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VARIABLE INTEREST ENTITIES | 9 Months Ended
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Sep. 30, 2021
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
VARIABLE INTEREST ENTITIES |
8. VARIABLE INTEREST ENTITIES
At September 30, 2021, commercial trusts, commercial securitizations and the collateralized loan obligation are reported in Assets of disposal group held for sale in the Consolidated Statements of Financial Condition. Refer to the “Sale of Commercial Real Estate Business” Note for additional information. Multifamily Securitization In November 2019, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $1.0 billion and retained interest-only securities with a notional balance of $1.0 billion and senior securities with a principal balance of $28.5 million. In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $0.5 billion and retained interest-only securities with a notional balance of $0.5 billion. At the inception of the arrangements, the Company determined that it was the primary beneficiary based upon its involvement in the design of these VIEs and through the retention of a significant variable interest in the VIEs. The Company elected the fair value option for the financial liabilities of these VIEs in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase. In 2020, the Company deconsolidated the 2019 multifamily VIE since it sold all of its interest-only securities and no longer retains a significant variable interest in the entity. The Company incurred $1.1 million of costs in connection with the 2020 multifamily securitization that were expensed as incurred during the nine months ended September 30, 2020. Residential Trusts The Company consolidates a securitization trust, which is included in “Residential Trusts” in the tables below, 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 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 not elected to apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities 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 $10.7 million and $23.0 million at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, a total of $10.7 million of bonds were held by third parties and the Company retained $12.1 million of mortgage-backed securities, which were eliminated in consolidation. Residential Securitizations The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Residential Securities. OBX Trusts The entities in the table below are referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company.
Securitization | Date of Closing | Face Value at Closing
|  | (dollars in thousands)
OBX 2018-1 | March 2018 | $ | 327,162 |
OBX 2018-EXP1 | August 2018 | $ | 383,451 |
OBX 2018-EXP2 | October 2018 | $ | 384,027 |
OBX 2019-INV1 | January 2019 | $ | 393,961 |
OBX 2019-EXP1 | April 2019 | $ | 388,156 |
OBX 2019-INV2 | June 2019 | $ | 383,760 |
OBX 2019-EXP2 | July 2019 | $ | 463,405 |
OBX 2019-EXP3 | October 2019 | $ | 465,492 |
OBX 2020-INV1 | January 2020 | $ | 374,609 |
OBX 2020-EXP1 | February 2020 | $ | 467,511 |
OBX 2020-EXP2 | July 2020 | $ | 489,352 |
OBX 2020-EXP3 | September 2020 | $ | 514,609 |
OBX 2021-NQM1 | March 2021 | $ | 257,135 |
OBX 2021-J1 | April 2021 | $ | 353,840 |
OBX 2021-NQM2 | June 2021 | $ | 376,004 |
OBX 2021-J2 | July 2021 | $ | 382,483 |
OBX 2021-NQM3 | August 2021 | $ | 356,474 |
OBX 2021-INV1 | September 2021 | $ | 320,199 |
As of September 30, 2021, a total of $3.4 billion of bonds were held by third parties and the Company retained $678.4 million of mortgage-backed securities, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trusts are available from third party pricing services. The Company incurred $2.2 million and $2.8 million of costs during the three months ended September 30, 2021 and 2020, respectively, and $4.0 million and $7.1 million of costs during the nine months ended September 30, 2021 and 2020, respectively, in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $3.3 billion at September 30, 2021. Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation. Credit Facility VIEs In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of September 30, 2021, the borrowing limit on this facility was $675.0 million. 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 potentially be significant to the entity. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $595.4 million at September 30, 2021. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At September 30, 2021, the subsidiary had an intercompany receivable of $359.0 million, which eliminates upon consolidation and a secured financing of $359.0 million to the third party financial institution. In July 2017, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of September 30, 2021, the borrowing limit on this facility was $400.0 million. 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 $371.2 million at September 30, 2021, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition under Loans, net. At September 30, 2021, the subsidiary had a secured financing of $199.2 million to the third party financial institution. In January 2019, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of September 30, 2021, the borrowing limit on this facility was $400.0 million. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $301.7 million at September 30, 2021. As of September 30, 2021, the subsidiary had a secured financing of $171.4 million to the third party financial institution. MSR VIEs The Company owns variable interests in an entity that invests in MSR 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 subjected to the 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 also owns variable interests in entities that invest in Interests in MSR. These entities are VIEs because they do not have sufficient equity at risk to finance their activities and the Company is the primary beneficiary because it has power to remove the decision makers with or without cause and holds substantially all of the variable interests in the entities. The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $2.2 billion at September 30, 2021. 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 multifamily securitization, credit facility VIEs and OBX Trusts as the transfers of loans or securities did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated Statements of Financial Condition at September 30, 2021 and December 31, 2020 are as follows:
September 30, 2021
|  |  | Residential Trusts |  | MSR VIEs
Assets |  |  | (dollars in thousands)
Cash and cash equivalents |  |  | $ | — |  |  | $ | 11,046 |
Loans |  |  | — |  |  | 3,726 |
Assets transferred or pledged to securitization vehicles |  |  | 23,739 |  |  | — |
Mortgage servicing rights |  |  | — |  |  | 90,979 |
Interests in MSR |  |  | — |  |  | 57,530 |
Principal and interest receivable |  |  | 156 |  |  | — |
Other assets |  |  | — |  |  | 12,774 |
Total assets |  |  | $ | 23,895 |  |  | $ | 176,055 |
Liabilities |  |  |  |  |
Debt issued by securitization vehicles (non-recourse) |  |  | $ | 10,717 |  |  | $ | — |
Payable for unsettled trades |  |  | — |  |  | 2,152 |
Interest payable |  |  | 25 |  |  | — |
Other liabilities |  |  | 414 |  |  | 7,714 |
Total liabilities |  |  | $ | 11,156 |  |  | $ | 9,866 |
December 31, 2020
|  |  | Residential Trusts |  | MSR VIEs
Assets |  |  | (dollars in thousands)
Cash and cash equivalents |  |  | $ | — |  |  | $ | 22,241 |
Loans |  |  | — |  |  | 47,048 |
Assets transferred or pledged to securitization vehicles |  |  | 40,035 |  |  | — |
Mortgage servicing rights |  |  | — |  |  | 100,895 |
Principal and interest receivable |  |  | 226 |  |  | — |
Total assets |  |  | $ | 40,261 |  |  | $ | 170,184 |
Liabilities |  |  |  |  |
Debt issued by securitization vehicles (non-recourse) |  |  | $ | 23,351 |  |  | $ | — |
Other secured financing |  |  | — |  |  | 30,420 |
Payable for unsettled trades |  |  | — |  |  | 3,076 |
Interest payable |  |  | 55 |  |  | — |
Other liabilities |  |  | 246 |  |  | 13,345 |
Total liabilities |  |  | $ | 23,652 |  |  | $ | 46,841 |
The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs, excluding the multifamily securitization, credit facility and OBX Trusts VIEs, at September 30, 2021 are as follows: Securitized Loans at Fair Value Geographic Concentration of Credit Risk
|  | Residential Trusts
|  |  |  |  |  | Property Location |  | Principal Balance |  | % of Balance
|  |  |  |  |  | California |  | $ | 12,219 |  |  | 52.6 | %
|  |  |  |  |  | Illinois |  | 3,516 |  |  | 15.1 | %
|  |  |  |  |  | Texas |  | 2,456 |  |  | 10.6 | %
|  |  |  |  |  | Other (1) |  | 5,052 |  |  | 21.7 | %
|  |  |  |  |  | Total |  | $ | 23,243 |  |  | 100.0 | %
|  |  |  |  |  | (1) No individual state greater than 5%.
Corporate Debt Funds The Company manages parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities are considered VIEs because the investors do not have substantive liquidation, kick-out or participating rights. The fees that the Company earns are not considered variable interests of the VIE. The Company is not the primary beneficiary of the Fund Entities and therefore does not consolidate the Fund Entities. During the three and nine months ended September 30, 2021, the Company transferred $209.9 million and $284.9 million of loans for cash. The loan transfers were accounted for as sales. Residential Credit Fund The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the fund is the management and performance fees that it earns, which are not considered variable interests in the entity. As of September 30, 2021 and December 31, 2020, the Company has issued participating interests in residential mortgage loans in the amount of $641.0 million and $39.2 million, respectively. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition. The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings.

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- Definition The entire disclosure for a variable interest entity (VIE), including but not limited to, judgments and assumptions in determining whether to consolidate and in identifying the primary beneficiary, gain (loss) recognized on the initial consolidation of the VIE, terms of arrangements, amounts and classification of the VIE's assets and liabilities, and the entity's maximum exposure to loss. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -URI http://asc.fasb.org/topic&trid=2197479 + Details
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