid-State Trust XI                    8.75%       3.42%      2.85%      7.75%        5.41%         4.87% Mid-State Capital Corporation 2004-1 Trust                          8.00%       5.30%      5.50%      6.50%        2.85%         2.48% Mid-State Capital Corporation 2005-1 Trust                          8.00%       7.44%      7.39%      4.75%        3.00%         2.51% Mid-State Capital Corporation 2006-1 Trust                          8.00%       10.58%     11.84%     5.25%        5.31%         3.83% Mid-State Capital Corporation 2010-1 Trust                         10.50%       8.35%      2.47%      5.50%        0.31%         0.00% WIMC Capital Trust 2011-1              (1)          -          -         (1)           -             -    

(1) Relevant trigger is not applicable per the underlying trust agreements.

   Since January 2008, Mid-State Trust 2006-1 has exceeded certain triggers and has not provided any excess cash flow to us. Certain triggers for Mid-State Trust 2005-1 and Trust X were exceeded in November 2009 and October 2006, respectively, but were cured in 2010.  

Mortgage-Backed Debt

  We have historically funded the residential loan portfolio through the securitization market. The mortgage-backed debt issued by the Residual Trusts is accounted for at amortized cost. The mortgage-backed debt of the Non-Residual Trusts is accounted for at fair value.  At December 31, 2011, the total unpaid principal balance of mortgage-backed debt was $2.3 billion as compared to $1.3 billion at December 30, 2010. The increase in mortgage-backed debt was due primarily to the consolidation of the Non-Residual Trusts upon the acquisition of Green Tree. The increase in mortgage-backed debt was also due to the issuance of $102.0 million in mortgage-backed debt by Trust 2011-1, the sale of Class B secured notes of Trust 2010-1 of $85.1 million, and the reissuance of $36.0 million in various mortgage-backed debt previously extinguished, in order to fund the Acquisition.  The mortgage-backed debt is collateralized by $2.9 billion of assets including residential loans, receivables related to the Non-Residual Trusts, real estate owned and restricted cash and cash equivalents. All of the mortgage-backed debt is non-recourse and not cross-collateralized and, therefore, must be satisfied exclusively from the proceeds of the residential loans and real estate owned held in each securitization trust and also from draws on the LOCs of certain Non-Residual Trusts.  Borrower remittances received on the residential loans collateralizing this debt and draws under LOCs issued by a third party and serving as credit enhancements to certain of the Non-Residual Trusts are used to make payments on the mortgage-backed debt. The maturity of the mortgage-backed debt is directly affected by the rate of principal prepayments on the collateral. As a result, the actual maturity of the mortgage-backed debt is likely to occur earlier than the stated maturity. Certain of our mortgage-backed debt issued by the Residual Trusts are also subject to voluntary redemption according to specific terms of the respective indenture agreements, including an option by us to exercise a clean-up call. The mortgage-backed debt issued by the Non-Residual Trusts is subject to mandatory clean-up call provisions which we are obligated to exercise at the earliest possible call dates. We expect to exercise these mandatory call obligations beginning in 2017 and continuing through 2019. The total outstanding balance of the residential loans expected to be called at the respective call dates is $417.4 million.                                           54 

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  Table of Contents  Corporate Debt  Term Loans and Revolver  On July 1, 2011, we entered into a $500 million first lien senior secured term loan and a $265 million second lien senior secured term loan, or 2011 Term Loans, to partially fund the acquisition of Green Tree. Also on July 1, 2011, we entered into a $45 million senior secured revolving credit facility, or Revolver. Our obligations under the 2011 Term Loans and Revolver are guaranteed by the assets and equity of substantially all of our subsidiaries excluding the assets of the consolidated Residual and Non-Residual Trusts.  The terms of the 2011 Term Loans and Revolver are summarized in the table below.    Debt Agreement            Interest Rate        Amortization       Maturity/Expiration $500 million first      LIBOR plus 6.25%,    3.75% per quarter    June 30, 2016 lien term loan          LIBOR floor of       beginning 4th                         1.50%                quarter of 2011;                                              remainder at                                              final maturity $265 million second     LIBOR plus                                December 31, 2016 lien term loan          11.00%, LIBOR        Bullet payment at                         floor of 1.50%       maturity $45 million revolver    LIBOR plus 6.25%,                         June 30, 2016                         LIBOR floor of       Bullet payment at                         1.50%                maturity   In addition to the required amortization payments noted in the table above, the first lien agreement requires us to prepay outstanding principal with 75% of excess cash flows as defined by the credit agreement when our Total Leverage Ratio is greater than 3.0 or 50% of excess cash flows when our Total Leverage Ratio is less than 3.0. These excess cash flow payments, if required, will be made during the first quarter of each fiscal year beginning in 2013. In addition, in the case of settlement of the first lien prior to scheduled maturity, excess cash flow payments based on terms similar to those of the first lien agreement would be required for the second lien. Additional mandatory payments are required from (i) all net proceeds associated with new indebtedness, (ii) all net proceeds relating to sales of assets or recovery events, subject to certain exceptions and (iii) a portion of proceeds for issuances of equity, subject to certain exceptions.  During the year ended December 31, 2011, we repaid principal of $18.8 million on the 2011 Term Loans. The capacity under the Revolver allows requests for the issuance of LOCs of up to $22.5 million or total cash borrowings of up to $45.0 million less any amounts outstanding in issued LOCs. During the year ended December 31, 2011, we borrowed and repaid $23.0 million under the Revolver. At December 31, 2011, we had outstanding $0.3 million in an issued LOC with total availability under the Revolver of $44.7 million. The commitment fee on the unused portion of the Revolver is 0.75% per year. We incurred $27.5 million in deferred debt issuance costs associated with the issuance of 2011 Term Loans and Revolver.  The 2011 Term Loans and Revolver contain customary events of default and covenants, including among other things, financial covenants, covenants that restrict our and our subsidiaries' ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends and repurchase stock, engage in mergers or consolidations, and make investments. Financial covenants that must be maintained include an Interest Coverage Ratio and Total Leverage Ratio as defined in the debt agreements. Non-compliance with the Interest Coverage Ratio or the Total Leverage Ratio could result in the requirement to immediately repay all amounts outstanding under the 2011 Term Loans and Revolver. These ratios are based on EBITDA, adjusted to conform to requirements of the 2011 Term Loans, or Pro Forma Adjusted EBITDA. Pro Forma Adjusted EBITDA is defined for purposes of the 2011 Term Loan covenants as net income (loss) plus interest, provision for income taxes and depreciation and amortization, and adjustments for certain specified items as defined in the debt agreements, including pro forma adjustments during the first twelve months of the agreements.  The Interest Expense Coverage ratio is calculated by dividing Pro Forma Adjusted EBITDA by consolidated interest expense (as defined in the debt agreements), both as measured on a trailing twelve-month basis preceding the measurement date. The Total Leverage Ratio is calculated by dividing consolidated total indebtedness as of                                           55 

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  the measurement date by Pro Forma Adjusted EBITDA as measured on a trailing twelve-month basis preceding the measurement date. The first lien requires a minimum Interest Expense Coverage Ratio of 2.25:1.00 increasing to 2.75:1.00 by the end of 2016, while the second lien requires a ratio of 2.00:1.00 increasing to 2.50:1.00. The first lien requires us to maintain a maximum Total Leverage Ratio of 4.50:1.00 being reduced over time to 3.00:1.00 by the end of 2016 while the second lien requires a ratio of 4.75:1.00 reduced to 3.25:1.00.  Pro Forma Adjusted EBITDA is a material component of these covenants. For instance, these debt agreements contain financial ratios that are calculated by reference to Pro Forma Adjusted EBITDA. Pro Forma Adjusted EBITDA is not a presentation made in accordance with U.S. GAAP, is not a measure of financial performance or condition, liquidity or profitability, and should not be considered as an alternative to (1) net income (loss) or any other performance measures determined in accordance with U.S. GAAP or (2) operating cash flows determined in accordance with U.S. GAAP. Additionally, Pro Forma Adjusted EBITDA is not intended to be a measure of free cash flow for our discretionary use, as it does not consider certain cash payments required for interest, taxes and debt service. Our presentation of Pro Forma Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Because not all companies use identical calculations, the presentation of Pro Forma Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. We believe that the presentation of Pro Forma Adjusted EBITDA is appropriate to provide additional information about the calculation of the financial covenants in the debt agreements.  Provided below is a reconciliation of our loss before income taxes, which is a U.S. GAAP measure of our operating results, to Pro Forma Adjusted EBITDA, which has been calculated in accordance with the definitions in the 2011 Term Loans and Revolver agreements (in thousands). For the period of time prior to the effective date of the 2011 Terms Loans and Revolver agreements, or the first six months of 2011, the calculation has followed the general guidelines of the definitions per these agreements.                                                         For the Year Ended                                                      December 31, 2011         Loss before income taxes                    $             (6,133 )         Add:         Deprecation and amortization                              53,078         Interest expense on debt                                  42,260          EBITDA                                                    89,205         Add:         Transaction and integration-related costs                 19,179         Pro forma synergies(1)                                    16,828         Residual Trusts cash flows(2)                              9,108         Net impact of Non-Residual Trusts(3)                       6,855         Provision for loan losses                                  6,016         Non-cash share-based compensation expense                  4,997         Non-cash interest expense                                  3,021          Sub-total                                                 66,004         Less:         Non-cash interest income                                 (17,305 )         Pro forma monetized assets(4)                            (13,305 )         Other(5)                                                  (1,106 )          Sub-total                                                (31,716 )          Pro Forma Adjusted EBITDA                   $            123,493                                             56 

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   Table of Contents      (1)  Represents the estimated transaction-related synergies that have not yet

been realized as if they occurred as of January 1, 2011. This pro forma

adjustment has been made in accordance with the definition in our 2011 Term

     Loans and Revolver agreements.    

(2) Represents cash flows in excess of overcollateralization requirements that

     have been released to us from the Residual Trusts.    

(3) Represents the non-cash fair value adjustments related to the Non-Residual

Trusts net of the cash servicing fee earned on the underlying residential

     loans included in our loss before income taxes.     (4)  Represents interest expense as if the monetization of assets to fund the      acquisition of Green Tree had occurred as of January 1, 2011.    

(5) Represents other cash and non-cash non-recurring adjustments included in our

loss before income taxes.

Interest Coverage and Total Leverage Ratios

Provided below are the Interest Coverage Ratio and the Total Leverage Ratio calculated at December 31, 2011:

                                                           Covenant Requirement                                                      1st Lien         2nd

Lien Actual Ratios Interest Coverage Ratio-equal to or greater than 2.25:1.00 2.00:1.00

            2.84 Total Leverage Ratio-equal to or less than            4.50:1.00        4.75:1.00            3.59   

Mortgage Servicing Rights Credit Agreement

  In November 2009, Green Tree entered into a Mortgage Servicing Rights Credit Agreement to finance the purchase of servicing rights. The note is secured by the servicing rights purchased and requires equal monthly payments for 36 months. The interest rate on this agreement is based on LIBOR plus 2.50%. The facility expires in November 2012. The balance outstanding under this agreement at December 31, 2011 was $9.6 million.  

Other Credit Agreements

  In April 2009, we entered into a syndicated credit agreement, a revolving credit agreement and security agreement, and a support letter of credit agreement. All three of these agreements were due to mature on April 20, 2011. These agreements were terminated by us on or before April 6, 2011.  

Servicing Advance Facilities

Servicer Advance Reimbursement Agreement

  In October 2009, Green Tree entered into a Servicer Advance Reimbursement Agreement, which provides for the reimbursement of certain principal and interest and protective advances that are the responsibility of the Company under certain servicing agreements. The agreement provides for a reimbursement amount of up to $100.0 million. The reimbursement rates vary by product and range from 80% to 95%. The cost of this agreement is LIBOR plus 2.50% on the amounts that are reimbursed. The early reimbursement period expires on June 30, 2012 but is automatically renewed on an annual basis unless advance notification is received from the counterparty of its intent to terminate the agreement 120 days prior to the one year period. Collections of advances that have been reimbursed under the agreement require remittance upon collection to settle the outstanding balance under the agreement. The balance outstanding under this agreement at December 31, 2011 was $58.3 million.  

On February 29, 2012, the counterparty notified us of its intent to terminate this agreement and to provide a new agreement with revised terms.

Receivables Loan Agreement

In July 2009, Green Tree entered into a three-year Receivables Loan Agreement collateralized by certain principal and interest advances and protective advances reimbursable from securitization trusts serviced by us.

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  The principal payments on this note are paid from recoveries or repayments of the underlying advances. Accordingly, the timing of the principal payments is dependent on the recoveries or repayments received on the underlying advances that collateralize the notes. We are able to pledge new advances to the facility up to an outstanding note balance of $75.0 million. The advance rates on this facility vary by product ranging from 70% to 91.5%. The interest rate on this agreement is LIBOR plus 6.50%. The facility expires in July 2012. The balance outstanding under this agreement at December 31, 2011 was $48.7 million.  

Servicing Advance Financing Facilities

  As of November 11, 2008, Marix entered into a Servicing Advance Financing Facility Agreement, or the Servicing Facility. The note rate on the Servicing Facility was LIBOR plus 6.0%. The facility was originally set to terminate on September 30, 2010, but was extended as part of the Marix purchase agreement for six months to March 31, 2011. The maximum borrowing capacity on the Servicing Facility was $8.0 million.  On September 9, 2009, Marix entered into a second Servicing Advance Financing Facility Agreement, or Second Facility. The rate on the Second Facility was converted from one-month LIBOR plus 6.0% to one-month LIBOR plus 3.5% on March 31, 2010. The facility was set to terminate on March 31, 2010, but was extended for twelve months to March 31, 2011. The maximum borrowing capacity on the Second Facility was $2.5 million.  

The collateral for these servicing advance facilities represented servicing advances on mortgage loans serviced by Marix for investors managed by or otherwise affiliated with the seller of Marix, and such advances included principal and interest, taxes and insurance, and other protective advances. During the first quarter of 2011, we retired these servicing advance facilities.

Sources and Uses of Cash

The following table sets forth selected consolidated cash flow information for the periods indicated (in thousands):

                                                          For the Years Ended December 31,                                                     2011              2010             2009 Cash flows provided by operating activities      $   108,884        $  21,891        $  18,962 Cash flows provided by (used in) investing activities                                          (947,592 )         32,566          123,369 Cash flows provided by (used in) financing activities                                           757,008          (39,391 )        (44,364 )                                                   $   (81,700 )      $  15,066        $  97,967    Operating Activities  Net cash provided by operating activities was $108.9 million for the year ended December 31, 2011 as compared to $21.9 million and $19.0 million for the same periods in 2010 and 2009, respectively. For the year ended December 31, 2011, the primary sources of cash from operating activities were the income generated from our servicing operations, our insurance business and the net interest spread from our residential loan portfolio. Cash flows from operating activities for the years ended December 31, 2010 and 2009 were primarily generated from our residential loan portfolio carried at amortized cost.  

Investing Activities

  Net cash used in investing activities was $947.6 million for the year ended December 31, 2011 as compared to net cash provided of $32.6 million and $123.4 million for the same periods in 2010 and 2009, respectively. The net outflow of cash for investing activities in the current period reflects the cash paid net of cash acquired of $990.6 million to purchase Green Tree. For the years ended December 31, 2011, 2010 and 2009, the primary sources of cash from investing activities were the principal payments received on our residential loans of $126.7 million, $99.2 million and $117.4 million, respectively. During the years ended December 31, 2011, 2010 and 2009, cash of $46.5 million, $73.7 million and $0, respectively, was used to purchase residential loans.                                           58

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Financing Activities

  Net cash provided by financing activities was $757.0 million for the year ended December 31, 2011 as compared to net cash used of $39.4 million and $44.4 million for the same periods in 2010 and 2009, respectively. The net inflow of cash from financing activities in the current year reflects the cash received from the issuance of debt, net of issuance costs, of $720.7 million and of mortgage-backed debt, net of issuance costs, of $220.0 million used to fund the acquisition of Green Tree. For the year ended December 31, 2011, the primary use of cash in financing activities was the payments on mortgage-backed debt of $137.5 million, payments on debt of $24.3 million and dividend payments of $14.1 million. For the years ended December 31, 2010 and 2009, the primary use of cash in financing activities was the payments on mortgage-backed debt of $79.7 million and $108.2 million, payments to extinguish mortgage-backed debt of $36.2 million and $0 and dividend payments of $53.5 million and $39.6 million, respectively.  

Common Stock Issuance

  On July 1, 2011, we issued 1,812,532 shares to partially fund the acquisition of Green Tree. As part of the Green Tree purchase agreement, we filed a shelf registration statement on August 29, 2011 covering the resale of these shares received by the prior owners of Green Tree. See Note 4 in the Notes to Consolidated Financial Statements for further information.  

On October 21, 2009, the Company issued 5,750,000 shares as part of a secondary offering which generated net proceeds of $76.8 million after deducting underwriting discounts and commissions and offering expenses.

Dividends

  Prior to the acquisition of Green Tree, we operated as a REIT. A REIT generally passes through substantially all of its earnings to stockholders without paying U.S. federal income tax at the corporate level. As long as we elected to maintain REIT status, we were required to declare dividends amounting to at least 90% of our net taxable income (excluding net capital gains) for each year by the time our U.S. federal tax return was filed. On November 15, 2011, we paid a dividend of $6.2 million to shareholders of which $0.6 million was settled in cash and $5.6 million in shares of our common stock. The special dividend represents an additional payment associated with taxable income for the year ended December 31, 2010 in order to satisfy REIT distribution requirements. The number of shares issued in the special dividend was calculated based on the closing price per share of our common stock on October 27, 2011.  Upon the acquisition of Green Tree on July 1, 2011, we no longer qualify as a REIT. The change to our REIT status is retroactive to January 1, 2011. All future distributions will be made at the discretion of our Board of Directors and will depend upon, among other things, our earnings, financial condition and liquidity, and such other factors as the Board of Directors deems relevant, as well as contractual restrictions, which we are now, or may in the future be subject to, including certain covenants in our credit agreements that limit our ability to pay dividends.  Credit Risk Management 

Residential Loan Credit Risk

  We are subject to credit risk associated with the residual interests that we own in the consolidated Residual Trusts as well as with the unencumbered residential loans held in our portfolio, both of which are recognized as residential loans on our consolidated balance sheets. Credit risk is the risk that we will not fully collect the principal we have invested due to borrower defaults. We manage the credit risk associated with our residential loan portfolio through sound loan underwriting, monitoring of existing loans, early identification of problem loans, timely resolution of problems, establishment of an appropriate allowance for loan losses and sound nonaccrual and charge-off policies.  We do not currently own residual interests in the Non-Residual Trusts. However, we have assumed mandatory call obligations related to the Non-Residual Trusts and will be subject to credit risk associated with the purchased residential loans when the calls are exercised. The Company expects to call these securitizations beginning in 2017 and continuing through 2019.                                           59

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  The principal balance of our residential loan portfolio at December 31, 2011 that exposes us to credit risk consisted of residential loans held by the consolidated Residual Trusts and unencumbered residential loans of $1.8 billion. The $1.8 billion principal balance of residential loans and carrying value of other collateral of the Residual Trusts are permanently financed with $1.4 billion of mortgage-backed debt leaving us with a net credit exposure of $429.5 million, which approximates our residual interest in the consolidated Residual Trusts.  The residential loans that expose us to credit risk are predominantly credit-challenged, non-conforming loans with an average LTV ratio at origination of approximately 90% and an average refreshed borrower credit score of 588. While we feel that our underwriting and due diligence of these loans will help to mitigate the risk of significant borrower default on these loans, we cannot assure you that all borrowers will continue to satisfy their payment obligations under these loans, thereby avoiding default.  

The information provided below consists of data for the residential loan portfolio for which we are subject to credit risk as explained above.

Allowance for Loan Losses

  We maintain an allowance for loan losses for the unencumbered residential loans and the residential loans held in the consolidated Residual Trusts that are recognized on our consolidated balance sheets and are accounted for at amortized cost. The following table provides information regarding our allowance for loan losses and related ratios for the periods presented (dollars in thousands):                                           December 31,                                     For the Years Ended December 31,                                                  Allowance as a %                        Allowance for                    of                        Net                Charge-off          Coverage                         Loan Losses            Residential Loans (1)          Charge-offs             Ratio(2)           Ratio(3) 2011                  $        13,824                            0.86 %       $      8,099                  0.50 %          170.69 % 2010                           15,907                            0.97                8,280                  0.50            192.11 2009                           17,661                            1.06               10,749                  0.62            164.30      

(1) The allowance for loan loss ratio is calculated as period end allowance for

loan losses divided by period end residential loans before the allowance for

     loan losses.    

(2) The charge-off ratio is calculated as charge-offs, net of recoveries divided

by average residential loans before the allowance for loan losses. Net

charge-offs includes charge-offs recognized upon acquisition of real estate

     in satisfaction of residential loans.    

(3) The coverage ratio is calculated as period end allowance for loan losses

divided by charge-offs, net of recoveries.

The following table summarizes activity in the allowance for loan losses for our residential loan portfolio (in thousands):

                                                 For the Years Ended December 31,                                              2011             2010          2009       Balance at beginning of year        $   15,907        $ 17,661      $

18,969

      Provision for loan losses                6,016           6,526       

9,441

       Charge-offs, net of recoveries(1)       (8,099 )        (8,280 )      (10,749 )        Balance at end of year              $   13,824        $ 15,907      $  17,661        (1)  Includes charge-offs recognized upon acquisition of real estate in      satisfaction of residential loans of $4.7 million, $5.2 million and      $7.6 million for the years ended December 31, 2011, 2010 and 2009,      respectively.                                            60 

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Delinquency Information

  The past due or delinquency status of residential loans is generally determined based on the contractual payment terms. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with the bankruptcy court approved mortgage payment obligations. The following table presents the delinquency status of our unencumbered residential loans and the residential loans held in the Residual Trusts based on the total number of loans outstanding and on the total unpaid principal balance outstanding:                                                                    December 31,                                                   2011              2010              2009 Total number of residential loans outstanding                                         32,921            33,801            34,205 Delinquencies as a percent of number of residential loans outstanding: 30-59 days                                            0.92 %            1.12 %            1.15 % 60-89 days                                            0.50 %            0.39 %            0.58 % 90 days or more                                       2.90 %            1.99 %            2.51 %  Total                                                 4.32 %            3.50 %            4.24 %  Principal balance of residential loans outstanding (in thousands)                     $ 1,776,063       $ 1,803,758       $ 1,819,859 Delinquencies as a percent of amounts outstanding: 30-59 days                                            1.09 %            1.54 %            1.33 % 60-89 days                                            0.65 %            0.49 %            0.74 % 90 days or more                                       3.99 %            2.65 %            3.37 %  Total                                                 5.73 %            4.68 %            5.44 %    The increase in total delinquencies at December 31, 2011 as compared to the level of total delinquencies at December 31, 2010 largely reflects the fact that beginning in the second quarter of 2011, the Company discontinued its loan acquisition program. The lack of new loan acquisitions under this program since the first quarter of 2011 has had an adverse affect on the delinquency measurement and, therefore, is a factor when comparing the measures for 2011 to prior periods.  

The following table summarizes our unencumbered residential loans and the residential loans in the Residual Trusts that have been placed in non-accrual status due to payments being past due 90 days or more:

                                                              December 31,                                                     2011       2010       2009           Residential loans:           Number of loans                             954        672        860           Unpaid principal balance (in millions)   $ 70.8     $ 47.8     $ 61.2   Portfolio Characteristics  The weighted-average original loan-to-value ratio, or LTV, of our residential loan portfolios is 90.00% and 89.00% at December 31, 2011 and 2010, respectively. The LTV dispersion of our unencumbered residential loans and the residential loans in the Residual Trusts is provided in the following table:                                                  December 31,                        LTV Category:       2011          2010                       0.00 - 70.00           1.56 %        2.03 %                       70.01 - 80.00          3.09 %        4.14 %                       80.01 - 90.00(1)      65.62 %       65.82 %                       90.01 -100.00         29.73 %       28.01 %                        Total                100.00 %      100.00 %        (1)  For residential loans in the portfolio, prior to electronic tracking of      original LTVs, the maximum LTV was 90%, or 10% equity. Thus, these

residential loans have been included in the 80.01 to 90.00 LTV category.

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  Original LTVs do not include additional value contributed by the borrower to complete the home. This additional value typically was created by the installation and completion of wall and floor coverings, landscaping, driveways and utility connections in more recent periods. Current LTVs are not readily determinable given the rural geographic distribution of our portfolio which precludes us from obtaining reliable comparable sales information to utilize in valuing the collateral.  The weighted-average FICO score of our unencumbered residential loans and the residential loans in the Residual Trusts refreshed as of October 2011 was 588 and 584 at December 31, 2011 and 2010, respectively. The refreshed weighted-average FICO dispersion of our portfolio is provided in the following table:                                                     December 31,                    Refreshed FICO Scores:     2011          2010                    <=600                       52.85 %       55.11 %                    601 - 640                   15.14 %       13.71 %                    641 - 680                    9.70 %        9.25 %                    681 - 720                    4.99 %        4.86 %                    721 - 760                    2.67 %        2.77 %                    761 - 800                    2.30 %        2.37 %                    >=801                        0.91 %        0.96 %                    Unknown or unavailable      11.44 %       10.97 %                     Total                      100.00 %      100.00 %   

Our unencumbered residential loans and residential loans in the Residual Trusts are concentrated in the following states:

                                                December 31,                           States:         2011          2010                        Texas               34.71 %       34.62 %                        Mississippi         14.36 %       14.67 %                        Alabama              7.95 %        8.23 %                        Florida              7.06 %        6.78 %                        Louisiana            6.07 %        6.24 %                        South Carolina       5.56 %        5.64 %                        Other(1)            24.29 %       23.82 %                         Total              100.00 %      100.00 %       

(1) Other at December 31, 2011 consists of loans in 43 states individually

representing a concentration of less than 5%.

Our unencumbered residential loans and residential loans in the Residual Trusts were originated in the following periods:

                                                         December 31,                      Origination Year:             2011          2010              Year 2011 Origination                   4.88 %           -              Year 2010 Origination                   3.38 %        4.07 %              Year 2009 Origination                   2.99 %        3.39 %              Year 2008 Origination                   8.59 %        8.42 %              Year 2007 Origination                  15.44 %       14.25 %              Year 2006 Origination                  10.15 %       10.93 %              Year 2005 Origination                   7.25 %        7.69 %              Year 2004 Origination and earlier      47.32 %       51.25 %               Total                                 100.00 %      100.00 %                                             62 

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Real Estate Credit Risk

  We own assets secured by real property and own property directly as a result of foreclosures. Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.  The following table presents activity related to foreclosed property (dollars in thousands):                                                                            For the Years Ended December 31,                                                          2011                                      2010                         2009                                           Loans and                 Non-Residual                 Loans and                    Loans and                                           Residuals                  Trusts(1)                   Residuals                    Residuals                                     Units         Amount        Units      

Amount Units Amount Units Amount Balance at beginning of year 1,041 $ 67,629

           -      $      -         1,031      $  63,124           824      $  48,198 Foreclosures and other additions, at fair value              1,126         64,958         705      

8,183 1,329 80,675 1,393 79,879 Cost basis of financed sales (1,153 ) (68,123 ) -

             -        (1,210 )      (68,334 )      (1,012 )      (52,472 ) Cost basis of cash sales to third parties and other dispositions                           (147 )       (5,989 )      (512 )      (5,134 )        (109 )       (7,007 )        (174 )      (11,263 ) Lower of cost or fair value adjustments                               -         (4,824 )         -          (553 )           -           (829 )           -         (1,218 )  Balance at end of year                  867      $  53,651         193      $  2,496         1,041      $  67,629         1,031      $  63,124       

(1) Foreclosed property held by the Non-Residual Trusts is included in Other in

Note 23 in the Notes to Consolidated Financial Statements.

Contractual Obligations

The following table summarizes, by remaining maturity, our future cash obligations related to our long-term debt and operating leases obligations at December 31, 2011 (in thousands):

                                  2012         2013         2014         2015         2016         Thereafter         Total Debt(1) First lien term loan        $ 75,000     $ 75,000     $ 75,000     $ 75,000     $ 181,250     $          -     $   481,250 Second lien term loan              -            -            -            -       265,000                -         265,000 Other                         10,281          718          368            -             -                -          11,367  Total debt                    85,281       75,718       75,368       75,000       446,250                -         757,617 Operating leases              10,056        7,067        6,864        5,033         4,099            3,188          36,307 Mandatory call obligation         -            -            -            -             -           417,358         417,358  Total                       $ 95,337     $ 82,785     $ 82,232     $ 80,033     $ 450,349     $    420,546     $ 1,211,282       

(1) Amounts exclude future cash payments related to interest expense. The

Company made interest payments on debt of $37.7 million during the year

ended December 31, 2011.

   See Note 16 in the Notes to Consolidated Financial Statements for further information regarding our debt. We exclude mortgage-backed debt from the contractual obligations disclosed in the table above as this debt is non-recourse and not cross-collateralized and, therefore, must be satisfied exclusively from the proceeds of the residential loans and real estate owned held in the securitization trusts and by the LOC draws for certain Non-Residual Trusts. See Note 17 in the Notes to Consolidated Financial Statements for further information regarding our mortgage-backed debt. We also exclude the servicing advance facilities from the contractual obligations disclosed in the table above. Similar to the mortgage-backed debt, the Receivables Loan Agreement is also non-recourse to us. Payments under the Servicer Advance Reimbursement Agreements are required upon                                           63 

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  collection of the underlying advances that have been reimbursed under the agreement. See Note 15 in the Notes to Consolidated Financial Statements for further information regarding our Servicing Advance Liabilities. As we cannot make reasonably reliable estimates of the cash settlement of uncertain tax positions with the taxing authority, these long-term liabilities have also been excluded from the table above. See Note 20 in the Notes to Consolidated Financial Statements for further information regarding our uncertain tax positions.  

Operating lease obligations include (i) leases for our principal operating locations in Tampa, Florida and Saint Paul, Minnesota; (ii) leases for our centralized servicing operations in Phoenix, Arizona; Tempe, Arizona; Rapid City, South Dakota; and Fort Worth, Texas; and (iii) other regional servicing operations.

Off-Balance Sheet Arrangements

  As a result of the acquisition of Green Tree, we have interests in VIEs that we do not consolidate as we have determined that we are not the primary beneficiary of the VIEs. The nature of our involvement with these VIEs is described below. Refer to Notes 2 and 5 in the Notes to Consolidated Financial Statements for further information.  We service loans for eleven securitization trusts for which we also have an obligation to reimburse a third party for the final $165.0 million in LOCs if drawn. The LOCs were provided as credit enhancements to these securitizations and, accordingly, the securitization trusts will draw on these LOCs if there are not enough cash flows from the underlying collateral to pay the debt holders. For seven of these securitization trusts, we also have a $417.4 million mandatory clean-up call obligation and have consolidated these seven trusts on our consolidated balance sheet at July 1, 2011 as a result of the acquisition of Green Tree. For the remaining four of the eleven trusts, we do not have a mandatory clean-up call obligation. For these four trusts, our only involvement is that of servicer and the LOC reimbursement obligation. Based on our estimates of the underlying performance of the collateral in these securitizations, we do not expect that the final $165.0 million will be drawn, and therefore, we have not recorded a liability for the fair value of this obligation on our consolidated balance sheet; however, actual performance may differ from this estimate in the future. As our only involvement with these four securitization trusts is that of servicer and the LOC reimbursement obligation, which we do not expect to be drawn, we have concluded that we are not the primary beneficiary of these four trusts and, therefore, we have not consolidated these trusts on our consolidated balance sheet. We do not hold any residual or other interests in these four trusts. As the servicer of the loans in these trusts, we collect servicing fees.  Our maximum exposure to loss related to these four unconsolidated VIEs equals the carrying value of servicing rights, net and servicer and protective advances, net recognized on our consolidated balance sheet totaling $5.7 million at December 31, 2011 plus an obligation to reimburse a third party for the final $165.0 million drawn on LOCs as discussed above.  At December 31, 2011, we retained credit risk on twelve mortgage securities totaling $1.2 million that were sold with recourse by Hanover in a prior year. Accordingly, we are responsible for credit losses, if any, with respect to these securities.  Other than the arrangements described above, we do not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or VIEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and have not entered into any synthetic leases. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships other than those described above.  

Critical Accounting Policies and Estimates

  Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified certain policies that, due to judgment, estimates and assumptions inherent in those policies are critical to an understanding of our consolidated financial statements. These policies are described below.                                           64 

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Residential Loans Carried at Amortized Cost and Revenue Recognition

Residential Loans Carried at Amortized Cost

  Our historical residential loans consist of residential mortgage loans and residential retail installment agreements originated by us and acquired from other originators, principally Jim Walter Homes, Inc., or JWH, an affiliate of Walter Energy, or more recently, acquired as part of a pool. In addition, with the acquisition of Green Tree, we are required to repurchase certain loans at par under a mandatory repurchase obligation (refer to Note 4 in the Notes to Consolidated Financial Statements for further information). Residential loans originated for or acquired from JWH were initially recorded at the discounted value of the future payments using an imputed interest rate, net of cost basis adjustments such as deferred loan origination fees and associated direct costs, premiums and discounts and are stated at amortized cost. The imputed interest rate used represented the estimated prevailing market rate of interest for loans of similar terms issued to borrowers with similar credit risk. We have had minimal origination activity subsequent to May 1, 2008, when we ceased purchasing new originations from JWH or providing financing to new customers of JWH. New originations subsequent to May 1, 2008 relate to the financing of sales of real estate owned. The imputed interest rate on these financings is based on observable market mortgage rates, adjusted for variations in expected credit losses where market data is unavailable. Variations in the estimated market rate of interest used to initially record residential loans could affect the timing of interest income recognition. Residential loans acquired in a pool are generally purchased at a discount to their unpaid principal balance, are recorded at their purchase price, and stated at amortized cost.  

Interest Income and Amortization

  Interest income on our residential loans carried at amortized cost consists of the interest earned on the outstanding principal balance of the underlying loan based on the contractual terms of the mortgage loan and retail installment agreement and the amortization of cost basis adjustments, principally premiums and discounts. The retail installment agreements state the maximum amount to be charged to borrowers, and ultimately recognized as interest income, based on the contractual number of payments and dollar amount of monthly payments. Cost basis adjustments are deferred and recognized over the contractual life of the loan as an adjustment to yield using the level yield method. Residential loan pay-offs received in advance of scheduled maturity (voluntary prepayments) affect the amount of interest income due to the recognition at that time of any remaining unamortized premiums, discounts or other cost basis adjustments arising from the loan's inception.  Non-accrual Loans  Residential loans carried at amortized cost are placed on non-accrual status when any portion of the principal or interest is 90 days past due. When placed on non-accrual status, the related interest receivable is reversed against interest income of the current period. Interest income on non-accrual loans, if received, is recorded using the cash basis method of accounting. Residential loans are removed from non-accrual status when there is no longer significant uncertainty regarding the collection of the principal and the associated interest. If a non-accrual loan is returned to accruing status, the accrued interest, at the date the residential loan is placed on non-accrual status, and forgone interest during the non-accrual period, are recorded as interest income as of the date the loan no longer meets the non-accrual criteria. The past due or delinquency status of residential loans is generally determined based on the contractual payment terms. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with the bankruptcy court approved mortgage payment obligations. Loan balances are charged off when it becomes evident that balances are not collectible.  

Acquired Credit-Impaired Loans

  At acquisition, we review each loan or pool of loans to determine whether there is evidence of deterioration in credit quality since origination and if it is probable that we will be unable to collect all amounts due according to the loan's contractual terms. We consider expected prepayments and estimate the amount and timing of undiscounted expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determine the excess of the scheduled contractual principal and contractual interest payments of the loan or pool of loans assuming prepayments over all cash flows expected at acquisition as an amount that should                                           65

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  not be accreted (the non-accretable difference). The remaining amount, representing the excess or deficit of the cash flows expected to be collected for the loan or pool of loans over the amount paid, is accreted into interest income over the remaining life of the loan or pool of loans (accretable yield). These loans are reflected in the consolidated balance sheets net of these discounts.  Quarterly, we evaluate the expected cash flows for each loan or pool of loans. An additional allowance for loan losses is recognized if it is probable we will not collect all of the cash flows expected to be collected as of the acquisition date. If the re-evaluation indicates the expected cash flows for a loan or pool of loans has significantly increased when compared to previous estimates, the yield is increased to recognize the additional income over the life of the asset prospectively.  

Allowance for Loan Losses on Residential Loans Carried at Amortized Cost

  The allowance for loan losses represents management's estimate of probable incurred credit losses inherent in the residential loan portfolio accounted for at amortized cost as of the balance sheet date. This portfolio is made up of one segment and class that consists primarily of less-than prime, credit challenged residential loans. The risk characteristics of the portfolio segment and class relate to credit exposure. The method for monitoring and assessing credit risk is the same throughout the portfolio. The allowance for loan losses on residential loans accounted for at amortized cost includes two components: (1) specifically identified residential loans that are evaluated individually for impairment and (2) all other residential loans that are considered a homogenous pool that are collectively evaluated for impairment.  We review all residential loans accounted for at amortized cost for impairment and determine a residential loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Factors considered in assessing collectability include, but are not limited to, a borrower's extended delinquency and the initiation of foreclosure proceedings. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. We determine a specific impairment allowance generally based on the difference between the carrying value of the residential loan and the estimated fair value of the collateral.  The determination of the level of the allowance for loan losses and, correspondingly, the provision for loan losses, for the residential loans evaluated collectively is based on, but not limited to, delinquency levels and trends, default frequency experience, prior loan loss severity experience, and management's judgment and assumptions regarding various matters, including the composition of the residential loan portfolio, known and inherent risks in the portfolio, the estimated value of the underlying real estate collateral, the level of the allowance in relation to total loans and to historical loss levels, current economic and market conditions within the applicable geographic areas surrounding the underlying real estate, changes in unemployment levels and the impact that changes in interest rates have on a borrower's ability to refinance their loan and to meet their repayment obligations. Management evaluates these assumptions and various other relevant factors impacting credit quality and inherent losses when quantifying our exposure to credit losses and assessing the adequacy of its allowance for loan losses as of each reporting date. The level of the allowance is adjusted based on the results of management's analysis. Generally, as residential loans age, the credit exposure is reduced, resulting in decreasing provisions.  

While we consider the allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary if circumstances differ substantially from the assumptions used by management in determining the allowance for loan losses.

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Fair Value Measurements

  We have an established and documented process for determining fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:  

Basis or Measurement

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

  We determine fair value based upon quoted broker prices, when available, or through the use of alternative approaches, such as the discounting of expected cash flows at market rates commensurate with an instrument's credit quality and duration.  We elected to account for certain assets and liabilities of the Non-Residual Trusts at fair value and have classified the related fair value measurement as Level 3 within the fair value hierarchy. See Note 6 in the Notes to Consolidated Financial Statements.  

Goodwill and Other Intangible Assets

Goodwill

  Goodwill represents the excess of the consideration paid for an acquired entity over the fair value of the identifiable net assets acquired. The Company tests goodwill for impairment at the reporting unit level at least annually or whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable from future cash flows. Goodwill is assessed for impairment by comparing the carrying value of reporting units to their fair values. Fair value of goodwill is based on discounted cash flows, market multiples and/or appraised values, as appropriate. The fair value of each reporting unit is compared to its net assets including goodwill. If the fair value of the reporting unit is less than its carrying value, goodwill is considered impaired and an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value.  Other Intangible Assets  Intangible assets are associated with customer relationships and relate to the asset receivables management, insurance and servicing businesses, as well as institutional relationships. The intangible assets associated with the asset receivables management, insurance and servicing businesses are being amortized using an economic consumption method over the related expected useful lives. The intangible asset related to institutional relationships is being amortized on a straight-line basis over two and a half years. Intangible assets subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recorded if the carrying value is not recoverable and exceeds its fair value, which is generally based on discounted cash flows.  

Servicing Rights

  Servicing rights are an intangible asset representing the right to service a portfolio of loans. Capitalized servicing rights relate to servicing and sub-servicing contracts we acquired with the acquisition of Green Tree. Additionally, we may acquire the rights to service loans through the purchase of such rights from third parties.                                           67

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  We account for our capitalized servicing rights using the amortization method. All newly acquired servicing rights are initially measured at fair value and subsequently amortized based on expected cash flows in proportion to and over the life of net servicing income. We determine estimated net servicing income using the estimated future balance of the underlying residential loan portfolio. We adjust amortization prospectively in response to changes in estimated projections of future cash flows.  We estimate the fair value of our servicing rights by calculating the present value of expected future cash flows utilizing assumptions that we believe a market participant would consider in valuing our servicing rights. The significant components of the estimated future cash inflows for servicing rights include estimates and assumptions related to the prepayments of principal, defaults, ancillary fees, discount rate, and the expected cost of servicing.  We assess servicing rights for impairment based on fair value by strata at each reporting date. We group the loans that we service into strata based on one or more of the predominant risk characteristics of the underlying loans. Our primary strata represent type of loan products and consist of manufactured housing loans, first lien mortgage loans and second lien mortgage loans. To the extent the estimated fair value is less than the carrying amount for any strata, we recognize an impairment loss in earnings.  

Real Estate Owned

  Real estate owned, net, which is included in other assets in the consolidated balance sheets, represents properties acquired in satisfaction of residential loans. Upon foreclosure or when the Company otherwise takes possession of the property, real estate owned is recorded at the lower of cost or estimated fair value less estimated costs to sell. The excess of cost over the fair value of the property acquired less estimated costs to sell is charged to the allowance for loans losses for residential loans accounted for at amortized cost and to net fair value losses for loans accounted for at fair value. The fair value of the property is generally based upon historical resale recovery rates and current market conditions. Subsequent declines in the value of real estate owned are recorded as adjustments to the carrying amount through a valuation allowance and are recorded in other expenses, net in the consolidated statements of operations. Costs relating to the improvement of the property are capitalized to the extent the balance does not exceed its fair value, whereas those costs relating to maintaining the property are charged to other expenses, net in the consolidated statements of operations when incurred. The majority of real estate owned is reported in the Loans and Residuals operating segment.  

New Accounting Pronouncements

  Refer to Note 2 in the Notes to Consolidated Financial Statements for a summary of recently adopted and recently issued accounting standards and their related effects on our consolidated results of operations and financial condition. 

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