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 our acquired and originated 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 in 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 in the unaudited interim consolidated balance sheets. The following table presents additional information on the Company’s securitized debt obligations:


	March 31, 2020						December 31, 2019
	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	$	6,131	$	6,131	5.5	%	$	6,399	$	6,399	5.5	%
ReadyCap Lending Small Business Trust 2019-2		117,876		117,876	4.3			131,032		129,007	4.3
Sutherland Commercial Mortgage Trust 2017-SBC6		38,679		37,958	3.5			42,309		41,486	3.4
Sutherland Commercial Mortgage Trust 2018-SBC7		114,938		113,166	4.7			138,235		136,212	4.7
Sutherland Commercial Mortgage Trust 2019-SBC8		210,516		207,679	2.9			219,617		216,981	2.9
ReadyCap Commercial Mortgage Trust 2014-1		18,406		18,411	5.8			18,626		18,632	5.6
ReadyCap Commercial Mortgage Trust 2015-2		60,344		57,772	4.5			64,239		61,443	4.5
ReadyCap Commercial Mortgage Trust 2016-3		27,295		25,927	3.6			32,269		30,777	4.7
ReadyCap Commercial Mortgage Trust 2018-4		114,670		111,058	3.9			121,179		117,428	3.9
ReadyCap Commercial Mortgage Trust 2019-5		282,994		273,342	4.1			309,296		299,273	4.1
ReadyCap Commercial Mortgage Trust 2019-6		378,765		371,539	3.2			379,400		371,939	3.2
Ready Capital Mortgage Financing 2018-FL2		80,042		79,202	3.3			115,381		114,057	3.8
Ready Capital Mortgage Financing 2019-FL3		267,904		264,837	3.0			267,904		264,249	3.5
Total (1)	$	1,718,560	$	1,684,898	3.6	%	$	1,845,886	$	1,807,883	3.7	%

(1) Excludes non-company sponsored securitized debt obligations of $7.2 million and $7.3 million that are consolidated in the unaudited interim consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively.

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)	March 31, 2020		December 31, 2019
Assets:
Cash and cash equivalents	$	20	$	23
Restricted cash		8,538		8,301
Loans, net		2,195,177		2,326,199
Loans, held for sale, at fair value		4,017		4,434
Due from servicers		10,279		27,964
Accrued interest		11,486		11,565
Total assets	$	2,229,517	$	2,378,486
Liabilities:
Securitized debt obligations of consolidated VIEs, net		1,692,074		1,815,154
Total liabilities	$	1,692,074	$	1,815,154

Assets of unconsolidated VIEs

The following table reflects our variable interests in identified VIEs, of which we are not the primary beneficiary, as of March 31, 2020 and December 31, 2019:


	Carrying Amount				Maximum Exposure to Loss (1)
(In Thousands)	March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Assets:
Mortgage backed securities, at fair value(2)	$	55,685	$	66,108	$	55,685	$	66,108
Investment in unconsolidated joint ventures		53,379		58,850		53,379		58,850
Total assets in unconsolidated VIEs	$	109,064	$	124,958	$	109,064	$	124,958
(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.