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 Delawarelimited partnership; "our Manager" refers to Thetis Asset Management LLC, a Delawarelimited liability company; " Aspen Capital" refers to the Aspen Capitalgroup of companies; "Aspen" and "Aspen Yo" refers to Aspen Yo LLC, an Oregonlimited liability company that is part of Aspen Capital; and "the Servicer" and "Gregory" refer to Gregory Funding LLC, an Oregonlimited 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.
Great Ajax Corp.is a Marylandcorporation that is organized and operated in a manner intended to allow us to qualify as a REIT. We primarily target acquisitions of (i) 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 and (ii) NPLs, which are residential mortgage loans on which the most recent three payments have not been made. We may acquire RPLs and NPLs either directly or in joint ventures with institutional accredited investors. The joint ventures are structured as securitization trusts, of which we acquire debt securities and beneficial interests. We may also acquire or originate SBC loans. The SBC loans that we target through acquisitions generally have a principal balance of up to $5.0 millionand 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. Additionally, we invest in single-family and smaller commercial properties directly either through a foreclosure event of a loan in our mortgage portfolio, or, less frequently, through a direct acquisition. We own a 19.8% equity interest in our Manager and an 8.0% equity interest in the parent company of our Servicer through GA-TRS, a wholly owned subsidiary of the Operating Partnership. 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 Iand AJX Mortgage Trust II are wholly owned subsidiaries of the Operating Partnershipformed 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 REOs 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 June 30, 2022, owns 99.9% of Great Ajax II REIT Inc.which owns Great Ajax II Depositor LLCwhich then acts as the depositor of mortgage loans into securitization trusts and holds subordinated securities issued by such trusts. Similarly, as of June 30, 2022, the Operating Partnershipwholly owned Great Ajax III Depositor LLC, which was formed to act as the depositor into Ajax Mortgage Loan Trust2021-E ("2021-E"), which is a real estate mortgage investment conduit ("REMIC"). We have securitized mortgage loans through these securitization trusts and retained subordinated securities from the secured borrowings. These trusts are considered to be variable interest entities ("VIEs"), and we have determined that we are the primary beneficiary of the VIEs. In 2018, we formed Gaea Real Estate Corp.("Gaea"), as a wholly-owned subsidiary of the Operating Partnershipthat invests in multifamily properties with a focus on property appreciation and triple net lease veterinary clinics. We elected to treat Gaea as a TRS under the Code for 2018 and elected to treat Gaea as a REIT under the Code in 2019 and thereafter. 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, and Gaea Real Estate Operating LLC, to act as its general partner. We also formed Gaea Veterinary Holdings LLC, BFLD Holdings LLC, Gaea Commercial Properties LLC, Gaea Commercial Finance LLCand Gaea RE Holdings LLCas 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. 53 -------------------------------------------------------------------------------- On November 22, 2019, Gaea completed a private capital raise transaction through which it raised $66.3 millionfrom the issuance of its common stock to third parties to allow Gaea to continue to advance its investment strategy. Additionally, in January 2022, Gaea completed a second private capital raise in which it raised approximately $30.0 millionfrom the issuance of its common stock and warrants. At June 30, 2022we owned approximately 22.2% of Gaea. We account for our investment in Gaea under the equity method. We elected to be taxed as a REIT for U.S.federal income tax purposes beginning with our taxable year ended December 31, 2014. Our qualification as a REIT depends upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our capital stock. We believe that we are organized in conformity with the requirements for qualification as a REIT under the Code, and that our current intended manner of operation enables us to meet the requirements for taxation as a REIT for U.S.federal income tax purposes.
The following table outlines the carrying value of our portfolio of mortgage loan assets and single-family and smaller commercial properties as of
June 30, 2022and December 31, 2021($ in millions): June 30, 2022 December 31, 2021 Residential RPLs $ 896.6$ 971.1 Residential NPLs 111.8 119.5 SBC loans 15.3 19.3 Real estate owned properties, net 7.4
Investments in securities at fair value 315.5
Investment in beneficial interests 126.0
Total mortgage related assets
We closely monitor the status of our mortgage loans and work with our borrowers through our servicer to improve their payment records.
Market trends and outlook
Price increases for both single and multi-family homes have slowed over the first half of 2022, while mortgage interest rates have increased to levels not seen since 2018. In July, 2022 the
U.S. Federal Reserve(the "Fed") raised its benchmark federal-funds rate by three quarters of a percentage point to a range between 2.25% and 2.50%. This follows a similar rate increase of three quarters of a percentage point in June. The Fedindicated it would likely continue raising the federal-funds rate as long as inflation remained above its 2.00% target and would continue reducing its holdings of Treasurysecurities and agency debt and agency mortgage-backed securities. According to Freddie Mac, the 30-year fixed rate mortgage rate increased to an average of 5.30% for the week ending July 30, 2022.(1) Additionally, as the COVID-19 pandemic continues to run its course, extended loan 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.
Through the end of the second quarter, the recent trends below have continued, including:
•elevated operating costs resulting from new regulatory requirements continue to drive sales of residential mortgage assets by banks and other mortgage lenders; •increasing mortgage interest rates, higher home prices, low inventory, tighter lending standards and increased down payment requirements are pricing first time homeowners out of the market; •rising home prices are triggering significant prepayments by borrowers selling their homes to downsize or relocate to lower cost markets; •rising interest rates have slowed down the refinance volume resulting in lower prepayments from the refinance channel; 54 -------------------------------------------------------------------------------- •the flight to the suburbs during the COVID pandemic has increased the demand for single-family and multi-family residential rental properties; and •the Dodd-Frank risk retention rules for asset backed securities have reduced the universe of participants in the securitization markets. 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 continue to increase in the near term and remain at heightened levels for the foreseeable future. We believe that investments in residential RPLs and NPLs with positive equity provide an optimal investment value. As a result, we are currently focused on acquiring pools of RPLs and NPLs, at attractive prices. 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, particularly in urban areas where there is a sustainable trend of young adults desiring to live near where they work. We focus on densely populated urban areas where we expect positive economic change based on certain demographic, economic and social statistical data. 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 primary banks, lenders and portfolio acquirers typically desire. We continually monitor opportunities to increase our holdings of these SBC loans and properties. We also believe that banks and other mortgage lenders have strengthened their capital bases and are more aggressively foreclosing on delinquent borrowers or selling these loans to dispose of their inventory. Additionally, many NPL buyers are now interested in reducing their investment duration and are selling RPLs.
Factors that may affect our results of operations
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. 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 55 -------------------------------------------------------------------------------- financings and not 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 typically to cause the RPLs to continue to perform and NPLs to perform through loan modification. Following 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. We expect the timelines for these 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 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. Conversion to Rental Property. From time to time we may retain an REO property as a rental property. We do not expect to retain a material number of single family residential properties for use 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, 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. 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. 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. While we initially expected the COVID-19 outbreak to have a material downward effect on home prices, we are generally seeing increases in HPA in our target markets. A significant decline in HPA could have an adverse impact on our operating results. 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 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; 56 -------------------------------------------------------------------------------- (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. Market Conditions. As the Fed continues its current trend toward monetary tightening, mortgage markets are undergoing a great deal of uncertainty with regard to both interest rates and origination volume. 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 continues to impact, directly or indirectly, many of the other factors discussed above, as well as other aspects of our business. While domestic economies have largely re-opened, lingering impacts on supply chains, eviction moratoriums and foreclosure case backlogs may impact our business. As new variants garner differing responses at the federal, state and local level 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 new outbreaks domestically and internationally and the reactions of federal, state and local government efforts to contain the spread of COVID-19 and its variants, 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
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, and other subjective assessments. In particular, we have identified six policies that, due to the judgment and estimates inherent in those policies, are critical to understanding our consolidated financial statements. These policies relate to (i) the allowance for credit losses, (ii) accounting for Interest income on our mortgage loan portfolio;(iii) accounting for Investments at fair value; (iv) accounting for investments in Beneficial Interests; (v) accounting for Interest expense on our secured borrowings and repurchase facilities; and (vi) fair values. We believe that the judgment and estimates used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments or estimates could result in material differences in our results of operations or financial condition. For further information on our critical accounting policies, please refer to the Critical accounting policies in our Form 10-K for our calendar year ended
December 31, 2021, as there have been no changes to these policies.
Current accounting pronouncements
A description of relevant current accounting pronouncements can be found in the notes to our interim financial statements.
Important points for the past three months
•Interest income of
$20.9 million; net interest income of $11.7 million•Net loss attributable to common stockholders of $(9.2) million•Earnings per share ("EPS") per basic common share of $(0.40)•Operating income of $5.7 million•Operating income per basic common share of $0.25•Taxable consolidated income of $0.36per common share after payment of preferred dividends •Book value per common share of $14.98at June 30, 2022•Repurchased and retired $25.0 millionface amount of our preferred stock and associated warrants •Repurchased 475,355 shares of common stock at an average purchase price of $9.77per share •Refinanced four joint ventures with $436.3 millionin unpaid principal balance ("UPB") of mortgage loans with collateral values of $1.1 billionand retained $86.0 millionof varying classes of related agency rated securities to end the quarter with $441.4 millionof investments in debt securities and beneficial interests •Collected total cash of $74.0 million, from loan payments, sales of REO and collections from investments in debt securities and beneficial interests 57 -------------------------------------------------------------------------------- •Held $51.6 millionof cash and cash equivalents at June 30, 2022; average daily cash balance for the quarter was $60.6 million•As of June 30, 2022, approximately 74.2% of portfolio based on acquisition UPB made at least 12 out of the last 12 payments We generated a U.S.Generally Accepted Accounting Principles (" U.S.GAAP" or "GAAP") consolidated net loss attributable to common stockholders for the three months ended June 30, 2022of $(9.2) millionor $(0.40)per common share after preferred dividends, and Operating income, a non-GAAP financial measure which adjusts GAAP earnings by removing unrealized gains and losses as well as certain other non-core expenses and preferred dividends, was $5.7 millionor $0.25per common share. We consider Operating income to provide a useful measure for comparing the results of our ongoing operations over multiple quarters and believe this information will be useful to our investors as it is how Management evaluates our performance. Comparatively, our GAAP consolidated net income attributable to common stockholders for the three months ended June 30, 2021was $10.4 million, or $0.45per common share, and Operating income was $8.5 million, or $0.37per common share. During the three months ended June 30, 2022, we repurchased and retired 768,519 shares of our series A preferred stock, 231,481 shares of our series B preferred stock and 1,250,000 warrants for our common stock in a series of repurchase transactions. The series A and series B preferred stock was repurchased for an aggregate of $24.5 millionat an average price of $24.50per share, representing a discount of approximately 2.00% to the face value of $25.00per share. The warrants were repurchased for an aggregate of $9.2 millionwhich is equal to the expected future put value obligation of $20.00per warrant. The repurchase of the preferred stock caused the recognition of $2.5 millionof GAAP deferred issuance costs, and the repurchase of the warrants accelerated future GAAP accretion expense on the warrant's put option of $3.5 million. The repurchase of the preferred stock will save us approximately $1.7 millionannually in preferred dividends while the repurchase of the warrants will reduce future put option accretion expense by $2.8 millionannually. We funded these repurchases with cash on hand. During the three months ended March 31, 2022, we invested an additional $6.1 millionin Gaea to increase our total investment to $25.5 million, or 22.2% of total shares outstanding. In addition to common stock, we received 371,103 warrants to purchase additional shares at $16.41per share for a two year period following the date that the common stock commences trading on a trading market. At June 30, 2022, our book value decreased to $14.98per common share from $15.92at December 31, 2021, driven by the effect of mark to market adjustments of $19.7 millionon our investments in debt securities, dividends on our common and preferred stock of $15.9 millionand the net loss attributable to common stockholders of $5.6 million, partially offset by the repurchase of 475,355 shares of our common stock at an average price of $9.77per share and the removal of our convertible senior notes from the calculation due to their antidilutive effect on our earnings per share. 58 --------------------------------------------------------------------------------
Table 1: Operating results
Three months ended June 30, Six months ended June 30, ($ in thousands) 2022 2021 2022 2021 INCOME Interest income
$ 20,900 $ 23,048 $ 44,112 $ 47,083Interest expense (9,175) (8,830) (17,781) (19,134) Net interest income 11,725 14,218 26,331 27,949 Net decrease in the net present value of expected credit losses(1) 961 4,733 4,939 10,249 Net interest income after the impact of changes in the net present value of expected credit losses 12,686 18,951 31,270 38,198 (Loss)/income from investments in affiliates (355) 357 (418) 520 Other (loss)/income (3,563) 486 (7,113) 842 Total revenue, net 8,768 19,794 23,739 39,560
Related party expense - loan servicing fees 2,006 1,699 4,097 3,532 Related party expense - management fee 2,363 2,270 4,656 4,543 Professional fees 419 763 764 1,403 Real estate operating expenses (33) 88 152 273 Fair value adjustment on put option liability 3,595 2,201 6,795 4,145 Other expense 1,668 1,375 2,922 2,679 Total expense 10,018 8,396 19,386 16,575 Acceleration of put option settlement 3,531 - 3,531 - Loss on debt extinguishment - 161 - 1,072 (Loss)/income before provision for income taxes (4,781) 11,237 822 21,913 Provision for income taxes (benefit) - 67 (28) 101 Consolidated net (loss)/income (4,781) 11,170 850 21,812 Less: consolidated net income/(loss) attributable to the non-controlling interest 16 (1,158) 112 531 Consolidated net (loss)/income attributable to Company (4,797) 12,328 738 21,281 Less: dividends on preferred stock 1,925 1,950 3,874 3,899 Less: discount on retirement of preferred stock 2,459 - 2,459 - Consolidated net (loss)/income attributable to common stockholders
$ (9,181) $ 10,378 $ (5,595) $ 17,382Basic (loss)/earnings per common share $ (0.40) $ 0.45 $ (0.24) $ 0.76Diluted (loss)/earnings per common share $ (0.40) $ 0.42 $ (0.24) $ 0.72(1)Net decrease in the net present value of expected credit losses represents the net decrease to the allowance resulting from changes in actual and expected cash flows during both the three and six months ended June 30, 2022and June 30, 2021. It represents the net increase of the present value of the expected cash flows in excess of contractual cash flows offset by any incremental provision expense on the Mortgage loan pools and Beneficial interests. The decrease is calculated at the pool level for Mortgage loans and at the security level for Beneficial interests. To the extent a pool or Beneficial interest has an associated allowance, the decrease in expected credit losses is recorded in the period in which the change occurs, otherwise it is recognized prospectively as an increase in yield. 59
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