Note 13 – Variable Interest Entities and Securitization Activities

In the normal course of business, we enter into certain types of transactions with entities that are considered to be VIEs. Our primary involvement with VIEs has been related to our securitization transactions in which we transfer assets to securitization trusts. We primarily securitize acquired SBC loans, originated transitional loans, and acquired SBA loans, which provides a source of funding for us and has enabled us to transfer a certain portion of the economic risk of the loans or related debt securities to third parties.

We also transfer originated loans to securitization trusts sponsored by third parties, most notably Freddie Mac. Third-party securitizations are securitization entities in which we maintain an economic interest, but do not sponsor.

The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE. The majority of the VIEs in which we have been involved in are consolidated in our financial statements. See Note 3 for a discussion of our accounting policies applied to the consolidation of the VIE and transfer of the loans in connection with the securitization.

Securitization-Related VIEs

Company sponsored securitizations

In a securitization transaction, assets are transferred to a trust, which generally meets the definition of a VIE. Our primary securitization activity is in the form of SBC and SBA loan securitizations, conducted through securitization trusts which we consolidate, as we determined that we are the primary beneficiary.

For financial statement reporting purposes, since the underlying trust is consolidated, the securitization is effectively viewed as a financing of the loans that were securitized to enable the senior security to be created and sold to a third-party investor. As such, the senior security is presented on the consolidated balance sheets as securitized debt obligations of consolidated VIEs. The third-party beneficial interest holders in the VIE have no recourse against the Company, except that the Company has an obligation to repurchase assets from the VIE in the event that certain representations and warranties in relation to the loans sold to the VIE are breached. In the absence of such a breach, the Company has no obligation to provide any other explicit or implicit support to any VIE.

The securitization trust receives principal and interest on the underlying loans and distributes those payments to the certificate holders. The assets and other instruments held by the securitization trust are restricted in that they can only be used to fulfill the obligations of the securitization trust. The risks associated with the Company’s involvement with the VIE is limited to the risks and rights as a certificate holder of the securities retained by the Company.

The consolidation of the securitization transactions includes the senior securities issued to third parties which are shown as securitized debt obligations of consolidated VIEs on the consolidated balance sheets. The following table presents additional information on the Company’s securitized debt obligations:


	June 30, 2018						December 31, 2017
	Current				Weighted		Current				Weighted
	Principal		Carrying		Average		Principal		Carrying		Average
(In Thousands)	Balance		value		Interest Rate		Balance		value		Interest Rate
Waterfall Victoria Mortgage Trust 2011-SBC2	$	13,864	$	13,864	5.4	%	$	16,010	$	16,010	5.3	%
Sutherland Commercial Mortgage Loans 2015-SBC4		—		—	4.0			10,049		9,687	4.0
Sutherland Commercial Mortgage Trust 2017-SBC6		97,330		95,765	3.3			119,784		117,868	3.3
ReadyCap Commercial Mortgage Trust 2014-1		19,893		19,891	4.3			33,953		33,951	3.6
ReadyCap Commercial Mortgage Trust 2015-2		129,148		125,014	4.1			151,993		147,271	4.1
ReadyCap Commercial Mortgage Trust 2016-3		80,359		78,026	3.3			98,733		95,907	3.5
ReadyCap Commercial Mortgage Trust 2018-4		149,813		144,833	3.9			—		—	—
Ready Capital Mortgage Financing 2017-FL1		95,997		93,245	3.4			158,978		154,721	2.8
Ready Capital Mortgage Financing 2018-FL2		217,059		212,602	3.3			—		—	—
ReadyCap Lending Small Business Trust 2015-1		14,530		12,263	3.2			25,057		22,733	2.5
Total	$	817,993	$	795,503	3.6	%	$	614,557	$	598,148	3.4	%

Repayment of our securitized debt will be dependent upon the cash flows generated by the loans in the securitization trust that collateralize such debt. The actual cash flows from the securitized loans are comprised of coupon interest, scheduled principal payments, prepayments and liquidations of the underlying loans. The actual term of the securitized debt may differ significantly from our estimate given that actual interest collections, mortgage prepayments and/or losses on liquidation of mortgages may differ significantly from those expected.

Third-party sponsored securitizations

For Freddie Mac sponsored securitizations, we determined that we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant, which include special servicing decisions. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these trusts, we only account for our specific interests in them.

Other VIEs

Other VIEs include a variable interest that we hold in an acquired joint venture investment that we account for as an equity method investment. We do not consolidate these entities because we do not have the power to direct the activities that most significantly impact their economic performance, we only account for our specific interest in them.

Assets and Liabilities of Consolidated VIEs

The following table reflects the securitized assets and liabilities for VIEs that we consolidate on our consolidated balance sheets:


(In Thousands)	June 30, 2018		December 31, 2017
Assets:
Cash and cash equivalents	$	50	$	25
Restricted cash		8,183		15,838
Loans, net		1,105,776		836,180
Real estate acquired in settlement of loans		101		3,443
Accrued interest		7,278		4,261
Due from servicers		1,318		1,915
Total assets		1,122,706		861,662
Liabilities:
Securitized debt obligations of consolidated VIEs, net		795,503		598,148
Total liabilities		795,503		598,148

Assets of Unconsolidated VIEs

The following table reflects our variable interests in identified VIEs, of which we are not the primary beneficiary, as of June 30, 2018 and December 31, 2017:


	Carrying Amount				Maximum Exposure to Loss (1)
(In Thousands)	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Assets:
Mortgage backed securities, at fair value(2)	$	48,791	$	38,568	$	48,791	$	38,568
Investment in unconsolidated joint venture		41,598		55,369		41,598		55,369
Total assets in unconsolidated VIEs	$	90,389	$	93,937	$	90,389	$	93,937
(1) Maximum exposure to loss is limited to the greater of the fair value or carrying value of the assets as of the consolidated balance sheet date.
(2) Retained interest in Freddie Mac sponsored securitizations.