Residential Loans at Amortized Cost, Net

Residential loans at amortized cost, net consist of forward loans held for investment. The majority of these residential loans are held in securitization trusts that have been consolidated.

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



	June 30, 2014			December 31, 2013
Residential loans, principal balance	$	1,499,184		$	1,542,056
Unamortized discounts and other cost basis adjustments, net ⁽¹⁾	(126,101		)	(132,865		)
Allowance for loan losses	(11,930		)	(14,320		)
Residential loans at amortized cost, net ⁽²⁾	$	1,361,153		$	1,394,871

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(1)	Included in unamortized discounts and other cost-basis adjustments, net is $12.4 million and $12.8 million of accrued interest receivable at June 30, 2014 and December 31, 2013, respectively.


(2)	Included in residential loans at amortized cost, net is $21.5 million and $17.2 million of unencumbered forward loans at June 30, 2014 and December 31, 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 Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Balance at beginning of the period	$	12,084		$	19,932		$	14,320		$	20,435
Provision for loan losses⁽¹⁾	1,521			95			517			1,821
Charge-offs, net of recoveries ⁽²⁾	(1,675		)	(1,721		)	(2,907		)	(3,950		)
Balance at end of the period	$	11,930		$	18,306		$	11,930		$	18,306

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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 acquisition of real estate in satisfaction of residential loans of $1.0 million and $2.0 million for the three months ended June 30, 2014 and 2013, respectively, and $2.1 million and $4.0 million for the six months ended June 30, 2014 and 2013, 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):



	June 30, 2014		December 31, 2013
Allowance for loan losses
Loans collectively evaluated for impairment	$	10,372	$	13,058
Loans collectively evaluated for impairment and acquired with deteriorated credit quality	1,558		1,262
Total	$	11,930	$	14,320

Recorded investment in residential loans at amortized cost
Loans collectively evaluated for impairment	$	1,347,883	$	1,383,252
Loans collectively evaluated for impairment and acquired with deteriorated credit quality	25,200		25,939
Total	$	1,373,083	$	1,409,191

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

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 existing at the date the residential loan is placed on non-accrual status and 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. In the case of loans with an approved repayment plan, including plans approved by the bankruptcy court, delinquency is based on the modified due date of the loan. Loan balances are charged off when it becomes evident that balances are not collectible.

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
Recorded investment in residential loans at amortized cost
June 30, 2014	$	22,876	$	8,901	$	51,516	$	83,293	$	1,289,790	$	1,373,083	$	51,516
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.