Use of Special Purpose Entities (SPE) and Variable Interest Entities (VIE)

The Company uses SPEs to facilitate transactions that involve securitizing financial assets or re-securitizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets on improved terms. Securitization involves transferring assets to an SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business through the SPE’s issuance of debt or equity instruments. Investors in an SPE usually have recourse only to the assets in the SPE and depending on the overall structure of the transaction, may benefit from various forms of credit enhancement, such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.

The Company has entered into into resecuritization and financing transactions which required the Company to analyze and determine whether the SPEs that were created to facilitate the transactions are VIEs in ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. The Company evaluated the following resecuritization and financing transactions: 1) its Residential CDOs completed in 2005; 2) its multi-family CMBS re-securitization transaction completed in May 2012; 3) its collateralized recourse financing transactions completed in November 2013 and 4) its distressed residential mortgage loan securitization transactions completed in December 2012, July 2013 and September 2013 (each a “Financing VIE” and collectively, the “Financing VIEs”) and concluded that the entities created to facilitate each of the transactions are VIEs and that the Company is the primary beneficiary of these VIEs. Accordingly, the Company consolidated the Financing VIEs as of December 31, 2015.

The Company invests in multi-family CMBS consisting of PO securities that represent the first loss tranche of the securitizations from which they were issued, and certain IOs issued from Freddie Mac-sponsored multi-family K-Series securitization trusts. The Company has evaluated these CMBS investments in Freddie Mac-sponsored K-Series securitization trusts to determine whether they are VIEs and if so, whether the Company is the primary beneficiary requiring consolidation. The Company has determined that five and six Freddie Mac-sponsored multi-family K-Series securitization trusts as of December 31, 2015 and December 31, 2014, respectively are VIEs. The Company also determined that it is the primary beneficiary of each VIE within the Consolidated K-Series and, accordingly, has consolidated its assets, liabilities, income and expenses in the accompanying consolidated financial statements (see Notes 2 and 6). One and two of the Company’s multi-family CMBS investments included in the Consolidated K-Series (herein to referred to as "Non-Financed VIEs") are not subject to any financing as of December 31, 2015 and December 31, 2014, respectively.

In analyzing whether the Company is primary beneficiary of the Consolidated K-Series and the Financing VIEs (collectively referred to in this footnote as "Consolidated VIEs"), the Company considered its involvement in each of the VIEs, including the design and purpose of each VIE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of the VIEs. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed:


•	whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and


•	whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.

The following table presents a summary of the assets and liabilities of these Consolidated VIEs. Intercompany balances have been eliminated for purposes of this presentation.

Assets and Liabilities of Consolidated VIEs as of December 31, 2015 (dollar amounts in thousands):



	Financing VIEs								Non-financed VIEs
	Multi-family CMBS re-securitization⁽¹⁾		Collateralized Recourse Financing⁽²⁾		Distressed Residential Mortgage Loan Securitization ⁽³⁾		Residential Mortgage Loan Securitization		Multi- family CMBS⁽⁴⁾		Total
Investment securities available for sale, at fair value held in securitization trusts	$	40,734	$	—	$	—	$	—	$	—	$	40,734
Residential mortgage loans held in securitization trusts (net)	—		—		—		119,921		—		119,921
Distressed residential mortgage loans held in securitization trust (net)	—		—		114,214		—		—		114,214
Multi-family loans held in securitization trusts, at fair value	1,224,036		4,633,061		—		—		1,248,239		7,105,336
Receivables and other assets	4,864		15,281		6,076		1,200		5,456		32,877
Total assets	$	1,269,634	$	4,648,342	$	120,290	$	121,121	$	1,253,695	$	7,413,082
Residential collateralized debt obligations	$	—	$	—	$	—	$	116,710	$	—	$	116,710
Multi-family collateralized debt obligations, at fair value	1,168,470		4,464,340		—		—		1,186,091		6,818,901
Securitized debt	28,019		55,853		33,656		—		—		117,528
Accrued expenses and other liabilities	4,436		14,750		368		13		5,456		25,023
Total liabilities	$	1,200,925	$	4,534,943	$	34,024	$	116,723	$	1,191,547	$	7,078,162

(1)

The Company classified the multi-family CMBS issued by two K-Series securitizations and held by this Financing VIE as available for sale securities as the purpose is not to trade these securities. The Financing VIE consolidated one K-Series securitization that issued certain of the multi-family CMBS owned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization (see Note 6).

(2)

(3)

In December 2015, the Company repaid the Company’s outstanding notes from its distressed residential mortgage loan securitization transaction completed in December 2012 with an original principal amount of $38.7 million and outstanding principal balance at the time of repayment amounting to $5.5 million. With the repayment of the notes, the Company terminated and deconsolidated the Financing VIE that facilitated this financing transaction and the distressed residential loans serving as collateral on the notes were transferred back to the Company.


(4)	In February 2015, the Company sold a first loss tranche PO security issued by one of the Consolidated K-Series securitizations obtaining total proceeds of approximately $44.3 million and realizing a gain of approximately $1.5 million. The sale resulted in a de-consolidation of $1.1 billion in Multi-Family loans held in a securitization trust and $1.0 billion in Multi-Family CDOs.

Assets and Liabilities of Consolidated VIEs as of December 31, 2014 (dollar amounts in thousands):



	Financing VIEs								Non-financed VIEs
	Multi-family CMBS re-securitization⁽¹⁾		Collateralized Recourse Financings⁽²⁾		Distressed Residential Mortgage Loan Securitizations		Residential Mortgage Loan Securitizations		Multi- family CMBS⁽³⁾		Total
Investment securities available for sale, at fair value held in securitization trusts	$	38,594	$	—	$	—	$	—	$	—	$	38,594
Residential mortgage loans held in securitization trusts (net)	—		—		—		149,614		—		149,614
Distressed residential mortgage loans held in securitization trusts (net)	—		—		221,591		—		—		221,591
Multi-family loans held in securitization trusts, at fair value	1,273,633		4,720,908		—		—		2,370,973		8,365,514
Receivables and other assets	5,097		15,631		39,084		1,545		10,408		71,765
Total assets	$	1,317,324	$	4,736,539	$	260,675	$	151,159	$	2,381,381	$	8,847,078
Residential collateralized debt obligations	$	—	$	—	$	—	$	145,542	$	—	$	145,542
Multi-family collateralized debt obligations, at fair value	1,221,555		4,558,065		—		—		2,268,433		8,048,053
Securitized debt	27,660		55,853		149,364		—		—		232,877
Accrued expenses and other liabilities	4,581		14,639		1,024		14		10,304		30,562
Total liabilities	$	1,253,796	$	4,628,557	$	150,388	$	145,556	$	2,278,737	$	8,457,034

(1)

The Company classified the multi-family CMBS issued by two K-Series securitizations and held by the Financing VIE as available for sale securities as the purpose is not to trade these securities. The Financing VIE consolidated one K-Series securitization that issued certain of the multi-family CMBS owned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization (see Note 6).

(2)

The multi-family CMBS serving as collateral under the November 2013 collateralized recourse financing are comprised of securities issued from three separate Freddie Mac-sponsored multifamily K-Series securitizations. The Financing VIE consolidated these K-Series securitizations, including their assets, liabilities and expenses, in its financial statements as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in such K-Series securitizations (see Note 6). In September 2014, the Company repaid the Company’s outstanding notes from its collateralized recourse financing transaction completed in November 2012 with a principal amount of $52.0 million. With the repayment of the notes, the Company terminated and deconsolidated the Financing VIE that facilitated this financing transaction and the multi-family CMBS serving as collateral on the notes were transferred back to the Company.


(3)	Two of the Company's Freddie Mac-sponsored multi-family K-Series securitizations included in the Consolidated K-Series are not subject to any Financing VIE as of December 31, 2014.

The following table summarizes the Company’s securitized debt collateralized by multi-family CMBS or distressed residential mortgage loans (dollar amounts in thousands):



	Multi-family CMBS Re-securitization⁽¹⁾		Collateralized Recourse Financings⁽²⁾		Distressed Residential Mortgage Loan Securitizations⁽³⁾
Original Face amount of Notes issued by the VIE and purchased by 3rd party investors	$	35,000	$	55,853	$	176,970
Principal Amount at December 31, 2015	$	33,781	$	55,853	$	33,656
Principal Amount at December 31, 2014	$	34,208	$	55,853	$	149,364
Carrying Value at December 31, 2015⁽⁴⁾	$	28,019	$	55,853	$	33,656
Carrying Value at December 31, 2014⁽⁴⁾	$	27,660	$	55,853	$	149,364
Pass-through rate of Notes issued	5.35%		One-month LIBOR plus 5.25%		4.25 - 4.85%

(1)

The Company engaged in the re-securitization transaction primarily for the purpose of obtaining non-recourse financing on a portion of its multi-family CMBS portfolio. As a result of engaging in this transaction, the Company remains economically exposed to the first loss position on the underlying multi-family CMBS transferred to the Consolidated VIE. The holders of the Note have no recourse to the general credit of the Company, but the Company does have the obligation, under certain circumstances, to repurchase assets upon the breach of certain representations and warranties. The Company will receive all remaining cash flow, if any, through its retained ownership.


(2)	The Company entered into a CMBS Master Repurchase Agreements with a three-year term for the purpose of financing a portion of its multi-family CMBS portfolio. In connection with the transaction, the Company agreed to guarantee the due and punctual payment of its wholly-owned subsidiary's obligations under the CMBS Master Repurchase Agreement.

(3)

The Company engaged in these transactions for the purpose of financing distressed residential mortgage loans acquired by the Company. The distressed residential mortgage loans serving as collateral for the financings are comprised of performing, re-performing and to a lesser extent non-performing, fixed and adjustable-rate, fully-amortizing, interest only and balloon, seasoned mortgage loans secured by first liens on one to four family properties. Two of the four securitization transactions provide for a revolving period of one to two years from the date of the respective financing (“Revolving Period”) where no principal payments will be made on the note. All cash proceeds generated by the distressed residential mortgage loans and received by the respective securitization trust during the Revolving Period, after payment of interest on the note, reserve amounts and certain other transaction expenses, will be available for the purchase by the trust of additional mortgage loans that satisfy certain eligibility criteria. In December 2015, the Company repaid the Company’s outstanding notes from its distressed residential mortgage loan securitization transaction completed in December 2012 with an original principal amount of $38.7 million and outstanding principal balance at the time of repayment amounting to $5.5 million.. With the repayment of the notes, the Company terminated and deconsolidated the Financing VIE that facilitated this financing transaction and the distressed residential loans serving as collateral on the notes were transferred back to the Company.


(4)	Classified as securitized debt in the liability section of the Company’s accompanying consolidated balance sheets.

The following table presents contractual maturity information about the Financing VIEs’ securitized debt as of December 31, 2015 and December 31, 2014, respectively (dollar amounts in thousands):



Scheduled Maturity (principal amount)	December 31, 2015			December 31, 2014
Within 24 months	$	89,509		$	205,217
Over 36 months	33,781			34,208
Total	123,290			239,425
Discount	(5,762		)	(6,548		)
Carrying value	$	117,528		$	232,877

There is no guarantee that the Company will receive any cash flows from these securitization trusts.

Residential Mortgage Loan Securitization Transaction

The Company has completed four residential mortgage loan securitizations (other than the distressed residential mortgage loan securitizations discussed above) since inception; the first three were accounted for as permanent financings and have been included in the Company’s accompanying consolidated financial statements. The fourth was accounted for as a sale and accordingly, is not included in the Company's accompanying consolidated financial statements.

Unconsolidated VIEs

The Company has evaluated its multi-family CMBS investments in two Freddie Mac-sponsored K-Series securitizations as of December 31, 2015 and 2014, respectively, and its mezzanine loan, preferred equity and other equity investments to determine whether they are VIEs and should be consolidated by the Company. Based on a number of factors, the Company determined that it does not have a controlling financial interest and is not the primary beneficiary of these VIEs. The following table presents the classification and carrying value of unconsolidated VIEs as of December 31, 2015 and 2014 (dollar amounts in thousands):



	December 31, 2015						December 31, 2014
	Investment securities available for sale, at fair value, held in securitization trusts		Receivables and other Assets		Total		Investment securities available for sale, at fair value, held in securitization trusts		Receivables and other Assets		Total
Multi-Family CMBS	$	40,734	$	76	$	40,810	$	38,594	$	80	$	38,674
Mezzanine loan, preferred equity and investments in unconsolidated entities	—		129,887		129,887		—		72,799		72,799
Total assets	$	40,734	$	129,963	$	170,697	$	38,594	$	72,879	$	111,473

Our maximum loss exposure on the multi-family CMBS investments and mezzanine loan and equity investments is approximately $170.7 million and $111.5 million at December 31, 2015 and December 31, 2014, respectively. The Company’s maximum exposure does not exceed the carrying value of its investments.