8. Residential Loans

Residential loans include loans that are both held for investment and held for sale and consist of residential mortgages, including reverse mortgages, manufactured housing loans and retail installment agreements. The majority of residential loans are held in securitization trusts or pools that have either been consolidated or have not met the criteria for sale accounting. Refer to Note 4 for further information regarding VIEs and Note 5 for further information regarding transfers of residential loans.

Residential Loans at Amortized Cost, Net

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


	June 30, 2013		December 31, 2012
Forward loans in Residual Trusts	$	1,427,715	$	1,475,782
Unencumbered forward loans		15,992		14,539

Residential loans at amortized cost, net	$	1,443,707	$	1,490,321

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


	June 30, 2013			December 31, 2012
Residential loans, principal balance	$	1,602,614		$	1,662,183
Unamortized premiums (discounts) and other cost basis adjustments, net ⁽¹⁾		(140,601	)		(151,427	)
Allowance for loan losses		(18,306	)		(20,435	)

Residential loans at amortized cost, net	$	1,443,707		$	1,490,321

(1)	Included in unamortized premiums (discounts) and other cost basis adjustments, net is $13.5 million in accrued interest receivable at June 30, 2013 and December 31, 2012.

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 accounted for at amortized cost as of the balance sheet date. This portfolio is made up of one segment and class that consists primarily of less-than prime, credit challenged residential loans. The risk characteristics of the portfolio segment and class relate to credit exposure. The method for monitoring and assessing credit risk is the same throughout the portfolio.

Residential loans accounted for at amortized cost are homogeneous and are collectively evaluated 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 and trends, default frequency experience, prior loan loss severity experience, and management’s judgment and assumptions regarding various matters, including the composition of the residential loan portfolio, known and inherent risks in the portfolio, the estimated value of the underlying real estate collateral, the level of the allowance in relation to total loans and to historical loss levels, current economic and market conditions within the applicable geographic areas surrounding the underlying real estate, changes in unemployment levels and the impact that changes in interest rates have on a borrower’s ability to refinance their loan and to meet their repayment obligations. Management evaluates these assumptions and various other relevant factors impacting credit quality and inherent losses when quantifying 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.

While there has been some stabilization in residential property values, there has not been significant improvement in property values particularly in more rural areas of the southeastern U.S. market. Additionally, there are continued high unemployment levels and a generally uncertain economic backdrop. As a result, the Company expects the allowance for loan losses to continue to remain elevated until such time as it experiences a sustained improvement in the credit quality of the residential loan portfolio. The future growth of the allowance is highly correlated to unemployment levels and changes in home prices within the Company’s markets.

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.

Loan Modifications

The Company will occasionally modify a loan agreement at the request of the borrower. The Company’s current modification program offered to borrowers is limited and is used to assist borrowers experiencing temporary hardships and is intended to minimize the economic loss to the Company and to avoid foreclosure. Generally, the Company’s modifications are short-term interest rate reductions and/or payment deferrals with forgiveness of principal rarely granted. A modification of a loan constitutes a troubled debt restructuring when a borrower is experiencing financial difficulty and the modification constitutes a concession. Loans modified in a troubled debt restructuring are typically already on non-accrual status and have an allowance recorded. At times, loans modified in a troubled debt restructuring by the Company may have the financial effect of increasing the allowance associated with the loan. The allowance for an impaired loan that has been modified in a troubled debt restructuring is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the collateral, less any selling costs. Troubled debt restructurings have historically been insignificant to the Company and are expected to continue to be insignificant in the future as the Company’s business model continues to shift from being a mortgage portfolio owner to a fee-based business services provider.

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 Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Balance at beginning of period	$	19,932		$	13,784		$	20,435		$	13,824
Provision for loan losses		95			1,957			1,821			3,526
Charge-offs, net of recoveries ⁽¹⁾		(1,721	)		(1,411	)		(3,950	)		(3,020	)

Balance at end of period	$	18,306		$	14,330		$	18,306		$	14,330

(1)	Includes charge-offs recognized upon acquisition of real estate in satisfaction of residential loans of $2.0 million and $1.0 million for the three months ended June 30, 2013 and 2012, respectively, and $4.0 million and $2.2 million for the six months ended June 30, 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 impairment method (in thousands):


	June 30, 2013		December 31, 2012
Allowance for loan losses
Loans collectively evaluated for impairment	$	16,960	$	19,408
Loans collectively evaluated for impairment and acquired with deteriorated credit quality		1,346		1,027

Total	$	18,306	$	20,435

Recorded investment in residential loans at amortized cost
Loans collectively evaluated for impairment	$	1,435,108	$	1,483,389
Loans collectively evaluated for impairment and acquired with deteriorated credit quality		26,905		27,367

Total	$	1,462,013	$	1,510,756

Aging of Past Due Residential Loans

Residential loans at amortized cost are placed on non-accrual status when any portion of the principal or interest is 90 days past due. When placed on non-accrual status, the related interest receivable is reversed against interest income of the current period. Interest income on non-accrual loans, if received, is recorded using the cash basis method of accounting. Residential loans are removed from non-accrual status when there is no longer significant uncertainty regarding collection of the principal and the associated interest. If a non-accrual loan is returned to accruing status, the accrued interest, at the date the residential loan is placed on non-accrual status, and forgone interest during the non-accrual period, are recorded as interest income as of the date the loan no longer meets the non-accrual criteria. The past due or delinquency status of residential loans is generally determined based on the contractual payment terms. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with the bankruptcy court approved mortgage payment obligations. Loan balances are charged off when it becomes evident that balances are not collectible.

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		Current		Total Residential Loans		Non- Accrual Loans
Recorded investment in residential loans at amortized cost
June 30, 2013	$	20,671	$	9,047	$	55,598	$	85,316	$	1,376,697	$	1,462,013	$	55,598
December 31, 2012		23,543		13,215		66,623		103,381		1,407,375		1,510,756		66,623

Credit Risk Profile Based on Delinquencies

Factors that are important to managing overall credit quality and minimizing loan losses are sound loan underwriting, monitoring of existing loans, early identification of problem loans, timely resolution of problems, an appropriate allowance for loan losses, and sound nonaccrual and charge-off policies. The Company primarily utilizes delinquency status to monitor the credit quality of the portfolio. Monitoring of residential loans increases when the loans are delinquent. The Company considers all loans 30 days or more past due to be non-performing. The classification of delinquencies, and thus the non-performing calculation, excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with the bankruptcy court approved mortgage payment obligations.

The following table presents the recorded investment in residential loans accounted for at amortized cost by credit quality indicator (in thousands):


	June 30, 2013		December 31, 2012
Performing	$	1,376,697	$	1,407,375
Non-performing		85,316		103,381

Total	$	1,462,013	$	1,510,756

Residential Loans at Fair Value

Residential loans at fair value are comprised of the following types of loans (in thousands):


	June 30, 2013		December 31, 2012
Reverse loans ⁽¹⁾	$	7,906,635	$	6,047,108
Forward loans in Non-Residual Trusts		613,627		646,498
Forward loans held for sale		1,664,215		16,605

Residential loans at fair value	$	10,184,477	$	6,710,211

(1)	Includes $28.5 million in reverse loans held for sale at December 31, 2012. There were no reverse loans held for sale at June 30, 2013.

Residential Loans Held for Investment

Residential loans held for investment and accounted for at fair value include forward loans that are held in the Non-Residual Trusts and reverse mortgage loans. At acquisition, the fair value of residential loans acquired outside of a business combination is the purchase price of the residential loans, which is determined primarily based on the outstanding principal balance, the probability of future default and the estimated amount of loss from default. Acquisition and origination of residential loans held for investment relate primarily to reverse loans. The Company acquired reverse loans to be held for investment in the amount of $462.2 million and $1.3 billion during the three and six months ended June 30, 2013, respectively, and originated $338.0 million and $608.1 million in reverse loans held for investment during the three and six months ended June 30, 2013, respectively.

Residential Loans Held for Sale

The Company originates, purchases and sells forward loans into the secondary market. The Company typically transfers these loans to Fannie Mae, which are then transferred into securitization trusts. In connection with these transactions, loans are converted into mortgage-backed securities that are sold to third-party investors. The Company accounts for these transfers as sales and typically retains the right to service the loans. Refer to Note 5 for transfer of residential loan activities.

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


	For the Three Months Ended June 30, 2013			For the Six Months Ended June 30, 2013
Balance at beginning of period	$	278,474		$	45,065
Purchases and originations of residential loans held for sale		4,848,332			5,281,349
Proceeds from sales of and payments on residential loans held for sale		(3,522,518	)		(3,749,979	)
Realized gains on sales of residential loans		75,918			84,226
Change in unrealized gains on residential loans held for sale		(15,897	)		(2,271	)
Interest income		8,473			9,261
Transfers from residential loans held for investment		43			5,183
Other		(8,610	)		(8,619	)

Balance at end of period	$	1,664,215		$	1,664,215