XML 90 R15.htm IDEA: XBRL DOCUMENT

Note 7 - Use of Special Purpose Entities and Variable Interest Entities

9 Months Ended

Sep. 30, 2014

Use Of Special Purpose Entities And Variable Interest Entities [Abstract]

Use Of Special Purpose Entities And Variable Interest Entities [Text Block]

7. Use of Special Purpose Entities and Variable Interest Entities

A Special Purpose Entity (“SPE”) is an entity designed to fulfill a specific limited need of the company that organized it. SPEs are often used 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 evaluated its CMBS investments in Freddie Mac-sponsored K-Series securitizations to determine whether they are VIEs. In addition, the Company also evaluated its financings transactions, such as its Residential CDOs completed in 2005, its multi-family CMBS re-securitization transaction completed in May 2012, its collateralized recourse financing transactions completed in November 2012 and November 2013 and 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.

The Company then completed an analysis of whether the VIEs should be consolidated by the Company, based on consideration of its involvement in each of the VIEs, including the design and purpose of the SPE, 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 Company has determined that it has a variable interest in the Consolidated K-Series for which it is the primary beneficiary and has a controlling financial interest and, accordingly, has consolidated their assets, liabilities, income and expenses in the accompanying consolidated financial statements (see Notes 2 and 6).

Also, based on its evaluation of the factors discussed above, including its involvement in the purpose and design of the entity, the Company determined that the Financing VIEs, except for the collateralized recourse financing transaction completed in November 2012, met the criteria for consolidation and, accordingly, consolidated the Financing VIEs created to facilitate these transactions as of September 30, 2014.

In September 2014, the Company, through a wholly-owned subsidiary, repurchased $52 million of outstanding notes issued in connection with the Company’s November 2012 collateralized recourse financing transaction. The repurchase of the notes resulted in the simultaneous (i) termination of the CMBS Master Repurchase Agreement entered into by affiliates of the Company in connection with the November 2012 collateralized recourse financing transaction (and the related repayment of outstanding borrowings thereunder) and (ii) transfer back to the Company of the multi-family CMBS serving as collateral for the $52 million of borrowings. The CMBS Master Repurchase Agreement was scheduled to mature in November 2015. In connection with the early termination of the CMBS Master Repurchase Agreement, the Company recognized a loss on extinguishment of debt of $3.4 million, which included unamortized debt issue costs of $0.4 million from the transaction. The repayment of the notes and the termination of the CMBS Master Repurchase Agreement deconsolidated the Financing VIE that facilitated the transaction as of September 30, 2014.

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

Assets and Liabilities of Consolidated VIEs as of September 30, 2014 (dollar amounts in thousands):

	Financing VIEs								Non-financing VIEs
	Multi-family CMBS re-securitization⁽¹⁾		Collateralized Recourse Financing⁽²⁾		Distressed Residential Mortgage Loan Securitization		Residential Mortgage Loan Securitization		Multi-family CMBS⁽³⁾		Total

Investment securities available for sale, at fair value held in securitization trusts	$	38,379	$	—	$	—	$	—	$	—	$	38,379
Residential mortgage loans held in securitization trusts (net)		—		—		—		152,902		—		152,902
Distressed residential mortgage loans held in securitization trust (net)		—		—		247,175		—		—		247,175
Multi-family loans held in securitization trusts, at fair value		1,265,620		4,654,533		—		—		2,383,016		8,303,169
Receivables and other assets		4,988		15,331		13,497		1,184		10,216		45,216
Total assets	$	1,308,987	$	4,669,864	$	260,672	$	154,086	$	2,393,232	$	8,786,841

Residential collateralized debt obligations	$	—	$	—	$	—	$	148,298	$	—	$	148,298
Multi-family collateralized debt obligations, at fair value		1,214,324		4,502,772		—		—		2,287,917		8,005,013
Securitized debt		27,548		55,853		154,012		—		—		237,413
Accrued expenses and other liabilities		4,450		14,286		146		13		10,118		29,013
Total liabilities	$	1,246,322	$	4,572,911	$	154,158	$	148,311	$	2,298,035	$	8,419,737

⁽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⁾

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 multi-family K-Series securitizations. The Financing VIE consolidated these K-Series securitizations, including their 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 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 the 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 is not subject to any financing as of September 30, 2014.

Assets and Liabilities of consolidated Financing VIEs as of December 31, 2013 (dollar amounts in thousands):

	Financing VIEs
	Multi-family CMBS re-securitization⁽¹⁾		Collateralized Recourse Financings⁽²⁾		Distressed Residential Mortgage Loan Securitizations		Residential Mortgage Loan Securitizations		Total
Investment securities available for sale, at fair value held in securitization trusts	$	29,289	$	63,289	$	—	$	—	$	92,578
Residential mortgage loans held in securitization trusts (net)		—		—		—		163,237		163,237
Distressed residential mortgage loans held in securitization trusts (net)		—		—		254,721		—		254,721
Multi-family loans held in securitization trusts, at fair value		1,234,084		6,876,938		—		—		8,111,022
Receivables and other assets		5,241		27,198		10,072		1,760		44,271
Total assets	$	1,268,614	$	6,967,425	$	264,793	$	164,997	$	8,665,829

Residential collateralized debt obligations	$	—	$	—	$	—	$	158,410	$	158,410
Multi-family collateralized debt obligations, at fair value		1,195,637		6,675,383		—		—		7,871,020
Securitized debt		27,240		107,853		169,871		—		304,964
Accrued expenses and other liabilities		4,640		25,315		981		15		30,951
Total liabilities	$	1,227,517	$	6,808,551	$	170,852	$	158,425	$	8,365,345

⁽¹⁾

⁽²⁾

The multi-family CMBS serving as collateral under the collateralized recourse financings are comprised of securities issued from seven separate Freddie Mac-sponsored multi-family K-Series securitizations. The Financing VIE classified the multi-family CMBS issued by the 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 five of the K-Series securitizations, including their 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 such K-Series securitizations (see Note 6).

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

	Multi-family CMBS Re-securitization ⁽¹⁾			Collateralized Recourse Financing ⁽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 September 30, 2014	$	34,283		$	55,853	$	154,012
Principal Amount at December 31, 2013	$	34,508		$	107,853	$	169,871
Carrying Value at September 30, 2014 ⁽⁴⁾	$	27,548		$	55,853	$	154,012
Carrying Value at December 31, 2013 ⁽⁴⁾	$	27,240		$	107,853	$	169,871
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 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 these transactions, the Company agreed to guarantee the due and punctual payment of its wholly-owned subsidiary's obligations under the CMBS Master Repurchase Agreements. 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. In connection with the repayment of the notes, the Company terminated and deconsolidated the Financing VIE that facilitated the financing transaction and the multi-family CMBS serving as collateral on the notes were transferred back to the Company.

⁽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.

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

The following table presents contractual maturity information about the Financing VIEs’ securitized debt as of September 30, 2014 and December 31, 2013, respectively:

Scheduled Maturity (principal amount)	September 30, 2014			December 31, 2013
(Dollar amount in thousands)
Within 24 months	$	154,012		$	90,700
Over 24 months to 36 months		55,853			187,024
Over 36 months		34,283			34,507
Total		244,148			312,231
Discount		(6,735	)		(7,267	)
Carrying value	$	237,413		$	304,964

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 condensed consolidated financial statements.

Unconsolidated VIEs

The Company has evaluated its multi-family CMBS investments in three and four Freddie Mac-sponsored K-Series securitizations as of September 30, 2014 and December 31, 2013, 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 September 30, 2014 and December 31, 2013 (dollar amounts in thousands):

	September 30, 2014						December 31, 2013
	Investment securities available for sale, at fair value ⁽¹⁾		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	$	84,332	$	161	$	84,493	$	92,578	$	183	$	92,761
Mezzanine loan and equity investments		—		35,763		35,763		—		28,058		28,058
Total assets	$	84,332	$	35,924	$	120,256	$	92,578	$	28,241	$	120,819

⁽¹⁾	Multi-Family CMBS amounting to $38.4 million are held in a securitization trust and are included in investment securities available for sale, held in securitization trust in the accompanying condensed consolidated balance sheets at September 30, 2014.

Our maximum loss exposure on the multi-family CMBS investments, mezzanine loan and equity investments is approximately $120.3 million and $120.8 million at September 30, 2014 and December 31, 2013, respectively. The Company’s maximum exposure does not exceed the carrying value of its investments.