VARIABLE INTEREST ENTITIES

In February 2015, the Company purchased the junior-most tranche, Class C Certificate of the Freddie Mac securitization, FREMF Mortgage Trust 2015-KLSF (“FREMF 2015-KLSF”) for $102.1 million. The underlying portfolio is a pool of 11 floating rate multifamily mortgage loans with a cut-off principal balance of $1.4 billion. The Company is required to consolidate the FREMF 2015-KLSF Trust’s assets and liabilities of $549.5 million and $509.4 million, respectively, at March 31, 2018.

In April 2015, the Company purchased the junior-most tranche, Class C Certificate of the Freddie Mac securitization, FREMF Mortgage Trust 2015-KF07 (“FREMF 2015-KF07”) for $89.4 million. The underlying portfolio is a pool of 40 floating rate multifamily mortgage loans with a cut-off principal balance of $1.2 billion. The Company is required to consolidate the FREMF 2015-KF07 Trust’s assets and liabilities of $632.6 million and $587.5 million, respectively, at March 31, 2018.

In February 2016, the Company purchased the junior- most tranche, Class C Certificate of the Freddie Mac securitization, FREMF Mortgage Trust 2016-KLH1 (“FREMF 2016-KLH1”) for $107.6 million, net of a $4.4 million discount to face value of $112.0 million. The underlying portfolio is a pool of 28 floating rate multifamily mortgage loans with a cut-off principal balance of $1.5 billion. The Company is required to consolidate the FREMF 2016-KLH1 Trust’s assets and liabilities of $1.5 billion and $1.4 billion, respectively, at March 31, 2018. FREMF 2015-KLSF, FREMF 2015-KF07 and FREMF 2016-KLH1 are collectively referred to herein as the FREMF Trusts.

The FREMF Trusts are structured as pass-through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The FREMF Trusts are VIEs and the Company is considered to be the primary beneficiary as a result of its ability to replace the special servicer without cause through its ownership of the Class C Certificates and its current designation as the directing certificate holder. The Company’s exposure to the obligations of the VIEs is generally limited to the Company’s investment in the FREMF Trusts of $198.1 million. Assets of the FREMF Trusts may only be used to settle obligations of the FREMF Trusts. Creditors of the FREMF Trusts have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the FREMF Trusts. No gain or loss was recognized upon initial consolidation of the FREMF Trusts, but $0.8 million of related costs were expensed. The FREMF Trusts’ assets are included in Commercial real estate debt investments and the FREMF Trusts’ liabilities are included in Securitized debt of consolidated VIEs in the accompanying Consolidated Statements of Financial Condition.

Upon consolidation, the Company elected the fair value option for the financial assets and liabilities of the FREMF Trusts in order to avoid an accounting mismatch, and to more faithfully represent the economics of its interest in the entities. The fair value option requires that changes in fair value be reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company early adopted ASU 2014-13 and applied the practical expedient fair value measurement, whereby the Company determines whether the fair value of the financial assets or financial liabilities is more observable as a basis for measuring the less observable financial instruments. The Company has determined that the fair value of the financial liabilities of the FREMF Trusts are more observable, since the prices for these liabilities are primarily available from third-party pricing services utilized for multifamily mortgage-backed securities, while the individual assets of the trusts are inherently less capable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Given that the Company’s methodology for valuing the financial assets of the FREMF Trusts are an aggregate fair value derived from the fair value of the financial liabilities, the Company has determined that the fair value of each of the financial assets in their entirety should be classified in Level 2 of the fair value measurement hierarchy.

The FREMF Trusts mortgage loans had an unpaid principal balance of $2.7 billion at March 31, 2018. At March 31, 2018, there are no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the underlying loans or securitized debt securities at March 31, 2018 based upon the Company’s process of monitoring events of default on the underlying mortgage loans.

The Company consolidates a residential mortgage trust that issued residential mortgage-backed securities that are collateralized by residential mortgage loans that had been transferred to the trust by one of the Company’s subsidiaries. The Company owns most of the mortgage-backed securities issued by this VIE, including the subordinate securities, and a subsidiary of the Company continues to be the master servicer. As such, the Company is deemed to be the primary beneficiary of the residential mortgage trust and consolidates the entity. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has elected not to apply the practical expedient under ASU 2014-13 as prices of both the financial liabilities and financial assets of the residential mortgage trust are available from third-party pricing services. The contractual principal amount of the residential mortgage trust’s debt held by third parties was $34.0 million at March 31, 2018. The Company also consolidates a residential securitization trust in which it had purchased subordinated securities because its liquidation rights over the trusts became exercisable in December 2017. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has elected not to apply the practical expedient under ASU 2014-13 as prices of both the financial liabilities and financial assets of the residential mortgage trust are available from third-party pricing services. The contractual principal amount of the residential mortgage trust’s debt held by third parties was $94.4 million at March 31, 2018.

In March 2018, the Company closed OBX 2018-01 Trust (“OBX Trust”), with a face value of $327.5 million. The securitization represented a financing transaction which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company. A total of $279.2 million of bonds were issued to third parties and the Company retained $60.9 million of mortgage-backed securities. The Company is deemed to be the primary beneficiary and consolidates the OBX Trust because it has power to direct the activities that most significantly impact the OBX Trust’s performance and holds a variable interest that could be potentially significant to this VIE. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has elected not to apply the practical expedient under ASU 2014-13 as prices of both the financial liabilities and financial assets of the residential mortgage trust are available from third-party pricing services. The Company incurred approximately $1.5 million of costs in connection with the securitization that were expensed as incurred. The contractual principal amount of the OBX Trust’s debt held by third parties was $279.2 million at March 31, 2018.

Although the loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trust did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation.

In June 2016, a consolidated subsidiary of the Company entered into a $300.0 million credit facility with a third party financial institution. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest in the entity that could be potentially significant to the entity. The Company has pledged corporate loans with a carrying amount of $457.7 million at March 31, 2018 as collateral for this credit facility. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At March 31, 2018, the subsidiary had an intercompany receivable of $124.9 million, which eliminates upon consolidation and an Other secured financing of $124.9 million to the third party financial institution.

In July 2017, a consolidated subsidiary of the Company entered into a $150.0 million credit facility with a third party financial institution. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has transferred corporate loans to the subsidiary with a carrying amount of $208.9 million at March 31, 2018, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition in Corporate debt. At March 31, 2018, the subsidiary had an Other secured financing of $100.3 million to the third party financial institution.

The Company also owns variable interests in an entity that invests in MSRs and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100% of the voting interests in this entity, in August 2017, the Company sold 100% of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo.

The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $1.5 billion at March 31, 2018. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method.

The statements of financial condition of the Company’s VIEs, excluding the credit facility VIEs and OBX Trust, that are reflected in the Company’s Consolidated Statements of Financial Condition at March 31, 2018 and December 31, 2017 are as follows:



	March 31, 2018
	FREMF Trusts		Residential Mortgage Loan Trusts		MSR Silo
	(dollars in thousands)
Assets
Cash and cash equivalents	$	—	$	—	$	43,206
Commercial real estate debt investments	2,695,513		—		—
Residential mortgage loans	—		229,278		25,206
Mortgage servicing rights	—		—		596,378
Accrued interest receivable	10,762		901		—
Other assets	—		87		35,486
Total assets	$	2,706,275	$	230,266	$	700,276
Liabilities
Securitized debt (non-recourse) at fair value	$	2,497,410	$	128,260	$	—
Other secured financing	—		—		16,557
Other derivatives, at fair value	—		—		8
Accrued interest payable	4,668		316		—
Accounts payable and other liabilities	—		123		2,570
Total liabilities	$	2,502,078	$	128,699	$	19,135

	December 31, 2017
	FREMF Trusts		Residential Mortgage Loan Trusts		MSR Silo
	(dollars in thousands)
Assets
Cash and cash equivalents	$	—	$	—	$	42,293
Commercial real estate debt investments	2,826,357		—		—
Residential mortgage loans	—		478,811		19,667
Mortgage servicing rights	—		—		580,860
Accrued interest receivable	10,339		1,599		—
Other derivatives, at fair value	—		—		1
Other assets	—		1,418		32,354
Total assets	$	2,836,696	$	481,828	$	675,175
Liabilities
Securitized debt (non-recourse) at fair value	$	2,620,952	$	350,819	$	—
Other secured financing	—		—		10,496
Accrued interest payable	4,554		931		—
Accounts payable and other liabilities	—		112		4,856
Total liabilities	$	2,625,506	$	351,862	$	15,352

The statements of comprehensive income (loss) of the Company’s VIEs, excluding the credit facility VIEs and OBX Trust, that are reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2018 and 2017 are as follows:



	For the Three Months Ended March 31, 2018
	FREMF Trusts			Residential Mortgage Loan Trusts			MSR Silo
	(dollars in thousands)
Net interest income:
Interest income	$	23,838		$	2,373		$	635
Interest expense	13,834			1,759			192
Net interest income	10,004			614			443
Realized gain (loss) on disposal of investments	—			2,042			(571		)
Net gains (losses) on trading assets	—			—			69
Net unrealized gains (losses) on investments measured at fair value through earnings	292			(816		)	14,615
Other income (loss)	(4,477		)	(77		)	28,716
General and administration expenses	—			14			472
Net income (loss)	$	5,819		$	1,749		$	42,800



	For the Three Months Ended March 31, 2017
	FREMF Trusts			Residential Mortgage Loan Trusts			MSR Silo
	(dollars in thousands)
Net interest income:
Interest income	$	27,719		$	1,369		$	—
Interest expense	14,576			274			65
Net interest income	13,143			1,095			(65		)
Realized gain (loss) on disposal of investments	—			(261		)	(509		)
Net unrealized gains (losses) on investments measured at fair value through earnings	702			982			(20,264		)
Other income (loss)	(6,298		)	(97		)	34,588
General and administration expenses	—			20			1,102
Net income (loss)	$	7,547		$	1,699		$	12,648

The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs, excluding the credit facility VIEs and OBX Trust, at March 31, 2018 are as follows:

Securitized Loans at Fair Value Geographic Concentration of Credit Risk



FREMF Trusts					Residential Mortgage Loan Trusts
Property Location	Principal Balance		% of Balance		Property Location	Principal Balance		% of Balance
(dollars in thousands)
Maryland	$	494,604	18.5	%	California	$	76,367	33.0	%
Texas	361,641		13.6	%	Florida	21,340		9.2	%
Virginia	329,250		12.4	%	Texas	18,357		7.9	%
New York	280,925		10.5	%	Illinois	15,752		6.8	%
North Carolina	232,271		8.7	%	New Jersey	13,290		5.7	%
Pennsylvania	225,810		8.5	%	Other ⁽¹⁾	86,430		37.4	%
Massachusetts	179,440		6.7	%
Ohio	156,834		5.9	%
Other ⁽¹⁾	404,652		15.2	%
Total	$	2,665,427	100.0	%		$	231,536	100.0	%

(1) No individual state greater than 5%.