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Principles of Consolidation (Tables)

6 Months Ended

Jun. 30, 2014

Securitization Activity Related to Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents information related to securitization transactions that occurred during the three and six months ended June 30, 2014 and 2013.

Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2014		2013		2014		2013
Principal balance of loans transferred	$	347,305	$	1,802,058	$	347,305	$	4,042,710
Trading securities retained, at fair value		69,563		40,642		69,563		91,850
AFS securities retained, at fair value		20,428		92,367		20,428		207,095
Gains on sale		-		-		-		-
MSRs recognized		2,186		16,148		2,186		28,614

The following table summarizes the cash flows between us and the unconsolidated VIEs sponsored by us during the three and six months ended June 30, 2014 and 2013.

Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2014		2013		2014		2013
Cash proceeds	$	267,776	$	1,705,504	$	267,776	$	3,859,354
MSR fees received		3,624		2,099		7,047		3,075
Funding of compensating interest		(43)		(145)		(76)		(263)
Cash flows received on retained securities		15,924		9,883		28,227		14,950

MSR Assumptions Related to Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents the key weighted-average assumptions to measure MSRs at the date of securitization.

MSR Assumptions Related to Unconsolidated VIEs Sponsored by Redwood


	Issued During
	Three Months Ended June 30,	Six Months Ended June 30,
At Date of Securitization	2014 2013	2014 2013

Prepayment speeds	5 - 15 % 5 - 12 %	5 - 15 % 5 - 14 %
Discount rates	11 % 12 %	11 % 12 %

Unconsolidated Variable Interest Entity's Sponsored by Redwood Summary

The following table presents additional information at June 30, 2014 and December 31, 2013, related to unconsolidated securitizations accounted for as sales since 2012. Loans at these securitization entities have not incurred any credit losses.

Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	June 30, 2014		December 31, 2013
On-balance sheet assets, at fair value:
Interest-only and senior securities, classified as trading	$	159,311	$	110,505
Senior and subordinate securities, classified as AFS		449,863		405,415
Maximum loss exposure ⁽¹⁾		609,174		515,920
Assets transferred:
Principal balance of loans outstanding		6,730,820		6,627,874
Principal balance of delinquent loans 30+ days delinquent		7,041		14,587

(1)

Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization.

Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at June 30, 2014 and December 31, 2013.

Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood


June 30, 2014	MSRs		Senior Securities		Subordinate Securities
(Dollars in Thousands)	MSRs		Senior Securities		Subordinate Securities
Fair value at June 30, 2014	$	54,712	$	159,311	$	449,863
Expected life (in years) ⁽¹⁾		7		7		11

Prepayment speed assumption (annual CPR) ⁽¹⁾		12 %		9 %		10 %
Decrease in fair value from:
10% adverse change	$	2,088	$	7,254	$	1,345
25% adverse change		4,908		12,104		3,519

Discount rate assumption ⁽¹⁾		11 %		5 %		6 %
Decrease in fair value from:
100 basis point increase	$	2,194	$	7,929	$	34,532
200 basis point increase		4,212		15,159		65,057

Credit loss assumption ⁽¹⁾		N/A		0.23 %		0.23 %
Decrease in fair value from:
10% higher losses		N/A	$	89	$	1,197
25% higher losses		N/A		222		2,380
December 31, 2013	MSRs		Senior Interest-only Securities		Subordinate Securities
(Dollars in Thousands)	MSRs		Senior Interest-only Securities		Subordinate Securities
Fair value at December 31, 2013	$	60,318	$	110,505	$	405,415
Expected life (in years) ⁽¹⁾		8		7		11

Prepayment speed assumption (annual CPR) ⁽¹⁾		8 %		10 %		11 %
Decrease in fair value from:
10% adverse change	$	1,649	$	5,773	$	1,658
25% adverse change		4,218		13,555		4,354

Discount rate assumption ⁽¹⁾		11 %		5 %		6 %
Decrease in fair value from:
100 basis point increase	$	2,468	$	5,632	$	30,644
200 basis point increase		4,828		10,757		57,836

Credit loss assumption ⁽¹⁾		N/A		0.23 %		0.23 %
Decrease in fair value from:
10% higher losses		N/A	$	70	$	1,369
25% higher losses		N/A		175		3,420

(1)	Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.

Loan Transfers Accounted for as Secured Borrowings

The following table presents a summary of our interests in third-party VIEs at June 30, 2014, grouped by collateral type.

Third-Party Sponsored VIE Summary


(In Thousands)	June 30, 2014
Residential real estate securities at Redwood
Senior	$	663,587
Re-REMIC		192,596
Subordinate		133,857

Total Investments in Third-Party Real Estate Securities	$	990,040

Variable Interest Entity, Primary Beneficiary

Schedule of Variable Interest Entities

The following table presents a summary of the assets and liabilities of these VIEs. Intercompany balances have been eliminated for purposes of this presentation.

Assets and Liabilities of Consolidated VIEs at June 30, 2014


June 30, 2014 (Dollars in Thousands)	Sequoia Entities		Residential Resecuritization		Commercial Securitization		Total
Residential loans, held-for-investment	$	1,616,504	$	-	$	-	$	1,616,504
Commercial loans, held-for-investment		-		-		254,615		254,615
Real estate securities, at fair value		-		245,853		-		245,853
Restricted cash		145		-		138		283
Accrued interest receivable		2,391		549		1,826		4,766
Other assets		3,323		-		79		3,402

Total Assets	$	1,622,363	$	246,402	$	256,658	$	2,125,423

Accrued interest payable	$	1,078	$	17	$	678	$	1,773
Asset-backed securities issued		1,553,669		69,709		144,700		1,768,078

Total Liabilities	$	1,554,747	$	69,726	$	145,378	$	1,769,851


Number of VIEs		24		1		1		26

Variable Interest Entity, Not Primary Beneficiary

Schedule of Variable Interest Entities

The following table presents commercial loan transfers accounted for as secured borrowings for the three and six months ended June 30, 2014.

Loan Transfers Accounted for as Secured Borrowings


(In Thousands)	Three Months Ended June 30, 2014		Six Months Ended June 30, 2014
Principal balance	$	29,500	$	63,375
Cash proceeds		30,274		65,048

- Definition

Tabular disclosure of the significant judgments and assumptions made in determining whether a variable interest (as defined) held by the entity requires the variable interest entity (VIE) (as defined) to be consolidated and (or) disclose information about its involvement with the VIE, individually or in aggregate (as applicable); the nature of restrictions, if any, on the consolidated VIE's assets and on the settlement of its liabilities reported by an entity in its statement of financial position, including the carrying amounts of such assets and liabilities; the nature of, and changes in, the risks associated with involvement in the VIE; how involvement with the VIE affects the entity's financial position, financial performance, and cash flows; the lack of recourse if creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the primary beneficiary (if applicable); the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, if any, that could require the entity to provide financial support to the VIE, including events or circumstances that could expose the entity to a loss; the methodology used by the entity for determining whether or not it is the primary beneficiary of the variable interest entity; the significant factors considered and judgments made in determining that the power to direct the activities of a VIE that most significantly impact the VIE's economic performance are shared (as defined); the carrying amounts and classification of assets and liabilities of the VIE included in the statement of financial position; the entity's maximum exposure to loss, if any, as a result of its involvement with the VIE, including how the maximum exposure is determined and significant sources of the entity's exposure to the VIE; a comparison of the carrying amounts of the assets and liabilities and the entity's maximum exposure to loss; information about any liquidity arrangements, guarantees, and (or) other commitments by third parties that may affect the fair value or risk of the entity's variable interest in the VIE; whether or not the entity has provided financial support or other support (explicitly or implicitly) to the VIE that it was not previously contractually required to provide or whether the entity intends to provide that support, including the type and amount of the support and the primary reasons for providing the support; and supplemental information the entity determines necessary to provide.

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