News Column

MUNICIPAL MORTGAGE & EQUITY LLC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 14, 2014

General Overview

We own and manage a portfolio of real estate related assets. Our primary holdings include a portfolio of bonds and bond-related investments ("bonds"), a substantial portion of which are tax-exempt and backed by affordable multifamily rental properties. We also manage tax credit equity funds for third party investors that invest in similar affordable multifamily rental properties. Finally, we own a variety of direct investments in multifamily rental properties and land. Outside of the United States ("US"), we are in the business of raising, investing in and asset managing private real estate funds that invest primarily in affordable for-sale and rental housing, principally in South Africa.



The Company operates through two reportable segments: US Operations and International Operations.

US Operations

The Company's bond portfolio consisted of 35 bonds totaling $242.4 million (based on fair value and including $60.7 million of bonds eliminated due to consolidation), collateralized by 21 real estate properties at June 30, 2014. This bond portfolio is comprised primarily of multifamily tax-exempt bonds as well as community development district ("CDD") bonds. MuniMae is also the general partner ("GP") and manager of 13 low-income housing tax credit funds ("LIHTC Funds") which had $852.5 million of capital invested at June 30, 2014. These funds hold limited partnership interests in 117 affordable multifamily rental properties in the US. The Company's ownership interest in the LIHTC Funds is nominal (ranging from 0.01% to 0.04%); however, the Company is entitled to asset management fees as well as contingent asset management fees based on several factors, including the residual value of the LIHTC Funds' underlying multifamily rental properties. International Operations Substantially all of the Company's International Operations take place through a subsidiary, International Housing Solutions S.À r.l. ("IHS") which is in the business of raising, investing in and asset managing private real estate funds that invest in affordable for-sale and rental housing primarily in South Africa. On May 26, 2014, the Company purchased additional shares of IHS thereby increasing its ownership interest to approximately 96% from 83%. See Note 12, "Equity" for more information. In addition to earning asset management fees, IHS, as the managing member is entitled to special distributions based on returns generated by the funds it sponsors. As of June 30, 2014, IHS managed one multi-investor fund (South Africa Workforce Housing Fund SA I - "SA Fund"), and a real estate partnership for a single investor (International Housing Solutions Residential Partners Partnership - "SA Partnership"). In July 2014, IHS closed on a second multi-investor fund (IHS Fund II) with approximately $70 million of third party capital at initial closing.



Liquidity and Capital Resources

Our principal sources of liquidity include cash and cash equivalents and cash flows from investing activities. At June 30, 2014 and December 31, 2013, we had unrestricted cash and cash equivalents of $43.7 million and $66.8 million, respectively and we believe we have sufficient liquidity to meet our obligations as they become due. We consolidate certain funds and ventures even though we have no (or nominal) equity interest, and we therefore reflect the cash flow activities for those funds and ventures as part of our consolidated statements of cash flow. As reflected on our consolidated balance sheets, the cash held by these Consolidated Funds and Ventures ("CFVs") was reported in "Restricted cash," outside of the Company's cash and cash equivalents given that the Company does not have legal title to this cash. Therefore, the net decrease to cash and cash equivalents is representative of the change only to MuniMae's cash (i.e., without the cash of CFVs); however, the individual operating, investing and financing categories include cash flow activity for MuniMae and the CFVs. The tables below provide the cash activity related to MuniMae and the CFVs. For the six months ended June 30, 2014 (in thousands) MuniMae CFVs Total Unrestricted cash and cash equivalents at beginning of period $ 66,794$ 66,794 Net cash (used in) provided by: Operating activities (3,271 ) 278 (2,993 ) Investing activities 30,505 (121 ) 30,384 Financing activities (50,369 ) (157 ) (50,526 )

Net decrease in cash and cash equivalents (23,135 ) - (23,135 ) Cash and cash equivalents at end of period $ 43,659

$ 43,659 45 For the six months ended June 30, 2013 (in thousands) MuniMae CFVs Total Unrestricted cash and cash equivalents at beginning of period $ 50,857$ 50,857 Net cash provided by (used in): Operating activities 12,427 877 13,304 Investing activities 17,061 (2,403 ) 14,658 Financing activities (28,341 ) 1,526 (26,815 )

Net increase in cash and cash equivalents 1,147 - 1,147 Cash and cash equivalents at end of period $ 52,004

$ 52,004 Operating activities Cash flows used by operations for MuniMae were $3.3 million for the six months ended June 30, 2014, compared to cash flows provided by operations of $12.4 million for the six months ended June 30, 2013. The $15.7 million decrease in cash provided by operating activities was primarily due to:



a decrease in interest income of $23.1 million primarily as a result of the

MuniMae TE Bond Subsidiary, LLC ("TEB") sale in 2013, a $1.3 million decrease

in principal payments received on loans held for sale, a $0.9 million decrease

in other income received, a $0.8 million increase in cash used to purchase an

interest rate cap during the first quarter 2014 and a $0.4 million decrease in

preferred stock dividends received, partially offset by:



a $9.2 million reduction in interest expense primarily as a result of the TEB

sale in 2013 and a $1.5 million decrease in other expenses paid due to legal

and other professional fees paid related to the TEB sale in 2013. Investing activities Cash flows provided by investing activities for MuniMae were $30.5 million and $17.1 million for the six months ended June 30, 2014 and 2013, respectively. The $13.4 million increase in cash provided by investing activities was primarily due to:



a $29.4 million increase in proceeds received from the sale of real estate and

a $14.5 million decrease in restricted cash investing activities (primarily a

result of cash used to replace a letter of credit posted on the Company's

behalf to secure a guarantee obligation in the first quarter of 2013), partially offset by:



a $19.8 million decrease in principal payments and sales proceeds received on

bonds, a $6.8 million increase in advances on and originations of loans held

for investment, a $3.1 million increase in advances on and purchases of bonds

and a $0.7 million increase in investments in property partnerships. Financing activities Cash flows used in financing activities for MuniMae were $50.4 million and $28.3 million for the six months ended June 30, 2014 and 2013, respectively. The $22.1 million increase in cash used in financing activities was primarily due to:



a decrease of $73.3 million in proceeds generated from the issuance of TEB

preferred shares during the first quarter of 2013, a decrease of $36.6 million

in proceeds from a total return swap financing entered into in connection with

the transfer of our preferred stock investments during the first quarter of

2013, $22.0 million of cash used in the second quarter of 2014 to purchase

bonds, but treated as repayment of borrowings because we consolidate the

related borrowing partnerships, a $4.4 million increase in the purchase of

treasury stock and a $1.6 million increase in distributions paid to holders of

noncontrolling interests, partially offset by:



$80.7 million of cash used to repurchase TEB preferred shares in 2013, a $17.2

million decrease in the repayment of subordinate debentures, a $12.4 million

decrease in repayment of borrowings, a $4.6 million decrease in distributions

paid to perpetual preferred shareholders and a $1.0 million decrease in payments of debt issuance costs. Debt The following table summarizes the outstanding balances and weighted-average interest rates at June 30, 2014. See "Notes to Consolidated Financial Statements - Note 6, Debt" for more information on our debt. 46 Weighted-Average June 30, Interest Rate at (dollars in thousands) 2014 June 30, 2014 Asset Related Debt (1)

Notes payable and other debt - bond related $ 113,529 1.5 % Notes payable and other debt - non-bond related 7,171

10.0 Total asset related debt 120,700 2.0 Other Debt (1) Subordinate debentures (2) 147,544 7.2

Notes payable and other debt (3) 60,574



5.3

Total other debt 208,118



6.6

Total asset related debt and other debt 328,818

4.9 Debt related to CFVs 69,673 3.7 Total debt $ 398,491 4.7



(1) Asset related debt is debt which finances interest-bearing assets and the

interest expense from this debt is included in "Net interest income" on the

consolidated statements of operations. Other debt is debt which does not

finance interest-bearing assets and the interest expense from this debt is

included in "Interest expense" under" Operating and other expenses" on the

consolidated statements of operations.

(2) Included in the subordinate debt balance were $6.5 million of net premiums

and effective interest rate payable (i.e., the difference between the current

pay rate and the effective interest rate) at June 30, 2014.



(3) This amount includes $2.0 million of debt that has come due and remains

payable; however, the Company has a forbearance agreement with the lender

such that it is not pursuing any remedies. Asset Related Debt



Notes Payable and Other Debt - Bond Related

At June 30, 2014, this debt was comprised of total return swap ("TRS") financing agreements on bonds available-for-sale. See "Notes to Consolidated Financial Statements - Note 6, Debt" for more information. Other Debt Subordinate debt At June 30, 2014, the Company had $141.0 million of subordinate debt (principal) with a carrying value of $147.5 million and a weighted average effective interest rate of 7.2%. At June 30, 2014, $111.9 million of subordinate debt (principal) had a pay rate of 75 bps which will reset to 3-month LIBOR plus 330 bps in March and April of 2015. See "Notes to Consolidated Financial Statements - Note 6, Debt" for more information. Notes payable and other debt At June 30, 2014, this debt includes $36.6 million of TRS financing agreements on the Company's preferred stock investment. See "Notes to Consolidated Financial Statements - Note 3, Investment in Preferred Stock" for more information. The debt is non-amortizing, matures on March 31, 2015 and bears an interest rate of 3-month London Interbank Offered Rate ("LIBOR") plus 400 bps (4.2% at June 30, 2014) and resets quarterly. The Company recorded debt issuance costs of $0.8 million associated with the transaction, of which $0.4 million was paid at inception and $0.4 million is payable at termination. The majority of the remaining debt included $13.5 million collateralized by real estate.



See "Notes to Consolidated Financial Statements - Note 6, Debt" for more information.

Covenant Compliance and Debt Maturities

At June 30, 2014, the Company had $2.0 million of debt that had come due and remains payable; however, the Company has a forbearance agreement with the lender such that it is not pursuing any remedies. The Company is not in default under any of its other debt arrangements. Letters of Credit



The Company had no letters of credit outstanding at June 30, 2014.

47 Guarantees



The following table summarizes guarantees by type at June 30, 2014:

June 30, 2014 Maximum Carrying (in thousands) Exposure Amount Indemnification contracts $ 20,224$ 1,031 The indemnification contracts are with the purchaser of the tax credit equity ("TCE") business and are related to the guarantees of investor yields on certain LIHTC Funds and indemnifications related to property performance on certain Lower Tier Property Partnerships. We made no cash payments under these indemnification agreements for the six months ended June 30, 2014. Our maximum exposure under the indemnification contracts represents the maximum loss the Company could incur under its guarantee agreements and is not indicative of the likelihood of the expected loss under the guarantees. The carrying amount represents the amount of unamortized fees received related to these guarantees with no additional amounts recognized as management does not believe it is probable that the Company will have to make payments under these indemnifications. In addition to the above guarantees, the Company has guaranteed the investor yields on certain LIHTC Funds in which the Company continues to hold general partner interests and as a result, the Company consolidates these funds. The maximum exposure under these guarantees was estimated to be approximately $614.4 million at June 30, 2014. The Company does not expect to have any payouts related to these guarantees as the funds are now meeting and are expected in the future to meet investor yield requirements. See "Notes to Consolidated Financial Statements - Note 15, Consolidated Funds and Ventures." Debt Related to CFVs The creditors of CFVs do not have recourse to the assets or general credit of MuniMae. At June 30, 2014, the debt related to CFVs had the following terms: June 30, 2014 Carrying Face Weighted-average (in thousands) Amount Amount Interest Rates Maturity Dates SA Fund (1) $ 50,150$ 50,150 2.6 % April 2018 Consolidated Lower Tier Various dates Property Partnerships 19,523 19,315 6.4 through March 2049 Total debt $ 69,673$ 69,465



(1) This amount includes $1.1 million of capitalized interest for the period

ended June 30, 2014. SA Fund



The SA Fund has an agreement with the Overseas Private Investment Corporation, an agency of the US, to provide loan financing not to exceed $80.0 million.

The

SA Fund has drawn a total of $49.1 million of debt against this financing arrangement as of June 30, 2014. This debt is an obligation of the SA Fund and there is no recourse to the Company.

This debt is denominated in US dollars; however, the SA Fund's functional currency is the South African rand. Therefore, the SA Fund is exposed to foreign currency risk. In order to hedge this risk, from an economic standpoint, the SA Fund has entered into certain foreign exchange derivative contracts. As required, these derivative instruments are carried at fair value. The SA Fund does not designate these derivatives as accounting hedges and therefore, changes in fair value are recognized through "Net gains related to CFVs" on the consolidated statements of operations. The change of value in the debt obligation due to currency fluctuation is recognized through "Expenses from CFVs" on the consolidated statements of operations.



Consolidated Lower Tier Property Partnerships

At June 30, 2014, the Company consolidates a non-profit entity for which it is deemed the primary beneficiary. This non-profit entity consolidates certain Lower Tier Property Partnerships because it is deemed to be the primary beneficiary. The Company does not have an equity interest in the Consolidated Lower Tier Property Partnerships or the non-profit entity. Generally, the assets held by these Consolidated Lower Tier Property Partnerships are affordable multifamily housing properties financed with tax-exempt bonds. 48 Company Capital Common Shares As of June 30, 2014, through a series of actions, our Board of Directors authorized a stock repurchase program of up to 7.0 million. At its August 2014 meeting, the Board amended the terms under which the Company will purchase shares. Going forward, the Board will determine a price up to which it will authorize management to purchase shares on the open market based on an assessment of the economic benefit of such purchases to the Company. Effective at the filing of this Report and until modified by further action by the Board, that price is $1.92 per share. Prior to May 9, 2014, the Company had been making its purchases pursuant to a 10b5-1 plan. Because brokers are not generally willing to manage 10b5-1 plans for companies whose shares trade on the over the counter market, the Board authorized the Company to use open market purchases in lieu of a 10b5-1 plan. As a result, effective May 9, 2014, the Company executes its share repurchases on the open market during open trading periods for insiders. During the six months ended June 30, 2014, the Company repurchased 2.8 million shares at an average price of $1.66. On July 1, 2014, the Company acquired 0.3 million shares at $1.91 per share in a block purchase pursuant to the Company's stock repurchase program, bringing the total purchased under the program since inception to 5.2 million shares. As of August 7, 2014, the Company is authorized under the program to repurchase an additional 1.8 million shares. Dividend Policy Our Board makes determinations regarding dividends based on management's recommendation, which is based on an evaluation of a number of factors, including our common shareholders' equity, business prospects and available cash. Our Board has not declared a dividend since the fourth quarter of 2007. In the future our Board will determine whether and in what amounts to declare dividends based on our earnings and cash flows, cash needs and any other factors our Board deems appropriate. It is unlikely that we will pay a dividend for

the foreseeable future.



Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements is based on the selection and application of US generally accepted accounting principles ("GAAP"), which requires us to make certain estimates and assumptions that affect the reported amounts and classification of the amounts in our consolidated financial statements. These estimates and assumptions require us to make difficult, complex and subjective judgments involving matters that are inherently uncertain. We base our accounting estimates and assumptions on historical experience and on judgments that are believed to be reasonable under the circumstances known to us at the time. Actual results could materially differ from these estimates. We applied our critical accounting policies and estimation methods consistently in all material respects and for all periods presented, and have discussed those policies with our Audit Committee. We believe the following accounting policies involve a higher degree of judgment and complexity and represent the critical accounting policies and estimates used in the preparation of our consolidated financial statements. Valuation of Bonds

Bonds available-for-sale include mortgage revenue bonds and other municipal bonds. We account for investments in bonds as available-for-sale debt securities under the provisions of ASC No. 320, "Investments - Debt and Equity Securities." Accordingly, these investments in bonds are carried at fair value with changes in fair value (excluding other-than-temporary impairments) recognized in other comprehensive income. For most of our performing bonds, we estimate fair value using a discounted cash flow methodology; specifically, the Company discounts contractual principal and interest payments, adjusted for expected prepayments. The discount rate for each bond is based on expected investor yield requirements adjusted for bond attributes such as the expected term of the bond, debt service coverage ratio, geographic location and bond size. If observable market quotes are available, we will estimate the fair value based on such quoted prices. For non-performing bonds (i.e., defaulted bonds as well as certain non-defaulted bonds that we deem at risk of default in the near term), we estimate the fair value by discounting the property's expected cash flows and residual proceeds using estimated discount and capitalization rates, less estimated selling costs. However, to the extent available, the Company may estimate fair value based on a sale agreement, a letter of intent to purchase, an appraisal or other indications of fair value as available. There are significant judgments and estimates associated with forecasting the estimated cash flows related to the bonds or the underlying collateral for non-performing bonds, including macroeconomic conditions, interest rates, local and regional real estate market conditions and individual property performance. In addition, the determination of the discount rates applied to these cash flow forecasts involves significant judgments as to current credit spreads and investor return expectations. The bonds reflected on the Consolidated Balance Sheets at June 30, 2014 were priced on average at approximately 90% of the portfolio's unpaid principal balance ("UPB"). Given the size of our portfolio, different judgments as to credit spreads and investor return expectations could result in materially different valuations.



Consolidated Funds and Ventures

We have numerous investments in partnerships and other entities that primarily hold or develop real estate. In most cases our direct or indirect legal interest in these entities is minimal; however, we apply ASC No. 810 "Consolidation" in order to determine if we need to consolidate any of these entities. There is considerable judgment in assessing whether to consolidate an entity under these accounting principles. Some of the criteria we are required to consider include:



The determination as to whether an entity is a variable interest entity

("VIE"). 49



If the entity is considered a VIE, then the determination of whether we are the

primary beneficiary of the VIE is needed and requires us to make judgments

regarding: (1) our power to direct the activities of the VIE that most

significantly impact the VIE's economic performance, and (2) our obligation to

absorb losses of the VIE that could potentially be significant to the VIE or

our right to receive benefits from the VIE that could potentially be

significant to the VIE. These assessments require a significant analysis of all

of the variable interests in an entity, any related party considerations and

other features that make such an analysis difficult and highly judgmental.

If the entity is required to be consolidated, then upon initial consolidation, we record the assets, liabilities and noncontrolling interests at fair value. Substantially all of our consolidated entities are investment entities that own real estate or real estate related investments and, as such, there are judgments related to the forecasted cash flows to be generated from the investments such as rental revenue and operating expenses, vacancy, replacement reserves and tax benefits (if any). In addition, we must make judgments about discount rates

and capitalization rates. Income Taxes

The Company is a limited liability company that has elected to be taxed as a corporation for income tax purposes. All of our business activities, with the exception of our foreign investments and managing member interests in the LIHTC Funds, are conducted by entities included in our consolidated corporate federal income tax return. The Company has significant net operating losses ("NOLs") that we expect will be sufficient to offset federal taxable income and gains for the foreseeable future; however we currently maintain a valuation allowance against our entire deferred tax asset, in accordance with accounting literature. ASC No. 740, "Income Taxes," establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Significant judgment is required in determining and evaluating income tax positions, including assessing the relative merits and risks of various tax treatments considering statutory, judicial and regulatory guidance available regarding the tax position. We establish additional provisions for income taxes when there are certain tax positions that could be challenged and it is more likely than not these positions will not be sustained upon review by taxing authorities. Judgment is also required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns as well as the recoverability of our deferred tax assets. In assessing our ability to realize the benefit of our deferred tax assets we consider information such as forecasted earnings, future taxable income and tax planning strategies in measuring the required valuation allowance. 50 Results of Operations The following discussion of our consolidated results of operations should be read in conjunction with our financial statements, including the accompanying notes. See "Critical Accounting Policies and Estimates" for more information concerning the most significant accounting policies and estimates applied in determining our results of operations.



The table below summarizes our consolidated financial performance for the three months and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Total interest income $ 2,845$ 14,858$ 8,150$ 30,796 Total interest expense 945 13,726 2,148 20,015 Net interest income 1,900 1,132 6,002 10,781 Total fee and other income 2,216 1,829 4,366 3,667 Revenue from CFVs 5,610 6,332 10,660 9,120 Total revenues, net of interest expense 9,726 9,293 21,028 23,568 Operating expenses: Interest expense 3,489 3,616 7,062 7,745 Operating expenses 5,971 9,308 12,556 18,767 Net impairment on bonds and loan losses - 480 - 833 Total expenses from CFVs 12,659 13,406 24,308 24,837 Total operating expenses 22,119 26,810 43,926 52,182 Net gains on assets, derivatives and extinguishment of liabilities 1,553 921 1,188 38,368 Net gains due to real estate consolidation and foreclosure - 8,484 2,003 8,484 Net (losses) gains related to CFVs (657 ) 8,933 4,152 23,920 Equity in losses from Lower Tier Property Partnerships (7,038 ) (7,368 ) (14,466 ) (13,786 ) (Loss) income from continuing operations before income taxes (18,535 ) (6,547 ) (30,021 ) 28,372 Income tax benefit (expense) 1,194 (95 ) 1,748 1,432 (Loss) income from discontinued operations, net of tax (441 ) 1,092 14,038 6,153 Net (loss) income (17,782 ) (5,550 ) (14,235 ) 35,957 Income allocable to noncontrolling interests: Income allocable to perpetual preferred shareholders of a subsidiary company - (1,673 ) - (3,678 ) Net losses (income) allocable to noncontrolling interests in CFVs and IHS: Related to continuing operations 15,364 6,948 25,274 7,758 Related to discontinued operations - (176 ) 150 (1,212 ) Net (loss) income to common shareholders $ (2,418 )$ (451 )$ 11,189$ 38,825 51 Net interest income



The following table summarizes our net interest income for the three months and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Interest income: Interest on bonds $ 2,629$ 14,667$ 7,789$ 30,462 Interest on loans and short-term investments 216 191 361 334 Total interest income 2,845 14,858 8,150 30,796 Asset related interest expense: Senior interests in and debt owed to securitization trusts - 7,930 - 11,244 Mandatorily redeemable preferred shares - 4,791 - 6,473 Notes payable and other debt, bond related 759 721 1,764 1,476 Notes payable and other debt, non-bond related 186 284 384 822 Total interest expense 945 13,726 2,148 20,015 Total net interest income $ 1,900$ 1,132$ 6,002$ 10,781



Quarter Ended June 30, 2014 Compared to Quarter Ended June 30, 2013

Total net interest income increased $0.8 million for the three months ended June 30, 2014 as compared to 2013 mainly due to $7.8 million of deferred costs that were accelerated and recognized in full in the second quarter of 2013 associated with the debt that was assumed by the purchaser of our common shares in TEB at the debt's face amount in July 2013. Interest income on bonds decreased $12.0 million for the three months ended June 30, 2014 as compared to 2013. This decline was mainly due to a $734.7 million decline in the weighted average bond UPB (from $937.7 million for the three months ended June 30, 2013 to $203.0 million for the three months ended June 30, 2014) due primarily to the sale of our common shares in TEB in July 2013. Asset related interest expense decreased $12.8 million for the three months ended June 30, 2014 as compared to 2013. This decrease was mainly due to the acceleration of deferred costs discussed above, as well as the transfer of our senior interests in and debt owed to securitization trusts and mandatorily redeemable preferred shares to the purchaser of our common shares in TEB in

July 2013.



Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Total net interest income decreased $4.8 million for the six months ended June 30, 2014 as compared to 2013.

Interest income on bonds decreased $22.7 million for the six months ended June 30, 2014 as compared to 2013. This decline was mainly due to a $747.0 million decline in the weighted average bond UPB (from $957.9 million for the six months ended June 30, 2013 to $210.9 million for the six months ended June 30, 2014) due primarily to the sale of our common shares in TEB. Partially offsetting this decline was a $1.4 million increase in interest recognized on non-accrual bonds. Asset related interest expense decreased $17.9 million for the six months ended June 30, 2014 as compared to 2013. This decrease was mainly due to the acceleration of deferred costs discussed above, as well as the transfer of our senior interests in and debt owed to securitization trusts and mandatorily redeemable preferred shares to the purchaser of our common shares in TEB. Other interest expense



The following table summarizes our other interest expense for the three months and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Other interest expense: Subordinate debentures $ 2,569$ 2,465$ 5,111$ 5,734 Notes payable and other debt 920 1,151 1,951 2,011 Total other interest expense $ 3,489$ 3,616

$ 7,062$ 7,745 52



Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Other interest expense (which represents interest expense associated with debt which does not finance interest-bearing assets) decreased $0.7 million for the six months ended June 30, 2014 as compared to 2013. This decline was mainly driven by the $45.5 million repurchase of outstanding subordinate debentures during first quarter 2013. Fee and Other Income



The following table summarizes our fee and other income for the three months and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Income on preferred stock investment $ 1,312$ 1,312$ 2,609$ 2,609 Asset management and advisory fees (recorded in "Other income") 272 200 863 391 Syndication fees (recorded in "Other income") 232 36 232 36 Other income 400 281 662 631 Total fee and other income $ 2,216$ 1,829

$ 4,366$ 3,667



Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Fee and other income increased by $0.7 million for the six months ended June 30, 2014 as compared to 2013 mainly due to $0.5 million of asset management fees recognized during the first quarter of 2014 associated with the SA Partnership, which was entered into during the fourth quarter of 2013. Operating Expenses



The following table summarizes our operating expenses for the three months and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Salaries and benefits $ 3,096$ 3,262$ 6,425$ 7,150 General and administrative 894 1,133

1,857 2,426 Professional fees 983 3,057 2,365 5,402 Other expenses 998 1,856 1,909 3,789 Total operating expenses $ 5,971$ 9,308$ 12,556$ 18,767



Quarter Ended June 30, 2014 Compared to Quarter Ended June 30, 2013

Total operating expenses decreased $3.3 million for the three months ended June 30, 2014 as compared to 2013.

Professional fees, which include auditing fees, consulting fees and legal fees, decreased $2.1 million for the three months ended June 30, 2014 as compared to 2013. The vast majority of this decrease was due to legal fees incurred during the second quarter of 2013 largely due to legal fees associated with the sale of our common shares in TEB. Other expenses primarily include asset management costs, asset workout expenses, depreciation and amortization and net costs associated with our ownership of real estate. Other expenses decreased $0.9 million for the three months ended June 30, 2014 as compared to 2013 mainly due to a $0.4 million impairment taken on a solar facility during the second quarter 2013. Also contributing to the decline was a $0.3 million reduction in foreign currency translation losses associated with our International Operations.



Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Total operating expenses decreased $6.2 million for the six months ended June 30, 2014 as compared to 2013.

Professional fees decreased $3.0 million for the six months ended June 30, 2014 as compared to 2013. This decrease was mainly due to $1.5 million of legal and other professional fees incurred during the second quarter 2013 associated with the sale of our common shares in TEB. Also contributing to the decline in professional fees was a $0.8 million reduction in general legal fees as well as a $0.7 million reduction in auditing fees associated with the audits of TEB

and its direct parent. Other expenses decreased $1.9 million for the six months ended June 30, 2014 as compared to 2013 mainly due to a $0.5 million reduction in foreign currency translation losses associated with our International Operations. Also contributing to the decline were $0.4 million of fees incurred to remarket TEB's Series B Preferred Shares in the first quarter 2013 and a $0.4 million impairment taken on a solar facility during the second quarter 2013. 53 Salaries and benefits related to our US Operations decreased $0.6 million for the six months ended June 30, 2014 as compared to 2013 mainly due to a decrease in employees from 31 at June 30, 2013 to 21 at June 30, 2014. Salaries and benefits related to our International Operations decreased $0.1 million for the six months ended June 30, 2014 as compared to 2013. General and administrative expenses decreased $0.6 million for the six months ended June 30, 2014 as compared to 2013 mainly due to reductions in office rent, insurance costs and information and technology costs.



Net Gains on Assets, Derivatives and Extinguishment of Liabilities

The following table summarizes our net gains on assets, derivatives and extinguishment of liabilities for the three months and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Net realized gains on bonds $ 768 $ 416$ 768 $ 598 Net gains (losses) on loans 6 203 (3 ) 1,372 Net gains on derivatives 377 302 21 135 Net gains on extinguishment of liabilities 402 - 402 36,263 Total net gains on assets, derivatives and extinguishment of liabilities $ 1,553 $ 921$ 1,188$ 38,368



Quarter Ended June 30, 2014 Compared to Quarter Ended June 30, 2013

During the second quarter of 2014 we recognized net gains on extinguishment of liabilities of $0.4 million. These net gains were primarily related to the discounted settlement of a $1.9 million obligation related to professional fees for $0.8 million resulting in a gain of $1.1 million. Partially offsetting this gain was a $0.9 million loss on the repurchase of a $14.0 million bond at a premium that had previously been sold at a discount and had been treated as a secured financing because the Company sold the bond with a guarantee of full principal and interest.



Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

For the six months ended June 30, 2014, net gain on extinguishment of liabilities were $0.4 million as compared to net gains of $36.3 million for the six months ended June 30, 2013. During the six months ended June 30, 2013, we recognized a $37.9 million gain on the repurchase of $45.5 million of unpaid principal balance of the subordinate debt of MFH, a wholly owned subsidiary of the Company, due May 3, 2034, for $17.4 million, plus accrued interest. The gain represents the difference between the cash payment of $17.4 million and the carrying value of the debt of $56.9 million, reduced by the acceleration of $1.6 million of debt issuance costs. Partially offsetting this gain was a $1.5 million loss on the redemption of all of the outstanding Series A mandatorily redeemable preferred shares. During the six months ended June 30, 2013, the Company recorded net gains on loans of $1.4 million comprised of $1.0 million of cash proceeds received on loans which had no carrying value and lower of cost or market ("LOCOM") gains of $0.4 million.



Net Gains Due to Real Estate Consolidation and Foreclosure

The following table summarizes our net gains due to real estate consolidation and foreclosure for the three months and six months ended June 30 2014 and 2013: For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Net gains due to initial real estate consolidation and foreclosure $ - $ 8,484 $ 2,003$ 8,484 On April 30, 2013, a non-profit entity consolidated by the Company was assigned the GP interest in three properties for which the Company had provided bond financing. On April 30, 2013, we estimated the fair value of our bonds secured by these three properties to be $28.1 million. The UPB of our bonds was $34.4 million and cumulative impairments and cumulative unrealized gains were $6.5 million and $4.5 million, respectively, at the date of consolidation. Upon assignment of the GP interests, the properties were consolidated and our bonds were eliminated against the corresponding mortgage payables of the properties. As a result, the unrealized gains of $4.5 million which were recorded within "Accumulated other comprehensive income" ("AOCI") were transferred into the consolidated statements of operations and recorded as "Net gains due to real estate and foreclosure" having no impact on common shareholders' equity. 54

On May 1, 2013, the non-profit entity referred to above was assigned the GP interest in two properties for which the Company provided debt financing. On May 1, 2013, we estimated the fair value of our bonds secured by these two properties to be $9.9 million, of which $0.8 million was recorded as an increase to AOCI at the date of consolidation. The UPB of our bonds was $10.9 million and cumulative impairments and cumulative unrealized gains were $3.7 million and $2.7 million, respectively (including the $0.8 million increase discussed above), at the date of consolidation. Upon assignment of the GP interests, the properties were consolidated and our bonds were eliminated against the corresponding mortgage payables of the properties. As a result, unrealized gains of $2.7 million were transferred out of AOCI and into the consolidated statements of operations and recorded as "Net gains due to real estate and foreclosure." Common shareholders' equity increased $0.8 million as a result of the bond valuation increase recorded on May 1, 2013 just prior to the property consolidation. On May 31, 2013, the Company took a deed-in-lieu of foreclosure on a property serving as collateral for one of the Company's bonds with an estimated fair value of $7.3 million. The UPB of the bond was $7.3 million and cumulative impairments and cumulative unrealized gains were $0.7 million and $1.3 million, respectively, at the date of consolidation. Upon real estate acquisition, the property was consolidated and the bond was derecognized. As a result, the unrealized gains of $1.3 million which were recorded through AOCI were transferred into the consolidated statements of operations and recorded as "Net gains due to real estate and foreclosure" having no impact on overall equity. On May 31, 2013, immediately after taking the deed-in-lieu of foreclosure, the Company sold the property to a third party for its carrying value. On March 4, 2014, the Company foreclosed on a property serving as collateral for one of the Company's bonds with an estimated fair value of $11.1 million. The UPB of the bond was $11.4 million and cumulative impairments and cumulative unrealized gains at the date of consolidation were $2.4 million and $2.0 million, respectively. Upon foreclosure, the property was consolidated and the bond was derecognized. As a result, the unrealized gains of $2.0 million which were recorded through accumulated other comprehensive income were transferred into the consolidated statements of operations and recorded as "Net gains due to real estate consolidation and foreclosure" having no impact on overall equity.



Income Tax Benefit (Expense)

The table below summarizes our income tax benefit (expense) related to continuing operations for the three months and six months ended June 30, 2014 and 2013.

For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Income tax benefit (expense) $ 1,194 $ (95 )$ 1,748$ 1,432 During the first six months of 2014, the Company generated a pre-tax loss from continuing operations allocable to common shareholders of approximately $4.7 million, pre-tax income from discontinued operations allocable to common shareholders of $14.2 million and other comprehensive income allocable to common shareholders before tax of $4.9 million. In accordance with GAAP, the Company must record a net zero tax provision related to deferred taxes which is required to be allocated between losses from continuing operations, income from discontinued operations and other comprehensive income. Application of this guidance required the recognition of a non-cash deferred tax benefit of $1.9 million in continuing operations, offset by a $1.9 million deferred tax expense allocated to income from discontinued operations and other comprehensive income for the period. For the three months ended June 30, 2014, the Company recognized a non-cash deferred tax benefit of $1.3 million in continuing operations, offset by a deferred tax expense allocated to income from discontinued operations and other comprehensive income for the period. As of June 30, 2014, the Company continues to reflect a full valuation allowance against our net deferred tax assets.

On March 20, 2013, the Company and certain of its subsidiaries entered into a closing agreement with the Commonwealth of Massachusetts for amended returns for the calendar years ending December 31, 2004 through 2006. Pursuant to the closing agreement the Commonwealth of Massachusetts agreed to issue a refund of $1.8 million to the Company. The Company received the refund on April 8, 2013. This agreement also resulted in a favorable resolution of $1.6 million of the Company's uncertain tax positions recorded at December 31, 2012. The release of the uncertain tax position resulted in a $1.6 million tax benefit in the first quarter of 2013.



Income Allocable to Perpetual Preferred Shareholders of a Subsidiary Company

The table below summarizes our income allocable to perpetual preferred shareholders of a subsidiary company for the three months and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Income allocable to perpetual preferred shareholders of a subsidiary company $ - $ 1,673 $ - $ 3,678 55 Income allocable to perpetual preferred shareholders of a subsidiary company decreased $1.7 million for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 and $3.7 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 as a result of the sale of our common shares in TEB in July 2013.



Net Income Allocable to the Common Shareholders Related to CFVs

The table below summarizes our net income related to funds and ventures that were consolidated for the three months and six months ended June 30, 2014 and 2013: For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013



Revenue:

Rental and other income from real estate $ 3,427$ 2,925$ 7,051$ 5,089 Interest and other income 2,183 3,407 3,609 4,031 Total revenue from CFVs 5,610 6,332 10,660 9,120 Expenses:

Depreciation and amortization 2,173 1,985

4,391 3,712 Interest expense 843 477 1,912 975 Other operating expenses 2,884 2,692 5,836 4,719 Foreign currency loss 116 3,395 526 7,550 Asset impairments 6,643 4,857 11,643 7,881 Total expenses from CFVs 12,659 13,406 24,308 24,837 Net gains (losses) related to CFVs: Investment gains 429 5,939 5,296 17,295 Derivative gains (948 ) 2,994 (1,006 ) 6,625 Net loss on sale of properties (138 ) - (138 ) - Equity in losses from Lower Tier Property Partnerships of CFVs (7,038 ) (7,368 ) (14,466 ) (13,786 ) Net loss (14,744 ) (5,509 ) (23,962 ) (5,583 ) Net losses allocable to noncontrolling interests in CFVs (1) 15,343 6,748 25,197 7,409 Net income allocable to the common shareholders related to CFVs $ 599 $ 1,239

$ 1,235$ 1,826



(1) Net losses allocable to noncontrolling interests in CFVs have been adjusted

to exclude noncontrolling interests related to IHS because the Company's

equity interest in IHS is substantial. The Company has little to no equity

interest in the other CFVs including the two non-profits, the LTPPs, the

LIHTC Funds and the SA Fund.



The details of Net income allocable to the common shareholders for the three months and six months ended June 30, 2014 and 2013 are as follows:

For the three months ended For the six months ended June 30, June 30, (in thousands) 2014 2013 2014 2013 Interest income $ 583 $ 820 $ 926$ 1,521 Asset management fees 828 884 1,670 1,741 Guarantee fees 331 331 662 662 Equity in losses from Lower Tier Property Partnerships (961 ) (939 ) (1,910 ) (2,437 ) Equity in income from SA Fund 14 208 142 491 Other expense (196 ) (65 ) (255 ) (152 ) Net income allocable to the common shareholders related to CFVs $ 599$ 1,239

$ 1,235$ 1,826

The Company's interest income, asset management fees and guarantee fees are eliminated in consolidation, but are allocated to the Company due to the Company's contractual right to this income. Interest income is related to bonds that were eliminated when we consolidated the properties that collateralize the bonds. Asset management fees are from managing the SA Fund and LIHTC Funds. Guarantee fees are related to certain LIHTC Funds where the Company has guaranteed the investors' yield. Equity in losses from Lower Tier Property Partnerships are losses that the Company records in the event that a LIHTC Fund's investment in a Lower Tier Property Partnership has been reduced to zero, but because the Company has a bond or loan interest in the property, the Company continues to record losses from the Lower Tier Property Partnership to the extent of the bond or loan carrying amount. Equity in income from SA Fund is our share of the SA Fund's net income based on our 2.7% equity interest in the

SA Fund. 56



Quarter Ended June 30, 2014 Compared to Quarter Ended June 30, 2013

Net income allocable to the common shareholders related to CFVs decreased $0.6 million for the three months ended June 30, 2014 as compared to 2013 mainly due to a $0.2 million decrease in interest income and a $0.2 million decrease in equity in income from the SA Fund. The decline in interest income was mainly due to the TEB sale.



Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Net income allocable to the common shareholders related to CFVs decreased $0.6 million for the six months ended June 30, 2014 as compared to 2013 mainly due to a $0.6 million decline in interest income and a $0.3 million decline in equity in income from the SA Fund. Partially offsetting these decreases was a $0.5 million decline in equity in losses from Lower Tier Property Partnerships. The decline in interest income was mainly due to the TEB sale.



Net Income to Common Shareholders from Discontinued Operations

The table below summarizes our net income from discontinued operations for the three months and six months ended June 30, 2014 and 2013:

For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Sublease income $ - $ 123 $ - $ 492 Income from CFVs (primarily rental income) - 3,818 279 7,742 Income from REO operations 846 - 1,148 - Rent expense - (123 ) - (492 ) Expenses from CFVs (primarily operating expenses) - (3,144 ) (244 ) (6,815 ) Expenses from REO operations (661 ) -

(1,112 ) - Other income 85 201 168 291 Other expense (35 ) (94 ) (63 ) (372 ) Income tax expense (944 ) - (1,448 ) - Net (loss) income before disposal activity (709 ) 781 (1,272 ) 846 Disposal: Net gains related to REO 265 81 15,302 81 Net gains related to CFVs 3 230 8 5,226 Net (loss) income from discontinued operations (441 ) 1,092 14,038 6,153 Loss (income) from discontinued operations allocable to noncontrolling interests - (176 ) 150 (1,212 ) Net (loss) income to common shareholders from discontinued operations $ (441 ) $ 916 $ 14,188$ 4,941



The details of net income to common shareholders from discontinued operations for the three months and six months ended June 30, 2014 and 2013 are as follows:

For the three months ended For the six months ended June 30, June 30,

(in thousands) 2014 2013 2014 2013 Interest income $ - $ 498 $ 185 $ 1,097 Other income 931 324 1,316 783 Other expense (696 ) (217 ) (1,175 ) (899 ) Income tax expense (944 ) - (1,448 ) - Net gains on disposal of REO 265 81 15,302 81

Net gains on redemption of bonds 3 230 8 3,879 Net income to common shareholders from discontinued operations $ (441 ) $ 916 $ 14,188$ 4,941 At December 31, 2013, the Company owned two multifamily properties that were classified as held-for-sale on the consolidated balance sheets. During the first quarter of 2014, the Company sold these real estate properties for $35.8 million which resulted in a gain on sale of real estate of $14.0 million. Also during the first quarter of 2014, the Company sold a real estate land investment for $1.0 million which resulted in a gain on sale of real estate of $0.5 million. These gains are reflected as Net gains on disposal of REO in the table above. 57 Additionally, during the first quarter of 2014, the Company foreclosed on three multifamily real estate properties serving as collateral to three of its bonds. These three properties had a carrying value of $20.8 million at June 30, 2014 and were classified as real estate held for sale. The operating results of these properties are reflected as other income and other expense in the table above. At December 31, 2012, a non-profit entity that the Company consolidates owned a multifamily property that was classified as held-for-sale. The Company provided bond financing to this multifamily property. Because we reflect the multifamily property on our balance sheet, the Company's bond was eliminated against the mortgage payable of the property. During the first quarter of 2013, the property was sold for a net gain of $3.6 million to the common shareholders. This gain is reflected as Net gains on redemption of bonds in the table above. Bond Portfolio

The table below provides key metrics related to all of our bonds including those bonds that have been eliminated due to consolidation accounting as of June 30, 2014. Because as a legal matter we own the bonds that have been eliminated in consolidation, the asset management of our bond portfolio includes the asset management of these eliminated bonds. The table below reflects the portfolio from an asset management perspective. See "Notes to Consolidated Financial Statements - Note 15, Consolidated Funds and Ventures" for more information. Number of Wtd Avg Wtd Avg Pay Debt Service Number of Multifamily

(dollars in thousands) UPB Fair Value Coupon Rate (7) Coverage (8) Bonds Properties Multifamily tax-exempt bonds Performing (1) $ 89,059$ 90,815 6.58 % 6.58 % 0.93 x 13 12 Non-performing (2), (3) 101,207 70,478 6.75 % 3.49 % 0.47 x 11 9

Subordinate cash flow and participating (4) 14,660 9,091 4.51 % 0.00 % N/A 3 0 Total Multifamily tax-exempt bonds $ 204,926

$ 170,384 6.67 % (9) 4.94 % (9) 0.69 x 27 21 CDD bonds (5) $ 56,535$ 53,020 7.13 % 7.13 % N/A 6 N/A Other bonds (6) $ 18,982$ 18,976 4.34 % 4.34 % N/A 2 N/A Total Bond Portfolio $ 280,443 (10) $ 242,380 (10) 6.60 % (9) 5.36 % (9) 0.69 x 35 21



(1) Included in this amount were senior interests in bonds of $36.6 million that

were financed by TRSs with a carrying amount of $36.1 million at June 30,

2014.



(2) Non-performing is defined as bonds that are 30+ days past due in either

principal or interest.



(3) Included in this amount were senior interests in bonds of $30.9 million that

were financed by TRSs with a carrying amount of $31.2 million at June 30,

2014. Also included in this amount were subordinate bonds with must pay

coupons and $1.8 million fair value.



(4) Included in this amount were subordinate cash flow bonds that do not have

must pay coupons and are payable out of available cash flow only. No debt

service has been collected on these bonds over the preceding twelve months

and debt service is not calculated on these bonds as non-payment of debt

service is not a default. Included in this amount were participating cash

flow bonds with $8.5 million UPB and $5.4 million fair value.



(5) Included in this amount were two bonds that were financed by TRSs with a

carrying amount of $27.6 million at June 30, 2014.



(6) These bonds were financed by TRSs with a carrying amount of $18.6 million at

June 30, 2014.



(7) The weighted average pay rate represents the cash interest payments collected

on the bonds as a percentage of the bonds' average UPB for the preceding

twelve months weighted by the bonds' average UPB over the period for the

population of bonds at June 30, 2014.



(8) Debt service coverage is calculated on a rolling twelve-month basis using

property level information as of the prior quarter-end for those bonds with

must pay coupons.



(9) The weighted average coupon and pay rate of the multifamily tax-exempt bonds

and total bond portfolio excludes the population of subordinate cash flow

bonds where non-payment of debt service is not a default.



(10) Includes 10 bonds that the Company eliminated as a result of consolidation

accounting (four of which were performing multifamily tax-exempt bonds,

three of which were non-performing multifamily tax-exempt bonds and three of

which were subordinate cash flow and participating multifamily tax-exempt

bonds). At June 30, 2014, these 10 bonds had an UPB of $78.0 million and a

fair value of $60.7 million, including $2.8 million of net unrealized

mark-to-market gains occurring after consolidation that have not been

reflected in the Company's common equity given that the Company is required

to consolidate and account for the real estate, which prohibits an increase

in fair value from its original cost basis until the real estate is sold.

See "Notes to Consolidated Financial Statements - Note 15, Consolidated

Funds and Ventures" for more information. 58



Multifamily tax-exempt bonds

Multifamily tax-exempt bonds are issued by state and local governments or their agencies or authorities to finance affordable multifamily rental housing; typically however, the only source of recourse on these bonds is the collateral, which is the first mortgage or a subordinate mortgage on the underlying properties. The 21 properties serving as collateral are located across 13 different Metropolitan Statistical Areas ("MSA"). The highest concentration is in the Atlanta MSA and as of June 30, 2014, 32% and 29% (based on UPB and fair value, respectively) were located in Atlanta. Approximately 72% of our UPB is collateralized by properties that are affordable low-income housing and serve the general population while four properties or approximately 26% of our UPB serve the senior population and one property or 2% of our UPB serves students. All of the properties are considered stabilized which means none of the properties have construction or lease-up risk and there is sufficient operating information to calculate rolling twelve month debt service coverage for those with must pay coupons.



As of June 30, 2014, the Company had 24 multifamily tax-exempt bonds with must pay coupons.

13 of the 24 bonds were performing bonds with $89.1 million UPB and $90.8 million fair value and a weighted average debt service coverage



ratio of 0.93x. The potential for defaults exist within this population,

but because these are low-income housing tax credit bonds, despite the

fact that approximately half of this population has less than 0.90x debt

service coverage, shortfalls to date have been supported by developers

and tax credit syndicators. 11 of the 24 bonds were non-performing bonds with $101.2 million UPB and $70.5 million fair value and a weighted average debt service coverage ratio of 0.47x. Additionally, as of June 30, 2014, four of the 24 must pay bonds were subordinate bonds with $8.5 million UPB and $2.8 million fair value. While these bonds do have must pay coupons, the debt service is paid only after payment is made on senior obligations that have a priority to the cash flow of the underlying collateral. The Company owns two of the related senior bonds with $10.6 million UPB and $10.1 million fair value. Two of the four must pay subordinate bonds with $7.6 million UPB and $1.8 million fair value were in default as of June 30, 2014. As of June 30, 2014, the Company had three bonds with $14.7 million UPB and $9.1 million fair value that were subordinate and do not have must pay coupons. Debt service on these bonds is paid to the extent there is available cash flow and only after payment is made on senior obligations that have a priority to the cash flow of the underlying collateral. The Company owns all of the related senior bonds with a $19.2 million UPB and $19.9 million fair value. These cash flow bonds were excluded from the calculation of debt service coverage ratios as non-payment is not a default.



Community Development District Bonds

As of June 30, 2014, there were six CDD bonds with $56.5 million UPB and $53.0 million fair value that were issued by community development districts to finance infrastructure improvements for two large residential or commercial development projects. These bonds are commonly referred to as CDD bonds in Florida and as Community Development Authority or Capital Improvement Cooperative District bonds in other states. The payment of debt service, and the ultimate repayment of the Company's financing, generally rely upon the ability of the development, as improved, to generate tax revenues or special assessments. The collapse of the for-sale housing market beginning in 2006, and the sharp decline in the commercial market shortly thereafter, has put stress on this portfolio. During the six months ended June 30, 2014, four CDD bonds that were in default at December 31, 2013 were brought current. Other Bonds As of June 30, 2014, there were two bonds with $19.0 million UPB and fair value in rated municipal bonds. Specifically, these investments are senior certificate interests in a structured-enhanced trust collateralized by a pool of tax-exempt municipal bonds.



Valuation Results for the six months ended 2014 as compared to the six months ended 2013

During the six months ended June 30, 2014, we recorded net unrealized gains of $7.8 million on our bond portfolio excluding bonds eliminated due to consolidation accounting ("Reported Bonds") through other comprehensive income. The majority of the net unrealized gains are due to declines in market yields on our performing bonds and declines in the discount and capitalization rates on certain non-performing and collateral dependent performing bonds. The remaining net unrealized gains were largely driven by improvements in property operations that increased future expected cash flows. During the six months ended June 30, 2013, we recorded net unrealized losses of $11.5 million on our Reported Bonds through other comprehensive income largely due to an increase in market yields on our performing bonds still held in the portfolio at June 30, 2013. Determination of Fair Value

The Company carries its Reported Bonds on a fair value basis at the end of each reporting period. Our bonds are not traded on an established exchange nor is there an active private trading market; therefore, our bonds are illiquid. This lack of liquidity inherently requires the Company's management to apply a higher degree of judgment in determining the fair value of its bonds than would be required if there were a sufficient volume of trades of comparable bonds in the market place. For most of our performing bonds (i.e., bonds that are current in their payment of principal and interest) where payment of full principal and interest is expected, we estimate fair value using a discounted cash flow methodology; specifically, the Company discounts contractual principal and interest payments, adjusted for expected prepayments. The discount rate for each bond is based on expected investor yield requirements adjusted for bond attributes such as the expected term of the bond, debt service coverage, geographic location and bond size. The Company routinely validates its performing bond valuation model by comparing actual bond sale prices to the bond model valuation. The weighted average discount rate (i.e.,market yield) on the performing bond portfolio was 5.8% and 6.6% at June 30, 2014 and December 31, 2013, respectively, for performing bonds still held in the portfolio at June 30, 2014. 59

For bonds that are past due in either principal or interest and for certain currently performing bonds where payment of full principal and interest is uncertain, the Company's valuations are based on an estimate of the collateral value which is derived from a number of sources, including an internally prepared estimate derived by discounting the property's expected cash flows and residual proceeds using estimated market discount and capitalization rates, less estimated selling costs. The weighted average discount rate for the bonds whose valuations are based on an estimate of the collateral value was 8.5% at June 30, 2014 and December 31, 2013 for the bonds remaining in our portfolio at June 30, 2014. The weighted average capitalization rate was 6.8% and 6.7% at June 30, 2014 and December 31, 2013, respectively, for the bonds remaining in our portfolio at June 30, 2014. To the extent available, the Company may estimate fair value based on a sale agreement, a letter of intent to purchase, an appraisal or other indications of fair value. The lack of liquidity in the bond markets in which the Company transacts, coupled with the significant judgments that are inherent in our valuation methodologies, results in a risk that if the Company needed to sell bonds, the price it is able to realize may be lower than the carrying value (i.e., the

fair value) of such bonds. Real Estate Investments



The table below provides key metrics related to all of our real estate investments as of June 30, 2014.

(dollars in thousands) GAAP Carrying Estimated Type Amount Fair Value



Affordable Multifamily Rental Properties$ 32,210$ 33,855 Land Investments

13,610 18,853 Total real estate investments $ 45,820 (1) $ 52,708



(1) Includes $18.6 million reported through real estate held-for-use, $20.8

million reported through real estate held-for-sale and $6.4 million reported

through other assets. The Company estimates the fair value of its affordable multifamily rental properties by discounting the property's expected cash flows and residual proceeds using estimated market discount and capitalization rates, less estimated selling costs. To the extent available, the Company estimates fair value based on a sale agreement, a letter of intent to purchase, an appraisal or other indications of fair value. The Company uses appraisals to estimate the fair value of its land investments.


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