Residential Whole Loans

Included on the Company’s consolidated balance sheets at September 30, 2015 and December 31, 2014, are approximately $777.4 million and $351.4 million, respectively, of residential whole loans arising from the Company’s 100% equity interest in certificates issued by certain trusts established to acquire the loans. Based on its evaluation of these interests and other factors, the Company has determined that the trusts are required to be consolidated for financial reporting purposes.

Residential Whole Loans at Carrying Value

Residential whole loans at carrying value totaled approximately $245.9 million and $207.9 million at September 30, 2015 and December 31, 2014, respectively. The carrying value reflects the original investment amount, plus accretion of interest income, less principal and interest cash flows received. The carrying value is reduced by any allowance for loan losses established subsequent to acquisition.

The Company recorded an allowance for loan losses of approximately $922,000 on its residential whole loan pools held at carrying value as of September 30, 2015. For the three and nine months ended September 30, 2015 a net provision for loan losses of approximately $335,000 and $785,000, respectively, was recorded, which is included in Operating and Other expense on the Company’s consolidated statements of operations.

The following table presents the activity in the Company’s allowance for loan losses on its residential whole loan pools at carrying value for the three and nine months ended September 30, 2015.



(In Thousands)	Three Months Ended September 30, 2015		Nine Months Ended September 30, 2015
Balance at the beginning of period	$	587	$	137
Provisions for loan losses	335		785
Balance at the end of the period	$	922	$	922

The following table presents information regarding estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the residential whole loans held at carrying value acquired by the Company for the three and nine months ended September 30, 2015:



(In Thousands)	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015
Contractually required principal and interest	$	10,646		$	103,950
Contractual cash flows not expected to be collected (non-accretable yield)	(1,313		)	(18,465		)
Expected cash flows to be collected	9,333			85,485
Interest component of expected cash flows (accretable yield)	(3,620		)	(34,901		)
Fair value at the date of acquisition	$	5,713		$	50,584

The following table presents accretable yield activity for the Company’s residential whole loans held at carrying value for the three and nine months ended September 30, 2015:



(In Thousands)	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015
Balance at beginning of period	$	155,574		$	133,012
Additions	3,620			34,901
Accretion	(3,972		)	(11,406		)
Reclassifications to non-accretable difference, net	2,692			1,407
Balance at end of period	$	157,914		$	157,914

Accretable yield for residential whole loans is the excess of loan cash flows expected to be collected over the purchase price. The cash flows expected to be collected represents the Company’s estimate of the amount and timing of undiscounted principal and interest cash flows. Additions include accretable yield estimates for purchases made during the period and reclassification to accretable yield from non-accretable yield. Accretable yield is reduced by accretion during the period. The reclassifications between accretable and non-accretable yield and the accretion of interest income are based on changes in estimates regarding loan performance and the value of the underlying real estate securing the loans. In future periods, as the Company updates estimates of cash flows expected to be collected from the loans and the underlying collateral, the accretable yield may change. Therefore, the amount of accretable income recorded during the three and nine months ended September 30, 2015 is not necessarily indicative of future results.

Residential Whole Loans at Fair Value

Certain of the Company’s residential whole loans are presented at fair value on its consolidated balance sheets as a result of a fair value election made at time of acquisition. Subsequent changes in fair value are reported in current period earnings and presented in Net gain on residential whole loans held at fair value on the Company’s consolidated statements of operations.

The following table presents information regarding the Company’s residential whole loans at fair value at September 30, 2015 and December 31, 2014:



(Dollars in Thousands)	September 30, 2015		December 31, 2014
Outstanding principal balance	$	670,068	$	182,613
Aggregate fair value	$	531,537	$	143,472
Number of loans	2,713		885

During the three and nine months ended September 30, 2015, the Company recorded net gains on residential whole loans at fair value of $5.0 million and $10.2 million, respectively. The Company did not have any residential whole loans held at fair value during the three and nine months ended September 30, 2014.

The following table presents the components of Net gain on residential whole loans held at fair value for the three and nine months ended September 30, 2015:



(In Thousands)	Three Months Ended September 30, 2015		Nine Months Ended September 30, 2015
Coupon payments and other income received	$	2,186	$	5,018
Net unrealized gains	2,362		3,872
Net gain on payoff/liquidation of loans	431		1,286
Total	$	4,979	$	10,176