Home Loan Servicing Solutions 10Q 2013 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

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

For the transition period from: to

Commission File Number: 1-35431

Home Loan Servicing Solutions, Ltd.

(Exact name of registrant as specified in its charter)

Cayman Islands

98-0683664

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

Home Loan Servicing Solutions, Ltd.

c/o Intertrust Corporate Services (Cayman) Limited

190 Elgin Avenue

George Town, Grand Cayman KY1-9005

Cayman Islands

(Address of principal executive offices) (Zip Code)

(345) 943-3100

(Registrant’s telephone number, including area code)

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

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

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


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

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

Number of Ordinary Shares, $0.01 par value, outstanding as of April 18, 2013: 56,855,296 shares.

HOME LOAN SERVICING SOLUTIONS, LTD.

FORM 10-Q

INDEX



	PAGE

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

Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012		2

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012		3

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012		4

Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2013 and 2012		5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012		6

Notes to Interim Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3. Quantitative and Qualitative Disclosures About Market Risk		28

Item 4. Controls and Procedures		29

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		29

Item 1A. Risk Factors		29

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds		29

Item 3. Defaults Upon Senior Securities		29

Item 4. Mine Safety Issues		30

Item 5. Other Information		30

Item 6. Exhibits		30

Signatures		31

PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)


	March 31, 2013			December 31, 2012
Assets
Cash and cash equivalents	$	61,157		$	76,048
Match funded advances		3,524,262			3,098,198
Notes receivable – Rights to MSRs		393,776			303,705
Related party receivables		14,385			28,271
Other assets		76,212			79,091

Total assets	$	4,069,792		$	3,585,313


Liabilities and Equity
Liabilities
Match funded liabilities	$	3,120,861		$	2,690,821
Dividends payable		7,391			6,706
Income taxes payable		12			46
Related party payables		34,950			2,874
Other liabilities		5,170			4,233

Total liabilities		3,168,384			2,704,680


Commitments and Contingencies (See Note 14)

Equity
Equity – Ordinary shares, $.01 par value; 200,000,000 shares authorized; 56,855,296 and 55,884,718 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		569			559
Additional paid-in capital		894,226			876,657
Retained earnings		7,676			4,493
Accumulated other comprehensive loss		(1,063	)		(1,076	)

Total equity		901,408			880,633

Total liabilities and equity	$	4,069,792		$	3,585,313

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

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)


For the three months ended March 31,
	2013		2012
Revenue
Interest income – notes receivable – Rights to MSRs	$	44,570	$	2,945
Interest income – other		102		33

Total interest income		44,672		2,978
Related party revenue		407		251

Total revenue		45,079		3,229


Operating expenses
Compensation and benefits		1,166		365
Related party expenses		226		71
General and administrative expenses		645		191

Total operating expenses		2,037		627


Income from operations		43,042		2,602


Other expense
Interest expense		18,242		1,291

Total other expense		18,242		1,291

Income before income taxes		24,800		1,311
Income tax expense		12		17

Net income	$	24,788	$	1,294


Earnings per share
Basic	$	0.44	$	0.31

Diluted	$	0.44	$	0.31


Weighted average ordinary shares outstanding
Basic		56,628,828		4,187,975
Diluted		56,628,828		4,187,975
Dividends declared per share	$	0.38	$	0.28

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

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)


For the three months ended March 31,
	2013		2012

Net income	$	24,788	$	1,294

Other comprehensive income, net of tax:

Change in the value of designated cash flow hedges, net of tax (1)		13		284

Total other comprehensive income, net of tax		13		284


Comprehensive income	$	24,801	$	1,578

(1)	Because the associated derivative financial instrument is held in an entity that had full allowances on its deferred tax assets, there is no net income tax effect on the change in the value of the designated cash flow hedges.

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

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Dollars in thousands, except share data)


	Ordinary Shares				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total
	Shares		Amount
Balance at December 31, 2012		55,884,718	$	559	$	876,657		$	4,493		$	(1,076	)	$	880,633
Net income				—		—			24,788			—			24,788
Other comprehensive income, net of tax												13			13
Issuance of ordinary shares, net of costs		970,578		10		17,569			—			—			17,579
Declaration of cash dividends ($0.38 per share)				—		—			(21,605	)		—			(21,605	)

Balance at March 31, 2013		56,855,296	$	569	$	894,226		$	7,676		$	(1,063	)	$	901,408


	Ordinary Shares				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total
	Shares		Amount
Balance at December 31, 2011		20,000	$	—	$	300		$	(291	)	$	—		$	9
Net income				—		—			1,294			—			1,294
Other comprehensive income, net of tax												284			284
Issuance of ordinary shares, net of costs		14,047,618		141		180,345			—			—			180,486
Declaration of cash dividends ($0.28 per share)				—		(2,936	)		(1,003	)		—			(3,939	)

Balance at March 31, 2012		14,067,618	$	141	$	177,709		$	—		$	284		$	178,134

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

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)


For the periods ended March 31,	2013			2012
Cash flows from operating activities
Net income	$	24,788		$	1,294
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of debt issuance costs		3,106			457
Changes in assets and liabilities:
Decrease in match funded advances		277,141			4,785
Decrease (increase) in debt service accounts		5,498			(1,786	)
Decrease (increase) in related party receivables		24,292			(1,425	)
Increase in related party payables		32,076			3,062
(Increase) in other assets		(382	)		(1,753	)
Increase in other liabilities		575			1,885

Net cash provided by operating activities		367,094			6,519


Cash flows from investing activities
Purchase of notes receivable – Rights to MSRs		(100,737	)		(62,495	)
Reduction in notes receivable – Rights to MSRs		10,636			784
Acquisition of advances and other assets (net of liabilities assumed) in connection with the purchase of notes receivable – Rights to MSRs		(713,582	)		(87,303	)

Net cash used in investing activities		(803,683	)		(149,014	)


Cash flows from financing activities
Proceeds from (repayment of) match funded liabilities, net		430,043			(982	)
Payment of debt issuance costs		(5,036	)		(3,989	)
Proceeds from issuance of ordinary shares		17,633			184,300
Payment of offering costs		(22	)		(3,117	)
Payment of dividends to shareholders		(20,920	)		—

Net cash provided by financing activities		421,698			176,212


Net increase (decrease) in cash		(14,891	)		33,717
Cash at beginning of period		76,048			283

Cash at end of period	$	61,157		$	34,000


Supplemental non-cash financing activities
Dividends declared but not paid	$	7,391		$	3,939
Offering costs accrued but not paid	$	32		$	1,037
Debt issuance costs accrued but not paid	$	309		$	—

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

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Home Loan Servicing Solutions, Ltd. and all of its wholly owned subsidiaries, HLSS Holdings, LLC and HLSS Management, LLC (collectively referred to throughout as “HLSS,” “us,” “our,” “we,” the “Company”) focus on acquiring mortgage servicing assets.

Basis of Presentation and Use of Estimates

We prepared the accompanying unaudited Condensed Consolidated Financial Statements in conformity with the instructions of the Securities and Exchange Commission (“SEC”) to Form 10-Q for interim financial statements. In our opinion, the accompanying unaudited financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Material estimates that are particularly significant relate to our fair value measurements of Notes receivable – Rights to MSRs. Prior to our Initial Public Offering (“IPO”) on March 5, 2012 we were a developmental stage company. Therefore, our results for the three months ended March 31, 2012 do not reflect a full quarter of operations and are not fully comparable to the results for the three months ended March 31, 2013.

Principles of Consolidation

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

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

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

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

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


	March 31, 2013		December 31, 2012
Match funded advances	$	3,524,262	$	3,098,198
Related party receivables(1)		—		21,265
Other assets (2)		73,830		77,110

Total assets	$	3,598,092	$	3,196,573

Match funded liabilities	$	3,120,861	$	2,690,821
Other liabilities		2,797		2,203

Total liabilities	$	3,123,658	$	2,693,024

(1)

Relates to collections made by Ocwen Financial Corporation and its subsidiaries (collectively “Ocwen”) on outstanding Match funded advances. This receivable represents the portion of Match funded advance collections that were in-transit to pay down our Match funded liabilities as of each presented period. See Note 13 for more information about our Related party receivables.

(2)	Other assets principally include debt service accounts and debt issuance costs. See Note 5 for more information about our Other assets.

Certain disclosures included in the company’s annual report are not required to be included on an interim basis in the company’s quarterly reports on Forms 10-Q. The company has condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with the company’s annual report on Form 10-K for the year ended December 31, 2012 which was filed with the U.S. Securities and Exchange Commission on February 7, 2013.

Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) ASU 2012-04. This ASU makes technical corrections and improvements to a variety of topics in the Codification. The changes include source literature amendments, guidance clarification, reference corrections and relocated guidance. The ASU also includes conforming amendments to the Codification to reflect ASC 820’s fair value measurement and disclosure requirements. Our adoption of this standard effective January 1, 2013 did not have a material impact on our Interim Condensed Consolidated Financial Statements.

Accounting Standards Update (“ASU”) ASU 2013-01.This ASU limits the scope of the new balance sheet offsetting disclosure requirements to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions. Our adoption of this standard effective January 1, 2013 did not have a material impact on our Interim Condensed Consolidated Financial Statements.

Accounting Standards Update (“ASU”) 2013-02.The ASU enhances the reporting of reclassifications out of accumulated other comprehensive income (“AOCI”). The ASU sets requirements for presentation for significant items reclassified to net income in their entirety during the period and for items not reclassified to net income in their entirety during the period. It requires companies to present information about reclassifications out of AOCI in one place. It also requires companies to present reclassifications by component when reporting changes in AOCI balances. Our adoption of this standard effective January 1, 2013 did not have a material impact on our Interim Condensed Consolidated Financial Statements.

2.	ASSETS ACQUIRED AND LIABILITIES ASSUMED

On March 13, 2013, we executed our third flow purchase “Flow 3” wherein we used cash flows from operations to purchase the following:

•

the contractual right to receive the servicing fees related to mortgage servicing rights with respect to 93 pooling and servicing agreements with UPB of approximately $15.9 billion and the right to automatically obtain legal ownership, without any additional payment to Ocwen, of each mortgage servicing right upon the receipt of the necessary approvals and consents (“Required Third Party Consents”) (these rights constitute the Rights to MSRs with respect to the mortgage servicing rights); and

•

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

The following table summarizes the purchase price of the assets we acquired from Ocwen during the period ended March 31, 2013 and reconciles the cash used to acquire such assets:


	Total
Notes receivable – Rights to MSRs	$	100,707
Match funded advances (1)		703,206
Purchase price, as adjusted		803,913
Amount due from Ocwen for post-closing adjustments		10,406

Cash used	$	814,319


Sources:
Cash on-hand	$	153,142
Match funded liabilities		661,177

Cash used	$	814,319

(1)	The cash used to purchase these assets are shown net within the “Acquisition of advances and other assets (net of liabilities assumed) in connection with the purchase of notes receivable – Rights to MSRs” of the interim condensed consolidated statement of cash flows.

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

•

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

•

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

•

other assets related to the foregoing.

The following table summarizes the purchase price of the assets and liabilities we acquired from Ocwen during the period ended March 31, 2012 and reconciles the cash used to acquire such assets and liabilities:


	Total
Notes receivable – Rights to MSRs	$	62,458
Purchase of Advance SPE:
Match funded advances (1)		413,374
Other assets (1)		22,136
Match funded liabilities (1)		(358,335	)
Other liabilities (1)		(841	)
Net assets of Advance SPE		76,334
Purchase price, as adjusted		138,792
Amount due from Ocwen for post-closing adjustments		11,006
Cash used	$	149,798

Sources:
Cash on-hand	$	149,798

Match funded liabilities
Cash used	$	149,798

(1)	The cash used to purchase these assets are shown net within the “Acquisition of advances and other assets (net of liabilities assumed) in connection with the purchase of notes receivable – Rights to MSRs” of the interim condensed consolidated statement of cash flows.

3.	FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The three broad categories are:

•

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

•

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

•

Level 3: Unobservable inputs for the asset or liability.

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

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

Notes Receivable – Rights to MSRs

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

•

Discount rates reflecting the risk of earning the future income streams from the Notes receivable – Rights to MSRs ranging from 16% to 22%.

•

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

•

Mortgage loan prepayment projections ranging from 12% to 26% of the related mortgage lifetime projected prepayment rate.

•

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

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

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

Derivative Financial Instruments

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

The following tables present assets and liabilities measured at fair value on a recurring basis categorized by input level within the fair value hierarchy as of the dates indicated:


	Fair value		Level 1		Level 2		Level 3
At March 31, 2013:
Measured at fair value on a recurring basis:
Assets:
Notes receivable – Rights to MSRs	$	393,776	$	—	$	—	$	393,776

Total assets	$	393,776	$	—	$	—	$	393,776

Liabilities:
Derivative financial instruments	$	1,063		—		—	$	1,063

Total liabilities	$	1,063	$	—	$	—	$	1,063


	Fair value		Level 1		Level 2		Level 3
At December 31, 2012:
Measured at fair value on a recurring basis:
Assets:
Notes receivable – Rights to MSRs	$	303,705	$	—	$	—	$	303,705

Total assets	$	303,705	$	—	$	—	$	303,705

Liabilities:
Derivative financial instruments	$	1,076		—		—	$	1,076

Total liabilities	$	1,076	$	—	$	—	$	1,076

The following tables present reconciliations of the changes in fair value of our Level 3 assets which we measure at fair value on a recurring basis:


	2013						2012
For the three months ended March 31,	Note receivable – Rights to MSRs			Derivative Financial Instruments			Note receivable – Rights to MSRs			Derivative Financial Instruments

Beginning balance	$	303,705		$	(1,076	)	$	—		$	—

Purchases and reductions:
Purchases		100,707			—			62,458			—
Reductions		(10,636	)		—			(784	)		—

		393,776			(1,076	)		61,674			—

Changes in fair value:
Included in net income		—			—			—			—
Included in other comprehensive income (1)		—			13			—			284

		—			13			—			284

Transfers in or out of Level 3		—			—			—			—

Ending balance	$	393,776		$	(1,063	)	$	61,674		$	284

(1)	These gains are attributable to derivatives still held at March 31, 2013 and March 31, 2012, respectively.

The following table shows the effect on the fair value of the Note receivable – Rights to MSRs assuming adverse changes to certain key assumptions used in valuing these assets at March 31, 2013 and December 31, 2012 (in thousands):


	Discount Rate			Prepayment Speeds			Delinquency Rates
	100 bps adverse change			1000 bps adverse change			1000 bps adverse change
March 31, 2013
Note Receivable – Rights to MSRs	$	(11,850	)	$	(17,587	)	$	(50,616	)


	Discount Rate			Prepayment Speeds			Delinquency Rates
	100 bps adverse change			1000 bps adverse change			1000 bps adverse change
December 31, 2012
Note Receivable – Rights to MSRs	$	(11,786	)	$	(15,470	)	$	(45,540	)

This sensitivity analysis above assumes a change is made to one key input, while holding all other inputs constant. As many of these inputs are correlated, a change in one input will likely impact other inputs which would ultimately impact the overall valuation.

The following table provides additional quantitative information on our significant inputs used for valuing our Note Receivable – Rights to MSRs as of March 31, 2013 and December 31, 2012, respectively:

March 31, 2013


Asset	Unobservable Input	Low			High			Weighted Average
Note receivable – Rights to MSRs	Discount Rate		16	%		22	%		20	%
	Prepayment Speeds		12	%		26	%		20	%
	Delinquency Rates		15	%		35	%		28	%

December 31, 2012


Asset	Unobservable Input	Low			High			Weighted Average
Note receivable – Rights to MSRs	Discount Rate		15	%		22	%		20	%
	Prepayment Speeds		12	%		27	%		19	%
	Delinquency Rates		15	%		35	%		29	%

Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value at the dates indicated:


	March 31, 2013		March 31, 2013		December 31, 2012		December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Match funded advances	$	3,524,262	$	3,524,262	$	3,098,198	$	3,098,198

Total financial assets	$	3,524,262	$	3,524,262	$	3,098,198	$	3,098,198

Financial liabilities:
Match funded liabilities	$	3,120,861	$	3,136,120	$	2,690,821	$	2,697,840

Total financial liabilities	$	3,120,861	$	3,136,120	$	2,690,821	$	2,697,840

Match Funded Advances

The carrying value of our Match funded advances approximates fair value. This is because our Match funded advances have no stated maturity, generally are realized within a relatively short period of time and do not bear interest. The fair value measurements for Match funded advances are categorized as Level 3.

Match Funded Liabilities

Match funded liabilities include term notes that are publically traded. The fair value estimate of the company’s fixed rate debt was determined by using broker quotes. We concluded that no adjustments are required to the quoted prices. The level of trading, both in number of trades and amount of term notes traded, is at a level that the company believes market quotes to be a reasonable representation of the current fair market value of the term notes. All other Match funded liabilities are short term in nature and the carrying value generally approximates the fair value. The fair value measurements for Match funded liabilities are categorized as Level 3.

4.	MATCH FUNDED ADVANCES

Match funded advances on residential loans we service for others are comprised of the following at the dates indicated:


	March 31, 2013		December 31, 2012
Principal and interest advances	$	1,331,129	$	1,231,471
Escrow advances		1,598,496		1,399,813
Corporate advances		594,637		466,914

	$	3,524,262	$	3,098,198

5.	OTHER ASSETS

Other assets consisted of the following at the dates indicated:


	March 31, 2013		December 31, 2012
Debt service accounts (1)	$	62,277	$	67,776
Debt issuance costs (2)		11,516		9,278
Interest-earning collateral deposits (3)		2,014		1,904
Other		405		133

	$	76,212	$	79,091

(1)

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

(2)	Costs relate to Match funded liabilities. We amortize these costs to the earlier of the scheduled amortization date, contractual maturity date or prepayment date of the debt.

(3)	Represents cash collateral held by the counterparty to our interest rate swap agreements.

6.	MATCH FUNDED LIABILITIES

Match funded liabilities are comprised of the following at the dates indicated:

Unused
Borrowing
Capacity (4)

Balance Outstanding

Borrowing Type(1)

Interest Rate (2)

Maturity
(3)

Amortization
Date (3)

March 31,
2013(5)

December 31,
2012

Series 2012 T1 Term Notes

134 – 396 bps

Oct. 2043

Oct. 2013

—

250,000

Series 2012 T2 Term Notes

199 – 494 bps

Oct. 2045

Oct. 2015

—

450,000

Series 2013 T1 Term Notes

90 – 249 bps

Jan. 2044

Jan. 2014

—

650,000

—

Series 2013 T2 Term Notes

150 – 323 bps

Jan. 2046

Jan. 2016

—

350,000

—

Series 2013 T3 Term Notes

229 – 446 bps

Jan. 2048

Jan. 2018

—

150,000

—


						Unused Borrowing Capacity (4)		Balance Outstanding
Borrowing Type(1)	Interest Rate (2)	Maturity (3)		Amortization Date (3)		Unused Borrowing Capacity (4)		March 31, 2013(5)		December 31, 2012
Series 1 Variable Funding Notes	1-Month LIBOR + 200 – 700 bps		Aug. 2043		Aug. 2013	$	99,273	$	300,727	$	339,465
Series 2 Variable Funding Notes	1-Month LIBOR + 120 – 475 bps		Aug. 2043		Aug. 2013		111,683		338,317		678,928
Series 3 Variable Funding Notes	1-Month LIBOR + 120 – 475 bps		Aug. 2043		Aug. 2013		111,683		338,317		678,928
Class A Term Money Market Fund Note(6)	65 bps		Sep. 2013		Sep. 2012		—		122,308		183,462
Class B Term Money Market Fund Note	275 bps		Sep. 2044		Sep. 2014		—		28,500		28,500
Class A Draw Money Market Fund Note(6)	1-Month LIBOR + 200 bps		Sep. 2044		Sep. 2014		—		142,692		81,538

						$	322,639	$	3,120,861	$	2,690,821

(1)	Each Match funded liability series has four classes, an A, B, C and D class.

(2)	The weighted average interest rate at March 31, 2013 was 1.81%. We pay interest monthly.

(3)

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

(4)

Our unused borrowing capacity is available to us if we have additional eligible collateral to pledge and meet other borrowing conditions. We pay a 0.75% fee on the unused borrowing capacity. Concurrent with Flow 3, the aggregate commitment on our variable funding notes was increased from $1.0 billion to $1.3 billion.

(5)	On January 22, 2013, we completed the issuance of $650,000 of one-year, $350,000 of three-year and $150,000 of five-year term notes (“2013 Term Notes”). Issuance of the 2013 Term Notes allowed us to reduce the outstanding borrowings on all classes of the Variable Funding Note Series 2 and 3 Notes.

(6)

The Class A Term Money Market Fund Note and Class A Draw Money Market Fund Note have a combined maximum borrowing capacity of $265,000. By design, the Class A Term Money Market Fund Note balance is reduced periodically as this note approaches its maturity on September 12, 2013. The reductions on the Class A Term Money Market Fund Note were offset by additional borrowings on the Class A Draw Money Market Fund Note so that the combined balance of these notes was equal to $265,000 at March 31, 2013 and December 31, 2012.

Analysis of Borrowing by Expected Maturity(1):


Year of Expected Maturity Date	As of March 31, 2013
2013	$	1,349,669
2014		821,192
2015		450,000
2016		350,000
2017 and thereafter		150,000

Total debt	$	3,120,861

(1)	The expected maturity date is the date on which the revolving period ends under each Advance Facility note and repayment of the outstanding balance must begin if the note is not renewed or extended.

7.	ORDINARY SHARES

Movements in the number of ordinary shares issued during the three months ended March 31, 2013 and March 31, 2012 are represented in the table below:


	2013		2012
Ordinary shares issued - beginning balance		55,884,718		20,000
Issuance of new ordinary shares		970,578		14,047,618

Ordinary shares issued – ending balance		56,855,296		14,067,618

8.	DERIVATIVE FINANCIAL INSTRUMENTS

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

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

Because our current derivative agreements are not exchange-traded, we are exposed to credit loss in the event of nonperformance by the counterparty to the agreement. We control this risk through credit monitoring procedures including financial analysis, dollar limits and other monitoring procedures. The notional amounts of our contracts do not represent our exposure to credit loss. See note 3 for additional information regarding our use of derivatives.

Interest Rate Management

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

The following table provides information about our interest rate swaps at March 31, 2013:


Purpose	Date Opened	Effective Date (1)	Maturity	We Pay	We Receive	Notional Amount		Fair Value
Designated as hedges:
Hedge the effects of changes in 1-Month LIBOR (2)	March 2012	March 2012	March 2016	0.6325%	1-Month LIBOR	$	125,313	$	(619	)
Hedge the effects of changes in 1-Month LIBOR (2)	May 2012	May 2012	May 2016	0.6070%	1-Month LIBOR		38,025		(133	)
Hedge the effects of changes in 1-Month LIBOR (2)	September 2012	September 2012	August 2017	0.5188%	1-Month LIBOR		217,662		93
Hedge the effects of changes in 1-Month LIBOR (2)	January 2013	January 2014	July 2014	0.3375%	1-Month LIBOR		307,043		(33	)
Hedge the effects of changes in 1-Month LIBOR (2)	January 2013	January 2016	December 2017	1.3975%	1-Month LIBOR		338,009		(371	)

Total designated as hedges							1,026,052		(1,063	)

Total						$	1,026,052	$	(1,063	)

The following table provides information about our interest rate swaps at December 31, 2012:


Purpose	Date Opened	Effective Date (1)	Maturity	We Pay	We Receive	Notional Amount		Fair Value
Designated as hedges:
Hedge the effects of changes in 1-Month LIBOR	March 2012	March 2012	March 2016	0.6325%	1-Month LIBOR	$	147,351	$	(759	)
Hedge the effects of changes in 1-Month LIBOR	May 2012	May 2012	May 2016	0.6070%	1-Month LIBOR		44,221		(174	)
Hedge the effects of changes in 1-Month LIBOR	September 2012	September 2012	August 2017	0.5188%	1-Month LIBOR		223,059		(143	)

Total designated as hedges							414,631		(1,076	)

Total						$	414,631	$	(1,076	)

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

(2)

Projected net settlements for the next twelve months total approximately $1,280 of payments to the counterparty. Unrealized losses of $1,063 related to our interest rate swaps are included in accumulated other comprehensive loss for the three months ended March 31, 2013. There were $284 of unrealized gains attributable to derivatives for the three months ended March 31, 2012. Given the current and expected effectiveness of our hedging arrangements, we do not expect any reclassifications from other comprehensive income into earnings associated with these hedging arrangements during the next twelve months.

The following table summarizes the use of derivatives during the three months ended March 31:


	2013		2012
Notional balance at beginning of period	$	414,631	$	—
Additions		645,052		235,058
Maturities		—		—
Terminations		—		—
Amortization		33,631		—

Notional balance at end of period	$	1,026,052	$	235,058

9.	INTEREST INCOME – NOTES RECEIVABLE – RIGHTS TO MSRs

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

The following table shows how we calculated Interest income—notes receivable – Rights to MSRs for the three months ended March 31:


	2013		2012
Servicing fees collected	$	102,258	$	6,461
Subservicing fee payable to Ocwen		47,052		2,732

Net servicing fees retained by HLSS		55,206		3,729
Reduction in notes receivable – Rights to MSRs		10,636		784

	$	44,570	$	2,945

10.

INTEREST EXPENSE

The following table presents the components of interest expense for the three months ended March 31:


	2013		2012
Match funded liabilities	$	14,781	$	791
Amortization of debt issuance costs		3,106		457
Interest rate swaps		355		43

	$	18,242	$	1,291	��

11.

INCOME TAXES

Income taxes have been provided for based upon the tax laws and rates in countries in which we conduct operations and earn related income. Our effective tax rate was 0.1% for the three months ended March 31, 2013 (1.3%, for the three months ended March 31, 2012). As of March 31, 2013 we have net operating loss carryforwards of $2,359 and $3,512, for U.S. federal and state and local tax, respectively. These carryforwards are available to offset future taxable income until they begin to expire in 2032 and 2022, respectively. We are a Cayman Islands exempted company, and the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation. Our subsidiaries are expected to be subject to U.S federal income taxation as corporations.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. As of March 31, 2013, the Company did not have any unrecognized tax benefits related to the current period or any previous period. Our policy is that we will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We did not accrue interest or penalties associated with any unrecognized tax benefits, nor was any interest expense or penalty recognized during the period.

12.

BUSINESS SEGMENT REPORTING

Our business strategy focuses on acquiring mortgage servicing assets consisting of mortgage servicing rights, rights to fees and other income from servicing mortgage loans, and associated servicing advances. As of March 31, 2013, we operate a single reportable business segment that holds Rights to MSRs.

13.

RELATED PARTY TRANSACTIONS

We entered into various agreements with Ocwen and Altisource Portfolio Solutions, S.A. (“Altisource”) in connection with our IPO on March 5, 2012. William C. Erbey, our founder and the Chairman of our Board of Directors, is also the Chairman of the Board of Directors and largest shareholder of Ocwen and the Chairman of the Board of Directors and largest shareholder of Altisource.

So long as the Required Third Party Consents have not been obtained with respect to the transfer of legal ownership of any mortgage servicing right, Ocwen remains obligated to perform as servicer under the related pooling and servicing agreements, and we are required to pay Ocwen a monthly fee for the servicing activities it performs. We are also required to purchase any servicing advances that Ocwen is required to make pursuant to such pooling and servicing agreements.

The following table summarizes our transactions with Ocwen for the three months ended March 31:


	2013		2012
Servicing fees collected	$	102,258	$	6,461
Subservicing fee payable to Ocwen		47,052		2,732

Net servicing fees retained by HLSS		55,206		3,729
Reduction in Notes receivable – Rights to MSRs		10,636		784

	$	44,570	$	2,945


Servicing advances purchased from Ocwen in the ordinary course of business	$	695,105	$	95,889

At March 31, 2013 Ocwen owed us $3,064 for servicing fees collected but not remitted to us, and we owed Ocwen $17,056 for the subservicing fee earned by Ocwen in March 2013. The Notes receivable – Rights to MSRs are due from Ocwen as of March 31, 2013.

Ocwen Professional Services Agreement

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

At March 31, 2013, Ocwen owed us $407 for professional services provided pursuant to the Ocwen Professional Services Agreement. During the three months ended March 31, 2013 and March 31, 2012, we earned fees of $407 and $251, respectively, for services provided to Ocwen pursuant to the Professional Services Agreement. Additionally, during the three months ended March 31, 2013 and March 31, 2012, we incurred fees of $30 and $10, respectively, for services received from Ocwen pursuant to the Ocwen Professional Services Agreement.

Altisource Administrative Services Agreement

This agreement requires Altisource to provide certain administrative services to us with pricing terms intended to reflect market rates. Services provided to us under this agreement include human resources administration (benefit plan design, recruiting, hiring and training and compliance support), legal and regulatory compliance support services, general business consulting, corporate services (facilities management, security and travel services), finance and accounting support services (financial analysis, financial reporting and tax services), risk management services, vendor management and other related services. The services Altisource provides to us under this agreement are on an as-needed basis, and the fees we pay Altisource are based on the actual costs incurred by them plus an additional markup of 15%. During the three months ended March 31, 2013 and March 31, 2012, we paid Altisource $196 and $61, respectively, for services provided to us pursuant to the Altisource Administrative Services Agreement.

Subleases

During the three months ended March 31, 2013 and March 31, 2012 we paid Altisource $20 and $7, respectively, for the rental of office space under two sublease agreements.

Receivables from and Payables to Related Parties

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


	March 31, 2013		December 31, 2012
Servicing fees collected (1)	$	3,064	$	4,966
Professional services (2)		407		1,322
Advance collections (3)		—		21,265
Other(4)		10,914		718

Receivables from Ocwen	$	14,385	$	28,271

Subservicing fees payable (5)	$	17,056	$	890
Advances made (6)		17,758		—
Professional services (2)		—		40
Other		—		1,815

Payables to Ocwen	$	34,814	$	2,745

Payables to Altisource	$	136	$	129

(1)

Ocwen is required to remit to us servicing fees it collects on our behalf within two business days. The amount due from Ocwen at March 31, 2013 represents servicing fees collected but not remitted at the end of the month. We record servicing fees we collect less the subservicing fee we pay to Ocwen as Interest income as shown in Note 9.

(2)	The respective amounts are for professional services provided during the periods indicated.

(3)	Upon collection, Ocwen is contractually obligated to remit Match funded advance collections to pay down our Match funded liabilities. This receivable represents the portion of Match funded advance collections that were in-transit to pay down our Match funded liabilities as of the period indicated.

(4)	At March 31, 2013 Ocwen owed us $10,406 for certain purchase price adjustments pertaining to the Flow 3 purchase.

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

(6)	At March 31, 2013 we owed Ocwen for advances made on our behalf. Ocwen is still the named servicer for the securitizations where we currently own Rights to MSRs. Thus, any advances Ocwen makes to these securitizations are an obligation for us, and we reimburse Ocwen at agreed upon settlement dates.

14.

COMMITMENTS AND CONTINGENCIES

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

15.

SUBSEQUENT EVENTS

Subsequent to our balance sheet date of March 31, 2013 we:

•

Paid cash dividends of $7,391 or $0.13 per ordinary share (April 10, 2013);

•

Declared a monthly dividend of $0.14 per ordinary share with respect to April, May and June 2013 (April 18, 2013).

ITEM 2.

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

FORWARD-LOOKING STATEMENTS

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

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

•

estimates regarding prepayment speeds, delinquency rates, servicing advances, amortization of mortgage servicing assets, interest income, operating costs, advance financing costs and other drivers of our results;

•

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

•

our ability to obtain the Required Third Party Consents to become the named servicer of the mortgage servicing rights;

•

our ability to pay monthly dividends;

•

assumptions about the availability of additional portfolios of subprime and Alt-A mortgage servicing rights and our ability to acquire additional mortgage servicing assets from Ocwen Financial Corporation and its subsidiaries (collectively “Ocwen”) and others;

•

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

•

assumptions about the effectiveness of our hedging strategy;

•

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

•

our competitive position;

•

the susceptibility of our mortgage servicing assets to fluctuations in valuation;

•

uncertainty related to future government regulation;

•

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

•

assumptions regarding our tax rate and decisions by taxing authorities;

•

general economic and market conditions; and

•

assumptions regarding amount and timing of debt or equity offerings.

Further information on the risks specific to our business is detailed within this report and our other reports and filings with the SEC including our Form 10-K dated February 7, 2013. Forward-looking statements speak only as of the date they were made and should not be relied upon. Home Loan Servicing Solutions, Ltd. (“HLSS”, the “Company”, “us”, “our” or “we”) undertakes no obligation to update or revise forward-looking statements.

For more information on the uncertainty of forward-looking statements, see “Risk Factors” within our Form 10-K dated February 7, 2013.

INTRODUCTION

The following discussion of our results of operations, change in financial condition and liquidity should be read in conjunction with our Interim Condensed Consolidated Financial Statements and the related notes, all included elsewhere in this report on Form 10-Q and within our Form 10-K dated February 7, 2013.

OVERVIEW

Strategic Priorities

Now in our second year of operations, we continue to execute upon our chief objective which is to acquire mortgage servicing assets. During the current quarter, we completed our third flow purchase from Ocwen since our inception (“Flow 3”). Flow 3 added $15.9 billion of UPB to our servicing portfolio, and we currently hold the rights to service $92.5 billion of UPB as of March 31, 2013.

We intend to continue to acquire additional mortgage servicing rights in two ways:

•

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

•

We may issue additional debt or equity to allow us to execute larger purchases of mortgage servicing assets. These follow-on purchases will be subject to market conditions and will likely require that additional advance financing capacity be arranged in advance or concurrent with each transaction.

Ocwen stated that as of March 31, 2013 it has servicing assets with over $100 billion of UPB that are similar to the assets that HLSS purchased in the transactions described above. We believe Ocwen’s servicing assets potentially provide a strong servicing asset pipeline, one which could help grow our servicing portfolio. We believe that Ocwen perceives that it has benefited from the transfer of Rights to MSRs to us. Although we cannot guarantee that future transactions will occur, we believe that Ocwen will benefit from such transactions and will, therefore, continue to sell mortgage servicing assets to us in this manner which will allow us to grow the UPB of our servicing portfolio.

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

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

Our results for the periods ended March 31 are discussed in more detail below.

Changes in Results of Operations Summary

The following table summarizes our condensed consolidated operating results for the periods ended March 31:


	Three Months
	2013		2012
Consolidated:
Revenue	$	45,079	$	3,229
Operating expenses		2,037		627

Income from operations		43,042		2,602
Interest expense		18,242		1,291

Income before income taxes		24,800		1,311
Income tax expense		12		17

Net income	$	24,788	$	1,294

Three Months Ended March 2013 versus 2012. Revenue primarily includes interest income recorded on Notes receivable – Rights to MSRs using the prospective interest method. Our 2013 interest income exceeds 2012 interest income because we had three full months of operations in 2013 versus one month of operations in 2012 and because our average UPB for the three months ended March 31, 2013 was $80.4 billion compared to average UPB of $5.0 billion for the three months ended March 31, 2012.

Operating expenses for the three months ended March 31, 2013 exceeded operating expenses for the three months ended March 31, 2012 primarily because we had three full months of operations during the first quarter of 2013 compared to one month of operations during the first quarter of 2012. In addition our compensation and benefits grew due to an increase in average headcount to fifteen employees for the three months ended March 31, 2013 versus ten for the three months ended March 31, 2012. Interest expense increased due to a larger average Match funded liability balance during the three months ended March 31, 2013 versus the three months ended March 31, 2012.

Income tax expense was $12 and $17 for the three months ended March 31, 2013 and March 31, 2012, respectively. Our effective tax rate was 0.1% for the three months ended March 31, 2013 (compared to 1.3% for the three months ended March 31, 2012). We base income tax provisions on expected annual income taxes calculated separately from the effect of significant, infrequent or unusual items. We are a Cayman Islands exempted company, and the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation. Our U.S. subsidiaries are subject to U.S. federal and state income taxation on their management activities, including management of servicing advance financing activities. HLSS Management, LLC employs all of our U.S. based employees and provides management services to Home Loan Servicing Solutions, Ltd. and to Ocwen under the Ocwen Professional Services Agreement. HLSS Holdings, LLC earns fees related to the management of servicing advance receivables and related financing activities. Continued reductions in the cost of advance financing could result in increased income tax expense as a higher proportion of our income is attributed to managing servicing advances in the U.S. We computed income tax expense by applying the Federal and state combined rate of 38% to the earnings of these subsidiaries.

Summary Operating Information

We operate the business as a single reportable segment. For purposes of our internal management reporting, we separately report the components of Interest income – notes receivable – Rights to MSRs which include Servicing Fee Revenue, Servicing Expense and Amortization Expense for MSRs. We provide a reconciliation of our reported results to our internal management reporting for the three months ended March 31, 2013 and March 31, 2012 in the following tables.

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

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


For the three months ended March 31, 2013:	Condensed Consolidated Results (GAAP)		Adjustments			Management Reporting (Non-GAAP)
Servicing fee revenue (1)	$	—	$	102,258		$	102,258
Interest income—notes receivable – Rights to MSRs (4)		44,570		(44,570	)		—
Interest income – other		102		—			102
Related party revenue		407		—			407

Total revenue		45,079		57,688			102,767

Operating expenses
Compensation and benefits		1,166		—			1,166
Servicing expense (2)		—		47,052			47,052
Amortization of MSRs (3)		—		10,636			10,636
Related party expenses		226		—			226
General and administrative expenses		645		—			645

Total operating expenses		2,037		57,688			59,725

Income from operations	$	43,042	$	—		$	43,042

(1)	Servicing fee revenue reflects $102,258 of servicing fees received under the agreements with Ocwen.

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

(3)	Amortization of MSRs reflects $10,636 reduction in the value of the Notes receivable – Rights to MSRs.

(4)

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


For the three months ended March 31, 2012:	Condensed Consolidated Results (GAAP)		Adjustments			Management Reporting (Non-GAAP)
Servicing fee revenue (1)	$	—	$	6,461		$	6,461
Interest income—notes receivable – Rights to MSRs (4)		2,945		(2,945	)		—
Interest income – other		33		—			33
Related party revenue		251		—			251

Total revenue		3,229		3,516			6,745

Operating expenses
Compensation and benefits		365		—			365
Servicing expense (2)		—		2,732			2,732
Amortization of MSRs (3)		—		784			784
Related party expenses		71		—			71
General and administrative expenses		191		—			191

Total operating expenses		627		3,516			4,143

Income from operations	$	2,602	$	—		$	2,602

(1)	Servicing Fee Revenue reflects $6,461 of servicing fees received under the agreements with Ocwen.

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

(3)	Amortization of MSRs reflects $784 reduction in the value of the Notes receivable – Rights to MSRs.

(4)

Three months ended March 2013 versus March 2012. Servicing fee revenue increased period over period because we owned the servicing rights for significantly greater UPB during the three months ended March 2013 period compared to the same prior year period. Servicing fee revenue is a function of principal and interest collected during the period and the contractual servicing fee rate. Average UPB for the first quarter of 2013 was $80.4 billion compared to $5.0 billion for the first quarter of 2012. We also earned income from professional services provided to Ocwen under the Ocwen Professional Services Agreement for a full three months during the current quarter. We did not earn revenue associated with these arrangements prior to our IPO on March 5, 2012, and thus the comparable quarterly period does not reflect three full months of professional services revenue.

Operating expenses increased period over period because we began operations at the completion of our IPO on March 5, 2012, thus our 2012 period includes approximately one month of expenses compared to three full months of expenses during 2013. In addition, the scale of our business has increased significantly from 2012 to 2013 through various follow-on and flow Rights to MSRs purchases. Operating expenses are primarily comprised of servicing fees paid to Ocwen for servicing the Rights to MSRs, salaries and wages and professional services. The servicing fees paid to Ocwen during the three months ended March 31, 2013 include $12,271 for the base fee and $34,781 in incentive fees. The servicing fees paid to Ocwen during the three months ended March 31, 2012 include $775 for the base fee and $1,957 in incentive fees. The difference is primarily attributable to increased average UPB for the current three months period compared to the same prior year period. Amortization Expense relates to reduction in UPB due to portfolio run-off and is greater during 2013 due to larger average UPB. There was no impairment of any of our servicing assets in either the three months ended March 31, 2013 or 2012. Our average headcount for the three months ended March 31, 2013 and 2012 periods was fifteen and ten, respectively. Most of our employees transferred to HLSS from Ocwen in connection with the closing of our IPO on March 5, 2012. Expenses prior to our IPO were primarily related to organization costs associated with starting our business.

The following table provides selected portfolio statistics as of March 31:


(in thousands, except for loan count data)	2013			2012			% Change

Residential Assets Serviced
Unpaid principal balance:
Performing loans (1)	$	71,068,116		$	11,867,430			499	%
Non-performing loans		19,548,192			2,630,919			643
Non-performing real estate		1,904,520			533,339			257

Total residential assets serviced	$	92,520,828		$	15,031,688			516


Percent of total UPB:
Servicing portfolio		100.0	%		100.0	%		0
Non-performing residential assets serviced		23.2	%		21.1	%		10

Number of:
Performing loans (1)		514,891			80,104			543
Non-performing loans		98,408			12,836			667
Non-performing real estate		10,560			2,546			315

Total number of residential assets serviced		623,859			95,486			553

Percent of total number:
Non-performing residential assets serviced		17.5	%		16.1	%		9

The following table provides selected portfolio statistics for the three months ended March 31:


(in thousands, except for loan count data)	2013			2012			% Change

Average residential assets serviced	$	80,444,886		$	5,043,162			1,495	%
Prepayment speed (average CPR)		12.7	%		14.2	%		(11	)
Average number of residential assets serviced		556,937			96,257			479

(1)

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

The following tables provide information regarding changes in our portfolio of residential assets serviced for the three months ended March 31:


(in thousands, except for loan count data)	UPB			Loan Count
Servicing portfolio at December 31, 2012	$	79,360,874			549,949
Additions		15,922,650			87,442
Runoff		(2,762,696	)		(13,532	)

Servicing portfolio at March 31, 2013	$	92,520,828			623,859


(in thousands, except for loan count data)	UPB			Loan Count
Servicing portfolio at December 31, 2011	$	—			—
Additions		15,227,283			96,162
Runoff		(195,595	)		(676	)

Servicing portfolio at March 31, 2012	$	15,031,688			95,486

Change in Financial Condition Summary

The overall increase in total assets of $484,479 and total liabilities of $463,704 during the three months ended March 31, 2013 primarily resulted from:

•

The completion of the Flow 3 purchase: we acquired assets of $803,913 and had associated increases in Match funded liabilities of $661,177; and

•

Advance facility activity: we received $277,141 in Match funded advance remittances and paid down $231,134 of outstanding Match funded liability balances.

The assets acquired included Notes receivable – Rights to MSRs which had a balance of $393,776 representing 9.7% of total assets at March 31, 2013. Notes receivable – Rights to MSRs are carried at fair value which is determined based on an appraisal prepared with the assistance of an independent valuation firm and requires the use of significant unobservable inputs. The most significant assumptions used in the appraisal are:

•

Discount rates reflecting the risk of earning the future income streams ranging from 16% to 22%.

•

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

•

Mortgage loan prepayment projections ranging from 12% to 26% of the related mortgage lifetime projected prepayment rate.

•

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

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

Total equity amounted to $901,408 at March 31, 2013 as compared to $880,633 at December 31, 2012. This increase of $20,775 is primarily due to the exercise by our underwriters of their right to purchase shares in connection with our equity offering on December 26, 2012 (net of expenses) of $17,579 and net income of $24,788, offset by dividends declared of $21,605. In addition, we recorded $13 of unrealized gains on interest rate swaps that we designated as cash flow hedges.

LIQUIDITY AND CAPITAL RESOURCES

We define liquidity as unencumbered cash balances plus unused, collateralized advance financing capacity. Our liquidity as of March 31, 2013, as measured by cash and available credit, was $105,140, a decrease of $4,098 from December 31, 2012. At March 31, 2013, our cash position was $61,157 compared to $76,048 at December 31, 2012, and we had $43,983 of fully collateralized available credit on our advance financing facility which we deem to be similar to cash. We did not draw on this available credit to minimize interest expense during the current period. Regarding the investment of cash, our investment policies emphasize principal preservation and availability by limiting the investment to demand deposit accounts.

Investment policy and funding strategy.

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

•

Interest income - notes receivable – Rights to MSRs; and

•

proceeds from Match funded liabilities.

Potential long-term sources of liquidity include proceeds from the issuance of debt or equity.

Our primary uses of funds are:

•

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

•

payments of interest and operating costs;

•

purchases of MSRs and related servicing advances; and

•

repayments of borrowings.

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

At March 31, 2013, $322,639 of our total maximum borrowing capacity remained unused. We maintain unused borrowing capacity for two reasons:

•

as a protection should advances increase due to increased delinquencies; and

•

to provide capacity for the acquisition of additional servicing rights.

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

Debt financing summary.As of March 31, 2013, we had $322,639 of unused borrowing capacity. Our ability to continue to pledge collateral under our advance facility depends on the performance of the collateral. Currently, the large majority of our collateral qualifies for financing. The debt covenants for our Advance Facility require that we maintain minimum levels of liquid assets. Failure to comply with these covenants could result in restrictions on new borrowings or the early termination of our Advance Facility. We believe we are in compliance with these covenants and do not expect them to restrict our activities.

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

Cash flows for the periods ended March 31.

The following table presents a summary of our cash flows for the three months ended March 31:


	2013			2012
Net income	$	24,788		$	1,294
Adjustments for non-cash items		3,106			457
Change in working capital accounts		339,200			4,768

Cash flows from operating activities		367,094			6,519
Cash flows from investing activities		(803,683	)		(149,014	)
Cash flows from financing activities		421,698			176,212

Net increase (decrease) in cash		(14,891	)		33,717
Cash at beginning of period		76,048			283

Cash at end of period	$	61,157		$	34,000

Three months ended March 31, 2013.Our operating activities provided $367,094 of cash. Components of operating cash flows included amounts provided by changes in working capital accounts of $339,200 and by our net income of $24,788, adjusted for amortization of debt issuance costs of $3,106. The primary contributors to the change in working capital accounts were reductions in servicing advances of $277,141, decreases in related party receivables of $24,292 and debt service accounts of $5,498, and increases in related party payables of $32,076. The remainder of the working capital activity relates to a net increase in cash flows from operations due to movements in other assets and other liabilities of $193.

The primary driver of the change in related party receivables was advance collections due from Ocwen of $21,265. Increases in related party payables were primarily attributable to subservicing fees payable to Ocwen of $17,056 for March subservicing activity and an amount due to Ocwen of $17,758 for advances made on our behalf at the end of March. The collection of servicing advances of $277,141 was used to pay down $231,134 of our Match funded liabilities which resulted in net cash provided of $46,007. Refer to the financing activities discussion below for more details regarding Match funded liability cash movements during the current period.

Our investing activities used $803,683 of cash during the months ended March 31, 2013 which primarily related to our acquisition of Rights to MSRs and related advances associated with our Flow 3 purchase from Ocwen. We paid $100,737 to Ocwen for Notes receivable – Rights to MSRs and $713,582 for Match funded advances. Finally, we had a reduction in Notes receivable – Rights to MSRs of $10,636.

Our financing activities provided $421,698 of cash. The underwriters’ exercise of their over-allotment option provided $17,633 of cash, net of offering expenses. We borrowed $661,177 on our servicing advance financing facility related to the Flow 3 purchase from Ocwen, and overall, we had net proceeds from Match funded liabilities of $430,043 during the period. This amount was offset by payments of debt issue costs totaling $5,036. Additionally, we paid dividends equal to $20,920. Finally, we paid offering costs of $22 associated with the over-allotment exercise during the period.

Three months ended March 31, 2012.Our operating activities provided $6,519 of cash. Components of operating cash flows included amounts provided by reductions in servicing advances of $4,785 and by our net income of $1,294, adjusted for amortization of debt issuance costs of $457. Increases in other liabilities of $4,947 were offset by increases in other assets of $4,964.

Our investing activities used $149,798 of cash during the three months ended March 31, 2012 to acquire Rights to MSRs, advances and other related assets net of liabilities assumed, in connection with the Initial Acquisition offset by a reduction of our Notes receivable – Rights to MSRs of $784. The purchase price that we paid to close the Initial Acquisition was based on estimated closing date values. On March 31, 2012, we determined the final purchase of $138,792 and recorded $11,006 due from Ocwen.

Our financing activities provided $176,212 of cash from the proceeds of the Offerings offset by payments of offering costs, debt issue costs for the transfer of the advance financing facility and repayments of match funded liabilities.

DIVIDENDS

Over time, we intend to distribute at least 90 percent of our earnings in the form of monthly cash dividends. During 2013, we declared the following dividends:


Record Date	Payment Date	Amount per Ordinary Share

January 31, 2013	February 11, 2013	$0.12

February 28, 2013	March 11, 2013	$0.13

March 29, 2013	April 10, 2013	$0.13

April 30, 2013	May 10, 2013	$0.14

May 31, 2013	June 10, 2013	$0.14

June 28, 2013	July 10, 2013	$0.14

CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND OTHER MATTERS

Contractual Obligations

We believe that we have adequate resources to fund all unfunded commitments to the extent required and meet all contractual obligations as they come due. Such contractual obligations include our interest payments and operating leases. The following table sets forth certain information regarding amounts we owe to others under contractual obligations as of March 31, 2013:


	Total		Less than 1 year		1 – 3 yrs		3 – 5 yrs		More than 5 yrs
Operating leases	$	128	$	81	$	47	$	—	$	—

Total contractual cash obligations	$	128	$	81	$	47	$	—	$	—

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

We exclude our Match funded liabilities from the contractual obligation table above because they represent non-recourse debt that has been collateralized by Match funded advances which are not available to satisfy general claims against HLSS. Holders of the notes issued by the SPE have no recourse against any assets other than the Match funded advances that serve as collateral for the securitized debt. Interest on Match funded liabilities was $14,781 and $791 during the three months ended March 31, 2013 and March 31, 2012, respectively. Future interest expense may vary depending on utilization, changes in LIBOR and spreads and the effectiveness of hedging strategies.

Off-Balance Sheet Arrangements

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

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

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

VIEs. If we determine that we are the primary beneficiary of a VIE, we report the VIE in our Interim Condensed Consolidated Financial Statements. As of March 31, 2013, we have no VIEs other than our advance financing SPE.

Related Parties

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

For the three months ended March 31, 2013 and March 31, 2012, pursuant to the purchase agreements and related sales supplements with Ocwen, we retained net servicing fees of $55,206 and $3,729, respectively. We recorded $44,570 and $2,945 as Interest income – notes receivable – Rights to MSRs and $10,636 and $784 as a reduction of Notes receivable – Rights to MSRs, for the three months ended March 31, 2013 and March 31, 2012, respectively. During the same periods, we acquired servicing advances made by Ocwen of $695,105 and $95,889, respectively. Ocwen billed us $30 and $10, respectively, under the Ocwen Professional Services Agreement during these same periods. We billed Ocwen $407 and $251 under the Ocwen Professional Services Agreement during these same periods. Revenue from the Ocwen Professional Services Agreement is included in Related party revenue.

Altisource billed us $196 and $61 for services provided to us during the three months ended March 31, 2013 and March 31, 2012, respectively, under the Altisource Administrative Services Agreement. We reported this amount within Related party expenses for each period then ended.

CRITICAL ACCOUNTING POLICIES

There have been no significant changes to the accounting policies that we believe are the most critical to an understanding of our results of operations and financial condition which are disclosed in our most recent Form 10-K for the year ended December 31, 2012.

RECENT ACCOUNTING DEVELOPMENTS

See Part I, Item 1, “Interim Condensed Consolidated Financial Statements — Note 1, Summary of Significant Accounting Policies — Recent Accounting Pronouncements.”

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

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

Liquidity Risk

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

Interest Rate Risk

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

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

If interest rates increase by 1% on our variable-rate advance financing and interest earning account balances, we estimate a net negative impact of approximately $6,759 resulting from an increase of $632 in annual interest income compared to an increase of $7,391 in annual interest expense based on March 31, 2013 balances. The reduced effect on interest expense is due in large part to our hedging activities.


	March 31, 2013
Variable-rate borrowings outstanding	$	1,120,053
Fixed-rate borrowings outstanding		2,000,808
Notional balance of interest rate swaps (1)		1,026,052

(1)	Relates to the interest rate swaps entered into to hedge our exposure to rising interest rates on our variable-rate borrowings with an outstanding balance of $1,120,053 at March 31, 2013.

Our Interim Condensed Consolidated Balance Sheet at March 31, 2013 includes $61,157 of interest-earning cash accounts and $2,014 of interest-earning collateral accounts.

ITEM 4. CONTROLS AND PROCEDURES

Our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of March 31, 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2013 our disclosure controls and procedures (1) were designed and functioning effectively to ensure that material information relating to HLSS, including its consolidated subsidiaries, is made known to our Chief Executive Officer and Chief Financial Officer by others within those entities particularly during the period in which this report was being prepared and (2) were operating effectively in that they provided reasonable assurance that information required to be disclosed by HLSS in the reports that it files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including the Chief Executive Officer or Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

We include a discussion of the principal risks and uncertainties that affect or could affect our business operations within our latest Form 10-K dated February 7, 2013.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibit Index



3.1		Amended and Restated Memorandum and Articles of Association of Home Loan Servicing Solutions, Ltd. Incorporated by reference to the registrant’s registration statement on Form S-1/A filed on February 6, 2012.

10.1		Series 2013-T1 Indenture Supplement, dated January 22, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed January 22, 2013.

10.2		Sale Supplement, dated March 13, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed March 18, 2013.

10.3		Subservicing Supplement, dated March 13, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed March 18, 2013.

11.1		Computation of earnings per share. Incorporated by reference from “PART I – FINANCIAL INFORMATION; ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)” on page 3 herein.

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

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

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

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

101INS		XBRL Instance Document**

101.SCH		XBRL Taxonomy Extension Schema Document**

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document**

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document**

101.LAB		XBRL Taxonomy Extension Label Linkbase Document**

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document**

*	Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K under the Exchange Act.

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are not deemed filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Signatures

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


				HOME LOAN SERVICING SOLUTIONS, LTD.

Date: April 18, 2013				By: /s/ James E. Lauter
				James E. Lauter
				Chief Financial Officer and Chief Accounting Officer (On behalf of the Registrant and as its principal financial officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

Home Loan Servicing Solutions (HLSSF) Inactive 10-Q2013 Q1 Quarterly report

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