ARBOR REALTY TRUST INC 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk ​ We disclosed a quantitative and qualitative analysis regarding market risk in Item 7A of our 2020 Annual Report. That information is supplemented by the information included above in Item 2 of this report. Other than the developments described thereunder, there have been no material changes in our exposure to market risk since December 31, 2020. The following table projects the potential impact on interest for a 12-month period, assuming an instantaneous increase or decrease of 10 basis points and an increase of 25 basis points in LIBOR (in thousands). Because LIBOR rates were close to zero at June 30, 2021, we have excluded the impact of a 25 basis point decrease in LIBOR. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets (Liabilities) 10 Basis 10 Basis 25 Basis ​ ​ Subject to Interest ​ Point ​ Point ​ Point ​ ​ Rate Sensitivity (1) ​ Increase ​ Decrease ​ Increase ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income from loans and investments ​ $ 7,385,929 ​ $ 676 ​ $ (304) ​ $ 3,623 Interest expense from debt obligations ​ (6,411,864) ​ 4,382 ​ (4,338) ​ 11,490 Net interest income ​ ​ ​ ​ ​ (3,706) ​ ​ 4,034 ​ ​ (7,867) Interest from cash, restricted cash and escrows (2) ​ ​ 1,997,758 ​ ​ 1,998 ​ ​ (1,998) ​ ​ 4,994 Net change to interest ​ ​ ​ ​ $ (1,708) ​ $ 2,036 ​ $ (2,873) (1) Represents the UPB of our loan portfolio and the principal balance of our debt. (2) The interest rates on these balances are not indexed to LIBOR, they are negotiated periodically with each corresponding bank based on certain benchmark rates. ​ Based on our structured loans and investments and corresponding debt as of June 30, 2021, increases in LIBOR of 0.10% and 0.25% would decrease our annual net interest income as a result of LIBOR floors on a portion of our loan portfolio that are above LIBOR as of June 30, 2021, which would limit the effect of an increase on interest income. Conversely, these LIBOR floors would reduce the impact on interest income from decreases in LIBOR, which would result in increases to net interest income. ​ 65 Table of Contents We enter into Swap Futures to hedge our exposure to changes in interest rates inherent in (1) our held-for-sale Agency Business Private Label loans from the time the loans are rate locked until sale and securitization, and (2) our Agency Business SFR – fixed rate loans from the time the loans are originated until the time they can be financed with match term fixed rate securitized debt. Our Swap Futures are tied to the five-year and ten-year swap rates and hedge our exposure to Private Label loans until the time they are securitized and changes in the fair value of our held-for-sale Agency Business SFR – fixed rate loans. A 25 basis point and a 50 basis point increase to the five-year and ten-year swap rates on our Swap Futures held at June 30, 2021 would have resulted in a gain of $4.4 million and $8.6 million, respectively, in the six months ended June 30, 2021, while a 25 basis point and a 50 basis point decrease in the rates would have resulted in a loss of $4.5 million and $9.1 million, respectively. ​ Our Agency Business originates, sells and services a range of multifamily finance products with Fannie Mae, Freddie Mac and HUD. Our loans held-for-sale to these agencies are not currently exposed to interest rate risk during the loan commitment, closing and delivery process. The sale or placement of each loan to an investor is negotiated prior to closing on the loan with the borrower, and the sale or placement is generally effectuated within 60 days of closing. The coupon rate for the loan is set after we establish the interest rate with the investor. ​ In addition, the fair value of our MSRs is subject to market risk since a significant driver of the fair value of these assets is the discount rates. A 100 basis point increase in the weighted average discount rate would decrease the fair value of our MSRs by $16.2 million as of June 30, 2021, while a 100 basis point decrease would increase the fair value by $17.1 million. ​