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 September 30, 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 nine months ended September 30, 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, there has been limited loan activity during the nine months ended September 30, 2013. During the nine months ended September 30, 2013, we originated one loan in the amount of $1.1 million relating to the financing of a portion of the sale of certain REO assets. At September 30, 2013, the average principal and interest balance for our seven loans was $4.4 million, as compared to $13.9 million for our nine loans at December 31, 2012. A roll-forward of loan activity during the nine months ended September 30, 2013 is as follows (in thousands):



	Principal Outstanding			Interest Receivable			Valuation Allowance			Carrying Value
Balances at December 31, 2012	$	124,048		$	849		$	(51,600	)	$	73,297
Additions:
Principal fundings - cash	473			—			—			473
Principal fundings - asset sale financing	1,085			—			—			1,085
Revenue recognized in excess of cash received	—			556			—			556
Reductions:
Principal repayments and interest payments	(8,617		)	(831		)	—			(9,448		)
Recovery of allowance for credit losses	—			—			6,700			6,700
Foreclosures/transfers to Real Estate Owned	(87,032		)	—			26,907			(60,125		)
Balances at September 30, 2013	$	29,957		$	574		$	(17,993	)	$	12,538

As of September 30, 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%. At December 31, 2012, we had 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 September 30, 2013 and December 31, 2012, the valuation allowance represented 58.9% and 41.3%, respectively, of the total outstanding loan principal and interest balances. We did not sell any loans during the three or nine months ended September 30, 2013.

Loan Maturities

The outstanding principal and interest receivable balances of our mortgage loans, net of the valuation allowance, as of September 30, 2013, have scheduled maturity dates within the next several quarters as follows (dollars in thousands):



Quarter	Outstanding Balance			Percent		# of Loans
Matured	$	24,774		81.1	%	5
Q1 2014	1,144			3.8	%	1
Q3 2014	4,613			15.1	%	1
Total Principal and Interest	30,531			100.0	%	7
Less: Valuation Allowance	(17,993		)

Net Carrying Value	$	12,538

From time to time, we may extend a mortgage loan's maturity date in the normal course of business. 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. Given the non-performing status of the majority of the loan portfolio, the sustained depression of real estate values and lack of available takeout financing, 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. We modified one loan during the nine months ended September 30, 2013, in which the borrower exercised its option to extend the maturity date by one year for a fee. There was no forgiveness or principal or outstanding interest, or change in interest rate.

Loans in Default

We continue to experience loan defaults as a result of depressed real estate market conditions and lack of takeout financing in the marketplace. A summary and roll-forward of activity of loans in default from December 31, 2012 through September 30, 2013 follows (dollars in thousands):



	Principal Outstanding			Accrued Interest Receivable		Valuation Allowance			Net Carrying Value			# of Loans
Balances at December 31, 2012	$	119,015		$	401	$	(51,600	)	$	67,816		7
Reductions:
Principal repayments	(7,612		)	—		—			(7,612		)	—
Recovery of allowance for credit losses	—			—		6,700			6,700			—
Loans removed from default - foreclosure	(87,032		)	—		26,907			(60,125		)	(2)

Balances at September 30, 2013	$	24,371		$	401	$	(17,993	)	$	6,779		5

Five of the seven of the loans that were in default at December 31, 2012 remained in default status as of September 30, 2013. During the nine months ended September 30, 2013, we took title to the assets with a carrying value of $60.1 million relating to two loans that were in default as December 31, 2012 via a deed-in-lieu of foreclosure.

We are currently exercising enforcement action which we believe could lead to foreclosure upon four of the five loans in default at September 30, 2013. 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. While we expect to complete the foreclosure process on the majority of such loans over the next six to nine months, the timing of foreclosure on these 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.

At September 30, 2013, all loans in default were also in non-accrual status. In addition, as of September 30, 2013 and December 31, 2012, interest receivable recorded on such loans prior to being placed in non-accrual status totaled $0.4 million for each period, respectively, and is included in mortgage loans held for sale on the accompanying condensed consolidated balance sheet.

No interest income was recognized on non-accrual loans on a cash or accrual basis during the nine months ended September 30, 2013 or 2012. In addition, borrower concentrations, geographic concentrations of our loan portfolio, related loan classifications and end-user categories have not materially changed since December 31, 2012, except as a result of foreclosures.