Note 14 – 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 within 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 unaudited interim consolidated balance sheets. The following table presents additional information on the Company’s securitized debt obligations:


	September 30, 2019						December 31, 2018
	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	$	8,368	$	8,368	5.5	%	$	12,226	$	12,226	5.4	%
ReadyCap Lending Small Business Trust 2015-1		—		—	—			3,397		1,180	3.4
Sutherland Commercial Mortgage Trust 2017-SBC6		48,706		47,800	3.4			69,764		68,574	3.3
Sutherland Commercial Mortgage Trust 2018-SBC7		158,891		156,651	4.7			205,451		202,491	4.7
Sutherland Commercial Mortgage Trust 2019-SBC8		231,121		228,373	2.9			—		—	—
ReadyCap Commercial Mortgage Trust 2014-1		24,857		24,863	5.6			36,108		36,129	4.5
ReadyCap Commercial Mortgage Trust 2015-2		83,138		80,139	4.4			110,497		106,755	4.2
ReadyCap Commercial Mortgage Trust 2016-3		39,211		37,616	4.2			63,945		62,053	3.7
ReadyCap Commercial Mortgage Trust 2018-4		135,693		131,799	3.9			144,701		140,314	3.9
ReadyCap Commercial Mortgage Trust 2019-5		346,882		336,516	4.1			—		—	—
Ready Capital Mortgage Financing 2017-FL1		—		—	—			63,615		61,902	3.7
Ready Capital Mortgage Financing 2018-FL2		142,018		140,128	3.8			217,057		213,743	3.4
Ready Capital Mortgage Financing 2019-FL3		267,904		263,739	3.8			—		—	—
Bear Stearns Commercial Mortgage 2005-TOP20		9,337		9,547	5.7			—		—	—
Total	$	1,496,126	$	1,465,539	3.9	%	$	926,761	$	905,367	4.0	%

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 third-party 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 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)	September 30, 2019		December 31, 2018
Assets:
Cash and cash equivalents	$	96	$	—
Restricted cash		7,012		11,643
Loans, net		1,928,533		1,220,974
Loans, held for sale, at fair value		3,075		—
Real estate acquired in settlement of loans		—		176
Accrued interest		10,423		6,750
Due from servicers		11,988		11,514
Total assets	$	1,961,127	$	1,251,057
Liabilities:
Securitized debt obligations of consolidated VIEs, net		1,465,539		905,367
Total liabilities	$	1,465,539	$	905,367

Assets of unconsolidated VIEs

The following table reflects our variable interests in identified VIEs, of which we are not the primary beneficiary, as of September 30, 2019 and December 31, 2018:


	Carrying Amount				Maximum Exposure to Loss (1)
(In Thousands)	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Assets:
Mortgage backed securities, at fair value(2)	$	69,481	$	75,591	$	69,481	$	75,591
Investment in unconsolidated joint ventures		55,663		33,438		55,663		33,438
Total assets in unconsolidated VIEs	$	125,144	$	109,029	$	125,144	$	109,029
(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.