Residential Loans at Amortized Cost, Net

Residential loans at amortized cost, net, consist of mortgage loans held for investment. The majority of these residential loans are held in securitization trusts that have been consolidated. Refer to Note 4 for further information regarding VIEs.

Residential loans at amortized cost, net, are comprised of the following components (in thousands):



	December 31,
	2014			2013
Residential loans, principal balance	$	1,442,838		$	1,542,056
Unamortized discounts and other cost basis adjustments, net ⁽¹⁾	(118,266		)	(132,865		)
Allowance for loan losses	(10,033		)	(14,320		)
Residential loans at amortized cost, net ⁽²⁾	$	1,314,539		$	1,394,871

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(1)	Included in unamortized discounts and other cost-basis adjustments, net, is $12.0 million and $12.8 million of accrued interest receivable at December 31, 2014 and 2013, respectively.


(2)	Included in residential loans at amortized cost, net, is $21.8 million and $17.2 million of unencumbered mortgage loans at December 31, 2014 and 2013, respectively.

Disclosures about the Credit Quality of Residential Loans at Amortized Cost and the Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable incurred credit losses inherent in the residential loan portfolio carried 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.

Residential loans carried at amortized cost are homogeneous and evaluated collectively for impairment. The determination of the level of the allowance for loan losses and, correspondingly, the provision for loan losses is based on, but not limited to, delinquency levels, 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 its loan and to meet its repayment obligations. Management evaluates these assumptions and various other relevant factors impacting credit quality and inherent losses when quantifying the Company’s 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 season, the credit exposure is reduced, resulting in decreasing provisions.

The allowance for loan losses is highly correlated to unemployment levels, delinquency status of the portfolio, and changes in home prices within the Company’s geographic markets. There has been a steady improvement in market conditions including an increase in median home selling prices and lower levels of housing inventory. Additionally, the unemployment rate has continued to stabilize since reaching a peak in October 2009. With continued stabilization in economic trends and portfolio performance, the Company expects continued improvement in the credit quality of the residential loan portfolio.

While the Company considers 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.

The following table summarizes the activity in the allowance for loan losses on residential loans at amortized cost, net (in thousands):



	For the Years Ended December 31,
	2014			2013			2012
Balance at beginning of the year	$	14,320		$	20,435		$	13,824
Provision for loan losses⁽¹⁾	1,491			1,229			13,352
Charge-offs, net of recoveries ⁽²⁾	(5,778		)	(7,344		)	(6,741		)
Balance at end of the year	$	10,033		$	14,320		$	20,435

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(1)	Provision for loan losses is included in other expense, net, on the consolidated statements of comprehensive income (loss).


(2)	Includes charge-offs recognized upon foreclosure of real estate in satisfaction of residential loans of $4.3 million, $7.2 million and $5.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The following table summarizes the ending balance of the allowance for loan losses and the recorded investment in residential loans at amortized cost by basis of accounting (in thousands):



	December 31,
	2014		2013
Allowance for loan losses
Loans collectively evaluated for impairment	$	8,437	$	13,058
Loans collectively evaluated for impairment and acquired with deteriorated credit quality	1,596		1,262
Total	$	10,033	$	14,320

Recorded investment in residential loans at amortized cost
Loans collectively evaluated for impairment	$	1,299,514	$	1,383,252
Loans collectively evaluated for impairment and acquired with deteriorated credit quality	25,058		25,939
Total	$	1,324,572	$	1,409,191

Aging of Past Due Residential Loans and Credit Risk Profile Based on Delinquencies

Factors that are important to managing overall credit quality and minimizing loan losses include sound loan underwriting, monitoring of existing loans, early identification of problem loans, timely resolution of problems, an appropriate allowance for loan losses, and sound non-accrual and charge-off policies. The Company primarily utilizes delinquency status to monitor the credit quality of the portfolio. The Company considers all loans 30 days or more past due to be non-performing and all loans that are current to be performing with regard to its credit quality profile.

The following table presents the aging of the residential loan portfolio accounted for at amortized cost, net (in thousands):



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due ⁽¹⁾		Current ⁽²⁾		Total Residential Loans		Non- Accrual Loans
December 31, 2014	$	24,096	$	8,884	$	55,663	$	88,643	$	1,235,929	$	1,324,572	$	55,663
December 31, 2013	18,798		7,186		54,836		80,820		1,328,371		1,409,191		54,836

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(1)	Balances represent non-performing loans for the credit quality profile.


(2)	Balances represent performing loans for the credit quality profile.

Concentrations of Credit Risk

Concentrations of credit risk associated with the residential loan portfolio carried at amortized cost are limited due to the large number of customers and their dispersion across many geographic areas. The table below provides the percentage of residential loans carried at amortized cost on the Company’s consolidated balance sheets at December 31, 2014 and 2013 by the state in which the home securing the loan is located and is based on their unpaid principal balances. Other consists of loans in states in which concentration individually represents less than 5% of total unpaid principal balance.



Texas	35	%
Mississippi	15	%
Alabama	8	%
Florida	7	%
Louisiana	6	%
South Carolina	6	%
Georgia	5	%
Other	18	%
Total	100	%