Residential Loans at Fair Value

Residential Loans Held for Investment

Residential loans held for investment and carried at fair value include reverse loans, mortgage loans related to Non-Residual Trusts and charged-off loans.

Credit Risk

Concentrations of credit risk associated with the residential loan portfolio carried at fair value and held for investment are limited due to the large number of customers and their dispersion across many geographic areas. At December 31, 2016, the concentrations of homes securing reverse loans and mortgage loans related to Non-Residual Trusts (represented by 5% or more of unpaid principal balance) were located in California, Florida, Texas, and New York.

HECMs are insured by the FHA. Although performing and nonperforming reverse loans are covered by FHA insurance, the Company may incur expenses and losses in the process of foreclosing on and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines, such as a portion of foreclosure related legal fees and closing costs incurred on the sale of REO.

The Company does not currently own residual interests in or provide credit support to the Non-Residual Trusts. However, the Company has assumed mandatory call obligations related to the Non-Residual Trusts and will be subject to a certain amount of credit risk associated with the purchased mortgage loans when the calls are exercised. This credit risk is considered in the fair value of the related mortgage loans. Refer to Note 31 for additional information.

The charged-off loan portfolio was acquired for a substantial discount to face value and as a result, exposes the Company to minimal credit risk.

Residential Loans Held for Sale

The Company sells substantially all of its originated or purchased mortgage loans into the secondary market for securitization or to private investors as whole loans. The Company typically retains the right to service these loans. Refer to Note 6 for additional information regarding these sales of residential loans that are held for sale.

A reconciliation of the changes in residential loans held for sale to the amounts presented on the consolidated statements of cash flows is presented in the following table (in thousands):



	For the Years Ended December 31,
	2016			2015			2014
Balance at beginning of the year	$	1,334,300		$	1,124,615		$	1,015,607
Purchases and originations of loans held for sale	21,054,053			25,942,841			18,878,305
Proceeds from sales of and payments on loans held for sale ⁽¹⁾	(21,467,419		)	(25,963,200		)	(19,177,179		)
Realized gains on sales of loans ⁽²⁾	233,447			171,128			367,314
Change in unrealized gains on loans held for sale ⁽²⁾	(14,803		)	(7,345		)	1,412
Interest income ⁽²⁾	41,824			52,227			40,051
Transfers from loans held for investment	—			16,690			—
Other	(5,122		)	(2,656		)	(895		)
Balance at end of the year	$	1,176,280		$	1,334,300		$	1,124,615

__________


(1)	Excludes realized gains and losses on freestanding derivatives.


(2)	Amount is a component of net gains on sales of loans on the consolidated statements of comprehensive loss. Refer to Note 7 for additional information related to the components of net gains on sales of loans.

Credit Risk

The Company is subject to credit risk associated with mortgage loans that it purchases and originates during the period of time prior to the sale of these loans. The Company considers credit risk associated with these loans to be insignificant as it holds the loans for a short period of time, which is, on average, approximately 20 days from the date of borrowing, and the market for these loans continues to be highly liquid. The Company is also subject to credit risk associated with mortgage loans it has repurchased as a result of breaches of representations and warranties during the period of time between repurchase and resale. At December 31, 2016, the Company held $4.4 million in repurchased loans.