Commercial Mortgage Residual Interests

9 Months Ended

Sep. 30, 2016

Investments, Debt and Equity Securities [Abstract]

Commercial Mortgage Residual Interests

Note 3 - Commercial Mortgage Residual Interests:

As of December 31, 2015, NNN held the commercial mortgage residual interests (“Residuals”) from seven loan securitizations. In September 2016, the loan servicer of four of the securitizations exercised its clean-up call option. The clean-up call allowed the servicer to purchase all of the trusts’assets, thereby terminating future cash distributions payable to NNN as the holder of these residual interests. During the quarter and nine months ended September 30, 2016 and 2015, NNN recorded an other than temporary valuation impairment as a reduction of earnings from operations. The other than temporary valuation impairment during the quarter and nine months ended September 30, 2016 related to the execution of the clean-up call option on the four securitizations, as well as, the fair value adjustment on the remaining three securitizations.

Unrealized gains and losses are reported as other comprehensive income in stockholders’ equity and other than temporary losses as a result of a change in the timing or amount of estimated cash flows are recorded as an other than temporary valuation impairment. The following table summarizes the recognition of unrealized gains and/or losses recorded as other comprehensive income as well as other than temporary valuation impairment (dollars in thousands):

	Quarter Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016			2015
Unrealized gains (losses)	$	(4,561	)	$	116	$	(4,454	)	$	(268	)
Other than temporary valuation impairment	5,978			53		6,830			481

As of September 30, 2016, the remaining three Residuals are recorded at fair value. Based on the expected timing of future cash flows relating to the Residuals certain valuation assumptions are made. The following table summarizes the key assumptions used in determining the value of three remaining securitizations as of September 30, 2016:

Discount rate	20	%
Average life equivalent CPR(1) speeds range	0.87% to 21.56% CPR
Foreclosures:
Frequency curve default model	0% - 1.33% range
Loss severity of loans in foreclosure	20	%
Yield:
LIBOR	Forward 3-month curve
Prime	Forward curve

⁽¹⁾  Conditional prepayment rate