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MarketScreener Homepage  >  Equities  >  Nyse  >  Great Ajax Corp.    AJX

GREAT AJAX CORP.

(AJX)
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GREAT AJAX : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/06/2020 | 09:23am EST
In this quarterly report on Form 10-Q ("report"), unless the context indicates
otherwise, references to "Great Ajax," "we," "the company," "our" and "us" refer
to the activities of and the assets and liabilities of the business and
operations of Great Ajax Corp.; "operating partnership" refers to Great Ajax
Operating Partnership L.P., a Delaware limited partnership; "our Manager" refers
to Thetis Asset Management LLC, a Delaware limited liability company; "Aspen
Capital" refers to the Aspen Capital group of companies; "Aspen" and "Aspen Yo"
refers to Aspen Yo LLC, an Oregon limited liability company that is part of
Aspen Capital; and "the Servicer" and "Gregory" refer to Gregory Funding LLC, an
Oregon limited liability company and our affiliate, and an indirect subsidiary
of Aspen Yo.

Our Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the unaudited interim consolidated
financial statements and related notes included in Item 1. Consolidated interim
financial statements of this report and in Item 8. Financial statements and
supplementary data in our most recent Annual Report on Form 10-K, as well as the
section entitled "Risk Factors" in Part II, Item 1A. of this report, as well as
other cautionary statements and risks described elsewhere in this report and our
most recent Annual Report on Form 10-K.

Overview


Great Ajax Corp. is a Maryland corporation that is organized and operated in a
manner intended to allow us to qualify as a REIT. We primarily target
acquisitions of RPLs, which are residential mortgage loans on which at least
five of the seven most recent payments have been made, or the most recent
payment has been made and accepted pursuant to an agreement, or the full dollar
amount, to cover at least five payments has been paid in the last seven months.
We also acquire and originate SBC loans. The SBC loans that we target through
acquisitions generally have a principal balance of up to $5.0 million and are
secured by multi-family residential and commercial mixed use retail/residential
properties on which at least five of the seven most recent payments have been
made, or the most recent payment has been made and accepted pursuant to an
agreement, or the full dollar amount, to cover at least five payments has been
paid in the last seven months. We also originate SBC loans that we believe will
provide an appropriate risk-adjusted total return. Additionally, we invest in
single-family and smaller commercial properties directly either through a
foreclosure event of a loan in its mortgage portfolio or through a direct
acquisition. We may also target investments in NPLs either directly or with
joint venture partners. NPLs are loans on which the most recent three payments
have not been made. We may acquire NPLs either directly or with joint venture
partners. We own a 19.8% equity interest in the Manager and an 8.0% equity
interest in the parent company of our Servicer. GA-TRS is a wholly owned
subsidiary of the Operating Partnership that owns the equity interest in the
Manager and the Servicer. We have elected to treat GA-TRS as a taxable REIT
subsidiary under the Code. Our mortgage loans and real properties are serviced
by the Servicer, also an affiliated company.

In 2014, we formed Great Ajax Funding LLC, a wholly owned subsidiary of the
Operating Partnership, to act as the depositor of mortgage loans into
securitization trusts and to hold the subordinated securities issued by such
trusts and any additional trusts we may form for additional secured borrowings.
AJX Mortgage Trust I and AJX Mortgage Trust II are wholly owned subsidiaries of
the Operating Partnership formed to hold mortgage loans used as collateral for
financings under our repurchase agreements. On February 1, 2015, we formed GAJX
Real Estate Corp., as a wholly owned subsidiary of the Operating Partnership, to
own, maintain, improve and sell certain real estate owned properties ("REO")
purchased by us. We have elected to treat GAJX Real Estate Corp. as a TRS under
the Code.

Our Operating Partnership, through interests in certain entities as of
September 30, 2020 and December 31, 2019, holds 99.9% and 99.8%, respectively,
of Great Ajax II REIT Inc. which holds an interest in Great Ajax II Depositor
LLC which was formed to act as the depositor of mortgage loans into
securitization trusts and to hold the subordinated securities issued by such
trusts and any additional trusts we may form for additional secured borrowings.
We have securitized mortgage loans through a securitization trust and retained
subordinated securities from the secured borrowings. This trust is considered to
be a VIE, and we have determined that we are the primary beneficiary of this
VIE.

In 2018, we formed Gaea Real Estate Corp. ("Gaea"), as a wholly owned subsidiary
of the Operating Partnership. We have elected to treat Gaea as a TRS under the
Code. Also during 2018, we formed Gaea Real Estate Operating Partnership LP, a
wholly owned subsidiary of Gaea, to hold investments in commercial real estate
assets. We also formed BFLD Holdings LLC, Gaea Commercial Properties LLC, Gaea
Commercial Finance LLC and Gaea RE LLC as subsidiaries of Gaea Real Estate
Operating Partnership. In 2019, we formed DG Brooklyn Holdings, LLC, also a
subsidiary of Gaea Real Estate Operating Partnership LP, to hold investments in
multi-family properties. On November 22, 2019, Gaea completed a private capital
raise in which it raised $66.3 million from the issuance of 4,419,641 shares of
its common stock to third parties to allow Gaea to continue to advance its
investment strategy. We retained a 23.2% ownership interest in Gaea following
the transaction. At September 30, 2020 we owned approximately 23.0% of Gaea.
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We elected to be taxed as a REIT for U.S. federal income tax purposes beginning
with our taxable year ended December 31, 2014. Our qualification as a REIT
depends upon our ability to meet, on a continuing basis, various complex
requirements under the Code relating to, among other things, the sources of our
gross income, the composition and values of our assets, our distribution levels
and the diversity of ownership of our capital stock. We believe that we are
organized in conformity with the requirements for qualification as a REIT under
the Code, and that our current intended manner of operation enables us to meet
the requirements for taxation as a REIT for U.S. federal income tax purposes.

Our Portfolio

The following table outlines the carrying value of our portfolio of mortgage loan assets and single-family and smaller commercial properties as of September 30, 2020 and December 31, 2019 ($ in millions):

                                          September 30, 2020      December 31, 2019
Residential RPLs                         $          1,068.5      $          1,085.5
Residential NPLs                                       28.4                    30.9
SBC/commercial loans                                    5.4                    35.1
Property held-for-sale, net                             6.5                    13.5
Rental property, net                                    0.7                     1.5
Investments at fair value                             284.7                   231.7
Investment in beneficial interests                     86.2                 

58.0

Total mortgage related assets            $          1,480.4      $          

1,456.2

We closely monitor the status of our mortgage loans and, through our Servicer, work with our borrowers to improve their payment records.

Market Trends and Outlook

COVID-19


The COVID-19 pandemic that began during the first quarter of 2020 created a
global public-health crisis that resulted in widespread volatility and
deteriorations in household, business, and economic market conditions, including
in the United States, where we conduct all of our business. While the duration
and severity of the COVID-19 pandemic remains unknown, many governmental and
nongovernmental authorities directed their actions toward curtailing household
and business activity in order to contain or mitigate the impact of the COVID-19
pandemic and deployed fiscal- and monetary-policy measures in order to seek to
partially mitigate the adverse effects. These programs have had varying degrees
of success and the extent of the long term impact on the mortgage market remains
unknown.

The COVID-19 pandemic began to meaningfully impact our operations in late March
2020 and this disruption was reflected in our results of operations for the
quarter ended March 31, 2020. During the quarter ended September 30, 2020 many
of these negative impacts continued to reverse as follows:

•We recorded total recovery of credit losses provisions of $4.0 million on our
Mortgage loan portfolio and Investments in beneficial interests as a result of
better than expected loan performance during the quarter and the related impact
on future repayment rates.
•We recovered $4.3 million of unrealized losses on our Investments in debt
securities to Other comprehensive income as counterparty marks at September 30,
2020 rebounded off the March 31, 2020 levels.
•We recovered $6.6 million of cash deposits on a net basis from our repurchase
financing counterparties as collateral prices rebounded off the March 31, 2020
levels.

The pandemic has continued and continues to significantly and adversely impact
certain areas of the United States. As a result, our forecast of macroeconomic
conditions and expected lifetime credit losses on our mortgage loan and
beneficial interest portfolios is subject to meaningful uncertainty. While
substantially all of our borrowers continue to make scheduled payments and we
continue to receive payments in full, we have acted swiftly to support our
borrowers with a mortgage forbearance program. While we generally do not hold
loans guaranteed by GSEs or the US government, we, through our Servicer, are
nonetheless offering a forbearance program under terms similar to those required
for GSE loans. Borrowers that are able to provide documentation of a negative
impact of COVID-19 are entitled to three months of forbearance. The three
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monthly payments may then be repaid over 12 months. If a borrower cannot repay
the deferred amount, our Servicer will work them on repayment options.
Notwithstanding the foregoing, to the extent special rules apply to a mortgagor
because of the jurisdiction or type of the Mortgage Loan, the Servicer will
comply with those rules. Our Servicer has extensive experience dealing with
delinquent borrowers and we believe it is well positioned to react on our behalf
to any increase in mortgage delinquencies. The following list shows the COVID-19
forbearance activity in our mortgage loan portfolio as of October 30, 2020(1) :

•Number of COVID-19 forbearance relief inquiries: 1,224 •Number of COVID-19 forbearance relief granted: 364



(1)Statistics are for loans carried on our balance sheet including loans held in
Ajax 2017-D and Ajax 2018-C where third parties own 50% and 37%, respectively.
Statistics do not include non-consolidated joint ventures where we own bonds and
beneficial interests issued by the joint ventures.

During the nine months ended September 30, 2020, we raised $125.0 million, net
of offering costs, in a series of private placements of preferred stock and
warrants. We expect to use the net proceeds from the private placement to
acquire mortgage loans and mortgage-related assets consistent with our
investment strategy and that this additional capital will provide sufficient
liquidity to both benefit from any investment opportunities and protect against
future market disruption.

Notwithstanding this additional capital and liquidity, we expect continued
volatility in the residential mortgage securities market in the short term and
increased acquisition opportunities later in the year or early 2021. Extended
forbearance, foreclosure timelines and eviction timelines could result in lower
yields and losses on our mortgage loan and beneficial interest portfolios and
losses on our REO held-for-sale. Ongoing disruption in the credit markets could
result in margin calls from our financing counterparties and additional mark
downs on our Investments in debt securities, beneficial interests and mortgage
loans.

We believe that certain cyclical trends continue to drive a significant realignment within the mortgage sector notwithstanding the impact of the pandemic. Through the end of the third quarter, the recent trends noted below have continued, including:


•historically low interest rates and elevated operating costs resulting from new
regulatory requirements continue to drive sales of residential mortgage assets
by banks and other mortgage lenders;
•declining home ownership in certain areas due to rising prices, low inventory,
tighter lending standards and increased down payment requirements that have
increased the demand for single-family and multi-family residential rental
properties;
•the Dodd-Frank risk retention rules for asset backed securities have reduced
the universe of participants in the securitization markets;
•the lack of a robust market for non-conforming mortgage loans will reduce the
pool of buyers due to tighter credit standards as a result of the COVID-19
pandemic; and
•the current market landscape and decrease in the price of residential mortgage
loans as a result of the COVID-19 outbreak we believe will generate new
opportunities in residential mortgage-related whole loan strategies.

The origination of subprime and alternative residential mortgage loans remains
substantially below 2008 levels and the qualified mortgage and ability-to-repay
rule requirements have put pressure on new originations. Additionally, many
banks and other mortgage lenders have increased their credit standards and down
payment requirements for originating new loans. Recent market disruption from
the pandemic has sharply reduced financing alternatives for borrowers not
eligible for financing programs underwritten by the GSEs or the federal
government.

The combination of these factors has also resulted in a significant number of
families that cannot qualify to obtain new residential mortgage loans. We
believe the U.S. federal regulations addressing "qualified mortgages" based on,
among other factors such as employment status, debt-to-income level, impaired
credit history or lack of savings, limit mortgage loan availability from
traditional mortgage lenders. In addition, we believe that many homeowners
displaced by foreclosure or who either cannot afford to own or cannot be
approved for a mortgage will prefer to live in single-family rental properties
with similar characteristics and amenities to owned homes as well as smaller
multi-family residential properties. In certain demographic areas, new
households are being formed at a rate that exceeds the new homes being added to
the market, which we believe favors future demand for non-federally guaranteed
mortgage financing for single-family and smaller multi-family rental properties.
For all these reasons, we believe that demand for single-family and smaller
multi-family rental properties will increase in the near term and remain at
heightened levels for the foreseeable future.

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We believe that investments in residential RPLs with positive equity provide an
optimal investment value. As a result, we are currently focusing on acquiring
pools of RPLs, though we may acquire NPLs, either directly or with joint venture
partners, if attractive opportunities exist. Through our Servicer, we work with
our borrowers to improve their payment records. Once there is a period of
continued performance, we expect that borrowers will typically refinance these
loans at or near the estimated value of the underlying property.

We also believe there are significant attractive investment opportunities in the
SBC loan and property markets and originate as well as purchase these loans. The
primary lenders for smaller multi-family and mixed retail/residential properties
are community banks and not regional and national banks and large institutional
lenders. We believe the primary lenders and loan purchasers are less interested
in these assets because they typically require significant commercial and
residential mortgage credit and underwriting expertise, special servicing
capability and active property management. It is also more difficult to create
the large pools of these loans that banks, other lenders and portfolio acquirers
typically desire. We continually monitor opportunities to increase our holdings
of these SBC loans and properties.

Factors That May Affect Our Operating Results


Acquisitions. Our operating results depend heavily on sourcing residential RPLs
and SBC loans and, when attractive opportunities are identified, NPLs. We
believe that there is generally a large supply of RPLs available to us for
acquisition and we believe the available supply provides for a steady
acquisition pipeline of assets since large institutions are active sellers in
the market. However, we expect that our residential mortgage loan portfolio may
grow at an uneven pace, as opportunities to acquire distressed residential
mortgage loans may be irregularly timed and may involve large portfolios of
loans, and the timing and extent of our success in acquiring such loans cannot
be predicted. We also believe there may be increased opportunities to acquire
NPLs due to the pandemic. In addition, for any given portfolio of loans that we
agree to acquire, we typically acquire fewer loans than originally expected, as
certain loans may be resolved prior to the closing date or may fail to meet our
diligence standards. The number of loans not acquired typically constitutes a
small portion of a particular portfolio. In any case where we do not acquire the
full portfolio, we make appropriate adjustments to the applicable purchase
price.

Financing. Our ability to grow our business by acquiring residential RPLs and
SBC loans depends on the availability of adequate financing, including
additional equity financing, debt financing or both in order to meet our
objectives. We intend to leverage our investments with debt, the level of which
may vary based upon the particular characteristics of our portfolio and on
market conditions. We have funded and intend to continue to fund our asset
acquisitions with non-recourse secured borrowings in which the underlying
collateral is not marked-to-market and employ repurchase agreements without the
obligation to mark to market the underlying collateral to the extent available.
We securitize our whole loan portfolios, primarily as a financing tool, when
economically efficient to create long-term, fixed rate, non-recourse financing
with moderate leverage, while retaining one or more tranches of the subordinate
MBS so created. The secured borrowings are structured as debt financings and not
real estate investment conduit ("REMIC") sales. We completed the securitization
transactions pursuant to Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act"), in which we issued notes primarily secured by seasoned,
performing and non-performing mortgage loans primarily secured by first liens on
one-to-four family residential properties. Currently there is substantial
uncertainty in the securitization markets which could limit our access to
financing.

To qualify as a REIT under the Code, we generally will need to distribute at
least 90% of our taxable income each year (subject to certain adjustments) to
our stockholders. This distribution requirement limits our ability to retain
earnings and thereby replenish or increase capital to support our activities.

Resolution Methodologies. We, through the Servicer, or our affiliates, employ
various loan resolution methodologies with respect to our residential mortgage
loans, including loan modification, collateral resolution and collateral
disposition. The manner in which an NPL is resolved will affect the amount and
timing of revenue we will receive. Our preferred resolution methodology is to
modify NPLs. Once successfully modified and there is a period of continued
performance, we expect that borrowers will typically refinance these loans at or
near the estimated value of the underlying property. We believe modification
followed by refinancing generates near-term cash flows, provides the highest
possible economic outcome for us and is a socially responsible business strategy
because it keeps more families in their homes. In certain circumstances, we may
also consider selling these modified loans. Through historical experience, we
expect that many of our NPLs will enter into foreclosure or similar proceedings,
ultimately becoming REO that we can sell or convert into single-family rental
properties that we believe will generate long-term returns for our stockholders.
Our REO properties may be converted into single-family rental properties or they
may be sold through REO liquidation and short sale processes. We expect the
timelines for each of the different processes to vary significantly. The exact
nature of resolution will depend on a number of factors that are beyond our
control, including borrower willingness, property value, availability of
refinancing, interest rates, conditions in the financial markets, regulatory
environment and other factors. To avoid the 100% prohibited transaction tax on
the sale of dealer property
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by a REIT, we may dispose of assets that may be treated as held "primarily for
sale to customers in the ordinary course of a trade or business" by contributing
or selling the asset to a TRS prior to marketing the asset for sale.

The state of the real estate market and home prices will determine proceeds from
any sale of real estate. We will opportunistically and on an asset-by-asset
basis determine whether to rent any REO we acquire, whether upon foreclosure or
otherwise. We may determine to sell such assets if they do not meet our
investment criteria. In addition, while we seek to track real estate price
trends and estimate the effects of those trends on the valuations of our
portfolios of residential mortgage loans, future real estate values are subject
to influences beyond our control. Declining real estate prices, including as a
result of COVID-19 pandemic, are expected to negatively affect our results. We
also expect that extended eviction timelines resulting from the COVID-19
pandemic will negatively impact sales of our REO held-for-sale.

Conversion to Rental Property. From time to time we will retain an REO property
as a rental property and may acquire rental properties through direct purchases
at attractive prices. The key variables that will affect our residential rental
revenues over the long-term will be the extent to which we acquire properties,
which, in turn, will depend on the amount of our capital invested, average
occupancy and rental rates in our owned rental properties. We expect the
timeline to convert multi-family and single-family loans into rental properties
will vary significantly by loan, which could result in variations in our revenue
and our operating performance from period to period. There are a variety of
factors that may inhibit our ability, through the Servicer, to foreclose upon a
residential mortgage loan and get access to the real property within the time
frames we model as part of our valuation process. These factors include, without
limitation: state foreclosure timelines and the associated deferrals (including
from litigation); unauthorized occupants of the property; U.S. federal, state or
local legislative action or initiatives designed to provide homeowners with
assistance in avoiding residential mortgage loan foreclosures that may delay the
foreclosure process; U.S. federal government programs that require specific
procedures to be followed to explore the non-foreclosure outcome of a
residential mortgage loan prior to the commencement of a foreclosure proceeding;
and declines in real estate values and high levels of unemployment and
underemployment that increase the number of foreclosures and place additional
pressure on the already overburdened judicial and administrative systems. We do
not expect to retain a material number of single family residential properties
for use as rentals. We do, however, intend to focus on retaining multi-unit
residences derived from foreclosures or acquired through outright purchases as
rentals.

Expenses. Our expenses primarily consist of the fees and expenses payable by us
under the Management Agreement and the Servicing Agreement. Additionally, our
Manager incurs direct, out-of-pocket costs related to managing our business,
which are contractually reimbursable by us. Loan transaction expense is the cost
of performing due diligence on pools of mortgage loans under consideration for
purchase. Professional fees are primarily for legal, accounting and tax
services. Real estate operating expense consists of the ownership and operating
costs of our REO properties, both held-for-sale and as rentals, and includes any
charges for impairments to the carrying value of these assets, which may be
significant. Those expenses may increase due to extended eviction timelines
caused by the pandemic. Interest expense, which is subtracted from our Interest
income to arrive at Net interest income, consists of the costs to borrow money.

On July 30, 2020, we priced Ajax Mortgage Loan Trust 2020-B ("2020-B") with
$97.2 million of AAA rated senior securities, and $17.3 million of A rated
securities issued with respect to $156.5 million of mortgage loans, all of which
were RPLs. The AAA and A rated securities have a weighted average coupon of
1.874% and represent 73.2% of the unpaid principal balance ("UPB") of the
underlying mortgage loans. As a result of our securities combined with the
closing of 2020-B and favorable repurchase lines of credit our overall cost of
funds have decreased materially since the quarter ended June 30, 2020.

Changes in Home Prices. As discussed above, generally, rising home prices are
expected to positively affect our results, particularly as this should result in
greater levels of re-performance of mortgage loans, faster refinancing of those
mortgage loans, more re-capture of principal on greater than 100% LTV
(loan-to-value) mortgage loans and increased recovery of the principal of the
mortgage loans upon sale of any REO. Conversely, declining real estate prices
are expected to negatively affect our results, particularly if the home prices
should decline below our purchase price for the loans and especially if
borrowers determine that it is better to strategically default as their equity
in their homes decline. While home prices have risen to, or in some cases
beyond, pre-Great Recession levels in many parts of the United States, there are
still significant regions where values have not materially increased. We
typically concentrate our investments in specific urban geographic locations in
which we expect stable or better property markets. However, when we analyze loan
and property acquisitions we do not take home price appreciation HPA into
account except for rural properties for which we model negative HPA related to
our expectation of worse than expected property condition. It is too early to
determine the impact of the COVID-19 outbreak on HPA and the resulting impact on
our markets. A significant decline in HPA will have an adverse impact on our
operating results.

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Changes in Market Interest Rates. With respect to our business operations,
increases in existing interest rates, in general, may over time cause: (1) the
value of our mortgage loan and MBS portfolio to decline; (2) coupons on our
adjustable rate mortgages ("ARM") and hybrid ARM mortgage loans and MBS to
reset, although on a delayed basis, to higher interest rates; (3) prepayments on
our mortgage loans and MBS portfolio to slow, thereby slowing the amortization
of our purchase premiums and the accretion of our purchase discounts; (4) the
interest expense associated with our borrowings to increase; and (5) to the
extent we enter into interest rate swap agreements as part of our hedging
strategy, the value of these agreements to increase. Conversely, decreases in
interest rates, in general, may over time cause: (a) prepayments on our mortgage
loan and MBS portfolio to increase, thereby accelerating the accretion of our
purchase discounts; (b) the value of our mortgage loan and MBS portfolio to
increase; (c) coupons on our ARM and hybrid ARM mortgage loans and MBS to reset,
although on a delayed basis, to lower interest rates; (d) the interest expense
associated with our borrowings to decrease; and (e) to the extent we enter into
interest rate swap agreements as part of our hedging strategy, the value of
these agreements to decrease. We currently expect the pace of loan prepayments
to slow due to the COVID-19 outbreak.

Market Conditions. Due to the dramatic repricing of real estate assets that
occurred during the 2008 financial crisis and the continuing uncertainty
regarding the direction and strength of the real estate markets including as a
result of the pandemic, we believe a void in the debt and equity capital
available for investing in real estate exists as many financial institutions,
insurance companies, finance companies and fund managers have determined to
reduce or discontinue investment in debt or equity related to real estate. We
believe the dislocations in the residential real estate market have resulted or
will result in an "over-correction" in the repricing of real estate assets,
creating a potential opportunity for us to capitalize on these market
dislocations and capital void to the extent we are able to obtain financing for
additional purchases.

We believe that in spite of the continuing uncertain market environment for
mortgage-related assets, including as a result of the pandemic outbreak, current
market conditions offer potentially attractive investment opportunities for us,
even in the face of a riskier and more volatile market environment. We expect
that market conditions will continue to impact our operating results and will
cause us to adjust our investment and financing strategies over time as new
opportunities emerge and risk profiles of our business change.

COVID-19 Pandemic. The pandemic has also impacted, and is likely to continue to
impact, directly or indirectly, many of the other factors discussed above, as
well as other aspects of our business. New developments continue to emerge and
it is not possible for us to predict with certainty which factors will impact
our business. In addition, we cannot assess the impact of each factor on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements. In particular, it is difficult to fully assess the impact of the
pandemic at this time due to, among other things, uncertainty regarding the
severity and duration of the outbreak domestically and internationally and the
effectiveness of federal, state and local government efforts to contain the
spread of COVID-19, the effects of those efforts on our business, the indirect
impact on the U.S. economy and economic activity and the impact on the mortgage
markets and capital markets.

Critical Accounting Policies and Estimates

Mortgage Loans


Loans acquired with deterioration in credit quality - As of their acquisition
date the loans we acquire have generally suffered some credit deterioration
subsequent to origination. As a result, prior to the adoption of ASU 2016-13,
Financial Instruments - Credit Losses, otherwise known as CECL, on January 1,
2020, we were required to account for the mortgage loans pursuant to ASC 310-30,
Accounting for Loans with Deterioration in Credit Quality. Under both standards,
our recognition of interest income for loans with deteriorated credit quality
("PCD loans") is based upon having a reasonable expectation of the amount and
timing of the cash flows expected to be collected. When the timing and amount of
cash flows expected to be collected are reasonably estimable, we use expected
cash flows to apply the effective interest method of income recognition.

Under both CECL and ASC 310-30, acquired loans may be aggregated and accounted
for as a pool of loans if the loans have common risk characteristics. A pool is
accounted for as a single asset with a single composite interest rate and an
aggregate expectation of cash flows. However, CECL allows more flexibility to
adjust the loan pools as the underlying risk factors change over time. Under ASC
310-30, we determined RPLs to have common risk characteristics and accounted for
them as a single loan pool for loans acquired within each three-month calendar
quarter. Similarly, we determined NPLs to have common risk characteristics and
accounted for them as a single non-performing pool for loans acquired within
each three-month calendar quarter. The result was generally two additional pools
(RPLs and NPLs) each quarter. Under CECL, we re-aggregated our loan pools around
similar risk factors, while eliminating the previous distinction for the quarter
in which loans were acquired. This resulted in reducing the number of loan pools
to four as of March 31, 2020, which increased to six as of
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June 30, 2020. The number of pools remains at six as of September 30, 2020. Each
loan pool is oriented around similar risk factors. Excluded from the aggregate
pools are loans that pay in full subsequent to the acquisition closing date but
prior to pooling. Any gain or loss on these loans is recognized as Interest
income in the period the loan pays in full.

Our accounting for PCD loans gives rise to an accretable yield and an allowance
for credit losses. Under CECL, upon the acquisition of PCD loans we record the
acquisition as three separate elements for 1) the amount of purchase discount
which we expect to recover through eventual repayment by the borrower, 2) an
allowance for future expected credit loss and 3) the UPB of the loan. The
purchase price discount which we expect at the time of acquisition to collect
over the life of the loans is the accretable yield. Cash flows expected at
acquisition include all cash flows directly related to the acquired loan,
including those expected from the underlying collateral. We recognize the
accretable yield as Interest income on a prospective level yield basis over the
life of the pool. The expectation of the amount of undiscounted cash flows to be
collected is evaluated at the end of each calendar quarter. If we expect to
collect greater cash flows over the life of the pool, any prior allowance is
reversed to the extent of the increase and the expected yield to maturity is
adjusted on a prospective basis. The allowance for credit losses is increased
when we estimate we will not collect all amounts previously estimated to be
collectible, and reduced or eliminated when the underlying asset has been
liquidated and all expected underlying cash flows have been realized. Management
assesses the credit quality of the portfolio and the 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, we consider the estimated net recoverable value of the loan pools as
well as other factors, such as the fair value of the underlying collateral.
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.

Our mortgage loans are secured by real estate. We monitor the credit quality of
the mortgage loans in our portfolio on an ongoing basis, principally by
considering loan payment activity or delinquency status. In addition, we assess
the expected cash flows from the mortgage loans, the fair value of the
underlying collateral and other factors, and evaluate whether and when it
becomes probable that all amounts contractually due will not be collected.

Borrower payments on the mortgage loans are classified as principal, interest,
payments of fees, or escrow deposits. Amounts applied as interest on the
borrower account are similarly classified as interest for accounting purposes
and are classified as operating cash flows in our consolidated Statement of Cash
Flows. Amounts applied as principal on the borrower account including amounts
contractually due from borrowers that exceed our basis in loans purchased at a
discount, are similarly classified as principal for accounting purposes and are
classified as investing cash flows in the consolidated Statement of Cash Flows
as required under U.S. GAAP. Amounts received as payments of fees are recorded
in Other income and classified as operating cash flows in the consolidated
Statement of Cash Flows. Escrow deposits are recorded on the Servicer's balance
sheet and do not impact our cash flow.

Loans acquired or originated that have not experienced a deterioration in credit
quality - while we generally acquire loans that have experienced deterioration
in credit quality, we also acquire loans that have not experienced a
deterioration in credit quality and originate SBC loans.

Accrual of interest on individual loans is discontinued when management believes
that, after considering economic and business conditions and collection efforts,
the borrower's financial condition is such that collection of interest is
doubtful. Our policy is to stop accruing interest when a loan's delinquency
exceeds 90 days. All interest accrued but not collected for loans that are
placed on non-accrual status or subsequently charged-off are reversed against
Interest income. Income is subsequently recognized on the cash basis until, in
management's judgment, the borrower's ability to make periodic principal and
interest payments returns and future payments are reasonably assured, in which
case the loan is returned to accrual status.

An individual loan is considered to be impaired when, based on current events
and conditions, it is probable we will be unable to collect all amounts due
(both principal and interest) according to the contractual terms of the loan
agreement. Impaired loans are carried at the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's market
price, or the fair value of the collateral if the loan is collateral dependent.
For individual loans, a troubled debt restructuring is a formal restructuring of
a loan where, for economic or legal reasons related to the borrower's financial
difficulties, a concession that would not otherwise be considered is granted to
the borrower. The concession may be granted in various forms, including
providing a below-market interest rate, a reduction in the loan balance or
accrued interest, an extension of the maturity date, or a combination of these.
An individual loan that has had a troubled debt restructuring is considered to
be impaired and is subject to the relevant accounting for impaired loans.

If necessary, an allowance for loan losses is established through a provision
for loan losses charged to expenses. The allowance is the difference between the
expected future cash flows from the loan and the contractual balance due.

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Real Estate


Real estate owned Property - we acquire real estate properties directly from
sellers and when we foreclose on a borrower and take title to the underlying
property. REO is recorded at cost if purchased, or at the present value of
future cash flows if obtained through foreclosure. REO we expect to actively
market for sale is classified as held-for-sale. REO held-for-sale is carried at
the lower of its acquisition basis, or its net realizable value (estimated fair
market value less expected selling costs). We estimate fair market value using a
combination of BPOs, comparable sales, appraisals, and competitive market
analyses provided by local realtors subject to our judgment. Net unrealized
losses due to changes in market value are recognized through a valuation
allowance by charges to income. No depreciation or amortization expense is
recognized on properties held-for-sale, while holding costs are expensed as
incurred. Foreclosed property that is sold to a third party at the foreclosure
sale ("Third Party Sales") is not considered REO and proceeds on these third
party sales are treated as payment in satisfaction of the underlying loan. See
Mortgage Loans, above.

Rental property is real estate property not held-for-sale. Rental property is
intended to be held as long-term investments but may eventually be
held-for-sale. Property is held for investment as rental property if the modeled
present value of the future expected cash flows from use as a rental exceed the
present value of expected cash flows from a sale. Depreciation is provided for
using the straight-line method over the estimated useful lives of the assets of
27.5 years. We perform an impairment analysis for all rental property not
held-for-sale using estimated cash flows if events or changes in circumstances
indicate that the carrying value may be impaired, such as prolonged vacancy,
identification of materially adverse legal or environmental factors, changes in
expected ownership period or a decline in market value to an amount less than
cost. This analysis is performed at the property level. The cash flows are
estimated based on a number of assumptions that are subject to economic and
market uncertainties including, among others, demand for rental properties,
competition for customers, changes in market rental rates, costs to operate each
property and expected ownership periods.

If the carrying amount of a held for investment asset exceeds the sum of its
undiscounted future operating and residual cash flows, an impairment loss is
recorded for the difference between estimated fair value of the asset and the
carrying amount. We generally estimate the fair value of assets held for use by
using BPOs, comparable sales or realtor competitive market analysis. In some
instances, appraisal information may be available and is used in addition to
other measures of fair value.

From time to time, we perform property renovations to maximize the value of REO
held-for-sale and held for investment. Such expenditures are generally advanced
by our Servicer and recovered by our Servicer when the property is liquidated
(for REO property held-for-sale) or upon completion of the renovations (for REO
property held for investment). For residential and commercial properties that
are not held-for-sale, the carrying value, including any renovations that
improve or extend the life of the asset, are accounted for at cost. The cost
basis is depreciated using the straight-line method over an estimated useful
life of 27.5 years. Interest and other carrying costs incurred during the
renovation period are capitalized until the property is ready for its intended
use. Expenditures for ordinary maintenance and repairs are charged to expense as
incurred. We generally intend to limit rental activity to multifamily or
multi-unit single family properties.

Investments at fair value


Our Investments at Fair Value as of September 30, 2020 and December 31, 2019
consist of investments in senior and subordinated notes issued by joint
ventures, which we form with third party institutional accredited investors. We
recognize income on the debt securities using the effective interest method.
Additionally, the notes are classified as available-for-sale and are carried at
fair value with changes in fair value reflected in our consolidated statements
of comprehensive income. We mark our investments to fair value using prices
received from our financing counterparties and believe any unrealized losses on
our debt securities to be temporary. Any other-than-temporary losses, which
represent the excess of the amortized cost basis over the present value of
expected future cash flows, are recognized in the period identified in our
consolidated statements of income. Risks inherent in our debt securities
portfolio, affecting both the valuation of the securities as well as the
portfolio's interest income include the risk of default, delays and
inconsistency in the frequency and amount of payments, risks affecting borrowers
such as man-made or natural disasters, or the pandemic, and damage to or delay
in realizing the value of the underlying collateral. We monitor the credit
quality of the mortgage loans underlying our debt securities on an ongoing
basis, principally by considering loan payment activity or delinquency status.
In addition, we assess the expected cash flows from the mortgage loans, the fair
value of the underlying collateral and other factors, and evaluate whether and
when it becomes probable that all amounts contractually due will not be
collected.

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Investments in Beneficial Interests


Our Investments in beneficial interests as of September 30, 2020 and
December 31, 2019 consist of investments in the trust certificates issued by
joint ventures which we form with third party institutional accredited
investors. The trust certificates represent the residual interest of any special
purpose entity formed to facilitate certain investments. We account for our
Investments in beneficial interests under CECL, as discussed under Mortgage
Loans.

Debt


Secured Borrowings - We issue, through securitization trusts, callable debt
secured by our mortgage loans in the ordinary course of business. The secured
borrowings are structured as debt financings, and the loans remain on our
balance sheet as we are the primary beneficiary of many of these securitization
trusts, which are variable interest entities ("VIEs"). These secured borrowing
VIEs are structured as pass-through entities that receive principal and interest
on the underlying mortgages and distribute those payments to the holders of the
notes. Our exposure to the obligations of the VIEs is generally limited to the
amount of our investments in the VIE entities; the creditors do not have
recourse to the primary beneficiary. Coupon interest on the debt is recognized
using the accrual method of accounting. Deferred issuance costs, including
original issue discount and debt issuance costs, are amortized on an effective
yield basis based on the underlying cash flow of the mortgage loans. We assume
the debt will be called at the specified call date for purposes of amortizing
discount and issuance costs because we believe we will have the intent and
ability to call the debt on the call date. Changes in the actual or projected
underlying cash flows are reflected in the timing and amount of deferred
issuance cost amortization.

Repurchase Facilities - We enter into repurchase financing facilities under
which we nominally sell assets to a counterparty and simultaneously enter into
an agreement to repurchase the sold assets at a price equal to the sold amount
plus an interest factor. Despite being legally structured as sales and
subsequent repurchases, repurchase transactions are generally accounted for as
debt secured by the underlying assets. At the maturity of a repurchase
financing, unless the repurchase financing is renewed, we are required to repay
the borrowing including any accrued interest and concurrently receive back our
pledged collateral from the lender. The repurchase financings are treated as
collateralized financing transactions; pledged assets are recorded as assets in
our consolidated balance sheets, and debt is recognized at the contractual
amount. Interest is recorded at the contractual amount on an accrual basis.
Costs associated with the set-up of a repurchasing contract are recorded as
deferred expense at inception and amortized over the contractual life of the
agreement. Any draw fees associated with individual transactions and any
facility fees assessed on the amounts outstanding are recorded as deferred
expense when incurred and amortized over the contractual life of the related
borrowing.

Fair Value

Fair Value of Financial Instruments - Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. A fair value
hierarchy has been established that requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to
measure fair value:

•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Observable inputs other than Level 1 prices, such as quoted prices
for similar assets and liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
•Level 3 - Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.

The degree of judgment utilized in measuring fair value generally correlates to
the level of pricing observability. Assets and liabilities with readily
available actively quoted prices or for which fair value can be measured from
actively quoted prices generally will have a higher degree of pricing
observability and a lesser degree of judgment utilized in measuring fair value.
Conversely, assets and liabilities rarely traded or not quoted will generally
have little or no pricing observability and a higher degree of judgment utilized
in measuring fair value. Pricing observability is impacted by a number of
factors, including the type of asset or liability, whether it is new to the
market and not yet established, and the characteristics specific to the
transaction.

The fair value of mortgage loans is estimated using the Manager's proprietary
pricing model, which estimates expected cash flows with the discount rate used
in the present value calculation representing the estimated effective yield of
the loan. For valuation purposes, we disclose the fair value of REO at the lower
of its acquisition basis, or its net realizable value (estimated fair market
value less expected selling costs). We estimate fair market value using BPOs,
comparable sales and competitive
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market analyses provided by local realtors. We use net realizable value as a
proxy for fair value as it represents the liquidation proceeds to us and is most
comparable to the fair value disclosure for loans.

The fair value of secured borrowings is estimated using estimates provided by
our financing counterparties which are compared for reasonableness to the
Manager's proprietary pricing model which estimates expected cash flows of the
underlying mortgage loans collateralizing the debt, and which drive the cash
flows used to make interest payments.

Our convertible senior notes are traded on the NYSE; the debt's fair value is determined from the NYSE closing price on the balance sheet date.

Recent Accounting Pronouncements

Refer to the notes to our interim financial statements for a description of relevant recent accounting pronouncements.

Results of Operations


For the three months ended September 30, 2020, we had net income attributable to
common stockholders of $5.3 million, or $0.23 per share for basic and for
diluted common shares. For the three months ended September 30, 2019, we had net
income attributable to common stockholders of $7.7 million, or $0.39 per share,
for basic and $0.36 for diluted common shares. Key items for the three months
ended September 30, 2020 include:

•Formed joint ventures that acquired $876.1 million in UPB of mortgage loans
with collateral values of $1.4 billion and retained $83.4 million of varying
classes of related securities issued by the joint ventures to end the quarter
with $370.9 million of investments in debt securities and beneficial interests
•Purchased 244 RPLs for $41.2 million, with UPB of $46.3 million and collateral
values of $65.3 million, one NPL for $0.5 million, with UPB of $0.5 million and
underlying collateral value of $0.7 million, and originated two SBCs with UPB of
$1.9 million and underlying collateral values of $3.9 million, to end the
quarter with $1.1 billion in net mortgage loans
•Interest income of $24.0 million; net interest income of $16.2 million,
including recovery of provision for credit losses of $4.0 million as a result of
better than expected loan performance and the related impact on future repayment
rates
•Net income attributable to common stockholders of $5.3 million
•Basic earnings per common share ("EPS") of $0.23
•Book value per common share of $15.35 at September 30, 2020
•Taxable income of $0.11 per common share
•Collected total cash of $56.4 million, from loan payments, sales of REO and
investments in debt securities and beneficial interests
•Held $135.2 million of cash and cash equivalents at September 30, 2020; average
daily cash balance for the quarter was $128.6 million excluding $51.0 million of
funds on deposit in a non-interest bearing account for a transaction closed
September 25, 2020. Including the $51.0 million on deposit, average daily cash
was $148.0 million
•At September 30, 2020, approximately 74.5% of portfolio based on UPB made at
least 12 out of the last 12 payments

Our consolidated net income attributable to common stockholders decreased
$2.4 million for the quarter ended September 30, 2020 compared to the quarter
ended September 30, 2019. Our net interest income after recovery of provision
for credit losses increased to $16.2 million from $13.4 million, primarily as a
result of $4.0 million in recovery from provision for credit losses on our loan
and securities portfolios. The comparative reduction in net income was driven
primarily by a $0.6 million mark to market decrease in earnings from our equity
method investments in our Manager and Servicer, a $0.6 million decrease in
rental income as a result of our deconsolidation of Gaea in November 2019 and a
$1.7 million increase in other expense due to the amortization of our put option
expense. Our book value decreased to $15.35 per share from $15.80 at
December 31, 2019 primarily from the year-to-date effects of a net $0.9 million
non-cash mark to market adjustment to the fair value of our debt securities as
generally determined by marks provided by our financing counterparties.

We recorded a loss from our investments in affiliates of $25 thousand for the
quarter ended September 30, 2020 compared to income of $0.6 million for the
quarter ended September 30, 2019. The primary driver of the difference is the
flow-through impact of a mark to market loss on shares of our stock held by our
Manager and our Servicer. We account for our investments in our Manager and our
Servicer using the equity method of accounting.

We recorded $0.2 million in impairments on our REO held-for-sale portfolio in
real estate operating expense for the quarter ended September 30, 2020 compared
to $0.7 million for the quarter ended September 30, 2019. We continue to
liquidate our REO properties held-for-sale at a faster rate than we acquire
properties, with seven properties sold in the third
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quarter while five were added to REO held-for-sale through foreclosures.
Impairments for the quarter were driven primarily by additional costs of holding
the properties. We expect the rate of new foreclosures to slow due to the
continuing impact of COVID-19. During the quarter ended September 30, 2019 we
sold 30 REO properties while adding seven through foreclosures.

Table 1: Results of Operations


                                           Three months ended September 30,        Nine months ended September 30,
($ in thousands)                               2020                2019               2020                2019
INCOME
Interest income                            $   23,950$  27,723$   74,941$   85,303
Interest expense                              (11,727)           (14,317)            (37,855)            (45,441)
Net interest income                            12,223             13,406              37,086              39,862
Provision for credit benefit/(losses)           4,007                 (3)              3,226                (242)
Net interest income after provision for
credit benefit/(losses)                        16,230             13,403              40,312              39,620
(Loss)/income from investments in
affiliates                                        (25)               583                (465)              1,301
Income/(loss) on sale of mortgage loans             -                109                (705)              7,123
Other income                                      537              1,221               1,964               3,159
Total revenue, net                             16,742             15,316              41,106              51,203
EXPENSE
Related party expense - loan servicing
fees                                            1,848              2,197               5,798               6,977
Related party expense - management fee          2,264              2,215               6,206               5,555
Loan transaction expense                         (178)                52                (216)                312
Professional fees                                 576                446               2,113               1,942
Real estate operating expenses                    173              1,216               1,273               2,889
Other expense                                   2,930                940               6,280               3,240
Total expense                                   7,613              7,066              21,454              20,915
Loss on debt extinguishment                       253                  -                 661                 182
Income before provision for income taxes        8,876              8,250              18,991              30,106
Provision for taxes (benefit)                     (16)                27                (215)                136
Consolidated net income                         8,892              8,223              19,206              29,970
Less: consolidated net income attributable
to the non-controlling interest                 1,662                532               3,493               1,922
Consolidated net income attributable to
Company                                         7,230              7,691              15,713              28,048
Less: dividends on preferred stock              1,950                  -               3,791                   -
Consolidated net income attributable to
common stockholders                        $    5,280$   7,691$   11,922$   28,048



On January 1, 2020 we adopted Accounting Standards Update (ASU) No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments ("CECL"). Under CECL, we are required to record the net
present value of the expected life of loan losses on our Mortgage loans and our
Investments in beneficial interests. Our transition adjustment on January 1,
2020 resulted in a reclassification from discount to the allowance for losses in
the amount of $14.4 million with no impact on Shareholder equity.

Interest Income


Our primary source of income is accretion earned on our mortgage loan portfolio
offset by the interest expense incurred to fund and hold portfolio acquisitions.
For the three months ended September 30, 2020 and 2019 net interest income after
recovery of provision for credit losses increased to $16.2 million from $13.4
million, primarily as a result of a $4.0 million recovery of provision for
credit losses on our loan and securities portfolios as a result of better than
expected loan performance during the quarter and the impact this has on
expectations of future repayment rates. Similarly for the nine months ended
September 30, 2020 and 2019 net interest income after recovery of provision for
credit losses increased to $40.3 million from
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$39.6 million primarily as a result of $3.5 million in recovery of provision of
credit losses on our loan and securities portfolios. As a result, for the three
and nine months ended September 30, 2020 we recorded recoveries of provisions
for credit losses of $2.7 million and $2.1 million, respectively, on our
mortgage loan portfolio and $1.3 million and $1.1 million, respectively, on our
investments in securities. To date, the COVID-19 impact on cash flow extensions
has not been as material as we initially expected. Comparatively during the
three and nine months ended September 30, 2019 we recorded provisions for credit
losses of $3 thousand and $0.2 million, respectively, on our mortgage loan
portfolio and no provisions for credit losses on our investments in beneficial
interests. Our accounting for credit losses during the calendar year 2020 is
based on CECL, under which both increases and decreases in payment expectations
are recorded in the period determined. For the comparative periods in 2019, our
impairment charges were determined under ASC 310-30, under which decreases in
payment expectations were recorded in the period determined while increases in
payment expectations were recorded prospectively over the remaining life of the
loan pool.

Our gross interest income decreased by $3.7 million to $24.0 million in the
quarter ended September 30, 2020 from $27.7 million in the quarter ended
September 30, 2019 primarily due to a decrease in the average balance of our
mortgage loan portfolio as paydowns and payoffs exceeded loan purchases, and by
decreases in the average yields on our loan portfolio based on our cash flows as
of the beginning of the quarter. Similarly gross interest income decreased by
$10.4 million to $74.9 million during the nine months ended September 30, 2020
from $85.3 million during the nine months ended September 30, 2019 primarily due
to a decrease in the average yields on our loan portfolio.

During the third quarter of 2020, we collected $42.4 million on our loan
portfolio as compared to $55.0 million for the third quarter of 2019. For the
nine months ended September 30, 2020, we collected $127.6 million on our loan
portfolio as compared to $149.3 million for the nine months ended September 30,
2019. The increase in cash collections from our loan portfolio in 2019 is due to
higher borrower refinancing and sale of the underlying property that resulted
increased loan payoffs.

Our interest expense decreased $2.6 million to $11.7 million in the quarter
ended September 30, 2020 from $14.3 million in the quarter ended September 30,
2019 primarily due to a decrease in the average interest rate primarily driven
by lower rates on our mortgage and bond repurchase agreements and secured
borrowings. Interest expense decreased by $7.5 million to $37.9 million in the
nine months ended September 30, 2020 from $45.4 million in the nine months ended
September 30, 2019 also primarily due to a decrease in the average interest rate
primarily driven lower rates on our mortgage and bond repurchase agreements and
secured borrowings. We expect our cost of funds to continue to decrease
materially in the current interest rate and credit environment.

The interest income detail for the three and nine months ended September 30, 2020 and 2019 are included in the table below ($ in thousands):

Table 2: Interest income detail

                                              Three months ended September 30,            Nine months ended September 30,
                                                  2020                   2019                2020                2019
Accretable yield recognized on RPLs, NPLs
and SBC loans                              $         18,603          $   23,869$   59,456$   75,286
Interest income on securities                         5,234               3,322              15,268               8,878
Bank interest income                                     75                 243                 271                 848
Other interest income/(loss)                             38                 289                 (54)                291
Interest income                            $         23,950          $   27,723$   74,941$   85,303
Provision for credit benefit/(losses)                 4,007                  (3)              3,226                (242)
Interest income after provision for credit
benefit/(losses)                           $         27,957          $   27,720$   78,167$   85,061

The average balance of our mortgage loan portfolio, investment in securities and debt outstanding for the three months ended September 30, 2020 and 2019 are included in the table below ($ in thousands):

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Table 3: Average Balances
                                                                    Three months ended September 30,
                                                                        2020                    2019
Average mortgage loan portfolio                                 $       

1,097,046 $ 1,180,105 Average carrying value of debt securities and beneficial interests

                                                       $         331,009          $   198,320
Total average asset level debt                                  $       

1,038,406 $ 1,057,536




The weighted average balance of our mortgage loan portfolio was $1.1 billion for
the three months ended September 30, 2020 compared to $1.2 billion for the three
months ended September 30, 2019. Additionally, we collected $56.4 million in
cash payments and proceeds on our mortgage loans, our REO held-for-sale and our
investments in securities for the three months ended September 30, 2020 compared
to collections of $69.7 million for the three months ended September 30, 2019.

Gain (loss) on sale of mortgage loans


We sold no mortgage loans during the three months ended September 30, 2020.
During the nine months ended September 30, 2020 we sold 26 SBC mortgage loans
with a carrying value of $26.1 million and UPB of $26.2 million for a loss of
$0.7 million. Comparatively during the three and nine months ended September 30,
2019, we sold three and 965 loans respectively with a carrying value of
$1.9 million and $178.8 million, respectively, and UPB of $2.0 million and
$202.1 million, respectively, for a gain of $0.1 million and $7.1 million,
respectively.

Other Income


Other income decreased for the three and nine months ended September 30, 2020 as
compared to the three and nine months ended September 30, 2019 due to decreased
rental income from the impact on our rental portfolio of our Gaea capital raise
in November 2019 and lower income from the federal government's Home Affordable
Modification Program ("HAMP") as more loans reached the five-year threshold and
no additional fees are earned. This was partially offset by the increased gain
on sale of securities issued by certain joint ventures. For the nine months
ended September 30, 2020 compared to the nine months ended September 30, 2019
decreases were also offset by increased net gain on sale of property
held-for-sale. A breakdown of Other income is provided in the table below ($ in
thousands):

Table 4: Other Income
                                                  Three months ended September 30,          Nine months ended September 30,
                                                      2020                  2019                2020                2019
Late fee income                                 $          177          $     158$       525$      603
Net gain on sale of Property
held-for-sale                                              150                279                  957                 400
Gain on sale of securities                                 145                  -                  145                   8
HAMP fees                                                   59                206                  311                 717
Rental Income                                                6                578                   26               1,431
Total Other Income                              $          537          $   1,221$     1,964$    3,159




Expenses

Total expenses increased for the three and nine months ended September 30, 2020
over the comparable period in 2019 due to an increase in other expense as a
result of our put option amortization expense and an increase in management fees
driven by an increase in our capital base as a result of our private placements
of preferred stock and warrants completed during the second quarter of 2020.
This was partially offset by lower real estate operating expense due to our
deconsolidation of Gaea in November 2019 as well as lower REO impairments. A
breakdown of expenses is provided in the table below ($ in thousands):

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Table 5: Expenses

                                              Three months ended September 

30, Nine months ended September 30,

                                                  2020                2019                2020                2019
Other expense                                $     2,930$      940$    6,280$    3,240
Related party expense - management fee             2,264               2,215               6,206               5,555
Related party expense - loan servicing
fees                                               1,848               2,197               5,798               6,977
Professional fees                                    576                 446               2,113               1,942
Real estate operating expenses                       173               1,216               1,273               2,889
Loan transaction expense                            (178)                 52                (216)                312
Total expenses                               $     7,613$    7,066$   21,454$   20,915



Other expense increased for the three and nine months ended September 30, 2020
over the comparable period in 2019 primarily due to the amortization of our put
option expense offset by lower travel expense. A breakdown of other expense is
provided in the table below ($ in thousands):

Table 6: Other Expense

                                                Three months ended 

September 30, Nine months ended September 30,

                                                    2020               2019(1)               2020               2019(1)
Amortization of put option liability           $     1,734          $        -          $     2,956          $        -
Insurance                                              238                 181                  606                 499
Borrowing related expenses                             227                 132                  615                 466
Taxes and regulatory expense                           198                 110                  395                 374
Employee and service provider share
grants                                                 187                 207                  535                 676
Directors' fees and grants                             104                 109                  322                 315
Other expense                                          104                  87                  290                 186
Software licenses and amortization                      90                  60                  224                 167
Internal audit services                                 35                  50                  107                 149
Lien release non due diligence                          13                 (34)                 104                 181
Travel, meals, entertainment                             -                  38                  126                 227
Total Other expense                            $     2,930$      940$     6,280$    3,240

(1)Includes reclass of other expense to lien release non due diligence.

Equity and Net Book Value per Share


Our net book value per common share was $15.35 and $15.80 at September 30, 2020
and December 31, 2019, respectively. The decrease in book value was driven
primarily by the reduction in common equity that resulted from net fair value
adjustments of $0.9 million taken on our portfolio of debt securities recorded
to Other comprehensive income since December 31, 2019. While GAAP does not
specifically define the parameters for calculating book value, we believe our
calculation is representative of our book value on a per share basis, and our
Manager believes book value per share is a valuable metric for evaluating our
business. The net book value per share is calculated by dividing equity, after
adjusting for the anticipated conversion of the senior convertible notes into
shares of common stock, the subtraction of non-controlling interests and
preferred shares classified in equity, and shares for Manager and director fees
that were approved but still unissued as of the date indicated, unvested
employee and service provider stock grants and the common shares from assumed
conversion of our Senior convertible notes. A breakdown of our book value per
share is set forth in the table below ($ in thousands except per share amounts):

                                       67
--------------------------------------------------------------------------------

Table 7: Book Value per Common Share

                                                               September 30, 2020           December 31, 2019
Outstanding shares                                                    23,034,443                  22,142,143

Adjustments for: Unvested grants of restricted stock, and Manager and director shares earned but not issued as of the date indicated

                      4,116                       2,600

Conversion of convertible senior notes into shares of common stock

                                                                  7,834,299                   8,270,208
Total adjusted shares outstanding                                     30,872,858                  30,414,951

Equity at period end                                          $          

506,346 $ 384,084 Net increase in equity from expected conversion of convertible senior notes

                                                 110,250                     120,669
Adjustment for equity due to preferred shares                           (115,144)                          -
Adjustment for equity due to non-controlling interests                   (27,468)                    (24,257)
Adjusted equity                                               $          473,984          $          480,496
Book value per share                                          $            15.35          $            15.80


Table 8: Fair Value Balance Sheet

The table below presents a summarized version of our GAAP balance sheets as compared to a summarized balance sheets presented at our estimates of fair values. While GAAP does not specifically define the parameters for the presentation of a fair value balance sheet, we believe the presentation is representative of our fair value, and our Manager believes this presentation is a valuable metric for evaluating our business below ($ in thousands):

© Edgar Online, source Glimpses

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