MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES

Lending Activities

Given the non-performing status of the majority of our loan portfolio and the suspension of significant lending activities, there has been limited loan activity during the nine months ended September 30, 2014. Except for the origination of two loans in the aggregate principal amount of $8.4 million in connection with the financing of a portion of the sale of certain REO assets during 2014, no new loans were originated during the nine months ended September 30, 2014. We originated one loan during the nine months ended September 30, 2013 in the principal amount of $1.1 million in connection with the partial financing of the sale of an REO asset. During the nine months ended September 30, 2014, we received mortgage loan principal payoffs totaling $5.7 million for two of our performing loans.

A roll-forward of loan activity for the nine months ended September 30, 2014 is as follows (in thousands):



	Principal Outstanding			Interest Receivable			Valuation Allowance			Carrying Value
Balances at December 31, 2013	$	30,222		$	527		$	(18,208	)	$	12,541
Additions:
Principal fundings - cash	27			—			—			27
Principal fundings - asset sale financing	8,400			—			—			8,400
Mortgage loans acquired in modification	864						—			864
Accrued interest revenue	1,689			226			—			1,915
Reductions:
Principal and interest repayments	(5,681		)	(336		)	—			(6,017		)
Assets acquired in satisfaction of loan balance	(4,020		)	—			—			(4,020		)
Foreclosures/transfers to Real Estate Owned	(4,917		)	(53		)	4,449			(521		)
Balances at September 30, 2014	$	26,584		$	364		$	(13,759	)	$	13,189

During the nine months ended September 30, 2014, we modified one loan under the terms of a court-approved order in which the Company accepted, in lieu of cash payment, certain assets with an aggregate estimated fair value of $4.0 million, and established the remaining loan balance principal at $4.0 million. As a result of the modification, (a) the aggregate balance of the assets received and the newly established loan balance exceeded the carrying value of the loan at the time of modification, (b) the interest rate on the loan was increased from 12.0% to 16.25%, and (c) the Company received additional collateral to further secure the remaining loan balance. The modification is deemed to be a "troubled debt restructuring" primarily because the total amount to be collected was below the contractual amount otherwise due under the loan when considering default interest due under the original loan terms (none of which was previously recorded by the Company). The failure to collect the full amount of default interest was deemed to be a concession under applicable accounting guidance. As a result, the fair value of the assets received was treated as a reduction to the recorded investment in the loan and the carrying value was recorded at the remaining net balance of $2.9 million (rather than the contractual balance of $4.0 million). The difference between the remaining net balance and the contractual amount due upon maturity was amortized as an adjustment to yield (i.e., interest income) over the remaining term of the loan which matured on September 30, 2014. Subsequent to September 30, 2014, the borrower defaulted on the loan and the Company commenced enforcement action against the borrower.

As of September 30, 2014, we had eight loans outstanding with an average principal and interest balance of $3.3 million, as compared to $4.4 million for our seven loans at December 31, 2013. Of our eight outstanding loans at September 30, 2014, we had two performing loans with an average outstanding principal and interest balance of $4.2 million and a weighted average interest rate of 7.0%. Of our seven outstanding loans at December 31, 2013, we had two performing loans with an average outstanding principal and interest balance of $2.9 million and a weighted average interest rate of 12.5%. As of September 30, 2014 and December 31, 2013, the valuation allowance represented 51.1% and 59.2%, respectively, of the total outstanding loan principal and interest balances.

Scheduled Loan Maturities

The outstanding principal and interest balance of mortgage investments, net of the valuation allowance, as of September 30, 2014, have scheduled maturity dates within the next several quarters as follows:



September 30, 2014
(in thousands, except percentage and unit data)
Quarter	Outstanding Balance			Percent		#
Matured	$	18,585		69.0	%	6
Q3 2015	7,249			26.9	%	1
Q1 2017	600			2.2	%	—
Q1 2020	514			1.9	%	1
Total Principal and Interest	26,948			100.0	%	8
Less: Valuation Allowance	(13,759		)
Net Carrying Value	$	13,189

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 it is likely we will modify additional loans in the future in an effort 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 and in default.

Given the non-performing status of the majority of the loan portfolio, we do not expect the payoffs to materialize for our legacy loans, particularly for loans past their respective maturity date. We may find it necessary to foreclose, modify, extend, make protective advances or sell such loans in order to protect our collateral, maximize our return or generate additional liquidity.

Summary of Loans in Default

We continue to experience loan defaults due to, among other reasons, loan balances that exceed the value of the underlying collateral and the absence of takeout financing in the marketplace. A summary and roll-forward of activity of loans in default for the nine months ended September 30, 2014 is as follows (dollars in thousands):



	Principal Outstanding			Interest Receivable			Valuation Allowance			Carrying Value			# of Loans
Balances at December 31, 2013	$	24,636		$	401		$	(18,208	)	$	6,829		5

Additions:
Additional loan fundings	27			—			—			27			—
Mortgage loans acquired in modification	864			—			—			864			2
Accrued interest revenue	1,689			—			—			1,689			—

Reductions :
Principal repayments	(4		)	(37		)	—			(41		)	—
Assets acquired in satisfaction of loan balance	(4,020		)	—			—			(4,020		)	—
Loans removed from default - foreclosure	(4,917		)	(53		)	4,449			(521		)	(1	)

Balances at September 30, 2014	$	18,275		$	311		$	(13,759	)	$	4,827		6

Of the five loans that were in default at December 31, 2013, four remained in default status as of September 30, 2014, one was removed upon foreclosure and transferred to REO. During the nine months ended September 30, 2014, two loans assigned to us in connection with the modification described above were added to loans in default.

During the nine months ended September 30, 2014, we completed foreclosure on one loan asset and transferred the underlying collateral to REO held for sale. We are exercising enforcement action which could lead to foreclosure or other disposition with respect to the remaining loans in default. However, the completion and/or timing of foreclosure on the remaining loans is dependent on several factors, including applicable states statutes, potential bankruptcy filings by the borrowers, and our ability to negotiate a deed-in-lieu of foreclosure.

At September 30, 2014, all loans in default were also in non-accrual status. In addition, as of September 30, 2014 and December 31, 2013, interest receivable recorded on such loans prior to being placed in non-accrual status totaled $0.3 million and $0.4 million for each period, respectively, and is included in mortgage loans held for sale on the accompanying condensed consolidated balance sheet.

As described above, prior to its default, the Company had one loan modification during the nine months ended September 30, 2014 and amortized the difference between the net loan balance and the contractual amount due upon maturity as an adjustment to yield (i.e., interest income) over the remaining term of the loan which matured on September 30, 2014. No interest income was recognized on any other non-accrual loans on a cash or accrual basis during the periods ended September 30, 2014 or 2013. Borrower concentrations, geographic concentrations of our loan portfolio, related loan classifications and end-user categories have not materially changed since December 31, 2013.