MORTGAGE INVESTMENTS, LOAN PARTICIPATIONS AND LOAN SALES

Lending Activities

There has been limited loan activity during the years ended December 31, 2016 and 2015. We did not originate any new loans during the year ended December 31, 2016. During the second quarter of 2016, one loan originated in the amount of $3.1 million was sold. For the year ended December 31, 2015, one loan originated in the amount of $11.0 million was sold to SREOF II Holdings, LLC, an affiliate of one of the Company’s directors and preferred shareholders at that time. In addition, the Company was assigned one loan in the principal amount of $0.3 million through the purchase of a lien on real property. The Company originated two loans during 2015 totaling $14.1 million relating to the partial financing of the sale of certain REO assets. During the year ended December 31, 2016, we received mortgage loan principal payments for two loans totaling $7.6 million, primarily from two loans that were paid off.

A roll-forward of loan activity for the years ended December 31, 2016 and 2015 follows (in thousands):



	Principal Outstanding			Interest Receivable			Valuation Allowance			Carrying Value
Balance at December 31, 2014	$	39,734		$	367		$	(15,562	)	$	24,539
Additions:
New loan originations	14,148			—			—			14,148
Mortgage loans acquired through recoveries	289			—			—			289
Interest adjustment	—			64			—			64
Accrued interest revenue	138			1,216			—			1,354
Reductions:
Principal and interest repayments	(4,357		)	(958		)	—			(5,315		)
Recovery of allowance for credit losses, net	—			—			291			291
Foreclosures/transfers to real estate owned	(662		)	—			—			(662		)
Foreclosures/transfers to other assets	(200		)	—			—			(200		)
Sale of mortgage loans	(25,498		)	(242		)	2,379			(23,361		)
Balance at December 31, 2015	$	23,592		$	447		$	(12,892	)	$	11,147
Additions:
Accrued interest revenue	—			262			—			262
Reductions:
Principal and interest repayments	(7,843		)	(111		)	210			(7,744		)
Sale of mortgage loans	(3,148		)	(139		)	—			(3,287		)
Balance at December 31, 2016	$	12,601		$	459		$	(12,682	)	$	378

As of December 31, 2016, the Company had three loans outstanding with an aggregate average principal and interest balance of $4.4 million, as compared to $3.9 million for our six loans outstanding at December 31, 2015. Of our three outstanding loans at December 31, 2016, we had one performing loan with an average outstanding principal and interest balance of $0.4 million and an interest rate of 11.0%. At December 31, 2015, we had four performing loans with an average outstanding principal and interest balance of $2.8 million and a weighted average interest rate of 10.5%. As of December 31, 2016 and 2015, the valuation allowance represented 97.1% and 53.6%, respectively, of the total outstanding loan principal and interest balances. The majority of the valuation allowance at December 31, 2016 and 2015 relates to two legacy loans which have been fully reserved and have a zero carrying value.

Geographic Diversification

Our mortgage loans consist of loans where the primary collateral is located in Arizona, California and New Mexico. As of December 31, 2016 and 2015, the geographical concentration of our loan balances by state was as follows (dollar amounts in thousands):



	December 31, 2016										December 31, 2015
	Outstanding Principal and Interest		Valuation Allowance			Net Carrying Amount		Percent		#	Outstanding Principal and Interest		Valuation Allowance			Net Carrying Amount		Percent		#
Arizona	$	—	$	—		$	—	—	%	—	$	3,811	$	(67	)	$	3,744	33.6	%	2
California	12,682		(12,682		)	—		—	%	2	19,882		(12,825		)	7,057		63.3	%	3
New Mexico	378		—			378		100.0	%	1	346		—			346		3.1	%	1
Total	$	13,060	$	(12,682	)	$	378	100.0	%	3	$	24,039	$	(12,892	)	$	11,147	100.0	%	6

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, 2016 and 2015, the Prime Rate was 3.75% and 3.50%, respectively. Since the majority of our loan principal balance is in default, the extent of mortgage income recognized on our loans is limited to only those loans that are performing.

At December 31, 2016, we had three loans with principal and interest balances totaling $13.1 million and interest rates ranging from 11.0% to 12.0%. Of this total, two loans with principal and interest balances totaling $12.7 million and a weighted average interest rate of 12.0% were non-performing loans and fully reserved, while one loan with principal and interest balances totaling $0.4 million and an interest rate of 11.0% was a performing loan.

At December 31, 2015, we had six loans with principal and interest balances totaling $24.0 million and interest rates ranging from 6.0% to 12.0%. Of this total, two loans with principal and interest balances totaling $12.7 million and a weighted average interest rate of 12.0% were non-performing loans, while four loans with principal and interest balances totaling $11.1 million and a weighted average interest rate of 10.5% were performing loans.

Changes in the Portfolio Profile — Scheduled Maturities

The outstanding principal and interest balances of mortgage investments, net of the valuation allowance, as of December 31, 2016 and 2015, have scheduled maturity dates within the next several quarters as follows (dollar amounts in thousands):



December 31, 2016							December 31, 2015
Quarter	Outstanding Balance			Percent		#	Quarter	Outstanding Balance			Percent		#
Matured	$	12,682		97.1	%	2	Matured	$	12,682		52.8	%	2
Q1 2017	—			—	%	—	Q1 2016	7,800			32.4	%	1
Q1 2018	—			—	%	—	Q4 2016	3,166			13.2	%	1
Q1 2019	—			—	%	—	Q1 2017	—			—	%	—
Q1 2020	—			—	%	—	Q1 2020	45			0.2	%	1
Thereafter	378			2.9	%	1	Thereafter	346			1.4	%	1
Total Principal and Interest	13,060			100.0	%	3		24,039			100.0	%	6
Less: Valuation Allowance	(12,682		)					(12,892		)
Net Carrying Value	$	378						$	11,147

From time to time, we may modify certain terms of a loan or extend a loan’s maturity date 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.

We do not expect payoffs to materialize for nonperforming loans past their maturity dates. 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.

During the year ended December 31, 2016, we collected mortgage loan payoffs totaling $7.6 million. This amount represented the negotiated payoffs of two of our performing loans at a collective discount of $0.2 million. The discounted payoffs on these loans did not represent troubled debt restructuring because the loans were fully performing and the Company initiated the discounted payoffs in order to generate liquidity. We recorded an adjustment as of December 31, 2015 to provide for this discount.

Loans Serving as Collateral for Borrowings

During the fourth quarter of 2015, a wholly-owned subsidiary of the Company borrowed $5.4 million pursuant to a non-revolving credit facility with the Banc of California, National Association (the “BOC Facility”). The BOC Facility was secured by a $7.2 million mortgage receivable (the “Serramonte Note”). The Serramonte Note was included in Mortgage Loans Held for Sale, Net, in the accompanying consolidated balance sheet, and had a carrying value of $7.1 million at December 31, 2015. Under the terms of the BOC Facility, all income and proceeds from the Serramonte Note, including all interest and principal payments, were to be remitted immediately to Banc of California. The Serramonte Note and BOC Facility were both repaid in during the first quarter 2016.

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, we do not have a specific loan modification program or initiative in place. Rather, as in the past, we may modify any loan, in our sole discretion, based on applicable facts and circumstances. In the future, we may modify loans on the same basis 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.

We did not enter into any loan modifications during the years ended December 31, 2016 or 2015.

The following tables present various summaries of our loan modifications made on a quarterly basis during the years ended December 31, 2016 and 2015 (dollars in thousands):



	December 31, 2016					December 31, 2015
	Amount (in thousands)		%		#	Amount (in thousands)		%		#
Loans Not Modified and Currently Matured	$	12,682	97.1	%	2	$	12,682	52.8	%	2
Loans Modified to Extend Maturity	—		—	%	—	—		—	%	—
Original Maturity Date Not Reached	378		2.9	%	1	11,357		47.2	%	4
Total Loan Principal and Accrued Interest	$	13,060	100	%	3	$	24,039	100	%	6

Summary of Existing Loans in Default

During 2016 and 2015, we continued to experience loans in default due to, among other reasons, loan balances that exceed the value of the underlying collateral and the absence 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, 2016, two of our three loans with outstanding principal and interest balances totaling $12.7 million were in default and past their respective scheduled maturity dates. At December 31, 2015, two of our six loans with outstanding principal and interest balances totaling $12.7 million were in default and past their respective scheduled maturity dates.

A summary and roll-forward of activity of loans in default for the years ended December 31, 2016 and 2015 follows (dollars in thousands):



	Principal Outstanding			Accrued Interest Receivable			Valuation Allowance			Net Carrying Value			# of Loans
Balances at December 31, 2014	$	18,275		$	311		$	(15,562	)	$	3,024		6
Additions:
Interest adjustment	—			64			—			64			—
Reductions:
Provision for credit losses	—			—			501			501			—
Foreclosures/transfers to Other Assets	(200		)	—			—			(200		)	—
Foreclosures/transfers to Real Estate Owned	(663		)	—			—			(663		)	(2	)
Sale of mortgage loans	(5,100		)	(5		)	2,379			(2,726		)	(2	)
Balance, December 31, 2015	$	12,312		$	370		$	(12,682	)	$	—		2
Additions:	—			—			—			—			—
Reductions:	—			—			—			—			—
Balance, December 31, 2016	$	12,312		$	370		$	(12,682	)	$	—		2

Both of the loans that were in default at December 31, 2015, remained in default status as of December 31, 2016 and are fully reserved. There were no other changes to loans in default during the year ended December 31, 2016. The one remaining performing loan in our portfolio had a principal and interest balance totaling $0.4 million as of December 31, 2016.

During the year ended December 31, 2015, we completed foreclosure on the collateral underlying two loans and transferred the property to REO held for sale. We are exercising enforcement action which could lead to foreclosure or other disposition upon the remaining loans in default, but we have not completed foreclosure on any such loans during the year ended or subsequent to December 31, 2016. The timing of foreclosure on the remaining loans is dependent on several factors, including applicable states statutes, potential bankruptcy filings by the borrowers, the nature and extent of other liens secured by the underlying real estate.

There were no changes in the concentration of loans in default by geographic location or by loan classification during the year ended December 31, 2016 or 2015 due to the limited lending activity during the period.

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, 2016 and 2015, respectively, loan principal and interest balances by concentration category (dollars in thousands):



	December 31, 2016						December 31, 2015
	Amount			%		#	Amount			%		#
Pre-entitled Land:
Processing Entitlements	$	378		2.9	%	1	$	8,209		34.1	%	3
	378			2.9	%	1	8,209			34.1	%	3
Entitled Land:
Held for Investment	12,682			97.1	%	2	15,830			65.9	%	3
	12,682			97.1	%	2	15,830			65.9	%	3
Total	13,060			100.0	%	3	24,039			100.0	%	6
Less: Valuation Allowance	(12,682		)				(12,892		)
Net Carrying Value	$	378					$	11,147

Unless loans are modified and additional loan amounts are 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 do not expect material changes between loan categories with the exception of changes resulting from foreclosures or loan sales.

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, 2016 and 2015, respectively, outstanding principal and interest loan balances by expected end-use of the underlying collateral, were as follows (dollars in thousands):



	December 31, 2016						December 31, 2015
	Amount			%		#	Amount			%		#
Residential	$	12,682		97.1	%	2	$	15,848		65.9	%	3
Mixed Use	378			2.9	%	1	7,546			31.4	%	2
Commercial	—			—	%	—	645			2.7	%	1
Total	13,060			100.0	%	3	24,039			100.0	%	6
Less: Valuation Allowance	(12,682		)				(12,892		)
Net Carrying Value	$	378					$	11,147

With the lack of new loan originations, the concentration of loans by type of collateral and end-use is expected to remain consistent within our portfolio. As of December 31, 2016 and 2015, respectively, the changes in the concentration of loans by type of collateral and end-use was primarily a result of foreclosures, loan sales, and partial financing of REO held for sale.

Borrower and Borrower Group Concentrations

Our investment policy generally 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 of December 31, 2016, we have three outstanding loans. One loan, the only performing loan, had an outstanding principal and interest carrying value, net of allowance, of $0.4 million, which represented 100% of our total loan portfolio carrying value. As of December 31, 2015, there were two borrowers whose aggregate principal and interest carrying value totaled $10.3 million, which represented 93% of our total loan portfolio carrying value. During the year ended December 31, 2016, three individual loans with average aggregate principal balances totaling $3.5 million collectively accounted for 99% of total mortgage loan income for the year, each of which were in excess of 10% of total mortgage income for 2016. During the year ended December 31, 2015, three individual loans with aggregate principal balances totaling $10.5 million collectively accounted for 90% of total mortgage loan income for the year.

Mortgage Loan Sales

During the year ended December 31, 2016, we sold one mortgage loans in addition to its underlying asset for $3.4 million (net of selling costs) and recognized a net gain of $0.2 million. During the year ended December 31, 2015, we sold three mortgage loans for $24.7 million (net of selling costs) and recognized a net loss of $0.1 million. One of the mortgage note sales in 2015 in the amount of $11.0 million was made to SREOF II Holdings, LLC, an affiliate of one of the Company’s directors and preferred shareholders at that time. The note was sold at par value, and therefore, the sale had no impact on the profit or loss of the Company.