Principles of Consolidation (Tables)

9 Months Ended

Sep. 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 nine months ended September 30, 2014 and 2013.

Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2014		2013		2014		2013
Principal balance of loans transferred	$	635,608	$	1,210,604	$	982,913	$	5,253,314
Trading securities retained, at fair value		1,680		8,702		71,243		100,552
AFS securities retained, at fair value		39,330		71,527		59,757		278,622
MSRs recognized		4,356		12,514		6,542		41,128

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

Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2014		2013		2014		2013
Cash proceeds	$	610,167	$	507,202	$	877,943	$	4,366,556
MSR fees received		3,571		3,160		10,618		6,235
Funding of compensating interest		(68)		(152)		(144)		(415)
Cash flows received on retained securities		16,190		15,656		44,417		30,606

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 September 30,				Nine Months Ended September 30,
At Date of Securitization	2014		2013		2014		2013

Prepayment speeds		5 - 16 %		5 - 8 %		5 - 16 %		5 - 13 %
Discount rates		11 %		12 %		11 %		12 %

Unconsolidated Variable Interest Entity's Sponsored by Redwood Summary

The following table presents additional information at September 30, 2014 and December 31, 2013, related to unconsolidated securitizations accounted for as sales since 2012.

Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	September 30, 2014		December 31, 2013
On-balance sheet assets, at fair value:
Interest-only and senior securities, classified as trading	$	100,613	$	110,505
Senior and subordinate securities, classified as AFS		441,835		405,415
Maximum loss exposure ⁽¹⁾		542,448		515,920
Assets transferred:
Principal balance of loans outstanding		7,173,303		6,627,874
Principal balance of delinquent loans 30+ days delinquent		16,482		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 September 30, 2014 and December 31, 2013.

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


September 30, 2014 (Dollars in Thousands)	MSRs		Senior Securities		Subordinate Securities
Fair value at June 30, 2014	$	59,890	$	100,613	$	441,835
Expected life (in years) ⁽¹⁾		7		6		10

Prepayment speed assumption (annual CPR) ⁽¹⁾		12 %		9 %		10 %
Decrease in fair value from:
10% adverse change	$	2,454	$	4,552	$	404
25% adverse change		5,589		10,470		2,058

Discount rate assumption ⁽¹⁾		11 %		7 %		9 %
Decrease in fair value from:
100 basis point increase	$	2,381	$	4,444	$	33,310
200 basis point increase		4,568		8,528		62,862

Credit loss assumption ⁽¹⁾		N/A		0.25 %		0.25 %
Decrease in fair value from:
10% higher losses		N/A	$	144	$	3,132
25% higher losses		N/A		349		7,779


December 31, 2013 (Dollars in Thousands)	MSRs		Senior 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 September 30, 2014, grouped by collateral type.

Third-Party Sponsored VIE Summary


(In Thousands)	September 30, 2014
Residential real estate securities at Redwood
Senior	$	552,793
Re-REMIC		176,117
Subordinate		123,626

Total Investments in Third-Party Real Estate Securities	$	852,536

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 September 30, 2014


September 30, 2014 (Dollars in Thousands)	Sequoia Entities		Residential Resecuritization		Commercial Securitization		Total
Residential loans, held-for-investment	$	1,546,507	$	-	$	-	$	1,546,507
Commercial loans, held-for-investment		-		-		204,741		204,741
Real estate securities, at fair value		-		233,311		-		233,311
Restricted cash		147		-		138		285
Accrued interest receivable		1,882		506		1,527		3,915
Other assets		3,349		-		21,699		25,048

Total Assets	$	1,551,885	$	233,817	$	228,105	$	2,013,807

Accrued interest payable	$	1,034	$	7	$	539	$	1,580
Asset-backed securities issued		1,484,751		56,508		114,943		1,656,202

Total Liabilities	$	1,485,785	$	56,515	$	115,482	$	1,657,782


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 nine months ended September 30, 2014.

Loan Transfers Accounted for as Secured Borrowings


(In Thousands)	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
Principal balance	$	-	$	63,375
Cash proceeds		-		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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