Commercial Loans

We invest in commercial loans that we originated as well as loans that we acquired from third-party originators. The following table summarizes the classifications and carrying value of commercial loans at December 31, 2015 and December 31, 2014.

Table 7.1 – Classifications and Carrying Value of Commercial Loans



(In Thousands)	December 31, 2015		December 31, 2014
Held-for-sale, at fair value	$	39,141	$	166,234
Held-for-investment
At fair value	67,657		71,262
At amortized cost	295,849		329,431
Total Commercial Loans	$	402,647	$	566,927

Of the held-for-investment commercial loans shown above at December 31, 2015 and December 31, 2014, $166 million and $195 million, respectively, were financed through the Commercial Securitization entity, and $135 million and $80 million were pledged as collateral under short-term borrowing arrangements.

Commercial Loans Held-for-Sale at Fair Value

Commercial loans held-for-sale include loans we have originated and intend to sell to third parties. At December 31, 2015, we held four senior commercial mortgage loans at fair value, with an aggregate outstanding principal balance of $39 million and an aggregate fair value of $39 million. As of December 31, 2014, there were 13 senior commercial mortgage loans at fair value, with an aggregate outstanding principal balance of $163 million and an aggregate fair value of $166 million.

During the years ended December 31, 2015 and 2014, we originated $618 million and $904 million (principal balance), respectively, of senior commercial loans for which we elected the fair value option and sold $741 million and $791 million (principal balance), respectively, of loans to third parties. During the years ended December 31, 2015 and 2014, we recorded positive $10 million and positive $21 million, respectively, of valuation adjustments on senior commercial mortgage loans for which we elected the fair value option through mortgage banking and investment activities, net on our consolidated statements of income. At December 31, 2015, all commercial loans held-for-sale were current and loans with a market value of $18 million were pledged as collateral under short-term borrowing arrangements. In February 2016, we discontinued commercial loan originations.

Commercial Loans Held-for-Investment

At Fair Value

Commercial loans held-for-investment at fair value include senior mortgage loans for which we have elected the fair value option and have been split into senior A-notes and junior B-notes. Although the A-notes for each of the loans were sold, the transfers did not qualify for sale accounting treatment and we treated the sales as secured borrowings. At December 31, 2015, we held three of these A/B notes with an aggregate outstanding principal balance of $67 million and an aggregate fair value of $68 million. At December 31, 2014, we held three A/B notes, with an aggregate outstanding principal balance of $68 million and an aggregate fair value of $71 million. We carry the A-notes and associated secured commercial borrowings at the same fair values and the periodic valuation adjustments associated with these assets and liabilities offset through mortgage banking and investment activities, net on our consolidated statements of income. During the years ended December 31, 2015 and 2014, there were no net changes in the fair value of the B-notes, in which we retain an actual economic interest. The carrying value of the B-notes at both December 31, 2015 and December 31, 2014 was $5 million.

At Amortized Cost

Commercial loans held-for-investment at amortized cost include loans we have originated and preferred equity investments we made or, in either case, acquired from third parties. As of December 31, 2015, these loans primarily include mezzanine loans that are secured by a borrower’s ownership interest in a single purpose entity that owns commercial property, rather than a lien on the commercial property. The preferred equity investments are typically preferred equity interests in a single purpose entity that owns commercial property and are included within, and referred to herein, as commercial loans held-for-investment due to the fact that their risks and payment characteristics are nearly equivalent to commercial mezzanine loans.

The following table provides additional information for our commercial loans held-for-investment at amortized cost at December 31, 2015 and December 31, 2014.

Table 7.2 – Carrying Value for Commercial Loans Held-for-Investment



(In Thousands)	December 31, 2015			December 31, 2014
Principal balance	$	307,047		$	341,750
Unamortized discount, net	(4,096		)	(4,862		)
Recorded investment	302,951			336,888
Allowance for loan losses	(7,102		)	(7,457		)
Carrying Value	$	295,849		$	329,431

At December 31, 2015 and December 31, 2014, we held 59 and 60, respectively, commercial loans held-for-investment at amortized cost. During the years ended December 31, 2015 and 2014, we originated or acquired $22 million and $59 million, respectively, of commercial loans held-for-investment at amortized cost. During the years ended December 31, 2015 and December 31, 2014, we received repayments of $57 million and $71 million, respectively, and in connection with certain loan prepayments, we received $4 million and $2 million, respectively, of yield maintenance fees. Of the $303 million of recorded investment in commercial loans held-for-investment at December 31, 2015, 7% was originated in 2015, 19% was originated in 2014, 16% was originated in 2013, 31% was originated in 2012, 23% was originated in 2011, and 4% was originated in 2010.

Allowance for Loan Losses on Commercial Loans

For commercial loans classified as held-for-investment, we establish and maintain an allowance for loan losses. The allowance includes a component for loans collectively evaluated for impairment and a component for loans individually evaluated for impairment.

Our methodology for assessing the adequacy of the allowance for loan losses includes a formal review of each commercial loan in the portfolio and the assignment of an internal impairment status. Based on the assigned impairment status, a loan is categorized as “Pass,” “Watch List,” or “Workout.”

The following table presents the principal balance of commercial loans held-for-investment by risk category.

Table 7.3 – Principal Balance of Commercial Loans Held-for-Investment by Risk Category



(In Thousands)	December 31, 2015		December 31, 2014
Pass	$	272,768	$	316,122
Watch list	34,279		25,628
Total Commercial Loans Held-for-Investment	$	307,047	$	341,750

The following table summarizes the activity in the allowance for commercial loan losses for the years ended December 31, 2015, 2014, and 2013.

Table 7.4 – Activity in the Allowance for Commercial Loan Losses



	Years Ended December 31,
(In Thousands)	2015			2014		2013
Balance at beginning of period	$	7,457		$	7,373	4,084
Charge-offs, net	—			—		—
(Reversal of) provision for loan losses	(355		)	84		3,289
Balance at End of Period	$	7,102		$	7,457	$	7,373

At December 31, 2015 and December 31, 2014, all of our commercial loans collectively evaluated for impairment were current. The following table summarizes the balances for loans collectively evaluated for impairment at December 31, 2015 and December 31, 2014.

Table 7.5 – Loans Collectively Evaluated for Impairment Review



(In Thousands)	December 31, 2015		December 31, 2014
Principal balance	$	307,047	$	341,750
Recorded investment	302,951		336,888
Related allowance	7,102		7,457

Commercial Loans Individually Evaluated for Impairment

We did not have any loans individually evaluated for impairment for either of the years ended December 31, 2015 or 2014.

Commercial Loan Characteristics

The following table displays the geographic concentration of commercial loans recorded on our consolidated balance sheets at December 31, 2015 and 2014.

Table 7.6 – Geographic Concentration of Commercial Loans



	December 31, 2015				December 31, 2014
Geographic Concentration (by Principal)	Held-for-Sale		Held-for- Investment		Held-for-Sale		Held-for- Investment
Nevada	45	%	—	%	—	%	—	%
Virginia	26	%	—	%	—	%	—	%
Florida	18	%	10	%	—	%	17	%
Illinois	11	%	—	%	—	%	—	%
California	—	%	22	%	6	%	19	%
New York	—	%	19	%	—	%	18	%
Michigan	—	%	10	%	18	%	8	%
Washington, District of Columbia	—	%	—	%	25	%	—	%
Colorado	—	%	—	%	17	%	—	%
Connecticut	—	%	—	%	10	%	—	%
Texas	—	%	5	%	9	%	—	%
Maryland	—	%	—	%	7	%	—	%
North Carolina	—	%	—	%	—	%	6	%
Other states (none greater than 5%)	—	%	34	%	8	%	32	%
Total	100	%	100	%	100	%	100	%

The following table displays the loan product type and accompanying loan characteristics of commercial loans recorded on our consolidated balance sheets at December 31, 2015 and 2014.

Table 7.7 – Characteristics and Product Types of Commercial Loans



December 31, 2015
(In Thousands)
Loan Balance						Number of Loans	Interest Rate					Maturity Date			Total Principal		30-89 Days DQ		90+ Days DQ
Held-for-Investment:
Fixed-rate loans
	$	—	to	$	5,000	40	9.50	%	to	12.50	%	2016-08	-	2024-12	$	109,973	$	—	$	—
	$	5,001	to	$	10,000	11	4.43	%	to	11.00	%	2015-04	-	2025-01	87,510		—		—
	$	10,001	to	$	15,000	3	9.50	%	to	9.50	%	2018-01	-	2021-06	42,374		—		—
	$	15,001	to	$	20,000	1	10.50	%	to	11.00	%	2016-06	-	2022-06	20,000		—		—
	$	25,001	to	$	30,000	1				10.00	%			2016-10	25,405		—		—
						56									285,262		—		—
ARM loans:
	$	—	to	$	5,000	1	11.20	%	to	11.20	%	2016-11	-	2016-11	1,330		—		—
	$	5,001	to	$	10,000	1	12.00	%	to	12.00	%	2015-02	-	2016-10	5,455		—		—
	$	10,001	to	$	15,000	1	9.16	%	to	9.16	%	2014-11	-	2016-08	15,000		—		—
						3									21,785		—		—
Total Held-for-Investment						59									$	307,047	$	—	$	—
Held-for-Investment, at Fair Value:
Fixed-rate loans:
	$	—	to	$	5,000	3	10.00	%	to	10.00	%	2023-12	-	2024-04	$	4,505	$	—	$	—
	$	10,001	to	$	15,000	1				4.95	%			2014-01	11,169		—		—
	$	20,001	to	$	25,000	1				4.83	%			2023-12	21,788		—		—
	$	25,001	to	$	30,000	1				4.79	%			2024-04	29,500		—		—
Total Held-for-Investment, at Fair Value						6									$	66,962	$	—	$	—
Held-for-Sale
Fixed-rate loans:
	$	—	to	$	5,000	1	4.81	%	to	4.81	%	2025-10	-	2025-10	$	4,150	$	—	$	—
	$	5,001	to	$	10,000	2	5.05	%		5.05	%	2026-01	-	2026-01	16,900		—		—
	$	15,001	to	$	20,000	1	4.90	%		4.90	%	2025-12	-	2025-12	17,700		—		—
Total Held-for-Sale						4									$	38,750	$	—	$	—



December 31, 2014
(In Thousands)
Loan Balance					Number of Loans	Interest Rate					Maturity Date			Total Principal		30-89 Days DQ		90+ Days DQ
Held-for-Investment:
Fixed-rate loans
	$	—	to	$5,000	37	9.50	%	to	12.50	%	2016-08	-	2024-12	$	102,994	$	—	$	—
	$	5,001	to	$10,000	14	4.43	%	to	11.00	%	2015-04	-	2025-01	109,551		—		—
	$	10,001	to	$15,000	2	9.50	%	to	9.50	%	2018-01	-	2021-06	24,874		—		—
	$	15,001	to	$20,000	2	10.50	%	to	11.00	%	2016-06	-	2022-06	37,700		—		—
	$	25,001	to	$30,000	1				10.00	%			2016-10	25,629		—		—
					56									300,748		—		—
ARM loans:
	$	5,001	to	$10,000	2	10.80	%	to	12.00	%	2015-02	-	2016-10	15,478		—		—
	$	10,001	to	$15,000	2	9.16	%	to	11.20	%	2014-11	-	2016-08	25,524		—		—
					4									41,002		—		—
Total Held-for-Investment					60									$	341,750	$	—	$	—
Held-for-Investment, at Fair Value:
Fixed-rate loans:
	$	—	to	$5,000	3	10.00	%	to	10.00	%	2023-12	-	2024-04	$	4,555	$	—	$	—
	$	10,001	to	$15,000	1				4.95	%			2024-01	11,399		—		—
	$	20,001	to	$25,000	1				4.83	%			2023-12	22,102		—		—
	$	25,001	to	$30,000	1				4.79	%			2024-04	29,500		—		—
Total Held-for-Investment, at Fair Value					6									$	67,556	$	—	$	—
Held-for-Sale
Fixed-rate loans:					13	4.19	%	to	4.79	%	2024-12	-	2045-01	$	162,790	$	—	$	—