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Real Estate Securities | 12 Months Ended
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Dec. 31, 2014
Real Estate Securities | Note 8. Real Estate Securities We invest in residential mortgage-backed securities. The following table presents the fair values of our real estate securities by collateral type at December 31, 2014 and 2013.
(In Thousands) |  | December 31, 2014 |  |  | December 31, 2013 |
Trading |  | $ | 111,606 |  |  | $ | 124,555 |
Available-for-sale |  |  | 1,267,624 |  |  |  | 1,558,306 |
Total Real Estate Securities |  | $ | 1,379,230 |  |  | $ | 1,682,861 |
Our real estate securities herein are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. Re-REMIC securities, as presented herein, were created through the resecuritization of certain senior security interests to provide additional credit support to those interests. These re-REMIC securities are therefore subordinate to the remaining senior interest, but senior to any subordinate tranches of the securitization from which they were created. Subordinate securities are all interests below senior and re-REMIC interests. Trading Securities We elected the fair value option for certain securities at Redwood and, previously, the Acacia entities, and classify them as trading securities. At December 31, 2014, our trading securities included $96 million of interest-only securities, for which there is no principal balance, $6 million of senior securities and $10 million of residential subordinate securities. The unpaid principal balance of residential senior and subordinate securities classified as trading was $6 million and $21 million, respectively, at December 31, 2014. The following table presents trading securities by collateral type and ownership entity at December 31, 2014 and 2013.
(In Thousands) |  | December 31, 2014 |  |  | December 31, 2013 |
Senior Securities |  |  |  |  |  |  |  |
Prime |  | $ | 93,802 |  |  | $ | 110,505 |
Non-prime |  |  | 7,951 |  |  |  | 9,070 |
Total Senior Securities |  |  | 101,753 |  |  |  | 119,575 |
Prime Subordinate Securities |  |  | 9,853 |  |  |  | 4,980 |
Total Trading Securities |  | $ | 111,606 |  |  | $ | 124,555 |
AFS Securities The following table presents the fair value of our available-for-sale securities held at Redwood by collateral type at December 31, 2014 and 2013.
(In Thousands) |  | December 31, 2014 |  |  | December 31, 2013 |
Senior Securities |  |  |  |  |  |  |  |
Prime |  | $ | 307,813 |  |  | $ | 662,306 |
Non-prime |  |  | 179,744 |  |  |  | 193,386 |
Total Senior Securities |  |  | 487,557 |  |  |  | 855,692 |
Re-REMIC Securities |  |  | 168,347 |  |  |  | 176,376 |
Subordinate Securities |  |  |  |  |  |  |  |
Prime Mezzanine (1) |  |  | 448,838 |  |  |  | 384,849 |
Subordinate (2) |  |  | 162,882 |  |  |  | 141,389 |
Total Subordinate Securities |  |  | 611,720 |  |  |  | 526,238 |
Total AFS Securities |  | $ | 1,267,624 |  |  | $ | 1,558,306 |
(1) | Mezzanine includes securities initially rated AA, A, and BBB- and issued in 2012 or later.
(2) | Subordinate securities includes less than $1 million of non-prime securities at both December 31, 2014 and 2013.
The senior securities shown above at December 31, 2014 and 2013, included $105 million and $131 million, respectively, of prime securities, and $117 million and $132 million, respectively, of non-prime securities that were financed through the Residential Resecuritization entity, as discussed in Note 4. We often purchase AFS securities at a discount to their outstanding principal balances. To the extent we purchase an AFS security that has a likelihood of incurring a loss, we do not amortize into income the portion of the purchase discount that we do not expect to collect due to the inherent credit risk of the security. We may also expense a portion of our investment in the security to the extent we believe that principal losses will exceed the purchase discount. We designate any amount of unpaid principal balance that we do not expect to receive and thus do not expect to earn or recover as a credit reserve on the security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method. At December 31, 2014, there were $8 million of AFS residential securities with contractual maturities less than five years, $2 million of AFS residential securities with contractual maturities greater than five years but less than ten years, and the remainder of our real estate securities had contractual maturities greater than ten years. The following table presents the components of carrying value (which equals the fair value) of residential AFS securities at December 31, 2014 and 2013. Carrying Value of Residential AFS Securities
December 31, 2014 (In Thousands) |  | Senior |  |  |  |  |  |  |  |  |  |
| Prime |  |  | Non-prime |  |  | Re-REMIC |  |  | Subordinate |  |  | Total |
Principal balance |  | $ | 311,573 |  |  | $ | 196,258 |  |  | $ | 195,098 |  |  | $ | 742,150 |  |  | $ | 1,445,079 |
Credit reserve |  |  | (3,660 | ) |  |  | (9,644 | ) |  |  | (15,202 | ) |  |  | (41,561 | ) |  |  | (70,067 | )
Unamortized discount, net |  |  | (34,782 | ) |  |  | (31,491 | ) |  |  | (79,611 | ) |  |  | (150,458 | ) |  |  | (296,342 | )
Amortized cost |  |  | 273,131 |  |  |  | 155,123 |  |  |  | 100,285 |  |  |  | 550,131 |  |  |  | 1,078,670 |
Gross unrealized gains |  |  | 35,980 |  |  |  | 24,682 |  |  |  | 68,062 |  |  |  | 63,026 |  |  |  | 191,750 |
Gross unrealized losses |  |  | (1,298 | ) |  |  | (61 | ) |  |  | — |  |  |  | (1,437 | ) |  |  | (2,796 | )
Carrying Value |  | $ | 307,813 |  |  | $ | 179,744 |  |  | $ | 168,347 |  |  | $ | 611,720 |  |  | $ | 1,267,624 |
December 31, 2013 (In Thousands) |  | Senior |  |  |  |  |  |  |  |  |  |
| Prime |  |  | Non-prime |  |  | Re-REMIC |  |  | Subordinate |  |  | Total |
Principal balance |  | $ | 670,051 |  |  | $ | 218,603 |  |  | $ | 214,046 |  |  | $ | 706,292 |  |  | $ | 1,808,992 |
Credit reserve |  |  | (10,144 | ) |  |  | (13,840 | ) |  |  | (30,429 | ) |  |  | (62,457 | ) |  |  | (116,870 | )
Unamortized discount, net |  |  | (44,133 | ) |  |  | (36,882 | ) |  |  | (80,188 | ) |  |  | (137,266 | ) |  |  | (298,469 | )
Amortized cost |  |  | 615,774 |  |  |  | 167,881 |  |  |  | 103,429 |  |  |  | 506,569 |  |  |  | 1,393,653 |
Gross unrealized gains |  |  | 47,980 |  |  |  | 25,654 |  |  |  | 72,947 |  |  |  | 41,205 |  |  |  | 187,786 |
Gross unrealized losses |  |  | (1,448 | ) |  |  | (149 | ) |  |  | — |  |  |  | (21,536 | ) |  |  | (23,133 | )
Carrying Value |  | $ | 662,306 |  |  | $ | 193,386 |  |  | $ | 176,376 |  |  | $ | 526,238 |  |  | $ | 1,558,306 |
The following table presents the changes for years ended December 31, 2014 and 2013, of the unamortized discount and designated credit reserves on residential AFS securities. Changes in Unamortized Discount and Designated Credit Reserves on Residential AFS Securities
|  | Year Ended December 31, 2014 |  |  | Year Ended December 31, 2013 |
(In Thousands) |  | Credit Reserve |  |  | Unamortized Discount, Net |  |  | Credit Reserve |  |  | Unamortized Discount, Net |
Beginning balance |  | $ | 116,870 |  |  | $ | 298,469 |  |  | $ | 187,032 |  |  | $ | 203,421 |
Amortization of net discount |  |  | — |  |  |  | (42,835 | ) |  |  | — |  |  |  | (34,943 | )
Realized credit losses |  |  | (11,501 | ) |  |  | — |  |  |  | (21,971 | ) |  |  | — |
Acquisitions |  |  | 3,581 |  |  |  | 15,348 |  |  |  | 13,604 |  |  |  | 92,124 |
Sales, calls, other |  |  | (2,555 | ) |  |  | (11,533 | ) |  |  | (19,868 | ) |  |  | (5,894 | )
Impairments |  |  | 565 |  |  |  | — |  |  |  | 1,834 |  |  |  | — |
Transfers to (release of) credit reserves, net |  |  | (36,893 | ) |  |  | 36,893 |  |  |  | (43,761 | ) |  |  | 43,761 |
Ending Balance |  | $ | 70,067 |  |  | $ | 296,342 |  |  | $ | 116,870 |  |  | $ | 298,469 |
Residential AFS Securities with Unrealized Losses The following table presents the components comprising the total carrying value of residential AFS securities that were in a gross unrealized loss position at December 31, 2014 and 2013.
|  | Less Than 12 Consecutive Months |  |  | 12 Consecutive Months or Longer |
(In Thousands) |  | Amortized Cost |  |  | Unrealized Losses |  |  | Fair Value |  |  | Amortized Cost |  |  | Unrealized Losses |  |  | Fair Value |
December 31, 2014 |  | $ | 126,681 |  |  | $ | (1,374 | ) |  | $ | 125,307 |  |  | $ | 70,676 |  |  | $ | (1,422 | ) |  | $ | 69,254 |
December 31, 2013 |  |  | 607,030 |  |  |  | (21,195 | ) |  |  | 585,835 |  |  |  | 19,828 |  |  |  | (1,938 | ) |  |  | 17,890 |
At December 31, 2014, after giving effect to purchases, sales, and extinguishments due to credit losses, our consolidated balance sheet included 290 AFS securities, of which 31 were in an unrealized loss position and 10 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2013, our consolidated balance sheet included 303 AFS securities, of which 76 were in an unrealized loss position and five were in a continuous unrealized loss position for 12 consecutive months or longer. Evaluating AFS Securities for Other-than-Temporary Impairments Gross unrealized losses on our AFS securities were $3 million at December 31, 2014. We evaluate all securities in an unrealized loss position to determine if the impairment is temporary or other-than-temporary (resulting in an OTTI). At December 31, 2014, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses that are other-than-temporary based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral. During 2014, we recognized OTTI losses of $5 million related to our AFS securities, of which $1 million was determined to be credit related and recorded in other market valuation adjustments in our consolidated statements of income and the remainder was determined to be non-credit related and recorded through accumulated other comprehensive income (loss) on our consolidated balance sheets. AFS securities for which OTTI is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the OTTI assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of the credit loss component of OTTI. The table below summarizes the significant valuation assumptions we used for our AFS securities at December 31, 2014. Significant Assumptions
|  | Range for Securities |
December 31, 2014 |  | Prime |  |  | Non-prime |
Prepayment rates |  |  | 8 - 15 | % |  |  | 10 - 10 | %
Loss severity |  |  | 20 - 52 | % |  |  | 35 - 35 | %
Projected losses |  |  | 1 - 22 | % |  |  | 15 - 15 | %
The following table details the activity related to the credit loss component of OTTI (i.e., OTTI recognized through earnings) for AFS securities held at December 31, 2014, 2013, and 2012, for which a portion of an OTTI was recognized in other comprehensive income. Activity of the Credit Component of Other-than-Temporary Impairments
|  | Years Ended December 31, |
(In Thousands) |  | 2014 |  |  | 2013 |  |  | 2012 |
Balance at beginning of period |  | $ | 37,149 |  |  | $ | 50,852 |  |  | $ | 78,126 |
Additions |  |  |  |  |  |  |  |  |  |  |  |
Initial credit impairments |  |  | 261 |  |  |  | 137 |  |  |  | 325 |
Subsequent credit impairments |  |  | 70 |  |  |  | — |  |  |  | 552 |
Reductions |  |  |  |  |  |  |  |  |  |  |  |
Securities sold, or expected to sell |  |  | (922 | ) |  |  | (5,811 | ) |  |  | (10,024 | )
Securities with no outstanding principal at period end |  |  | (2,709 | ) |  |  | (8,029 | ) |  |  | (18,127 | )
Balance at End of Period |  | $ | 33,849 |  |  | $ | 37,149 |  |  | $ | 50,852 |
Gross Realized Gains and Losses on AFS Securities Gains and losses from the sale of AFS securities are recorded as realized gains, net, in our consolidated statements of income. The following table presents the gross realized gains on sales and calls of AFS securities for the years ended December 31, 2014, 2013, and 2012.
|  | Years Ended December 31, |
(In Thousands) |  | 2014 |  |  | 2013 |  |  | 2012 |
Gross realized gains - sales |  | $ | 15,030 |  |  | $ | 24,613 |  |  | $ | 33,909 |
Gross realized gains - calls |  |  | 1,600 |  |  |  | 366 |  |  |  | 142 |
Gross realized losses - sales |  |  | (2,713 | ) |  |  | (214 | ) |  |  | (1,600 | )
Gross realized losses - calls |  |  | — |  |  |  | — |  |  |  | — |
Total Realized Gains on Sales and Calls of AFS Securities, net |  | $ | 13,917 |  |  | $ | 24,765 |  |  | $ | 32,451 |

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