Sun Communities (SUI) 10-K 2013 Q4 Annual report

ORIGEN FINANCIAL, INC.

Southfield, Michigan

CONSOLIDATED FINANCIAL STATEMENTS

Including Independent Auditors' Report

December 31, 2013 and 2012

TABLE OF CONTENTS

Independent Auditors' Report	1
Financial Statements
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Comprehensive Income (Loss)	4
Consolidated Statements of Changes in Stockholders' Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7 - 36

INDEPENDENT AUDITORS’ REPORT

Stockholders and Board of Directors

Origen Financial, Inc.

Southfield, Michigan

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Origen Financial, Inc., which comprise the balance sheets as of December 31, 2013 and 2012, and the related statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Origen Financial, Inc. as of December 31, 2013 and 2012 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ BAKER TILLY VIRCHOW KRAUSE, LLP

Southfield, Michigan

February 19, 2014

ORIGEN FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

As of December 31, 2013 and 2012

	2013			2012
ASSETS
Cash and cash equivalents	$	774		$	826
Restricted cash	8,516			11,110
Investments	1,191			1,442
Loans receivable, net	463,254			543,420
Furniture, fixtures and equipment, net	35			33
Repossessed houses, net	1,401			2,180
Other assets	3,612			4,233
TOTAL ASSETS	$	478,783		$	563,244
LIABILITIES AND STOCKHOLDERS' EQUITY
Securitization financing	$	423,369		$	491,720
Derivative liabilities	29,552			37,454
Other liabilities	8,557			10,935
Total Liabilities	461,478			540,109
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value per share	125			125
10,000,000 shares authorized
125 shares issued and outstanding
$1,000 per share liquidation preference
Common stock, $.01 par value per share	259			259
125,000,000 shares authorized
25,926,149 shares issued and outstanding
Additional paid in capital	225,230			225,230
Accumulated other comprehensive loss	(29,413		)	(37,403		)
Distributions in excess of earnings	(178,896		)	(165,076		)
Total Stockholders' Equity	17,305			23,135
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	478,783		$	563,244

See accompanying notes to consolidated financial statements and independent auditors' report.

ORIGEN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

For the Years Ended December 31, 2013 and 2012

	2013			2012
INTEREST INCOME
Interest income	$	47,670		$	55,486
Interest expense	(32,476		)	(37,440		)
Net Interest Income Before Loan Losses and Impairment	15,194			18,046
Provision for loan losses	10,169			17,415
Reversal of prior impairment on purchased loan pool	(1,017		)	—
Net Interest Income After Loan Losses and Impairment	6,042			631
NON‑INTEREST INCOME
Realized gain on derivative	—			6,278
Other	2,105			3,073
Total Non‑Interest Income	2,105			9,351
NON‑INTEREST EXPENSE
Personnel	1,376			1,428
Loan servicing	6,764			7,870
State business taxes	253			279
Other operating	1,857			1,782
Total Non‑Interest Expense	10,250			11,359
Loss Before Income Taxes	(2,103		)	(1,377		)
INCOME TAX EXPENSE	34			—
NET LOSS	$	(2,137	)	$	(1,377	)
Weighted average common shares outstanding, basic and diluted	25,926,149			25,926,149
NET LOSS – per common share, basic and fully diluted:	$	(0.08	)	$	(0.05	)

See accompanying notes to consolidated financial statements and independent auditors' report.

ORIGEN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

For the Years Ended December 31, 2013 and 2012

	2013			2012
Net loss	$	(2,137	)	$	(1,377	)
Other comprehensive income:
Net unrealized gains on interest rate swaps, designated as cash       flow hedges	7,902			4,208
Reclassification adjustment for net realized gains included in net loss	87			(45		)
Total Other Comprehensive Income	7,989			4,163
COMPREHENSIVE INCOME	$	5,852		$	2,786

See accompanying notes to consolidated financial statements and independent auditors' report.

ORIGEN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Years Ended December 31, 2013 and 2012

(In thousands, except share data)

	Preferred Stock		Common Stock		Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)			Distributions In Excess of Earnings			Total
													Stockholders'
													Equity
BALANCES, January 1, 2012	$	125	$	259	$	225,230	$	(41,566	)	$	(143,461	)	$	40,587
Net loss	—		—		—		—			(1,377		)	(1,377		)
Other comprehensive income	—		—		—		4,163			—			4,163
Cash distribution paid ($0.78 per common share)	—		—		—		—			(20,238		)	(20,238		)
BALANCES, December 31, 2012	125		259		225,230		(37,403		)	(165,076		)	23,135
Net loss	—		—		—		—			(2,137		)	(2,137		)
Other comprehensive income	—		—		—		7,989			—			7,989
Cash distribution paid ($0.45 per common share)	—		—		—		—			(11,682		)	(11,682		)
BALANCES, December 31, 2013	$	125	$	259	$	225,230	$	(29,414	)	$	(178,895	)	$	17,305

See accompanying notes to consolidated financial statements and independent auditors' report.

ORIGEN FINANCIAL, INC.

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2013 and 2012

	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,137	)	$	(1,377	)
Adjustments to reconcile to net cash flows from operating activities
Provision for loan losses	10,169			17,415
Depreciation and amortization	1,536			1,501
Purchased loan pool allowances (reversals)	(1,017		)	—
Increase in other assets	(966		)	(1,662		)
(Decrease) increase in other liabilities	(2,378		)	972
Net Cash Flows from Operating Activities	5,207			16,849
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) Decrease in restricted cash	2,594			(1,343		)
Principal collections on loans	62,295			57,887
Proceeds from sale of repossessed houses	9,975			11,246
Expenditures on capital assets	(20)			(3		)
Net Cash Flows from Investing Activities	74,844			67,787
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid	(11,682		)	(20,238		)
(Gain) loss on derivatives	—			(6,278		)
Decrease (increase) in derivative assets	—			6,750
Repayment of securitization financing	(68,421		)	(67,784		)
Net Cash Flows from Financing Activities	(80,103		)	(87,550		)
Net Change in Cash and Cash Equivalents	(52		)	(2,914		)
CASH AND CASH EQUIVALENTS ‑ BEGINNING OF YEAR	826			3,740
CASH AND CASH EQUIVALENTS ‑ END OF YEAR	774			826
Supplemental cash flow disclosures
Cash paid for interest	$	31,621		$	36,616
Cash paid for income taxes	$	25		$	—
Noncash investing activities
Loans transferred to repossessed assets	$	17,940		$	24,639
Noncash operating activities
Decrease in derivative liability	$	7,902		$	4,208

See accompanying notes to consolidated financial statements and independent auditors' report.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 1 - Organization and Summary of Significant Accounting Policies

Nature of Operations

Origen Financial, Inc., a Delaware corporation (the “Company”) is a real estate investment trust (“REIT”). Through March 2008 the Company’s business was to originate, purchase and service manufactured housing loans. The Company’s manufactured housing loans are amortizing loans that range in amounts from $10,000 to $250,000 and have terms of seven to thirty years and are located throughout the United States. The Company generally securitized or placed the manufactured housing loans it originated with institutional investors and retained the right to service the loans on behalf of those investors.

In March 2008, because of the lack of a reliable source for a loan warehouse facility and the unavailability of a profitable exit in the securitization market, the Company ceased originating loans for its own account and sold its portfolio of unsecuritized loans at a substantial loss. The proceeds from the loan sale were used to pay off its existing loan warehouse line of credit, which was not renewed.

In April 2008, the Company completed a secured financing transaction with a related party and used the proceeds, combined with other funds, to pay off the outstanding balance of a supplemental advance credit facility which would have expired in June 2008.

At the Company’s annual stockholders meeting on June 25, 2008, the Company’s stockholders approved an Asset Disposition and Management Plan. Pursuant to this plan, the company executed a number of transactions and took several actions, as follow:

• On June 30, 2008, the Company completed a transaction for the sale of its loan servicing platform assets and ceased all loan servicing operations.

• In July 2008, the Company completed the sale of certain assets of its loan origination and insurance business and used the proceeds to reduce its related party debt.

On January 14, 2009, the Company completed the sale of all the issued and outstanding stock of Origen Servicing, Inc ("Origen Servicing”) to Prime RF Holdings LLC. The purchase price was $175,000 and proceeds from the sale were used to reduce the Company’s related party debt. Origen Servicing was a wholly owned subsidiary of the Company that prior to the sale of substantially all of Origen Servicing’s assets to Green Tree in July 2008, conducted all of the Company’s servicing operations.

Currently, most of the Company’s activities are conducted through Origen Financial L.L.C., which is a wholly owned subsidiary. After the sale of the servicing and origination assets as described above, the Company’s business essentially consists of actively managing its residual interests in its securitized loan portfolios.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 1 - Organization and Summary of Significant Accounting Policies (cont.)

Basis of Financial Statement Presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements include the financial position, results of operations and cash flows of the Company, its wholly owned qualified REIT and taxable REIT subsidiaries. All intercompany amounts have been eliminated.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Included in these financial statements are the following significant estimates: allowance for loan losses, valuation of repossessed houses, valuation of derivatives, and valuation of investments in loan pools and debt securities acquired with evidence of deterioration of credit quality. Actual results could materially differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents represent short-term highly liquid investments with original maturities of three months or less and include cash and interest bearing deposits at banks. The Company has restricted cash related to securitized loans that are held in trust. The restricted cash represents principal and interest payments on manufactured housing loans that will be remitted to securitized trusts for distribution to bond holders. Cash balances may be in excess of amounts insured by the Federal Deposit Insurance Corporation.

Investments

All investments outstanding at December 31, 2013 and 2012 are debt securities acquired with evidence of deterioration of credit quality since origination, and are accounted for as described below.

All investments are regularly measured for impairment. Management uses its judgment to determine whether an investment has sustained an other‑than‑temporary decline in value. If management determines that an investment has sustained an other‑than‑temporary decline in its value, the investment is written down to its fair value by a charge to earnings, and a new cost basis is established for the investment. An evaluation of an other‑than‑temporary decline is dependent on the specific facts and circumstances. Factors considered in determining whether an other‑than‑temporary decline in value has occurred include: the estimated fair value of the investment in relation to its cost basis; the financial condition of the related entity; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery in the fair value of the investment.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 1 - Organization and Summary of Significant Accounting Policies (cont.)

Loan Pools and Debt Securities Acquired with Evidence of Deterioration of Credit Quality

The Company accounts for its investments in loan pools and debt securities acquired with evidence of deterioration of credit quality at the time of acquisition in accordance with ASC Topic 310, "Receivables, Loans, and Debt Securities Acquired with Deteriorated Credit Quality." The carrying values of such acquired loan pools and debt securities were approximately $10.7 million and $1.2 million, respectively, at December 31, 2013 and $11.3 million and $1.4 million, respectively, at December 31, 2012, and are included in loans receivable and investments, respectively, in the consolidated balance sheets.

Under the provisions of ASC Topic 310, each static pool of loans and debt securities is statistically modeled to determine its projected cash flows. The Company considers historical cash collections for loan pools and debt securities with similar characteristics as well as expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each pool of loans and debt securities. An internal rate of return is calculated for each static pool of loans and debt securities based on the projected cash flows and applied to the balance of the static pool. The resulting revenue recognized is based on the internal rate of return applied to the remaining balance of each static pool of loans and debt securities. Each static pool is analyzed at least quarterly to assess the actual performance compared to the expected performance. To the extent there are differences in actual performance versus expected performance, the internal rate of return is adjusted prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. Beginning January 2005, if revised cash flow estimates are less than the original estimates, ASC Topic 310 requires that the internal rate of return remain unchanged and an immediate impairment be recognized. For loans and debt securities acquired with evidence of deterioration of credit quality, if cash flow estimates increase subsequent to recording an impairment, ASC Topic 310 requires reversal of the previously recognized impairment before any increases to the internal rate of return are made. For any remaining increases in estimated future cash flows for loan pools or debt securities acquired with evidence of deterioration of credit quality, the Company adjusts the amount of accretable yield recognized on a prospective basis over the remaining life of the loan pool or debt security.

Application of the interest method of accounting requires the use of estimates to calculate a projected internal rate of return for each pool. These estimates are based on historical cash collections. If future cash collections are materially different in amount or timing than projected cash collections, earnings could be affected, either positively or negatively. Higher collection amounts or cash collections that occur sooner than projected will have a favorable impact on yields and revenues. Lower collection amounts or cash collections that occur later than projected will have an unfavorable impact and result in an immediate impairment being recognized.

Loans Receivable

Loans receivable consist of manufactured housing loans under contracts collateralized by the borrowers’ manufactured houses and in some instances, related land. Generally, loans receivable are classified as held for investment and are carried at amortized cost, except for loans purchased with evidence of deterioration of credit quality since origination, which are accounted for as described above, under “Loan Pools and Debt Securities Acquired with Evidence of Deterioration of Credit Quality.” Interest on loans is credited to income when earned. Loans held for investment include accrued interest and are presented net of deferred loan origination fees and costs and an allowance for estimated loan losses. All of the Company’s loans receivable were classified as held for investment at December 31, 2013 and 2012.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 1 - Organization and Summary of Significant Accounting Policies (cont.)

Allowance for Loan Losses

The allowance for possible loan losses is maintained at a level believed adequate by management to absorb losses on loans in the Company’s loan portfolio. In accordance with ASC 805-20-25, “Pre-acquisition Contingencies” (formerly Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”), the Company provides an allowance for loan losses when it is probable that a loan asset has been impaired and the amount of such loss can be reasonably estimated. The Company’s loan portfolio is comprised of homogenous manufactured housing loans with average loan balances of approximately $38,000 at December 31, 2013 and $40,000 at December 31, 2012. The allowance for loan losses is developed at a portfolio level and the amount of the allowance is determined by establishing a calculated range of probable losses. A range of probable losses is calculated by applying historical loss rate factors to the loan portfolio on a stratified basis using the Company’s current portfolio performance and delinquency levels (0‑30 days, 31‑60 days, 61‑90 days and more than 90 days delinquent) and by the extrapolation of probable loan impairment based on the correlation of historical losses by vintage year of origination. The Company makes a determination of the best estimate within the calculated range of loan losses. Such determination may include, in addition to historical charge off experience, the impact of changed circumstances on current impairment of the loan portfolio. The accrual of interest is discontinued when a loan becomes more than 90 days past due. Cash receipts on impaired loans are applied first to accrued interest and then to principal. Impaired loans, or portions thereof, are charged off when deemed uncollectible. The allowance for loan losses represents an unallocated allowance. There are no elements of the allowance allocated to specific individual loans or to impaired loans.

Furniture, Fixtures and Equipment

Furniture, fixtures and equipment are stated at cost less accumulated depreciation. Depreciation is recognized on a straight-line basis over the estimated useful lives of the assets as follows:

Furniture and fixtures	7 years
Computers	5 years
Software	3 years
Leasehold improvements	Shorter of useful life or lease term

Repossessed Houses

Manufactured houses acquired through foreclosure or similar proceedings are recorded at the lesser of the related loan balance or the estimated fair value of the house.

Other Assets

Other assets are comprised of prepaid expenses, deferred financing costs and other miscellaneous receivables. Prepaid expenses are amortized over the expected service period. Deferred financing costs are capitalized and amortized over the life of the corresponding obligation.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 1 - Organization and Summary of Significant Accounting Policies (cont.)

Derivative Instruments and Hedging Activities

Derivative instruments are carried at fair value on the consolidated balance sheets. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company designates the hedging instrument, based upon the exposure being hedged. For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item (i.e., the ineffective portion), if any, is recognized in current earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.

For derivatives designated as hedging instruments at inception, the Company performs an analysis to assess effectiveness. Each derivative designated as a hedge has been and is expected to be highly effective in offsetting changes in cash flows of the hedged item. All components of each derivative instrument's gain or loss are included in the assessment of hedge effectiveness. Net hedge ineffectiveness is recorded in "interest expense" on the consolidated statements of income.

On January 1, 2009, the Company adopted new guidance relating to disclosures about derivative instruments and hedging activities. This new guidance requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. To meet those objectives, the guidance requires (1) qualitative disclosures about objectives for using derivatives by primary underlying risk exposure (e.g., interest rate, credit or foreign exchange rate) and by purpose or strategy (fair value hedge, cash flow hedge, net investment hedge and non‑hedges), (2) information about the volume of derivative activity in a flexible format that the preparer believes is the most relevant and practicable, (3) tabular disclosures about balance sheet location and gross fair value amounts of derivative instruments, income statement and other comprehensive income, location of gain and loss amounts on derivative instruments by type of contract, and (4) disclosures about credit‑risk‑related contingent features in derivative agreements. See footnote 8 for additional information.

Securitizations Structured as Financings

Prior to year 2008, the Company engaged in securitizations of its manufactured housing loan receivables. The Company structured all loan securitizations occurring from 2003 through 2008 as financings for accounting purposes under ASC Topic 860, "Transfers and Servicing." When a loan securitization is structured as a financing, the financed asset remains on the Company’s books along with the recorded liability that evidences the financing, typically bonds. Income from the loan interest spread received on the securitized loans is recorded into income as earned. An allowance for credit losses is maintained on the loans. Deferred debt issuance costs and discount related to the bonds are amortized on a level yield basis over the estimated life of the bonds.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 1 - Organization and Summary of Significant Accounting Policies (cont.)

Income Taxes

The Company has elected to be taxed as a REIT as defined under Section 856(c)(1) of the Internal Revenue Code of 1986, as amended (the “Code”). In order for the Company to qualify as a REIT, at least ninety-five percent (95%) of the Company’s gross income in any year must be derived from qualifying sources. In addition, a REIT must distribute at least ninety percent (90%) of its REIT taxable net income to its stockholders.

Qualification as a REIT involves the satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within the Company’s control. In addition, frequent changes occur in the area of REIT taxation, which requires the Company continually to monitor its tax status.

As a REIT, the Company generally will not be subject to U.S. federal income taxes at the corporate level on the ordinary taxable income it distributes to its stockholders as dividends. If the Company fails to qualify as a REIT in any taxable year, its taxable income will be subject to U.S. federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if the Company qualifies as a REIT, it may be subject to certain state and local income taxes and to U.S. federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non‑REIT activities managed through taxable REIT subsidiaries, if any, is subject to federal and state income taxes. An income tax allocation is required to be estimated on the Company’s taxable income generated by its taxable REIT subsidiaries. Deferred tax components arise based upon temporary differences between the book and tax basis of items such as the allowance for loan losses, accumulated depreciation, share based compensation and goodwill.

The provision for income taxes is based on amounts reported in the consolidated statements of operations and includes deferred income taxes on temporary differences between the income tax basis and financial accounting basis of assets and liabilities. Deferred tax assets are evaluated for realization based on available evidence of loss carry back capacity, future reversals of existing taxable temporary differences, and assumptions made regarding future events. A valuation allowance is provided when it is more‑likely-than‑not that some portion of the deferred tax asset will not be realized. There is a valuation allowance recorded to the extent of net deferred tax assets (primarily net operating losses) on the Company’s taxable REIT subsidiaries. The amounts are not material to the financial statements.

The Company classifies interest and penalties on income tax liabilities in income tax expense on the consolidated statements of operations.

The provision (benefit) for income taxes is computed by applying the effective federal income tax rate to income (loss) before income taxes as reported in the consolidated financial statements after deducting non‑taxable items, principally income from a qualified REIT subsidiary, then adding interest (tax related), penalties, and state taxes .

The Company does not believe that it has any uncertainty in its tax returns. Therefore, there are no accruals for interest and penalties or uncertain tax positions included in the Company’s tax accrual. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 2010.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 1 - Organization and Summary of Significant Accounting Policies (cont.)

For income tax purposes, distributions paid to common stockholders consist of ordinary income and return of capital. Distributions paid were taxable as follows for the years ended December 31 (dollars in thousands):

	2013			2012
	Amount		Percentage	Amount		Percentage
Ordinary income	$	—	—	$	—	—
Return of capital	11,667		100.00	20,222		100.00
Total	$	11,667	100.00	$	20,222	100.00

A portion of the Company’s income from a qualified REIT subsidiary that would otherwise be classified as a taxable mortgage pool may be treated as “excess inclusion income,” which would be subject to the distribution requirements that apply to the Company and could therefore adversely affect its liquidity. Generally, a stockholder’s share of excess inclusion income would not be allowed to be offset by any operating losses otherwise available to the stockholder. Tax exempt entities that own shares in a REIT must treat their allocable share of excess inclusion income as unrelated business taxable income. Any portion of a REIT dividend paid to foreign stockholders that is allocable to excess inclusion income will not be eligible for exemption from the 30% withholding tax (or reduced treaty rate) on dividend income. For the year ended December 31, 2013, 1.9% of distributions paid represented excess inclusion income.

Fair Value of Financial Instruments

Fair values of financial instruments are based upon estimates at the balance sheet date of the price that would be received in an orderly transaction between market participants. The Company uses quoted market prices and observable inputs when available. However, these inputs are often not available in the markets for many of the Company’s assets. In these cases management typically performs discounted cash flow analysis using its best estimates of key assumptions such as credit losses, prepayment speeds and discount rates based on both historical experience and its interpretation of how comparable market data in more active markets should be utilized. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented may differ from amounts the Company could realize or settle currently.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 1 - Organization and Summary of Significant Accounting Policies (cont.)

Recent Accounting Pronouncements

During February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in ASU No. 2013-02 require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, ASU No. 2013-02 requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items in net income if the amounts being reclassified are required under accounting principles generally accepted in the United States of America (U.S. GAAP) to be reclassified in their entirety to net income in the same reporting period. For amounts not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU No. 2013-02 is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of the guidance is not expected to have a material impact on the Company's Consolidated Financial Statements or the Notes thereto.

The amendments in the ASU No. 2014-04 - Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF-13E-Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40), which has been deleted. The adoption of the guidance is not expected to have a material impact on the Company's Consolidated Financial Statements or the Notes thereto.

Reclassifications

Certain amounts for prior periods have been reclassified to conform with current financial statement presentation.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 2 - Earnings Per Share

Basic earnings per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporates the potential dilutive effect of common stock equivalents outstanding on an average basis during the period. Potential dilutive common shares primarily consist of employee stock options, non‑vested common stock awards, stock purchase warrants and convertible notes. The following table presents a reconciliation of basic and diluted loss per share for the years ended December 31, 2013 and 2012 (in thousands, except share and per share data):

	2013			2012
Numerator:
Net loss	$	(2,137	)	$	(1,377	)
Preferred stock dividends	(16		)	(16		)
Loss available to common shareholders, basic	$	(2,153	)	$	(1,393	)
Loss available to common shareholders, diluted	$	(2,153	)	$	(1,393	)
Denominator:
Weighted average basic common shares outstanding	25,926,149			25,926,149
Effect of dilutive securities: Incremental share ‑ non‑vested  stock awards	—			—
Weighted average diluted common shares outstanding	25,926,149			25,926,149
Net loss for common stockholders per share:
Basic	$	(0.08	)	$	(0.05	)
Diluted	$	(0.08	)	$	(0.05	)

NOTE 3 - Investments

The Company follows the provisions of ASC Topics 310 in reporting its investments. The investments are carried on the Company’s balance sheet at $1.2 million and $1.4 million at December 31, 2013 and 2012, respectively. See “Note 5 - Loan pools and Debt Securities Acquired with Evidence of Deterioration of Credit Quality” for further discussion related to the Company’s debt securities accounted for under the provisions of ASC Topic 310.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 4 - Loans Receivable

The carrying amounts and fair value of loans receivable consisted of the following at December 31 (in thousands):

	2013			2012
Manufactured housing loans ‑ securitized	$	475,785		$	558,831
Manufactured housing loans ‑ unsecuritized	1,037			1,351
Accrued interest receivable	3,259			3,729
Deferred loan origination costs	954			1,322
Discount on originated loans (1)	(9,292		)	(10,916		)
Discount on purchased loans	(208		)	(409		)
Allowance for purchased loans	(1,672		)	(2,689		)
Allowance for loan losses	(6,609		)	(7,799		)
Total	$	463,254		$	543,420

(1) Represents the fair market value of servicing rights sold in July 2008 which are related to loans held‑for‑investment. The discount is accreted into interest income over the life of the loans on a level yield method.

The following table sets forth the average per loan balance, weighted average loan yield, and weighted average initial term at December 31 (dollars in thousands):

	2013		2012
Number of loans receivable	12,415		13,849
Average loan balance	$	38	$	40
Weighted average loan yield	9.32%		9.34%
Weighted average initial term	21 years		20 years

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 4 - Loans Receivable (cont.)

The following table sets forth the concentration by state of the manufactured housing loan portfolio at December 31 (dollars in thousands):

	2013			2012
	Principal		Percent	Principal		Percent
California	$	190,688	40.0	$	227,201	40.6
Texas	40,200		8.4	46,452		8.3
New York	24,638		5.2	28,266		5.1
Florida	16,309		3.4	18,746		3.3
Alabama	15,727		3.3	18,435		3.3
Other	189,260		39.7	221,082		39.4
Total	$	476,822	100.0	$	560,182	100.0

The following table sets forth the number and value of loans for various original terms for the manufactured housing loan portfolio at December 31 (dollars in thousands):

	2013			2012
Original Term in Years	Number of Loans	Principal Balance		Number of Loans	Principal Balance
5 or less	29	$	1,378	32	$	1,529
6‑10	477	3,178		708	5,980
11‑12	86	992		102	1,434
13‑15	3,051	56,346		3,393	70,322
16‑20	7,001	310,238		7,680	362,807
21‑25	718	33,957		785	38,779
26‑30	1,053	70,733		1,149	79,331
Total	12,415	$	476,822	13,849	$	560,182

Delinquency statistics for the manufactured housing loan portfolio are as follows at December 31 (dollars in thousands):

	2013				2012
Days Delinquent	Number of Loans	Principal Balance		% of Portfolio	Number of Loans	Principal Balance		% of Portfolio
31‑60	105	$	3,780	0.8	127	$	4,787	0.9
61‑90	43	1,390		0.3	43	1,842		0.3
Greater than 90	92	4,209		0.9	109	5,218		0.9

The Company defines non‑performing loans as those loans that are greater than 90 days delinquent in contractual principal payments. The average balance of all non‑performing loans as a group was $4.3 million and $5.3 million for the years ended December 31, 2013 and 2012, respectively.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 5 - Loan Pools and Debt Securities Acquired with Evidence of Deterioration of Credit Quality

The Company has loan pools and debt securities that were acquired, for which there was at acquisition, evidence of deterioration of credit quality, and for which it was probable, at acquisition, that all contractually required payments would not be collected. These loan pools and debt securities are accounted for under the provisions of ASC Topic 310.

Loan Pools Acquired with Evidence of Deterioration of Credit Quality

The carrying amount of loan pools acquired with evidence of deterioration of credit quality was as follows at December 31 (in thousands):

	2013		2012
Outstanding balance	$	11,791	$	13,585
Carrying amount, net of allowance of $1,672 and $2,689, respectively	$	10,687	$	11,340

Accretable yield represents the excess of expected future cash flows over the remaining carrying value of the purchased portfolio, which is recognized as interest income on a level yield basis over the life of the loan portfolio. Nonaccretable yield represents the difference between the remaining expected cash flows and the total contractual obligation outstanding of the purchased receivables. Changes in accretable yield for the years ended December 31 were as follows (in thousands):

	2013			2012
Beginning balance	$	6,684		$	7,568
Accretion	$	(904	)	$	(1,052	)
Reversal of prior impairment	$	(1,017	)	$	—
Change in estimate of future cash flows	(231		)	168
Ending balance	$	4,532		$	6,684

Under the provisions of ASC Topic 310, if cash flow estimates increase subsequent to recording an impairment, a reversal of the previously recognized impairment is required before an increase to the internal rate of return is made. The Company reversed approximately $1.0 million and $0 of the impairment allowance during the years ended December 31, 2013 and 2012, respectively.

During the years ended December 31, 2013 and 2012, there were no loans acquired for which it was probable at acquisition that all contractually required payments would not be collected.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 5 - Loan Pools and Debt Securities Acquired with Evidence of Deterioration of Credit Quality (cont.)

Debt Securities Acquired with Evidence of Deterioration of Credit Quality

The carrying amount of debt securities acquired with evidence of deterioration of credit quality was as follows at December 31 (in thousands):

	2013	2012
Outstanding balance	$ 8,593	$ 8,598
	$ 1,191	$ 1,442
Carrying amount, net

Accretable yield represents the excess of expected future cash flows over the remaining carrying value of the debt securities, which is recognized as interest income on a level yield basis over the life of the debt securities. Nonaccretable difference represents the difference between the remaining expected cash flows and the total contractual obligation outstanding of the debt securities. Changes in accretable yield for the years ended December 31 were as follows (in thousands):

	2013			2012
Beginning balance	$	2,649		$	2,695
Accretion	(238		)	(283		)
Change in estimate of future cash flows	2,561			237
Ending balance	$	4,972		$	2,649

During the years ended December 31, 2013 and 2012 the Company recognized no other‑than‑temporary impairment on the principal balance of the security.

During the years ended December 31, 2013 and 2012, there were no debt securities acquired for which it was probable at acquisition that all contractually required payments would not be collected.

NOTE 6 - Allowance for Loan Losses

The allowance for loan losses and related additions and deductions to the allowance for the years ended December 31 were as follows (in thousands):

	2013			2012
Balance at beginning of period	$	11,802		$	15,088
Provision for loan losses	10,169			17,415
Gross charge offs	(21,574		)	(29,955		)
Recoveries	8,308			9,254
Balance at end of period	$	8,705		$	11,802
Allocation to carrying value of repossessed houses	(2,096		)	(4,003		)
Net Allowance	$	6,609		$	7,799

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 7 - Property and Equipment

Furniture, fixtures and equipment are summarized as follows at December 31 (in thousands):

	2013			2012
Furniture and fixtures	$	278		$	355
Leasehold improvements	47			49
Computer equipment	199			180
Total	524			584
Less: accumulated depreciation	(489		)	(551		)
Net Property and Equipment	$	35		$	33

Depreciation expense was approximately $18,000 and $19,000, for the years ended December 31, 2013 and 2012, respectively.

NOTE 8 - Derivatives

In the normal course of business, the Company enters into various transactions involving derivatives to manage exposure to fluctuations in interest rates. These financial instruments involve, to varying degrees, elements of credit and market risk.

Credit risk is the possible loss that may occur in the event of nonperformance by the counterparty to a financial instrument. The Company attempts to minimize credit risk arising from financial instruments by evaluating the creditworthiness of each counterparty, adhering to the same credit approval process used for traditional lending activities. Counterparty risk limits and monitoring procedures also facilitate the management of credit risk. The Company generally does not receive collateral when it enters into a derivative contract.

Market risk is the potential loss that may result from movements in interest rates that cause an unfavorable change in the value of a financial instrument. Market risk arising from derivative instruments is reflected in the consolidated financial statements. The Company manages this risk by establishing monetary exposure limits and monitoring compliance with those limits. Market risk inherent in derivative instruments held or issued for risk management purposes is typically offset by changes in the fair value of the assets or liabilities being hedged.

When hedge accounting is discontinued because the Company determines that the derivative no longer qualifies as a hedge, the derivative will continue to be recorded on the consolidated balance sheet at its fair value. Any change in the fair value of a derivative no longer qualifying as a hedge is recognized in current period earnings. For terminated cash flow hedges or cash flow hedges that no longer qualify as highly effective, the effective portion previously recorded in accumulated other comprehensive income is recorded in earnings when the hedged item affects earnings.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 8 - Derivatives (cont.)

Derivative Instruments

Derivative instruments are traded over an organized exchange or negotiated over-the-counter. Credit risk associated with exchange traded contracts is typically assumed by the organized exchange. Over-the-counter contracts are tailored to meet the needs of the counterparties involved and, therefore, contain a greater degree of credit risk and liquidity risk than exchange traded contracts, which have standardized terms and readily available price information. The Company reduces exposure to credit and liquidity risks from over-the-counter derivative instruments entered into for risk management purposes, by conducting such transactions with investment grade domestic financial institutions and subjecting counterparties to credit approvals, limits and monitoring procedures similar to those used in making other extensions of credit.

Detailed discussions of each class of derivative instruments held or issued by the Company for both risk management are as follows.

Interest Rate Swaps

Interest rate swaps are agreements in which two parties periodically exchange fixed cash payments for variable payments based on a designated market rate or index, or variable payments based on two different rates or indices, applied to a specified notional amount until a stated maturity. The Company's swap agreements are structured such that variable payments are primarily based on one month LIBOR or three-month LIBOR. These instruments are principally negotiated over-the-counter and are subject to credit risk, market risk and liquidity risk. All interest rate swaps entered into by the Company were entered with the intent to offset potential increases in interest expense and potential variability in cash flows under various interest rate environments. The Company does not speculate on interest rates. All interest rate swaps were entered into for the purpose of hedging the Company’s exposure to interest rate risk. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge the Company discontinues hedge accounting and all changes in value in the derivative instrument are recorded in interest expense in the statement of operations.

Documents governing interest rate swap agreements contain certain restrictive covenants. One of the Company’s interest rate swap agreements contained a minimum net worth covenant that the Company did not meet. This entitled the counterparty to initiate an early termination of the interest rate swap agreement. On May 2, 2012, the Company executed an interest rate swap termination transaction with its counterparty in three existing interest rate swap agreements. These interest rate swap agreements, since inception, had been classified by the Company as derivatives not designated as hedging instruments. The termination transactions settled on May 3, 2012 and a realized gain of approximately $6.2 million was recorded.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 8 - Derivatives (cont.)

The following table presents the composition of the Company's derivative instruments at December 31, 2013 and 2012 (in thousands):

	December 31, 2013
			Fair Value
			Asset		Liability
	Notional/		Derivatives		Derivatives
	Contract		(Unrealized		(Unrealized
	Amount		Gains)		Losses)
Derivatives designated as hedging instruments:
Interest rate contracts: Swaps - cash flow -
receive floating/pay fixed	$	243,928	$	—	$	29,522
Total Derivatives	$	243,928	$	—	$	29,522
	December 31, 2012
			Fair Value
			Asset		Liability
	Notional/		Derivatives		Derivatives
	Contract		(Unrealized		(Unrealized
	Amount		Gains)		Losses)
Derivatives designated as hedging instruments:
Interest rate contracts: Swaps - cash flow -
receive floating/pay fixed	$	283,393	$	—	$	37,454
Total Derivatives	$	283,393	$	—	$	37,454

By entering into derivative contracts, the Company is exposed to credit risk if the counterparties fail to perform. The Company minimizes credit risk through credit approvals, limits, monitoring procedures and collateral requirements. Nonperformance risk, including credit risk, is included in the determination of net fair value.

As part of a cash flow hedging strategy, the Company entered into interest rate swap agreements (weighted average original maturity of 5.24 years) that effectively converts a portion of existing floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense over the life of the agreements.

If interest rates, interest yield curves and notional amounts remain consistent with current projections, the Company expects to reclassify $10.3 million of comprehensive income to interest expense on derivative instruments designated as cash flow hedges during the next twelve months due to receipt of variable interest associated with floating rate debt.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 8 - Derivatives (cont.)

The following table summarizes the notional amount of interest rate swaps and the weighted average interest rates associated with amounts expected to be received or paid on interest rate swap agreements as of December 31, 2013 and 2012 (in thousands).

	December 31, 2013
			Weighted Average
	Notional/
	Contract		Receive	Pay
	Amount		Rate	Rate
Interest rate contracts:
Swaps - cash flow - receive floating/pay fixed
rate - Designated as hedging instruments	$	243,928	—	5.28%
Total	$	243,928	—	5.28%
	December 31, 2012
			Weighted Average
	Notional/
	Contract		Receive	Pay
	Amount		Rate	Rate
Interest rate contracts:
Swaps - cash flow - receive floating/pay fixed
rate - Designated as hedging instruments	$	283,393	—	5.28%
Total	$	283,393	—	5.28%

Management believes these hedging strategies achieve the desired relationship between the fixed cash flow requirements of the derivative contracts and the variable cash flow requirements of its securitization financing which, in turn, reduce the overall exposure of net interest expense to interest rate risk, although there can be no assurance that such strategies will be successful.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 9 - Loan Securitizations

Historically the Company securitized manufactured housing loans. The Company recorded each transaction based on its legal structure. The Company exchanged manufactured housing loans it originated and purchased with a trust for cash. The trust then issued ownership interests to investors in asset backed bonds secured by the loans.

The Company structured all loan securitizations occurring from 2003 through 2008 as financings for accounting purposes. When securitizations are structured as financings no gain or loss is recognized, nor is any allocation made to residual interests or servicing rights. Rather, the loans securitized continue to be carried by the Company as assets, and the asset backed bonds secured by the loans are carried as a liability. The Company records interest income on securitized loans and interest expense on the bonds issued in the securitizations over the life of the securitizations. Deferred debt issuance costs and discount related to the bonds are amortized on a level yield basis over the estimated life of the bonds.

Prior to 2003, the Company sold loan pools that were treated as true sales in accordance with the accounting guidance within ASC Topic 860, "Transfers and Servicing."

Whenever the Company sells loans, it makes customary representations and warranties to purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent of underwriting standards applied, and the types of documentation being provided. Typically these representations and warranties are in place for the life of the loan. If a loan does not perform, and a defect in the origination process is identified, the Company may be required to either repurchase the loan or indemnify the purchaser for losses it may incur on such loan. To date, the Company has not experienced any claims on it representations and warranties for loan pool sales that were accounted for as true sales. The Company has an insurance contract in place against losses in excess of $250,000 relating to representation and warranty claims. The Company does not believe that it has any exposure to representation and warranty claims; therefore it has not created an accrual for potential claims.

Loan securitization transactions are subject to certain restrictive covenants as detailed in the governing transaction documents. The Company monitors compliance with these covenants on a continuing basis.

NOTE 10 - Debt

Total debt outstanding was as follows at December 31 (in thousands):

	2013		2012
Securitization financing	$	423,369	$	491,720

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 10 - Debt (cont.)

Securitization Financing - 2004‑A Securitization

On February 11, 2004, the Company completed a securitization of approximately $238.0 million in principal balance of manufactured housing loans. The securitization was accounted for as a financing. As part of the securitization the Company, through a special purpose entity, issued $200.0 million in notes payable. The notes are stratified into six different classes and pay interest at a duration weighted average rate of approximately 5.12%. The notes had a contractual maturity date of October 2013 with respect to the Class A‑1 notes; August 2017, with respect to the Class A‑2 notes; and December 2020, with respect to the Class A‑3 notes. All three classes (A-1, A-2 and A-3) have been paid in full. The Class A‑4, Class M‑1 and Class M‑2 notes have a contractual maturity date of January 2035. The outstanding balance on the 2004‑A securitization notes was approximately $43.1 million and $50.3 million at December 31, 2013 and 2012, respectively.

Securitization Financing - 2004‑B Securitization

On September 29, 2004, the Company completed a securitization of approximately $200.0 million in principal balance of manufactured housing loans. The securitization was accounted for as a financing. As part of the securitization the Company, through a special purpose entity, issued $169.0 million in notes payable. The notes are stratified into seven different classes and pay interest at a duration‑weighted average rate of approximately 5.27%. The notes had a contractual maturity date of June 2013 with respect to the Class A‑1 notes; December 2017, with respect to the Class A‑2 notes; and August 2021, with respect to the Class A‑3 notes. All three classes (A-1, A-2 and A-3) have been paid in full. The Class A‑4, Class M‑1, Class M‑2 and Class B‑1 notes have a contractual maturity date of November 2035. The outstanding balance on the 2004‑B securitization notes was approximately $41.4 million and $49.2 million at December 31, 2013 and 2012, respectively.

Securitization Financing - 2005‑A Securitization

On May 12, 2005, the Company completed a securitization of approximately $190.0 million in principal balance of manufactured housing loans. The securitization was accounted for as a financing. As part of the securitization the Company, through a special purpose entity, issued $165.3 million in notes payable. The notes are stratified into seven different classes and pay interest at a duration‑weighted average rate of approximately 5.30%. The notes had a contractual maturity date of July 2013 with respect to the Class A‑1 notes; and May 2018, with respect to the Class A‑2 notes. Both the A-1 and A-2 classes have been paid in full. The remaining notes have a contractual maturity date of October 2021, with respect to the Class A‑3 notes; and June 2036, with respect to the Class A‑4, Class M‑1, Class M‑2 and Class B notes. The outstanding balance on the 2005‑A securitization notes was approximately $46.1 million and $54.3 million at December 31, 2013 and 2012, respectively.

Securitization Financing - 2005‑B Securitization

On December 15, 2005, the Company completed a securitization of approximately $175.0 million in principal balance of manufactured housing loans. The securitization was accounted for as a financing. As part of the securitization the Company, through a special purpose entity, issued $156.2 million in notes payable. The notes are stratified into eight different classes and pay interest at a duration‑weighted average rate of approximately 6.15%. The notes had a contractual maturity date of February 2014 with respect to the Class A‑1 notes; and December 2018, with respect to the Class A‑2 notes. Both the A-1 and A-2 classes have been paid in full. The remaining notes have a contractual maturity date of May 2022, with respect to the Class A‑3 notes; and January 2037, with respect to the Class A‑4, Class M‑1,

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 10 - Debt (cont.)

Class M‑2, Class B‑1 and Class B‑2 notes. The outstanding balance on the 2005‑B securitization notes was approximately $51.5 million and $59.1 million at December 31, 2013 and 2012, respectively.

Securitization Financing - 2006‑A Securitization

On August 25, 2006, the Company completed a securitization of approximately $224.2 million in principal balance of manufactured housing loans. The securitization was accounted for as a financing. As part of the securitization the Company, through a special purpose entity, issued $200.6 million in notes payable. The notes are stratified into two different classes. The Class A‑1 notes paid interest at one month LIBOR plus 15 basis points and had a contractual maturity date of November 15, 2018. The Class A-1 notes have been paid in full. The Class A‑2 notes pay interest (as specified in the Indenture) at a rate equal to the least of the applicable Auction Rate, the Net Contract Rate and the maximum cap rate of 18.00% per annum and have a contractual maturity date of October 2037. Additional credit enhancement was provided through the issuance of a financial guaranty insurance policy by Ambac Assurance Corporation. The outstanding balance on the 2006‑A securitization notes was approximately $86.3 million and $98.0 at December 31, 2013 and 2012, respectively.

Securitization Financing - 2007‑A Securitization

On May 2, 2007, the Company completed a securitization of approximately $200.4 million in principal balance of manufactured housing loans. The securitization was accounted for as a financing. As part of the securitization the Company, through a special purpose entity, issued $184.4 million in notes payable. The notes are stratified into two different classes. The Class A‑1 notes pay interest at one month LIBOR plus 19 basis points and have a contractual maturity date of April 2037. The Class A‑2 notes pay interest (as specified in the Indenture) at a rate equal to the least of the applicable Auction Rate, the Net Contract Rate and the maximum cap rate of 18.00% per annum and have a contractual maturity date of April 2037. Additional credit enhancement was provided through the issuance of a financial guaranty insurance policy by Ambac Assurance Corporation. The outstanding balance on the 2007‑A securitization notes was approximately $89.0 million and $103.0 at December 31, 2013 and 2012, respectively.

Securitization Financing - 2007‑B Securitization

On October 16, 2007, the Company completed a securitization of approximately $140.0 million in principal balance of manufactured housing loans. The securitization was accounted for as a financing. As part of the securitization the Company, through a special purpose entity, issued $126.7 million of a single AAA rated floating rate class of asset backed notes to a single qualified institutional buyer pursuant to Rule 144A under the Securities Act of 1933. The notes pay interest at one month LIBOR plus 120 basis points and have a contractual maturity date of September 2037. Additional credit enhancement was provided by a guaranty from Ambac Assurance Corporation. The outstanding balance on the 2007‑B securitization notes was approximately $66.1 million and $77.7 at December 31, 2013 and 2012, respectively.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 10 - Debt (cont.)

The average balance and average interest rate of outstanding debt was as follows at December 31 (dollars in thousands):

	2013		2012
	Average Balance	Average Rate	Average Balance	Average Rate
Securitization financing — 2004‑A securitization	46,943	6.2	54,024	6.2
Securitization financing — 2004‑B securitization	45,560	6.7	53,943	6.4
Securitization financing — 2005‑A securitization	50,495	5.9	59,087	5.8
Securitization financing — 2005‑B securitization	55,670	6.2	64,850	6.2
Securitization financing — 2006‑A securitization	92,419	8.3	104,233	8.5
Securitization financing — 2007‑A securitization	96,627	7.5	110,690	7.7
Securitization financing — 2007‑B securitization	72,362	7.1	82,950	7.0

The duration weighted average rate on the notes differ from the average rate of outstanding debt at December 31, 2013 and 2012, respectively due to the varying degrees of duration for each class and the amortization of transactions costs.

At December 31, 2013, the total of maturities and amortization of debt during the next five years and thereafter are approximately as follows: 2014 - $69.7 million; 2015 - $116.1 million; 2016 - $65.4 million; 2017 - $57.7 million; 2018 - $21.4 million and $93.3 million thereafter.

NOTE 11 - Employee Benefits

The Company maintains a 401(k) plan covering all employees who meet certain minimum requirements. Participating employees can make salary contributions to the plan up to Internal Revenue Code limits. The Company matches $1.00 for each dollar contributed by each eligible participant in the plan up to the first 1% of each eligible participant’s annual compensation and $0.50 for each dollar contributed by each eligible participant in the plan up to the next 5% of each eligible participant’s annual compensation. The Company’s related expense was approximately $33,000 and $32,000, respectively for the years ended December 31, 2013 and 2012.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 12 - Stockholders' Equity

On October 8, 2003, the Company completed a private placement of $150.0 million of its common stock to certain institutional and accredited investors.

Effective January 1, 2004, the Company sold 125 shares of its Series A Cumulative Redeemable Preferred Stock directly to 125 investors at a per share price of $1,000. The transaction resulted in net proceeds to the Company of $95,000. These shares pay dividends quarterly at an annual rate of 12.5%.

On February 4, 2004, the Company completed a private placement of 1,000,000 shares of its common stock to one institutional investor. The offering provided net proceeds to the Company of approximately $9.4 million.

On May 6, 2004, the Company completed an initial public offering of 8.0 million shares of its common stock. In June 2004 the underwriters of the initial public offering purchased an additional 625,900 shares of the Company’s common stock pursuant to an underwriter’s over‑allotment option. Net proceeds from these transactions were $72.2 million after discount and expenses.

In September 2005, the Securities and Exchange Commission declared effective the Company’s shelf registration statement on Form S‑3 for the proposed offering, from time to time, of up to $200 million of its common stock, preferred stock and debt securities. In addition to such debt securities, preferred stock and common stock the Company could sell under the registration statement from time to time, the Company registered for sale 1,540,000 shares of its common stock pursuant to a sales agreement entered into with Brinson Patrick Securities Corporation. Sales under the agreement commenced on June 5, 2007. There were no sales under this agreement during the years ended December 31, 2013 and 2012. The Company sold 50,063 shares of common stock under the sales agreement with Brinson Patrick Securities Corporation during the year ended December 31, 2007, at the price of the Company’s common stock prevailing at the time of each sale. The Company received proceeds, net of commissions, of $296,000 during the year ended December 31, 2007, as a result of these sales.

In December 2008, the Company voluntarily delisted its common stock from the NASDAQ Global Market, deregistered its common stock under the Securities Act of 1934 and terminated its shelf registration statement on Form S‑3 and its registration statement on Form S‑8.

Data pertaining to the Company’s distributions declared and paid to common stockholders during the years ended December 31, 2013 and 2012 are as follows:

Declaration Date	Record Date	Date Paid	Distribution per Share	Total Distribution (thousands)
December 16, 2013	December 26, 2013	December 31, 2013	$ 0.14	$ 3,630
August 29, 2013	September 9, 2013	September 16, 2013	$ 0.14	$ 3,630
May 14, 2013	May 27, 2013	June 3, 2013	$ 0.09	$ 2,333
February 20, 2013	March 4, 2013	March 11, 2013	$ 0.08	$ 2,074
December 13, 2012	December 24, 2012	December 28, 2012	$ 0.13	$ 3,370
September 6, 2012	September 17, 2012	September 25, 2012	$ 0.12	$ 3,111
June 4, 2012	June 15, 2012	June 22, 2012	$ 0.38	$ 9,852
March 14, 2012	March 26, 2012	April 2, 2012	$ 0.15	$ 3,889

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 13 - Liquidity Risks and Uncertainties

The risks associated with the Company’s business become more acute in any economic slowdown or recession. Periods of economic slowdown or recession may be accompanied by decreased demand for consumer credit and declining asset values. In the manufactured housing business, any material decline in collateral values increases the loan‑to‑value ratios of loans previously made, thereby weakening collateral coverage and increasing the size of losses in the event of default. Delinquencies, repossessions, foreclosures and losses generally increase during economic slowdowns or recessions. For the Company’s finance customers, loss of employment, increases in cost‑of‑living or other adverse economic conditions would impair their ability to meet their payment obligations. Higher industry inventory levels of repossessed manufactured houses may affect recovery rates and result in future impairment charges and provision for losses. In addition, in an economic slowdown or recession, servicing and litigation costs generally increase. Any sustained period of increased delinquencies, repossessions, foreclosures, losses or increased costs would adversely affect the Company’s financial condition, results of operations and liquidity. The Company bears the risk of delinquency and default on securitized loans in which it has a residual or retained ownership interest. The Company also reacquires the risks of delinquency and default for loans that it is obligated to repurchase. Repurchase obligations are typically triggered in sales or securitizations if the loan materially violates the Company’s representations or warranties.

The availability of sufficient sources of capital to allow the Company to continue its operations is dependent on numerous factors, many of which are outside its control. Relatively small amounts of capital are required for the Company’s ongoing operations and cash generated from operations should be adequate to fund the continued operations.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 14 - Lease Commitments

The Company leases office facilities and equipment under leasing agreements that expire at various dates. These leases generally contain scheduled rent increases or escalation clauses and/or renewal options. Future minimum rental payments under agreements classified as operating leases with non‑ cancelable terms at December 31, 2013 were as follows (in thousands):

2014	$	113
2015	116
2016	49
Thereafter	—
Total	$	278

For the years ended December 31, 2013 and 2012, rental and operating lease expense amounted to approximately $109,000 and $108,000, respectively. The Company did not pay any contingent rental expense and received no sublease income during the years ended December 31, 2013 and 2012, respectively.

NOTE 15 - Fair Value Measurements

On January 1, 2008, the Company adopted guidance related to fair value measurements and additional guidance for financial instruments. This guidance establishes a framework for measuring fair value and expands disclosures about fair value measurements. The updated guidance was issued to establish a uniform definition of fair value. The definition of fair value under this guidance is market based as opposed to company specific and includes the following:

Defines fair value as the price that would be received to sell an asset or paid to transfer a liability, in either case through an orderly transaction between market participants at a measurement date, and establishes a framework for measuring fair value;

Establishes a three level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date;

Nullifies previous fair value guidance, which required the deferral of profit at inception of a transaction involving a derivative financial instrument in the absence of observable data supporting the valuation technique;

Eliminates large position discounts for financial instruments quoted in active markets and requires consideration of the company’s creditworthiness when valuing liabilities; and

Expands disclosures about instruments that are measured at fair value.

The accounting guidance for financial instruments provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized Company commitments and written loan commitments not previously recorded at fair value. The Company has not elected to apply the fair value option for any financial instruments.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 15 - Fair Value Measurements (cont.)

Determination of Fair Value

The Company has an established process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market‑based or independently‑sourced market parameters, including interest rate yield curves and option volatilities. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, creditworthiness, liquidity and unobservable parameters that are applied consistently over time. Any changes to the valuation methodology are reviewed by management to determine appropriateness of the changes. As markets develop and the pricing for certain products becomes more transparent, the Company expects to continue to refine its valuation methodologies.

The methods described above may produce a fair value estimate that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in different estimates of fair values of the same financial instruments at the reporting date.

Valuation Hierarchy

The accounting guidance for fair value measurements and disclosures establishes a three‑level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy favors the transparency of inputs to the valuation of an asset or liability as of the measurement date and thereby favors use of Level 1 if appropriate information is available, and otherwise Level 2 and finally Level 3 if Level 2 input is not available. The three levels are defined as follows.

Level 1 - Fair value is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets in which the Company can participate.

Level 2 - Fair value is based upon quoted prices for similar (i.e., not identical) assets and liabilities in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 - Fair value is based upon financial models using primarily unobservable inputs.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.

The following is a description of the valuation methodologies used by the Company for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 15 - Fair Value Measurements (cont.)

Assets

Investments ‑ "SOP - 03-3" - These securities are comprised of mortgage‑backed securities that have evidence of deterioration of credit quality at purchase. The fair values are determined by using a third party discounted cash flow model based on observable market prices and are classified within Level 2 of the valuation hierarchy.

Loans receivable

The Company does not record these loans at fair value on a recurring basis. However, from time to time a loan is considered impaired and an allowance for loan losses is established. Loans are considered impaired if it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Once a loan is identified as impaired, the fair value of the impaired loan is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, and liquidation value or discounted cash flows. Impaired loans do not require an allowance if the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the collateral rather than on discounted cash flows. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as a nonrecurring Level 2 valuation.

Repossessed houses

Loans on which the underlying collateral has been repossessed are adjusted to fair value upon transfer to repossessed assets. Subsequently, repossessed assets are carried at the lower of carrying value or fair value, less anticipated marketing and selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the repossessed asset as a nonrecurring Level 2 valuation.

Liabilities

Derivative Financial Instruments

The Company's derivative contracts include only interest rate swaps. Where possible, such contracts are valued by comparing similar contracts in an active market with inputs that are observable and are classified within Level 2 of the valuation hierarchy. Where observable active market inputs are not available, the Company utilizes internal financial models using inputs derived from forecasts based on historical results and the Company’s estimates. These valuations are classified within Level 3 of the valuation hierarchy.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 15 - Fair Value Measurements (cont.)

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands):

	December 31, 2013
	Fair Value Measurement Using
	Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value
Derivative liabilities	$	—	$	—	$	29,552	$	29,552
Total liabilities	$	—	$	—	$	29,552	$	29,552
	December 31, 2012
	Fair Value Measurement Using
	Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value
Derivative liabilities	$	—	$	—	$	37,454	$	37,454
Total liabilities	$	—	$	—	$	37,454	$	37,454

Changes in assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31 were as follows (in thousands):

	2013			2012
Beginning balance	$	37,454		$	41,662
Net unrealized gains on interest rate swaps,      designated as cash flow hedges	(7,902		)	(4,208		)
Ending balance	$	29,552		$	37,454

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 15 - Fair Value Measurements (cont.)

The Company also has assets that under certain conditions are subject to measurement at fair value on a non‑recurring basis. These include assets that are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below:

	December 31, 2013
	Fair Value on a Non‑recurring Basis
	Level 1		Level 2		Level 3		Asset/Liability at Fair Value
Investments-SOP – 03-3	$	—	$	1,192	$	—	$	1,192
Impaired loans	—		1,683		—		1,683
Repossessed assets	—		1,401		—		1,401
Total Asset	$	—	$	4,276	$	—	$	4,276
	December 31, 2012
	Fair Value on a Non‑recurring Basis
	Level 1		Level 2		Level 3		Asset/Liability at Fair Value
Investment-SOP – 03-3	$	—	$	1,442	$	—	$	1,442
Impaired loans	—		1,826		—		1,826
Repossessed houses	—		2,180		—		2,180
Total Asset	$	—	$	5,448	$	—	$	5,448

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 15 - Fair Value Measurements (cont.)

Required Financial Disclosure about Financial Instruments

The accounting guidance for financial instruments requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair values. Certain financial instruments and all nonfinancial instruments are excluded from the scope of this guidance. Accordingly, the fair value disclosures required by this guidance are only indicative of the value of individual financial instruments as of the dates indicated and should not be considered an indication of the fair value of the Company.

	2013				2012
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Cash and cash equivalents	$	774	$	774	$	826	$	826
Restricted cash	8,516		8,516		11,110		11,110
Investments	1,191		1,191		1,442		1,442
Loans receivable	463,254		436,353		543,420		492,598
Liabilities
Securitization financing	423,369		380,086		491,720		413,479
Derivatives	29,552		29,552		37,454		37,454

The methods and assumptions that were used to estimate the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non‑recurring basis are discussed above. The following methods and assumptions were used to estimate the fair value for other financial instruments for which it is practicable to estimate that value:

• Cash, cash equivalents and restricted cash ‑ Due to their short term in nature, the carrying amount of cash, cash equivalents, and restricted cash approximates fair value.

• Investment‑Held‑to‑Maturity ‑ The fair value of investments, classified as held to maturity, is estimated by management using an internally developed cash flow model using market interest rates inputs as well as management's best estimates of spreads for similar collateral.

• Loans Receivable ‑ The fair value of loans is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management's best estimate of spreads for similar collateral.

• Securitized Financing ‑ The fair value of securitized financing is estimated based on a discounted cash flow model that incorporates the current borrowing rates of the notes or similar types of borrowing arrangements.

ORIGEN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and For the Years Ended December 31, 2013 and 2012

NOTE 16 - Related Party Transactions

The Company leases its executive offices in Southfield, Michigan from an entity in which Mr. Gary A. Shiffman, a director of the Company, and certain of his affiliates beneficially own approximately a 21% interest. Ronald A. Klein, a director and the Chief Executive Officer of the Company, owns less than a 1% interest in the landlord entity. The Company recorded rental expense for these offices of approximately $104,000 and $103,000 for the years ended December 31, 2013 and 2012, respectively.

NOTE 17 - Subsequent Events

The Company has evaluated subsequent events occurring through February 19, 2014, the date that the financial statements were available to be issued for events requiring recording or disclosure in the Company’s financial statements.

On February 19, 2014, the Company declared a dividend of $0.08 per common share payable to holders of record as of March 3, 2014. The dividend will be paid on March 13, 2014 and will approximate $2.1 million.