VARIABLE INTEREST ENTITIES

The Company has investments in Freddie Mac securitizations (“FREMF Trusts”) which are structured as pass-through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The FREMF Trusts are VIEs and the Company is considered to be the primary beneficiary as a result of its ability to replace the special servicer without cause through its ownership of the Class C Certificates and its current designation as the directing certificate holder. The FREMF Trusts are included in the “Commercial Trusts” in the tables below.

The Company purchased approximately $94 million of a subordinated tranche in a securitization trust in 2018. As the directing holder, the Company can remove the special servicer with or without cause as well as direct activities that are considered to be most significant to the economic performance of the trust. As such, the Company was determined to be the primary beneficiary and consolidates the trust. The trust is included in “Commercial Trusts” in the tables below.

Upon consolidation, the Company elected the fair value option for the financial assets and liabilities of the Commercial Trusts in order to avoid an accounting mismatch, and to represent more faithfully the economics of its interest in the entities. The fair value option requires that changes in fair value be reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company applied the practical expedient under ASU 2014-07, whereby the Company determines whether the fair value of the financial assets or financial liabilities is more observable as a basis for measuring the less observable financial instruments. The Company has determined that the fair value of the financial liabilities of the Commercial Trusts are more observable, since the prices for these liabilities are primarily available from third-party pricing services utilized for multifamily mortgage-backed securities, while the individual assets of the trusts are inherently less capable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Given that the Company’s methodology for valuing the financial assets of the Commercial Trusts are an aggregate fair value derived from the fair value of the financial liabilities, the Company has determined that the fair value of each of the financial assets in their entirety should be classified in Level 2 of the fair value measurement hierarchy.

The Commercial Trusts mortgage loans had an aggregate unpaid principal balance of $3.5 billion at September 30, 2018. At September 30, 2018, there were no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the underlying loans or securitized debt securities at September 30, 2018 based upon the Company’s process of monitoring events of default on the underlying mortgage loans.

The Company consolidates a securitization trust, which is included in “Residential Trusts” in the tables below, that issued residential mortgage-backed securities that are collateralized by residential mortgage loans that had been transferred to the trust by one of the Company’s subsidiaries. The Company owns most of the mortgage-backed securities issued by this VIE, including the subordinate securities, and a subsidiary of the Company continues to be the master servicer. As such, the Company is deemed to be the primary beneficiary of the residential mortgage trust and consolidates the entity. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has not elected to apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trust are available from third-party pricing services. The contractual principal amount of the residential mortgage trust’s debt held by third parties was $30.4 million at September 30, 2018.

In March 2018, the Company closed OBX 2018-01, with a face value of $327.5 million. In July 2018, the Company closed OBX 2018-EXP1 with a face value of $383.4 million. The OBX 2018-01 Trust and the OBX 2018-EXP1 Trust are referred to collectively as the “OBX Trusts”. These securitizations represent financing transactions which provided non-recourse financing to the Company that is collateralized by residential mortgage loans purchased by the Company. A total of $588.1 million of bonds were issued to third parties and the Company retained $122.5 million of mortgage-backed securities, which are eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trust are available from third-party pricing services. The Company incurred approximately $1.5 million of costs in connection with the OBX 2018-01 securitization and approximately $1.8 million of costs in connection with the OBX 2018-EXP1 securitization that were expensed as incurred during the first quarter ended March 31, 2018 and the third quarter ended September 30, 2018, respectively. The contractual principal amount of the OBX Trusts’ debt held by third parties was $530.1 million at September 30, 2018.

Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation.

In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of September 30, 2018, the borrowing limit on this facility was $400.0 million. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $443.6 million at September 30, 2018. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At September 30, 2018, the subsidiary had an intercompany receivable of $300.0 million, which eliminates upon consolidation and an Other secured financing of $300.0 million to the third party financial institution.

In July 2017, a consolidated subsidiary of the Company entered into a $150.0 million credit facility with a third party financial institution. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has transferred corporate loans to the subsidiary with a carrying amount of $235.6 million at September 30, 2018, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition in Loans. At September 30, 2018, the subsidiary had an Other secured financing of $150.0 million to the third party financial institution.

The Company also owns variable interests in an entity that invests in MSRs and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100% of the voting interests in this entity, in August 2017, the Company sold 100% of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo.

The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $1.6 billion at September 30, 2018. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method.

The statements of financial condition of the Company’s VIEs, excluding the credit facility VIEs and OBX Trusts, that are reflected in the Company’s Consolidated Statements of Financial Condition at September 30, 2018 and December 31, 2017 are as follows:



	September 30, 2018
	Commercial Trusts		Residential Trusts		MSR Silo
Assets	(dollars in thousands)
Cash and cash equivalents	$	—	$	—	$	28,441
Commercial real estate debt	3,521,945		—		—
Residential mortgage loans	—		107,764		97,825
Mortgage servicing rights	—		—		588,833
Interest receivable	13,432		555		—
Other assets	—		—		33,522
Total assets	$	3,535,377	$	108,319	$	748,621
Liabilities
Securitized debt (non-recourse)	$	3,240,043	$	29,698	$	—
Other secured financing	—		—		70,221
Interest payable	6,383		70		—
Other liabilities	—		148		2,160
Total liabilities	$	3,246,426	$	29,916	$	72,381

	December 31, 2017
	Commercial Trusts		Residential Trusts		MSR Silo
Assets	(dollars in thousands)
Cash and cash equivalents	$	—	$	—	$	42,293
Commercial real estate debt	2,826,357		—		—
Residential mortgage loans	—		478,811		19,667
Mortgage servicing rights	—		—		580,860
Interest receivable	10,339		1,599		—
Derivative assets	—		—		1
Other assets	—		1,418		32,354
Total assets	$	2,836,696	$	481,828	$	675,175
Liabilities
Securitized debt (non-recourse)	$	2,620,952	$	350,819	$	—
Other secured financing	—		—		10,496
Interest payable	4,554		931		—
Other liabilities	—		112		4,856
Total liabilities	$	2,625,506	$	351,862	$	15,352

The statements of comprehensive income (loss) of the Company’s VIEs, excluding the credit facility VIEs and OBX Trusts, that are reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017 are as follows:



	Three Months Ended September 30, 2018
	Commercial Trusts			Residential Trusts			MSR Silo
Net interest income:	(dollars in thousands)
Interest income	$	36,387		$	1,723		$	2,678
Interest expense	25,068			773			438
Net interest income	11,319			950			2,240
Net realized gains (losses) on disposal of investments	—			147			(516		)
Net unrealized gains (losses) on instruments measured at fair value through earnings	220			242			(13,364		)
Other income (loss)	(4,217		)	(70		)	26,866
Less: General and administrative expenses	—			21			481
Net income (loss)	$	7,322		1,248			14,745



	Three Months Ended September 30, 2017
	Commercial Trusts			Residential Trusts			MSR Silo
Net interest income:	(dollars in thousands)
Interest income	$	28,841		$	1,145		$	514
Interest expense	15,791			282			121
Net interest income	13,050			863			393
Net realized gains (losses) on disposal of investments	—			(229		)	(1,430		)
Net gains (losses) on trading assets	—			—			(19		)
Net unrealized gains (losses) on instruments measured at fair value through earnings	(2,256		)	(20		)	(36,226		)
Other income (loss)	(6,073		)	(89		)	32,001
Less: General and administrative expenses	(1		)	34			560
Net income (loss)	$	4,722		$	491		$	(5,841	)



	Nine Months Ended September 30, 2018
	Commercial Trusts			Residential Mortgage Loan Trusts			MSR Silo
Net interest income:	(dollars in thousands)
Interest income	$	85,325		$	6,280		$	4,126
Interest expense	54,265			3,621			875
Net interest income	31,060			2,659			3,251
Net realized gains (losses) on disposal of investments	—			2,049			(1,826		)
Net gains (losses) on other derivatives	—			—			70
Net unrealized gains (losses) on instruments measured at fair value through earnings	1,332			(925		)	3,101
Other income (loss)	(12,986		)	(221		)	83,924
Less: General and administrative expenses	—			50			1,408
Net income (loss)	$	19,406		$	3,512		$	87,112



	Nine Months Ended September 30, 2017
	Commercial Trusts			Residential Mortgage Loan Trusts			MSR Silo
Net interest income:	(dollars in thousands)
Interest income	$	81,508		$	3,685		$	1,005
Interest expense	42,046			854			243
Net interest income	39,462			2,831			762
Net realized gains (losses) on disposal of investments	—			(611		)	(1,915		)
Net gains (losses) on trading assets	—			—			(17		)
Net unrealized gains (losses) on instruments measured at fair value through earnings	2,833			1,682			(83,340		)
Other income (loss)	(18,595		)	(280		)	99,927
Less: General and administrative expenses	—			71			2,500
Net income (loss)	$	23,700		$	3,551		$	12,917

The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs, excluding the credit facility VIEs and OBX Trusts, at September 30, 2018 are as follows:



FREMF Trusts					Residential Mortgage Loan Trusts
Property Location	Principal Balance		% of Balance		Property Location	Principal Balance		% of Balance
(dollars in thousands)
Texas	$	478,593	13.7	%	California	$	48,718	44.9	%
Maryland	448,646		12.8	%	Texas	13,981		12.9	%
California	360,279		10.3	%	Illinois	8,297		7.6	%
Virginia	347,002		9.9	%	Washington	7,559		7.0	%
Pennsylvania	281,384		8.1	%	Florida	5,424		5.0	%
New York	280,925		8.0	%	Other ⁽¹⁾	24,501		22.6	%
North Carolina	251,187		7.2	%
Massachusetts	179,440		5.1	%
Other ⁽¹⁾	867,774		24.9	%
Total	$	3,495,230	100.0	%		$	108,480	100.0	%


⁽¹⁾	No individual state greater than 5%.