NOTE 3 — MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES

Lien Priority

Except in limited circumstances, our mortgage loans are collateralized by first deeds of trust (mortgages) on real property and generally include a personal guarantee by the principals of the borrower and, often times, the loans are secured by additional collateral. As of December 31, 2013, there were no third-party loans that were superior to our lien position on our existing loan portfolio. As of December 31, 2012, there was an outstanding third-party loan totaling $17.7 million and a capital lease obligation of approximately $3.1 million secured by a portion of our collateral that was superior to our lien position on one of our loans with an outstanding principal and accrued interest balance of $51.9 million. During the year ended December 31, 2013, we took title to the underlying assets through a deed-in-lieu of foreclosure and assumed the related third-party loan and capital lease obligation, which totaled approximately $24.7 million and $1.3 million, respectively, as of the date of acquisition.

Lending Activities

Given the non-performing status of the majority of the loan portfolio and the suspension of significant lending activities, there has been limited loan activity during the years ended December 31, 2013 and 2012. Except for the origination of one loan totaling $1.1 million relating to the financing of a portion of the sale of certain REO assets during 2013, no new loans were originated during the year ended December 31, 2013. Similarly, we originated only two loans during 2012 totaling $5.5 million relating to the partial financing of the sale of certain REO assets.

A roll-forward of loan activity for the years ended December 31, 2013 and 2012 follows (in thousands):



	Principal Outstanding			Interest Receivable			Valuation Allowance			Carrying Value
Balances at December 31, 2011	$	245,190		$	4,683		$	(141,687	)	$	108,186
Additions:
Principal fundings - cash	1,483			—			—			1,483
Principal fundings - asset sale financing	5,450			—			—			5,450
Revenue Recognized in excess of cash received	—			232			—			232
Reductions:
Principal repayments	(12,545		)	(840		)	983			(12,402		)
Recovery of allowance for credit losses	—			—			275			275
Valuation adjustment	—			—			(23		)	(23		)
Foreclosures/transfers to Real Estate Owned	(115,319		)	(3,226		)	88,630			(29,915		)
Write-off of uncollectible mortgage loans	(211		)	—			222			11
Balances at December 31, 2012	124,048			849			(51,600		)	73,297
Additions:
Principal fundings - cash	738			—			—			738
Principal fundings - asset sale financing	1,085			—			—			1,085
Revenue Recognized in excess of cash received	—			734			—			734
Reductions:
Principal repayments	(8,617		)	(1,056		)	—			(9,673		)
Recovery of allowance for credit losses	—			—			6,700			6,700
Valuation adjustment	—			—			(215		)	(215		)
Foreclosures/transfers to Real Estate Owned	(87,032		)	—			26,907			(60,125		)
Balances at December 31, 2013	$	30,222		$	527		$	(18,208	)	$	12,541

The valuation allowance transferred to real estate owned is treated as a charge-off at the time of foreclosure. Loan charge offs generally occur under one of two scenarios, including 1) the foreclosure of a loan and transfer of the related collateral to REO status, or 2) we elect to accept a loan payoff or loan sale at less than the contractual amount due. The amount of the loan charge off is equal to the difference between the contractual amounts due under the loan and either 1) the fair value of the collateral acquired through foreclosure, net of selling costs, or 2) the proceeds received from the loan payoff or loan sale. Generally, the loan charge off amount is equal to the loan’s valuation allowance at the time of foreclosure, loan payoff or sale. Under either scenario, the loan charge off is generally recorded through the valuation allowance.

As of December 31, 2013, we had seven loans outstanding with an the average principal and interest balance of $4.4 million, as compared to $13.9 million for our 9 loans at December 31, 2012. However, as of December 31, 2013, we had only two performing loans with an average outstanding principal and interest balance of $2.9 million and a weighted average interest rate of 12.5%. At December 31, 2012, we had only two performing loans with an average outstanding principal and interest balance of $2.7 million and a weighted average interest rate of 12.7%. As of December 31, 2013 and 2012, the valuation allowance represented 59.2% and 41.3%, respectively, of the total outstanding loan principal and interest balances.

Geographic Diversification

Our mortgage loans consist of loans where the primary collateral is located in various states. As of December 31, 2013 and 2012, the geographical concentration of our loan balances by state were as follows (amounts in thousands, except percentages and unit data):



	December 31, 2013										December 31, 2012
	Outstanding Principal and Interest		Valuation Allowance			Net Carrying Amount		Percent		#	Outstanding Principal and Interest		Valuation Allowance			Net Carrying Amount		Percent		#
Arizona	$	1,106	$	(1,077	)	$	29	0.2	%	1	$	94,699	$	(34,490	)	$	60,209	82.2	%	3
California	23,273		(17,131		)	6,142		49.0	%	5	23,082		(17,110		)	5,972		8.1	%	5
Utah	6,370		—			6,370		50.8	%	1	7,116		—			7,116		9.7	%	1
Total	$	30,749	$	(18,208	)	$	12,541	100.0	%	7	$	124,897	$	(51,600	)	$	73,297	100.0	%	9

Historically, our legacy loan portfolio was heavily concentrated in Arizona and California, markets in which values were severely impacted by the decline in the real estate market. Due to the decline in the number of outstanding loans, the concentration of our loan portfolio in Arizona and California totaled 49.2% and 90.3% at December 31, 2013 and 2012, respectively. Since we ceased funding new loans in the fourth quarter of 2008, and as a result of other factors, our ability to diversify our portfolio has been significantly impaired.

Interest Rate Information

Our loan portfolio includes loans that carry variable and fixed interest rates. All variable interest rate loans are indexed to the Prime rate with interest rate floors. At December 31, 2013 and 2012, the Prime rate was 3.25% per annum. Since the majority of our loans are in non-accrual status, the extent of mortgage income recognized on the loans in the preceding tables is limited to only those loans that are performing.

At December 31, 2013, we had seven loans with principal and interest balances totaling $30.7 million and interest rates ranging from 12.0% to 12.5%. Of this total, five loans with principal and interest balances totaling $25.0 million and a weighted average interest rate of 12.0% were non-performing loans, while two loans with principal and interest balances totaling $5.7 million and a weighted average interest rate of 12.5% were performing loans.

At December 31, 2012, we had 9 loans with principal and interest balances totaling $124.9 million and interest rates ranging from 7.5% to 14.0%. Of this total, 7 loans with principal and interest balances totaling $119.4 million and a weighted average interest rate of 8.8% were non-performing loans, while two loans with principal and interest balances totaling $5.5 million and a weighted average interest rate of 12.7% were performing loans.

Changes in the Portfolio Profile — Scheduled Maturities

The outstanding principal and interest balance of mortgage investments, net of the valuation allowance, as of December 31, 2013 and 2012, have scheduled maturity dates within the next several quarters as follows:



December 31, 2013							December 31, 2012
(in thousands, except percentage and unit data)
Quarter	Outstanding Balance			Percent		#	Quarter	Outstanding Balance			Percent		#
Matured	$	25,037		81.4	%	5	Matured	$	119,416		95.6	%	7
Q1 2014	1,164			3.8	%	1	Q1 2013	540			0.4	%	1
Q3 2014	4,548			14.8	%	1	Q3 2013	4,941			4.0	%	1
Total Principal and Interest	30,749			100.0	%	7		124,897			100.0	%	9
Less: Valuation Allowance	(18,208		)					(51,600		)
Net Carrying Value	$	12,541						$	73,297

From time to time, we may extend a mortgage loan’s maturity date in the normal course of business. In this regard, we have modified certain loans, extending maturity dates in some cases to two or more years, and we expect we will modify additional loans in the future in an effort to seek to preserve our collateral. Accordingly, repayment dates of the loans may vary from their currently scheduled maturity date. If the maturity date of a loan is not extended, we classify and report the loan as matured.

Loan Modifications

Although we have in the past modified certain loans in our portfolio by extending the maturity dates or changing the interest rates thereof on a case by case basis, we do not have in place at this time a specific loan modification program or initiative. Rather, as in the past, we may modify any loan, in our sole discretion, based on the applicable facts and circumstances. In the future, we expect to modify loans on the same basis as above without any reliance on any specific loan modification program or initiative.

In the absence of available take-out financing, under current accounting guidance, any loan that has reached maturity and has been modified or extended, regardless of the stage of development of the underlying collateral, is considered to be the result of the debtor having financial difficulties. Additionally, extending the loan without a meaningful increase in the interest rate is considered to be below market and, therefore, is deemed to be a “concession” to the debtor.

With both conditions met, we generally classify loan modifications or extensions made as troubled debt restructurings (“TDR”) for financial reporting purposes. Due to the application of fair value guidance to our loans, generally all loans’ carrying values reflect any impairment that would otherwise be recognized under TDR accounting treatment.

The following tables present various summaries of our loan modifications made on a quarterly basis during the years ended December 31, 2013 and 2012 (dollars in thousands):



		Outstanding Principal and Interest				Outstanding Funding Commitment				Average Interest Rate				Average Loan Term (Months)		Weighted Avg Interest Rate
Period of Modification	# of Loans	Pre- Modification		Post- Modification		Pre- Modification		Post- Modification		Pre- Modification		Post- Modification		Pre- Modification	Post- Modification	Pre- Modification		Post- Modification
Q1 2012	1	$	719	$	719	$	—	$	—	11.00	%	14.00	%	30	42	11.00	%	14.00	%
Q3 2013	1	4,500		4,500		—		—		12.50	%	12.50	%	24	36	12.50	%	12.50	%
Totals	2	$	5,219	$	5,219	$	—	$	—



				Loan Status		Loan Category
Period	Principal and Interest Outstanding		# of Loans	# Performing	# Non- Performing	Pre-entitled Land	Entitled Land	Construction & Existing Structures
Q1 2012	$	719	1	1	—	—	1	—
Q3 2013	4,500		1	1	—	1	—	—
Total loans	$	5,219	2	2	—	1	1	—



Period	Principal and Interest Outstanding		Number of Loans	Interest Rate Changes	Interest Reserves Added	Additional Collateral Taken	Borrower Prefunded Interest
Q1 2012	$	719	1	1	—	—	—
Q3 2013	4,500		1	—	—	—	—
Total loans	$	5,219	2	1	—	—	—



	December 31, 2013					December 31, 2012
	Amount (in thousands)		%		#	Amount (in thousands)		%		#
Loans Not Modified and Currently Matured	$	25,037	81.4	%	5	$	119,416	95.6	%	7
Loans Modified to Extend Maturity	4,548		14.8	%	1	540		0.4	%	1
Original Maturity Date Not Reached	1,164		3.8	%	1	4,941		4.0	%	1
Total Loan Principal and Accrued Interest	$	30,749	100	%	7	$	124,897	100	%	9

Summary of Existing Loans in Default

During 2013 and 2012, we continued to experience loan defaults as a result of depressed real estate market conditions and lack of takeout financing in the marketplace. Loans in default may encompass both non-accrual loans and loans for which we are still accruing income, but are delinquent as to the payment of accrued interest or are past scheduled maturity. At December 31, 2013, five of our seven loans with outstanding principal and interest balances totaling $25.0 million were in default, all of which were past their respective scheduled maturity dates. At December 31, 2012, 7 of our 9 loans with outstanding principal and interest balances totaling $119.4 million were in default, all of which were past their respective scheduled maturity dates. Subsequent to December 31, 2013, the two performing loans were repaid in full.

A summary and roll-forward of activity of loans in default for the years ended December 31, 2013 and 2012 follows (dollars in thousands):



	Principal Outstanding			Accrued Interest Receivable			Valuation Allowance			Net Carrying Value			# of Loans
Balances at December 31, 2011	$	237,971		$	4,806		$	(141,687	)	$	101,090		18
Additions:
Additional loan fundings	1,406			(354		)	—			1,052			—
Allowance adjustment	—			—			(23		)	(23		)	—

Reductions :
Loans removed from default - due to sale	(4,832		)	(825		)	983			(4,674		)	(1	)
Loans removed from default - due to write-off	(211		)	—			222			11			(1	)
Recovery of allowance for credit losses	—			—			275			275			—
Loans removed from default - foreclosure	(115,319		)	(3,226		)	88,630			(29,915		)	(9	)
Balances at December 31, 2012	119,015			401			(51,600		)	67,816			7

Additions:
Allowance adjustment	—			—			(215		)	(215		)	—

Reductions :
Principal repayments	(7,347		)	—			—			(7,347		)	—
Recovery of allowance for credit losses	—			—			6,700			6,700			—
Loans removed from default - foreclosure	(87,032		)	—			26,907			(60,125		)	(2	)

Balances at December 31, 2013	$	24,636		$	401		$	(18,208	)	$	6,829		5

Of the 7 loans that were in default at December 31, 2012, five of these loans remained in default status as of December 31, 2013, two such loans were foreclosed upon, and no such loans were sold during the year ended December 31, 2013.

We are exercising enforcement action which could lead to foreclosure upon four of the five loans in default, but we have not completed foreclosure on any such loans subsequent to December 31, 2013. The timing of foreclosure on the remaining loans is dependent on several factors, including applicable states statutes, potential bankruptcy filings by the borrowers, our ability to negotiate a deed-in-lieu of foreclosure and other factors.

We are continuing to work with the borrower with respect to the remaining one loan in default in order to seek to maintain the entitlements on the related project and, thus, the value of our existing collateral. These negotiations may result in a modification of the existing loan. However, such negotiations may also result in a payoff of an amount that is below our loan principal and accrued interest, and that discounted payoff may be less than the contractual principal and interest due. Generally, the valuation allowance contemplates the potential loss that may occur as a result of a payoff of the loan at less than its contractual balance due. We are considering our preferred course of action with respect to all loans. However, we have not commenced enforcement action on this other loan thus far.

The geographic concentration of our portfolio loans in default, net of the valuation allowance, at December 31, 2013 and 2012 is as follows (dollars in thousands):



	December 31, 2013
	Percent of Outstanding Principal		#	Outstanding Principal		Accrued Interest		Valuation Allowance			Net Carrying Amount
Arizona	4.3	%	1	$	1,064	$	42	$	(1,077	)	$	29
California	69.8	%	3	17,203		359		(17,131		)	431
Utah	25.9	%	1	6,369		—		—			6,369
	100.0	%	5	$	24,636	$	401	$	(18,208	)	$	6,829



	December 31, 2012
	Percent of Outstanding Principal		#	Outstanding Principal		Accrued Interest		Valuation Allowance			Net Carrying Amount
Arizona	79.5	%	3	$	94,657	$	42	$	(34,490	)	$	60,209
California	14.5	%	3	17,242		359		(17,110		)	491
Utah	6.0	%	1	7,116		—		—			7,116
	100.0	%	7	$	119,015	$	401	$	(51,600	)	$	67,816

The concentration of loans in default by loan classification, net of the valuation allowance as of December 31, 2013 and 2012 is as follows (dollars in thousands):



	December 31, 2013
	Percent of Outstanding Principal		#	Outstanding Principal		Accrued Interest		Valuation Allowance			Net Carrying Amount
Pre-entitled Land	19.9	%	1	$	4,890	$	53	$	(4,450	)	$	493
Entitled Land	75.8	%	3	18,682		306		(12,681		)	6,307
Construction	4.3	%	1	1,064		42		(1,077		)	29
	100.0	%	5	$	24,636	$	401	$	(18,208	)	$	6,829



	December 31, 2012
	Percent of Outstanding Principal		#	Outstanding Principal		Accrued Interest		Valuation Allowance			Net Carrying Amount
Pre-entitled Land	4.1	%	1	$	4,930	$	53	$	(4,450	)	$	533
Entitled Land	16.3	%	3	19,428		306		(12,661		)	7,073
Construction	79.6	%	3	94,657		42		(34,489		)	60,210
	100.0	%	7	$	119,015	$	401	$	(51,600	)	$	67,816

Other than as discussed in the foregoing paragraphs, the two remaining performing loans in our portfolio, with principal and interest balances totaling $5.7 million, were current as of December 31, 2013 to principal and interest payments.

Loans in Default and Impaired Loans

Under GAAP, an entity is required to recognize a loss when both (a) available information indicates that it is probable that an asset has been impaired at the date of the financial statements, and (b) the amount of loss can be reasonably estimated. Under this definition, certain of the loans that are classified as “in default” status would qualify as impaired under this GAAP definition while others would not so qualify. Since the majority of our loan portfolio is considered collateral dependent, the extent to which our loans are considered collectible, with consideration given to personal guarantees provided in connection with such loans, is largely dependent on the fair value of the underlying collateral.

Our loans in default balances include loans in non-accrual and accrual status for which we continue to accrue income, but are delinquent as to accrued interest or are past scheduled maturity, in accordance with our accounting policy. Unless and until we have determined that the value of the underlying collateral is insufficient to recover the total contract amounts due under the loans, we expect to continue to accrue interest until the loan is greater than 90 days delinquent with respect to accrued, uncollected interest, or greater than 90 days past scheduled maturity, whichever comes first. This results in the classification of loans in default that may not be deemed impaired under GAAP.

The following table presents required disclosures under GAAP for loans that meet the definition for impaired loans as of December 31, 2013 and 2012:



	As of December 31,
	2013			2012
	(in thousands)
Loans in Default - Impairment Status:
Impaired loans in default	$	18,266		$	60,011
Non-impaired loans in default	6,370			59,004
Total loans in default	$	24,636		$	119,015

Valuation Allowance on Impaired Loans
Impaired loans in default	$	18,266		$	60,011
Less: valuation allowance	(18,208		)	(51,600		)
Net carrying value of impaired loans	$	58		$	8,411

Concentration by Category based on Collateral Development Status

We have historically classified loans into categories for purposes of identifying and managing loan concentrations. The following table summarizes, as of December 31, 2013 and 2012, respectively, loan principal and interest balances by concentration category:



	December 31, 2013						December 31, 2012
	(in thousands, except for percentage and unit data)
	Amount			%		#	Amount			%		#
Pre-entitled Land:
Held for Investment	$	4,943		16.1	%	1	$	4,983		4.0	%	1
Processing Entitlements	4,548			14.8	%	1	4,942			4.0	%	1
	9,491			30.9	%	2	9,925			8.0	%	2
Entitled Land:
Held for Investment	13,782			44.8	%	3	12,618			10.1	%	2
Infrastructure under Construction	6,370			20.7	%	1	7,116			5.7	%	1
	20,152			65.5	%	4	19,734			15.8	%	3
Construction & Existing Structures:
New Structure - Construction in-process	1,106			3.6	%	1	43,351			34.7	%	3
Existing Structure - Improvements	—			—		—	51,887			41.5	%	1
	1,106			3.6	%	1	95,238			76.2	%	4
Total	30,749			100.0	%	7	124,897			100.0	%	9
Less: Valuation Allowance	(18,208		)				(51,600		)
Net Carrying Value	$	12,541					$	73,297

Unless loans are modified and additional loan amounts advanced to allow a borrower’s project to progress to the next phase of the project’s development, the classifications of our loans generally do not change during the loan term. Thus, in the absence of funding new loans, we generally do not expect material changes between loan categories with the exception of changes resulting from foreclosures.

We also classify loans into categories based on the underlying collateral’s projected end-use for purposes of identifying and managing loan concentration and associated risks. As of December 31, 2013 and 2012, respectively, outstanding principal and interest loan balances by expected end-use of the underlying collateral, were as follows:



	December 31, 2013						December 31, 2012
	(in thousands, except for percentage and unit data)
	Amount			%		#	Amount			%		#
Residential	$	26,201		85.2	%	6	$	68,068		54.5	%	7
Mixed Use	4,548			14.8	%	1	4,942			4.0	%	1
Commercial	—			—		—	51,887			41.5	%	1
Total	30,749			100.0	%	7	124,897			100.0	%	9
Less: Valuation Allowance	(18,208		)				(51,600		)
Net Carrying Value	$	12,541					$	73,297

With the lack of funding of new loans, the concentration of loans by type of collateral and end-use is expected to remain consistent within our portfolio. As of December 31, 2013 and 2012, respectively, the changes in the concentration of loans by type of collateral and end-use was primarily a result of foreclosures of certain loans.

Borrower and Borrower Group Concentrations

Our investment policy provides that no single loan should exceed 10% of the total of all outstanding loans and that aggregate loans outstanding to one borrower or borrower group should not exceed 20% of the total of all outstanding loans. Following the origination of a loan, however, a single loan or the aggregate loans outstanding to a borrower or borrower group may exceed those thresholds as a result of foreclosures, limited lending activities, and changes in the size and composition of our overall portfolio.

As a result of the foreclosure of the majority of our legacy loan portfolio, as of December 31, 2013, there were only seven remaining outstanding loans. Of those remaining loans, there were two borrowers whose aggregate outstanding principal and interest totaled $10.9 million, which represented approximately 35% of our total mortgage loan principal and interest outstanding, one of which was non-performing and the other was performing. As of December 31, 2012, there were three borrowers or borrowing groups whose aggregate outstanding principal and interest totaled $93.6 million, which represented approximately 75% of our total mortgage loan principal and interest outstanding, and each of which was in non-accrual status as of December 31, 2012. We recognized no mortgage interest income for these loans during the years ended December 31, 2013, 2012 or 2011. However, as a result of the limited number of performing loans, during the year ended December 31, 2013, two individual loans with average aggregate principal balances totaling $1.4 million collectively accounted for 87.8% of total mortgage loan income for the year and were each in excess of 10% of total mortgage income for 2013. These loans were paid off subsequent to December 31, 2013. During the year ended December 31, 2012, four individual loans with aggregate principal balances totaling $48.9 million collectively accounted for 65% of total mortgage loan income for the year and were each in excess of 10% of total mortgage income for 2012. One such loan was sold during the year ended December 31, 2012 while another was paid off as of December 31, 2012. In addition, six other loans accounted for approximately 77% of total mortgage loan income during the year ended December 31, 2011 and were each in excess of 10% of total mortgage income for 2011.

For the year ended December 31, 2012, SEC rules may have required the presentation and disclosure of audited financial statements for two operating properties that were previously owned by a borrowing group securing loans that represent greater than 20% of our total assets, and which was subsequently acquired through deed-in-lieu of foreclosure by agreement with the borrower in 2013 as described in note 4. Audited financial statements were not available for the year ended December 31, 2012 and the unaudited financial information that was available was incomplete and, in our opinion, was not reliable. Accordingly, we omitted such disclosures for the year ended December 31, 2012.

Mortgage Loan Sales

During the year ended December 31, 2013, we sold no mortgage loans. During the year ended December 31, 2012, we sold one mortgage loans for $3.2 million (net of selling costs), and recognized no gain or loss on sale. During the year ended December 31, 2011, we sold seven mortgage loans for $13.2 million (net of selling costs), of which we financed $7.8 million, and recognized a gain on sale of $0.1 million.