Variable Interest Entities

6 Months Ended

Jun. 30, 2022

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Since its inception, the Company has utilized Variable Interest Entities (“VIEs”) for the purpose of securitizing whole mortgage loans to obtain long-term non-recourse financing. The Company evaluates its interest in each VIE to determine if it is the primary beneficiary.

VIEs for Which the Company is the Primary Beneficiary

The Company has entered into securitization transactions where it was determined that the Company was the primary beneficiary, as, with respect to each securitization vehicle, it controls the class of securities with call rights, or “controlling class” of securities, the XS tranche. The Company was the sole entity to contribute residential whole mortgage loans to each of these securitization vehicles, AOMT 2021-4, AOMT 2021-7 and AOMT 2022-1, respectively.

During the six months ended June 30, 2022, in the AOMT 2022-1 transaction, the Company securitized and consolidated approximately $537.6 million unpaid principal balance of seasoned residential non-QM mortgage loans.

The retained beneficial interest in VIEs for which the Company is the primary beneficiary is the subordinated tranches of the securitization and further interests in additional interest‑only tranches. The table below sets forth the fair values of the assets and liabilities recorded in the consolidated balance sheet related to these consolidated VIEs as of June 30, 2022 and December 31, 2021:


	June 30, 2022		December 31, 2021
Assets:	(in thousands)
Residential mortgage loans in securitization trusts - cost	$	1,061,973	$	665,510
Fair value adjustment	(79,394)		1,855
Residential mortgage loans in securitization trusts - at fair value	$	982,579	$	667,365

Accrued interest receivable	$	1,902	$	1,728


Liabilities (1):
Non-recourse securitization obligations, collateralized by residential mortgage loans - principal balance, amortized cost	$	507,051	$	619,108
Less: debt issuance costs capitalized	(1,898)		(2,551)
Non-recourse securitization obligations, collateralized by residential mortgage loans, amortized cost, net	$	505,153	$	616,557

Non-recourse securitization obligations, collateralized by residential mortgage loans - principal balance, subject to fair value adjustment	$	476,962	$	—
Fair value adjustment	(32,673)		—
Non-recourse securitization obligations, collateralized by residential mortgage loans - at fair value, net	$	444,289	$	—

Total non-recourse securitization obligations, collateralized by residential mortgage loans, net	$	949,442	$	616,557

(1) Debt issuance costs for non-recourse securitization obligations electing the fair value option are recorded to expense upon issuance of the securitization. Debt issuance costs incurred with the issuances of non-recourse securitization obligations for which the fair value option was not elected are presented at amortized cost.

Income and expense amounts related to the consolidated VIEs recorded in the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2022 (1) is set forth as follows:


	Three Months Ended June 30, 2022		Six Months Ended June 30, 2022
	(in thousands)
Interest income	$	11,469	$	21,887
Interest expense, non-recourse liabilities (2)	(5,679)		(10,262)
Net interest income	$	5,790	$	11,625
Net unrealized loss on mortgage loans in securitization trusts - at fair value	(24,578)		(79,752)
Unrealized gain on mark-to-market of non-recourse securitization obligation - at fair value	14,361		32,673
Securitization expenses incurred in issuance of AOMT 2022-1	—		(2,019)
Operating expenses	(252)		(448)
Net loss from consolidated VIEs	$	(4,679)	$	(37,921)

(1) The Company had no consolidated VIEs during the three and six months ended June 30, 2021.

(2) Includes amortization of debt issuance costs for AOMT 2021-7 and AOMT 2021-4.

VIEs for Which the Company is Not the Primary Beneficiary

In 2019 and 2020, the Company co‑sponsored and participated in the formation of various entities that were considered to be VIEs. These VIEs were formed to facilitate securitization issuances that were comprised of secured residential whole loans and/or small balance commercial loans contributed to securitization trusts.

These securities were issued as a result of the unconsolidated securitizations where the Company retained bonds from the issuances of AOMT 2019-2, AOMT 2019-4, AOMT 2019-6, AOMT 2020-3, and AOMT 2020-SBC1. The Company determined that it was not then and is not now the primary beneficiary of any of these entities, and thus has not consolidated the operating results or statements of financial position of any of these entities. The Company performs ongoing reassessments of all VIEs in which the Company has participated since its inception as to whether changes in the facts and circumstances regarding the Company’s involvement with a VIE would cause the Company’s consolidation conclusion to change, and the Company’s assessment of the VIEs in which the Company participated during the years 2019 and 2020 remains unchanged.

The securities received in the aforementioned 2019 and 2020 securitization transactions are included in “RMBS - at fair value” and “CMBS - at fair value” on the consolidated balance sheets as of June 30, 2022 and December 31, 2021, and details on the accounting treatment and fair value methodology of the securities can be found in Note 9, Fair Value Measurements. See Note 5, Investment Securities, for the fair value of AOMT securities held by the Company as of June 30, 2022 and December 31, 2021 that were retained by the Company as a result of the securitization transactions in 2020 and 2019.