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Loans Held for Sale or Investment at Fair Value

12 Months Ended

Dec. 31, 2023

Loans Held for Sale or Investment at Fair Value

3. Loans Held for Sale or Investment at Fair Value

Our loan portfolio consists of business purpose loans secured by single family, multifamily and commercial real estate that were acquired from third party originators or issued by us. The composition of the loan portfolio by classification as of December 31, 2023 and 2022, respectively, is summarized in the table below ($ in thousands):


	Held for Sale				Held for Investment
	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Total loan commitments	$	7,420	$	15,080	$	6,235	$	98,157
Less: construction holdbacks (1)	(2,988)		(3,350)		(214)		(13,188)
Total principal outstanding	4,432		11,730		6,021		84,969
Change in fair value of loans	24		(137)		(388)		(1,826)
Total loans at fair value	$	4,456	$	11,593	$	5,633	$	83,143

(1) Construction holdbacks include in process accounts such as payments, advances, interest reserve, accrued interest and other accounts.

The loan portfolio consists of 21 loans at December 31, 2023, with a weighted average coupon of 10.4%, of which the Company receives a net yield of 10.2% after taking into account the strip interest to the sellers of the loans. The weighted average life of the portfolio is approximately 0.20 months. Three loans represent 74% of the total principal outstanding at December 31, 2023. There were nine loans on nonaccrual status or 90 days or more past due at December 31, 2023, with a fair value of $3.0 million. These loans have an unpaid principal balance of $2.8 million at December 31, 2023.

As of December 31, 2023, we have commenced formal foreclosure proceedings on five loans with an aggregate fair value of $1.3 million in order to force the sale of the real estate that serves as collateral for such loans. We expect that the sale of the collateral will allow us to recover the full repayment of the outstanding loans and accrued interest as of December 31, 2023. There were no loans for which formal foreclosure proceedings had commenced at December 31, 2023.

The table below represents activity within the loan portfolio by classification for the period shown ($ in thousands):


	Loans Held for Sale		Loans Held for Investment
Balance at December 31, 2022	$	11,593	$	83,143
Acquisitions	—		350
Originations	12,359		—
Proceeds from sales of loans (1)	(23,453)		(45,484)
Additional fundings	4,880		6,498
Interest receivable	4		(1,181)
Payoffs and repayments	(1,088)		(39,131)
Fair value adjustment	161		1,438
Balance at December 31, 2023	$	4,456	$	5,633

(1) Includes net realized loss on sale of loans.

The composition of the total loan commitment by state as of December 31, 2023 is summarized below ($ in thousands):


State	Commitment		Percent of Portfolio
Florida	$	8,536	62.5	%
Washington	3,470		25.4	%
Arkansas	553		4.0	%
Texas	350		2.6	%
Michigan	230		1.7	%
New Mexico	221		1.6	%
Pennsylvania	176		1.3	%

Other	119		0.9	%
Total	$	13,655	100.0	%

For financial reporting purposes of our alternative loans, we follow a fair value hierarchy established under GAAP, as described in Note 2 - Summary of Significant Accounting Policies, that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or at the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale.

In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.

The following table presents the assets that are reported at fair value on a recurring basis as of December 31, 2023 and 2022, as well as the fair value of hierarchy of the valuation inputs used to measure fair value. We did not have any liabilities to report at fair value on a recurring basis as of December 31, 2023 and 2022.


Assets	Carrying		Fair Value Measurements Using
(In thousands)	Value		Level 1		Level 2		Level 3
December 31, 2023
Loans held for sale	$	4,456	$	—	$	—	$	4,456
Loans held for investment	5,633		—		—		5,633
Total measured	$	10,089	$	—	$	—	$	10,089

December 31, 2022
Loans held for sale	$	11,593	$	—	$	—	$	11,593
Loans held for investment	83,143		—		—		83,143
Total measured	$	94,736	$	—	$	—	$	94,736

The estimated fair value for our business purpose loans is determined using the discounted cash flow model (“DCF”) to estimate the net present value of the future cash flows expected from each loan. For performing loans, the DCF is based on the future expected cash flows of each loan in accordance with its contractual terms net of the strip component. Cash flows for performing loans with construction holdbacks incorporate the draws to complete the required improvements to the underlying property securing the loan. For nonaccrual loans, the estimated cash flows are based on the current fair value of the collateral of the loans, in which the Company will utilize a third-party appraisal to determine the fair value (Level 3).

On a loan by loan basis, the weighted average discount rate range utilized for the DCF applied to the net yield to be received by the Company was 10.0% which is less than the overall yield on the portfolio of 10.2%, resulting in the increase in value of the portfolio at December 31, 2023. The determination of the discount rate was based on analysis of the current interest rates charged for business purpose loans in conjunction with the increase in rates for other underlying base rates such as the 10-year U.S. treasury bond and the 30 day Secured Overnight Financing Rate ("SOFR") (Level 3). For nonaccrual loans, the discount

applied to the value of the collateral was based on available market information on REO sales transaction as of the valuation date (Level 3).

We did not transfer any assets from one level to another level during the years ended December 31, 2023 and 2022, respectively.

We evaluate the change in fair value attributable to instrument-specific credit risk as the excess of the total change in fair value over the change in fair value attributable to changes in the risk-free rate. Instrument-specific credit risk had an immaterial impact on the change in fair value recognized for loans held during the years ended December 31, 2023 and 2022.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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