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VARIABLE INTEREST ENTITIES | 9 Months Ended
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Sep. 30, 2022
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
VARIABLE INTEREST ENTITIES |
8. VARIABLE INTEREST ENTITIES
The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $1.1 billion at September 30, 2022. 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. Multifamily Securitization 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 this arrangement, the Company determined that it was the primary beneficiary based upon its involvement in the design of this VIE and through the retention of a significant variable interest in the VIE. The Company elected the fair value option for the financial liabilities of this VIE 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. 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. 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 Residential securitizations are issued by entities generally 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. Residential securitizations closed during the year are included in the table below.
Securitization | Date of Closing | Face Value at Closing
|  | (dollars in thousands)
OBX 2022-NQM1 | January 2022 | $ | 556,696 |
OBX 2022-INV1 | January 2022 | $ | 377,275 |
OBX 2022-INV2 | February 2022 | $ | 466,686 |
OBX 2022-NQM2 | February 2022 | $ | 439,421 |
OBX 2022-INV3 | March 2022 | $ | 330,823 |
OBX 2022-NQM3 | March 2022 | $ | 315,843 |
OBX 2022-NQM4 | May 2022 | $ | 457,285 |
OBX 2022-J1 | May 2022 | $ | 389,334 |
OBX 2022-NQM5 | June 2022 | $ | 390,775 |
OBX 2022-INV4 | June 2022 | $ | 335,900 |
OBX 2022-NQM6 | June 2022 | $ | 387,913 |
OBX 2022-J2 | August 2022 | $ | 305,969 |
OBX 2022-NQM7 | August 2022 | $ | 358,931 |
OBX 2022-NQM8 | September 2022 | $ | 397,470 |
As of September 30, 2022 and December 31, 2021, a total carrying value of $7.4 billion and $4.6 billion, respectively, of bonds were held by third parties and the Company retained $1.0 billion and $780.8 million, respectively, 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 had 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. Effective August 1, 2022, upon initial consolidation of new securitization entities, the Company elected to apply the measurement alternative for consolidated collateralized financing entities in order to simplify its accounting and valuation processes. The liabilities of these securitization entities are deemed to be more observable and are used to measure the fair value of the assets. The Company incurred $1.7 million and $2.2 million of costs during the three months ended September 30, 2022 and 2021, respectively, and $6.8 million and $4.0 million of costs during the nine months ended September 30, 2022 and 2021, 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 $8.6 billion and $4.6 billion at September 30, 2022 and December 31, 2021, respectively. 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 connection with the sale of substantially all of the assets that comprise the MML Portfolio, the credit facilities which provided financing for the Company’s corporate debt were paid-off and terminated during the three months ended June 30, 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction. 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 owned variable interests in entities that invested in Interests in MSR. These entities were VIEs because they did not have sufficient equity at risk to finance their activities and the Company was the primary beneficiary because it had power to remove the decision makers with or without cause and held substantially all of the variable interests in the entities. During the quarter ended September 30, 2022, the Company terminated its contracts previously classified as Interests in MSR on its Consolidated Statements of Financial Condition and purchased the underlying mortgage servicing rights. As a result, consolidated VIEs holding the Interests in MSR and related assets and liabilities were liquidated. No gain or loss was recognized upon deconsolidation. The underlying mortgage servicing rights were initially recognized at fair value and subsequent changes in fair value are recognized in earnings. See the “Mortgage Servicing Rights” Note and “Fair Value Measurements” Note for further information regarding MSR. 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, 2022 and December 31, 2021 are as follows:
September 30, 2022
| MSR VIEs
Assets |
Cash and cash equivalents | $ | 3,533 |
Loans | 1,378 |
Mortgage servicing rights | 37 |
Interests in MSR | — |
Other assets | 4,068 |
Total assets | $ | 9,016 |
Liabilities |
Payable for unsettled trades | $ | 2,152 |
Other liabilities | 3,636 |
Total liabilities | $ | 5,788 |
December 31, 2021
| MSR VIEs
Assets |
Cash and cash equivalents | $ | 16,187 |
Loans | 2,347 |
Mortgage servicing rights | 7,254 |
Interests in MSR | 69,316 |
Other assets | 10,406 |
Total assets | $ | 105,510 |
Liabilities |
Payable for unsettled trades | $ | 1,911 |
Other liabilities | 14,582 |
Total liabilities | $ | 16,493 |
Corporate Debt Funds The Company managed parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities were considered VIEs because the investors did not have substantive liquidation, kick-out or participating rights. The fees that the Company earned were not considered variable interests of the VIE. The Company was not the primary beneficiary of the Fund Entities and therefore did not consolidate the Fund Entities. The corporate loans in the Fund Entities were assets managed for third parties and were part of the MML Portfolio transferred to Ares during the three months ended June 30, 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction. 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, 2022 and December 31, 2021, the Company had outstanding participating interests in residential mortgage loans of $0.7 billion and $1.0 billion, 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 https://asc.fasb.org/topic&trid=2197479 + Details
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