Other Assets

9 Months Ended

Sep. 30, 2021

The following table presents the components of the Company’s Other assets at September 30, 2021 and December 31, 2020:


(In Thousands)	September 30, 2021		December 31, 2020
REO (1)	$	178,802	$	249,699
Capital contributions made to loan origination partners	53,537		47,148
Goodwill	61,615		—
Intangibles, net (2)	24,700		—
Other interest-earning assets	35,437		—
Interest receivable	41,432		38,850
Other loan related receivables	45,242		16,682
Lease right-of-use asset (3)	39,500		758
Other	61,338		32,244
Total Other Assets	$	541,603	$	385,381

(1) Includes $16.1 million and $61.8 million of REO that is held-for-investment at September 30, 2021 and December 31, 2020, respectively.

(2) Net of aggregate accumulated amortization of $3.3 million as of September 30, 2021.

(3) An estimated incremental borrowing rate of 7.5% was used in connection with the Company’s primary operating lease (see Notes 2 and 10).

(a) Real Estate Owned

At September 30, 2021, the Company had 674 REO properties with an aggregate carrying value of $178.8 million. At December 31, 2020, the Company had 946 REO properties with an aggregate carrying value of $249.7 million.

At September 30, 2021, $176.3 million of residential real estate property was held by the Company that was acquired either through a completed foreclosure proceeding or from completion of a deed-in-lieu of foreclosure or similar legal agreement. In addition, formal foreclosure proceedings were in process with respect to $96.6 million of residential whole loans held at carrying value and $391.5 million of residential whole loans held at fair value at September 30, 2021.

The following table presents the activity in the Company’s REO for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020
Balance at beginning of period	$	204,762	$	348,516	$	249,699	$	411,659
Adjustments to record at lower of cost or fair value	(2,448)		93		(3,390)		(11,796)
Transfer from residential whole loans (1)	11,673		15,672		50,043		74,891
Purchases and capital improvements, net	1,584		771		2,207		10,072
Disposals and other (2)	(36,769)		(66,185)		(119,757)		(185,959)
Balance at end of period	$	178,802	$	298,867	$	178,802	$	298,867

Number of properties	674		1,131		674		1,131

(1)Includes a net gain recorded on transfer of approximately $700,000 and $834,000 for the three months ended September 30, 2021 and 2020, respectively; and a net loss recorded on transfer of approximately $400,000 and a net gain recorded on transfer of approximately $4.1 million for the nine months ended September 30, 2021 and 2020, respectively.

(2)During the three and nine months ended September 30, 2021, the Company sold 151 and 470 REO properties for consideration of $45.4 million and $134.0 million, realizing net gains of approximately $7.3 million and $13.4 million, respectively. During the three and nine months ended September 30, 2020, the Company sold 267 and 812 REO properties for consideration of $69.9 million and $195.2 million, realizing net gains of approximately $3.9 million and $10.0 million, respectively. These amounts are included in Other Income, net on the Company’s consolidated statements of operations.

(b) Capital Contributions Made to Loan Origination Partners

The Company has made investments in several loan originators as part of its strategy to be a reliable source of capital to select partners from whom it sources residential mortgage loans through both flow arrangements and bulk purchases. To date, such contributions of capital include the following investments (based on their carrying value prior to any impairments): $23.2 million of common equity (including partnership interests) and $67.8 million of preferred equity. In addition, for certain partners, options or warrants may have also been acquired that provide the Company the ability to increase the level of its investment if certain conditions are met. At the end of each reporting period, or earlier if circumstances warrant, the Company evaluates whether the nature of its interests and other involvement with the investee entity requires the Company to apply equity method accounting or consolidate the results of the investee entity with the Company’s financial results. On July 1, 2021, the Company completed the acquisition of certain ownership interests in Lima One, which resulted in the Company owning all of Lima One’s outstanding ownership interests. Accordingly, the Company consolidated Lima One’s financial results beginning on that date. In addition, in connection with the purchase accounting for the acquisition, the Company was required to revalue its investments in Lima One common equity, resulting in a $38.9 million gain, which was recorded in Other Income in the Company’s consolidated statements of operations (Refer to Note 16 for further details). Further, to the extent that the nature of the Company’s interests has resulted in the need for the Company to apply equity method accounting, the impact of such accounting on the Company’s results for periods subsequent to that in which the Company was determined to have significant influence over the investee company was not material for any period. With respect to investments in entities that the Company does not either consolidate or apply equity method accounting, as the interests acquired to date by the Company generally do not have a readily determinable fair value, the Company accounts for these interests (including any acquired options and warrants) in loan originators initially at cost. The carrying value of these investments will be adjusted if it is determined that an impairment has occurred or if there has been a subsequent observable transaction in either the investee company’s equity securities or a similar security that provides evidence to support an adjustment to the carrying value. Following an evaluation of the anticipated impact of COVID-19 on economic conditions for the short to medium term, the Company recorded impairment charges of $65.2 million on investments in certain loan origination partners during the nine months ended September 30, 2020, which was included in “Impairment and other losses on securities available-for-sale and other assets” on the consolidated statements of operations. During the three months ended September 30, 2021, the Company reversed $10.0 million of previously recorded impairment as two of the Company’s preferred equity investments were repaid in full. This gain was recorded in Other Income in the consolidated statements of operations. The Company did not record any impairment charges to earnings on investments in certain loan origination partners during the three and nine months ended September 30, 2021. At September 30, 2021, approximately $1.0 billion of the Company’s Residential whole loans, at carrying value were serviced by entities in which the Company has an investment, including Lima One.

The Company’s derivative instruments have historically generally been comprised of Swaps, the majority of which were designated as cash flow hedges against the interest rate risk associated with certain borrowings. In addition, in connection with managing risks associated with purchases of longer duration Agency MBS, the Company also entered into Swaps that were not designated as hedges for accounting purposes.

In response to the turmoil in the financial markets resulting from COVID-19 experienced during the three months ended March 31, 2020, and given that management no longer considered these transactions to be effective hedges in the then prevailing interest rate environment, the Company unwound all of its approximately $4.1 billion of Swap hedging transactions late in the first quarter of 2020 in order to recover previously posted margin.

The following table presents the net impact of the Company’s derivative hedging instruments on its net interest expense and the weighted average interest rate paid and received for such Swaps for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Thousands)	2021			2020			2021			2020
Interest (expense)/income attributable to Swaps	$	—		$	—		$	—		$	(3,359)
Weighted average Swap rate paid	—		%	—		%	—		%	2.06		%
Weighted average Swap rate received	—		%	—		%	—		%	1.63		%

During the nine months ended September 30, 2020, the Company recorded net losses on Swaps not designated in hedging relationships of approximately $4.3 million, which included $9.4 million of losses realized on the unwind of certain Swaps. These amounts are included in Other income, net on the Company’s consolidated statements of operations.

Impact of Derivative Hedging Instruments on AOCI

The following table presents the impact of the Company’s derivative hedging instruments on its AOCI for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020
AOCI from derivative hedging instruments:
Balance at beginning of period	$	—	$	(7,176)	$	—	$	(22,675)
Net loss on Swaps	—		—		—		(50,127)
Reclassification adjustment for losses/gains related to hedging instruments included in net income	—		7,176		—		72,802
Balance at end of period	$	—	$	—	$	—	$	—

TBA Securities

In order to economically hedge the risks arising from the investments in Agency eligible investor loans, the Company has entered into short positions in certain TBA securities. The table below summarizes open short positions in TBA securities as of September 30, 2021, which had an aggregate value of $5.4 million.

TBA Security

Notional Amount

Settlement Date

(In Thousands)

FNCL 2.0 10/21

420,000

October 14, 2021

FNCL 2.5 10/21

330,000

October 14, 2021

TBA short positions are subject to margining requirements which serve to mitigate counterparty credit risk associated with these transactions. Open TBA positions are measured at fair value each reporting date, with realized and unrealized changes in the fair value of these positions recorded in Other income, net in our consolidated statements of operations. For the three and nine months ended September 30, 2021, the Company recorded a net gain on TBA short positions of $2.1 million and $1.0 million, respectively. No TBA short positions had been entered into in the prior periods presented.