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LOANS | 9 Months Ended
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Sep. 30, 2022
SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract] |
LOANS |
6. LOANS
The Company invests in residential loans. Loans are classified as either held for investment or held for sale. Loans are eligible to be accounted for under the fair value option. If loans are elected under the fair value option, they are carried at fair value with changes in fair value recognized in earnings. Otherwise, loans held for investment are carried at cost less impairment and loans held for sale are accounted for at the lower of cost or fair value. Excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, as of September 30, 2022 and December 31, 2021, the Company rep orted $1.6 billion and $2.3 billion, respectively, of loans for which the fair value option was elected. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis. The carrying value of the Company’s residential loans held for sale was $1.4 million and $2.3 million at September 30, 2022 and December 31, 2021, respectively. Allowance for Losses – The Company evaluates the need for a loss reserve on each of its loans classified as held-for-investment, which primarily include corporate debt, where the fair value option is not elected. Allowance for loan losses are written off in the period the loans are deemed uncollectible. Given the unique nature of each underlying borrower and any collateral, the Company assesses an allowance for each individual loan held for investment. An allowance is established at origination or acquisition that reflects management’s estimate of the total expected credit loss over the expected life of the loan. In estimating the lifetime expected credit losses, management utilizes a probability of default and loss given default methodology (“Loss Given Default methodology”), which considers projected economic conditions over the reasonable and supportable forecast period. The forecast incorporates primarily market-based assumptions including, but not limited to, forward interest rate curves, unemployment rate estimates and certain indexes sourced from third party vendors. For any remaining period of the expected life of the loan after the reasonable and supportable period, the Company reverts to historical losses on a straight-line basis. Management uses third party vendors’ loan pool data for loans with similar risk characteristics to estimate historical losses given the limited loss history of the Company’s loan portfolio. Changes in the lifetime expected credit loss are reflected in Loan loss (provision) reversal in the Consolidated Statements of Comprehensive Income (Loss). For loans experiencing credit deterioration, the Company may use a different methodology to determine the expected credit losses such as a discounted cash flow analysis. Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the loans as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and sensitivities performed at inception of the investment. Because these determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date. The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment. The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies. Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management. The Company recorded net loan loss (provisions) reversals of $1.6 million and $27.9 million for the three and nine months ended September 30, 2022, respectively. The Company recorded net loan loss (provisions) reversals of $6.1 million and $145.3 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022 and December 31, 2021, the Company’s loan loss allowance was $0.0 million and $27.9 million, respectively. The following table presents the activity of the Company’s loan investments, excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, for the nine months ended September 30, 2022:
| Residential |  |  |  | Corporate Debt |  |  |  | Total
| (dollars in thousands)
Beginning balance January 1, 2022 | $ | 2,272,072 |  |  |  |  | $ | 1,968,991 |  |  |  |  | $ | 4,241,063 |
Purchases / originations | 5,008,390 |  |  |  |  | 185,269 |  |  |  |  | 5,193,659 |
Sales and transfers (1) | (5,470,437) |  |  |  |  | (1,902,444) |  |  |  |  | (7,372,881) |
Principal payments | (86,329) |  |  |  |  | (231,190) |  |  |  |  | (317,519) |
Gains / (losses) (2) | (166,111) |  |  |  |  | (23,320) |  |  |  |  | (189,431) |
(Amortization) / accretion | (5,948) |  |  |  |  | 2,694 |  |  |  |  | (3,254) |
Ending balance September 30, 2022 | $ | 1,551,637 |  |  |  |  | $ | — |  |  |  |  | $ | 1,551,637 |
(1) Includes securitizations, syndications, transfers to securitization vehicles and corporate debt transfers to assets of disposal group held for sale and other assets. Includes transfer of residential loans to securitization vehicles with a carrying value of $5.5 billion during the nine months ended September 30, 2022. (2) Includes loan loss allowances.
Residential The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. The Company’s residential loans are accounted for under the fair value option with changes in fair value reflected in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts. The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles and excluding loan warehouse facilities, at September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021
| (dollars in thousands)
Fair value | $ | 10,322,263 |  | $ | 7,768,507 |
Unpaid principal balance | $ | 11,469,486 |  | $ | 7,535,855 |
The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021 for these investments, excluding loan warehouse facilities:
| For the Three Months Ended |  | For the Nine Months Ended
| September 30, 2022 |  | September 30, 2021 |  | September 30, 2022 |  | September 30, 2021
| (dollars in thousands)
Interest income | $ | 109,973 |  |  | $ | 45,799 |  |  | $ | 275,083 |  |  | $ | 121,871 |
Net gains (losses) on disposal of investments (1) | 1,103 |  |  | (7,154) |  |  | (11,555) |  |  | (34,095) |
Net unrealized gains (losses) on instruments measured at fair value through earnings (1) | (541,771) |  |  | 12,525 |  |  | (1,281,501) |  |  | 49,436 |
Total included in net income (loss) | $ | (430,695) |  |  | $ | 51,170 |  |  | $ | (1,017,973) |  |  | $ | 137,212 |
(1) These amounts are presented in the line item Net gains (losses) on investments and other on the Consolidated Statements of Comprehensive Income (Loss)
The following table provides the geographic concentrations based on the unpaid principal balances at September 30, 2022 and December 31, 2021 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:
Geographic Concentrations of Residential Mortgage Loans
September 30, 2022 |  | December 31, 2021
Property location | % of Balance |  | Property location | % of Balance
California | 46.1% |  | California | 50.2%
New York | 10.2% |  | New York | 10.9%
Florida | 8.1% |  | Florida | 6.1%
All other (none individually greater than 5%) | 35.6% |  | All other (none individually greater than 5%) | 32.8%
Total | 100.0% |  |  | 100.0%
The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at September 30, 2022 and December 31, 2021:
| September 30, 2022 |  | December 31, 2021
| Portfolio Range | Portfolio Weighted Average |  | Portfolio Range | Portfolio Weighted Average
| (dollars in thousands)
Unpaid principal balance | $2 - $4,396 |  | $501 |  | $1 - $4,382 |  | $513
Interest rate | 2.00% - 15.00% |  | 4.41% |  | 0.75% - 9.24% |  | 4.04%
Maturity | 7/1/2029 - 9/1/2062 |  | 8/29/2051 |  | 7/1/2029 - 12/1/2061 |  | 12/22/2050
FICO score at loan origination | 588 - 831 |  | 760 |  | 604 - 831 |  | 762
Loan-to-value ratio at loan origination | 5% - 100% |  | 67% |  | 8% - 103% |  | 66%
At September 30, 2022 and December 31, 2021, approximately 11% and 16%, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate. The Company participates in an arrangement that provides a residential mortgage loan warehouse facility to a third-party originator. The Company has elected to apply the fair value option to this lending facility in order to simplify the accounting and keep the accounting consistent with other residential credit financial instruments with similar characteristics. At September 30, 2022 and December 31, 2021, the fair value and carrying value of this warehouse facility was $0.1 million and $1.0 million, respectively, and reported as Loans, net in the Consolidated Statements of Financial Condition. As of September 30, 2022, the lending facility was not on nonaccrual status nor past due. Commercial As of December 31, 2021, commercial real estate loans were reported in Assets of disposal group held for sale in the Consolidated Statements of Financial Condition and classified as held for sale. Refer to the “Sale of Commercial Real Estate Business” Note for additional information on the transaction. Corporate Debt In April 2022, the Company entered into a definitive agreement to sell substantially all of the corporate loan interests held by the MML business operated by the Company, as well as assets managed for third parties (collectively, the “MML Portfolio”), to Ares Capital Management LLC (“Ares”). The vast majority of these assets were legally transferred to Ares at the end of the third quarter and the remaining assets are expected to be transferred by the end of the fourth quarter of 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction.

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- Definition The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses. + References Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -URI https://asc.fasb.org/subtopic&trid=2196772 + Details
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