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Commercial Loans | 6 Months Ended
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Jun. 30, 2016
Commercial Loans |
Accounts, Notes, Loans and Financing Receivable [Line Items] |
Loans | Commercial Loans We invest in commercial loans that we historically originated or acquired. In February 2016, we discontinued commercial loan originations. In June 2016, we engaged a broker to sell all but two of our commercial mezzanine loans. As a result, we reclassified certain loans from held-for-investment to held-for-sale. The following table summarizes the classifications and carrying value of commercial loans at June 30, 2016 and December 31, 2015. Table 7.1 – Classifications and Carrying Value of Commercial Loans
(In Thousands) |  | June 30, 2016 |  | December 31, 2015
Held-for-sale |  |  |  |
At fair value |  | $ | 69,720 |  |  | $ | 39,141 |
At lower of cost or fair value |  | 233,058 |  |  | — |
Held-for-investment |  |  |  |
At fair value |  | — |  |  | 67,657 |
At amortized cost |  | 22,285 |  |  | 295,849 |
Total Commercial Loans |  | $ | 325,063 |  |  | $ | 402,647 |
At June 30, 2016, none of our commercial loans were financed through the Commercial Securitization entity or pledged as collateral under our borrowing agreements. Of the held-for-investment commercial loans at amortized cost shown above at December 31, 2015, $166 million were financed through the Commercial Securitization entity and $135 million were pledged as collateral under short-term borrowing arrangements. Commercial Loans Held-for-Sale At Fair Value In June 2016, we transferred loans with an unpaid principal balance of $67 million and a carrying value of $70 million from held-for-investment at fair value to held-for-sale at fair value. These include senior mortgage loans 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 June 30, 2016 and December 31, 2015, we held three of these A/B notes with an aggregate outstanding principal balance of $67 million and $67 million, respectively, and an aggregate fair value of $70 million and $68 million, respectively. 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 completely offset through our consolidated statements of income. During the three and six months ended June 30, 2016 and 2015, 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 June 30, 2016 and December 31, 2015 was $4 million and $5 million, respectively. Commercial loans held-for-sale also include loans we originated with the intent to sell to third parties. At June 30, 2016, we did not hold any senior commercial mortgage loans. At December 31, 2015, there were 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. During the three months ended June 30, 2016, we did not acquire or sell any senior commercial mortgage loans and we did not record any market valuation gains or losses on senior commercial mortgage loans. During the six months ended June 30, 2016, we acquired $38 million (principal balance) of senior commercial loans for which we elected the fair value option and sold $76 million (principal balance) of loans to third parties. During the six months ended June 30, 2016, we recorded $0.4 million of net market valuation gains on senior commercial mortgage loans for which we elected the fair value option through Mortgage banking activities, net on our consolidated statements of income. During the three and six months ended June 30, 2015, we acquired $258 million and $350 million (principal balance), respectively, of senior commercial loans for which we elected the fair value option and sold $146 million and $348 million (principal balance), respectively, of loans to third parties. During the three and six months ended June 30, 2015, we recorded $1 million and $7 million, respectively, of net market valuation gains on senior commercial mortgage loans for which we elected the fair value option through Mortgage banking activities, net on our consolidated statements of income. At Lower of Cost or Fair Value Commercial loans held-for-sale at the lower of cost or fair value primarily include mezzanine loans that are secured by a borrower’s ownership interest in a single purpose entity that owns commercial property. At June 30, 2016, we held 51 commercial loans at the lower of cost or fair value with $237 million in outstanding principal balance, a carrying value of $233 million, and an estimated net fair value of $237 million. In June 2016, we transferred loans with an unpaid principal balance of $237 million and a carrying value of $233 million from held-for-investment at amortized cost to held-for-sale at the lower of cost or fair value resulting from our decision to sell these loans. As we determined that the fair value of these loans was greater than their carrying value, we recorded the loans at their current amortized cost, eliminating $4 million of net purchase discount and establishing a valuation adjustment of $4 million. During the three and six months ended June 30, 2016, we did not record market valuation gains or losses on these commercial mortgage loans. Commercial Loans Held-for-Investment At Amortized Cost Commercial loans held-for-investment include mezzanine loans that are secured by a borrower’s ownership interest in a single purpose entity that owns commercial property. As described above, in June of 2016, we transferred most of our held for investment loans to held-for-sale. The following table provides additional information for our commercial loans held-for-investment at amortized cost at June 30, 2016 and December 31, 2015. Table 7.2 – Carrying Value for Commercial Loans Held-for-Investment at Amortized Cost
(In Thousands) |  | June 30, 2016 |  | December 31, 2015
Principal balance |  | $ | 23,144 |  |  | $ | 307,047 |
Unamortized discount, net |  | — |  |  | (4,096 | )
Recorded investment |  | 23,144 |  |  | 302,951 |
Allowance for loan losses |  | (859 | ) |  | (7,102 | )
Carrying Value |  | $ | 22,285 |  |  | $ | 295,849 |
At June 30, 2016 and December 31, 2015, we held two and 59 commercial loans held-for-investment at amortized cost, respectively. Of the $23 million of recorded investment in commercial loans held-for-investment at June 30, 2016, 24% was originated in 2012 and 76% was originated in 2011. 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.” Loans are considered individually impaired when we have determined that we will not be able to collect all of the contractually established cash flows according to the loan agreement. As a result of the transfer of most of our held-for-investment loans to held-for-sale, we recorded a reversal of provision for loan losses. This was based on our determination that the fair market value of these loans was higher than their amortized cost basis. As such, no valuation adjustment for the held-for-sale loans was charged against the allowance for loan losses and the previously outstanding allowance associated with these loans was eliminated and a reversal of provision for loan losses was recorded. 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) |  | June 30, 2016 |  | December 31, 2015
Pass |  | $ | 5,444 |  |  | $ | 272,768 |
Watch list |  | — |  |  | 34,279 |
Workout |  | 17,700 |  |  | — |
Total Commercial Loans Held-for-Investment |  | $ | 23,144 |  |  | $ | 307,047 |
The following table summarizes the activity in the allowance for commercial loan losses for the three and six months ended June 30, 2016 and 2015. Table 7.4 – Activity in the Allowance for Commercial Loan Losses
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
(In Thousands) |  | 2016 |  | 2015 |  | 2016 |  | 2015
Balance at beginning of period |  | $ | 7,390 |  |  | $ | 7,662 |  |  | $ | 7,102 |  |  | $ | 7,457 |
Reversal of provision for loan losses |  | (6,531 | ) |  | (261 | ) |  | (6,243 | ) |  | (56 | )
Balance at End of Period |  | $ | 859 |  |  | $ | 7,401 |  |  | $ | 859 |  |  | $ | 7,401 |
At June 30, 2016 and December 31, 2015, all of our commercial loans collectively evaluated for impairment were current. The following table summarizes the balances for loans collectively evaluated for impairment at June 30, 2016 and December 31, 2015. Table 7.5 – Loans Collectively Evaluated for Impairment Review
(In Thousands) |  | June 30, 2016 |  | December 31, 2015
Principal balance |  | $ | 5,444 |  |  | $ | 307,047 |
Recorded investment |  | 5,444 |  |  | 302,951 |
Related allowance |  | 136 |  |  | 7,102 |
During the three months ended June 30, 2016, one loan previously classified as "watchlist" was reclassified to "workout" and was determined to be impaired due to the loan not being repaid by its scheduled maturity. From the point we determined the loan was impaired, we did not receive or record any interest income related to this loan. For the three months ended June 30, 2016, the average recorded investment in the impaired loan was $18 million. At December 31, 2015, we did not have any commercial loans individually evaluated for impairment. The following table summarizes the balances for loans individually evaluated for impairment at June 30, 2016 and December 31, 2015. Table 7.6 – Loans Individually Evaluated for Impairment Review
(In Thousands) |  | June 30, 2016 |  | December 31, 2015
Principal balance |  | $ | 17,700 |  |  | $ | — |
Recorded investment |  | 17,700 |  |  | — |
Related allowance |  | 723 |  |  | — |

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