Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2015

Carrying Values and Estimated Fair Values of Assets and Liabilities

The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at March 31, 2015 and December 31, 2014.



	March 31, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Residential loans, held-for-sale
At fair value	$	1,093,413	$	1,093,413	$	1,341,032	$	1,341,032
At lower of cost or fair value	1,472		1,663		1,488		1,669
Residential loans, held-for-investment ⁽¹⁾
At fair value	2,304,870		2,304,870		581,668		581,668
At amortized cost	—		—		1,474,386		1,381,918
Commercial loans, held-for-sale	54,407		54,407		166,234		166,234
Commercial loans, held-for-investment
At fair value	72,619		72,619		71,262		71,262
At amortized cost	333,316		338,932		329,431		334,876
Trading securities	106,837		106,837		111,606		111,606
Available-for-sale securities	1,178,406		1,178,406		1,267,624		1,267,624
MSRs	120,324		120,324		139,293		139,293
Cash and cash equivalents	303,820		303,820		269,730		269,730
Restricted cash	725		725		628		628
Accrued interest receivable	17,970		17,970		18,222		18,222
Derivative assets	30,546		30,546		16,417		16,417
REO ⁽²⁾	5,305		5,446		4,391		4,703
Margin receivable⁽²⁾	79,760		79,760		65,374		65,374
FHLBC stock ⁽²⁾	28,434		28,434		10,688		10,688
Guarantee asset⁽²⁾	6,118		6,118		7,201		7,201
Pledged collateral⁽²⁾	10,265		10,265		9,927		9,927

Liabilities
Short-term debt	$	1,502,164	$	1,502,164	$	1,793,825	$	1,793,825
Accrued interest payable	14,319		14,319		8,502		8,502
Guarantee obligation	6,917		6,917		7,201		7,201
Derivative liabilities	68,064		68,064		58,331		58,331
ABS issued⁽¹⁾
Fair value	1,239,065		1,239,065		—		—
Amortized cost	113,956		114,613		1,545,119		1,446,605
FHLBC borrowings	850,792		850,792		495,860		495,860
Commercial secured borrowings	68,077		68,077		66,707		66,707
Convertible notes	492,500		488,243		492,500		492,188
Other long-term debt	139,500		97,650		139,500		101,835


(1)	Upon adoption of ASU 2014-13 on January 1, 2015, loans held-for-investment and ABS issued by consolidated Sequoia entities began to be recorded at fair value. See Note 3 for further discussion.


(2)	These assets are included in Other Assets on our consolidated balance sheets.

Assets and Liabilities Measured at Fair Value on Recurring Basis

The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at March 31, 2015, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2015



March 31, 2015	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	3,398,283	$	—	$	200,869	$	3,197,414
Commercial loans	127,026		—		—		127,026
Trading securities	106,837		—		—		106,837
Available-for-sale securities	1,178,406		—		—		1,178,406
Derivative assets	30,546		4,721		17,554		8,271
MSRs	120,324		—		—		120,324
Pledged collateral	10,265		10,265		—		—
FHLBC stock	28,434		28,434		—		—
Guarantee asset	6,118		—		—		6,118

Liabilities
Derivative liabilities	68,064		9,173		58,045		846
Commercial secured borrowings	68,077		—		—		68,077
ABS issued	1,239,065		—		—		1,239,065

Changes in Level 3 Assets and Liabilities Measured at Fair Value on Recurring Basis

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2015.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis



	Assets																					Liabilities
	Residential Loans			Commercial Loans			Trading Securities			AFS Securities			MSRs			Guarantee Asset			Derivatives⁽¹⁾			Commercial Secured Borrowings			ABS Issued
(In Thousands)	Residential Loans			Commercial Loans			Trading Securities			AFS Securities			MSRs			Guarantee Asset			Derivatives⁽¹⁾			Commercial Secured Borrowings			ABS Issued
Beginning balance - December 31, 2014	$	1,677,984		$	237,496		$	111,606		$	1,267,624		$	139,293		$	7,201		$	1,119		$	66,707		$	—
Transfer to FVO ⁽²⁾	1,370,699			—			—			—			—			—			—			—			1,302,216
Principal paydowns	(111,716		)	(240		)	(203		)	(26,110		)	—			—			—			(152		)	(66,517		)
Amortization income	—			—			—			9,838			—			—			—			—			—
Gains (losses) in net income, net	7,570			7,366			(14,114		)	4,306			(19,517		)	(1,083		)	20,087			1,509			2,946
Unrealized gains in OCI, net	—			—			—			3,795			—			—			—			—			—
Acquisitions	1,112,042			92,713			23,084			9,831			18,754			—			—			—			—
Sales	(857,249		)	(210,309		)	(13,536		)	(90,878		)	(18,206		)	—			—			—			—
Other settlements, net	(1,916		)	—			—			—			—			—			(13,781		)	13			421
Ending balance - March 31, 2015	$	3,197,414		$	127,026		$	106,837		$	1,178,406		$	120,324		$	6,118		$	7,425		$	68,077		$	1,239,066

(1) For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments, are presented on a net basis.

(2) Upon adoption of ASU 2014-13 on January 1, 2015, loans held-for-investment in, and ABS issued by, consolidated financial entities are now recorded at fair value. See Note 3 for further discussion.

Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held and Included in Net Income

The following table presents the portion of gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at March 31, 2015 and 2014. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2015 and 2014 are not included in this presentation.

Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at March 31, 2015 and 2014 Included in Net Income



	Included in Net Income
	Three Months Ended March 31,
(In Thousands)	2015			2014
Assets
Residential loans at Redwood	$	5,464		$	3,483
Residential loans at consolidated Sequoia entities	1,179			—
Commercial loans	2,959			2,530
Trading securities	(13,790		)	(4,431		)
Available-for-sale securities	—			(113		)
MSRs	(11,769		)	(2,291		)
Loan purchase commitments	7,422			—
Other assets - Guarantee asset	(1,083		)	—

Liabilities
Loan purchase commitments	—			(235		)
Commercial secured borrowing	(1,509		)	—
ABS issued	(2,946		)	—

Assets and Liabilities Measured at Fair Value on Non-Recurring Basis

The following table presents information on assets recorded at fair value on a non-recurring basis at March 31, 2015. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our balance sheet at March 31, 2015.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2015



									Gain (Loss) for
March 31, 2015	Carrying Value		Fair Value Measurements Using						Three Months Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		March 31, 2015
Assets
Residential loans, at lower of cost or fair value	$	1,103	$	—	$	—	$	1,103	$	—
REO	3,410		—		—		3,410		(74		)

Market Valuation Adjustments, Net

The following table presents the components of market valuation adjustments, net, recorded in our consolidated statements of income for the three months ended March 31, 2015 and 2014.

Market Valuation Adjustments, Net



	Three Months Ended March 31,
(In Thousands)	2015			2014
Mortgage banking activities
Residential loans, at fair value	$	2,056		$	7,128
Commercial loans, at fair value	5,857			3,626
Sequoia IO securities	(14,359		)	(4,277		)
Risk management derivatives, net	(10,583		)	(7,082		)
Loan purchase and forward sale commitments	18,256			8
Total mortgage banking activities⁽¹⁾	1,227			(597		)

MSRs	(19,517		)	(2,711		)
Other
Residential loans, at lower of cost or fair value	$	2		$	(2	)
Consolidated Sequoia entities ⁽²⁾	(1,093		)	—
Residential loans held-for-investment, at Redwood	1,978			—
Trading securities	270			(154		)
Impairments on AFS securities	—			(113		)
Other risk management derivative instruments, net	(1,374		)	(5,727		)
Guarantee asset	(1,083		)	—
Other	155			(142		)
Total other	(1,145		)	(6,138		)
Total Market Valuation Adjustments, Net	$	(19,435	)	$	(9,446	)


(1)	Income from mortgage banking activities presented above does not include fee income or provisions for repurchases that is a component of mortgage banking income presented on our consolidated statements of income as these amounts do not represent a market valuation adjustment.

(2)

On January 1, 2015, we adopted ASU 2014-13 and began to record the assets and liabilities of consolidated Sequoia entities at fair value. This amount represents the net change in fair value of the consolidated assets and liabilities of these entities, which include residential loans held-for-investment, REO, and ABS issued. This amount also represents the estimated change in value of our retained interests in these entities. See Note 3 for further discussion.

Quantitative Information about Significant Unobservable Inputs Used in Valuation of Level 3 Assets and Liabilities Measured at Fair Value

The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.

Fair Value Methodology for Level 3 Financial Instruments



March 31, 2015	Fair Value					Weighted Average
(Dollars in Thousands, except input values)	Fair Value		Unobservable Input	Range		Weighted Average
Assets
Residential loans, at fair value:
Jumbo fixed rate loans priced to securitization or to whole loan market and uncommitted to sell	$	1,334,594	IO Multiple	4.0 - 4.6	x	4.2		x
			Prepayment rate (Annual CPR)	12 - 15	%	14		%
			Senior spread to TBA price	$3.13 - 3.13		$	3.13
			Subordinate spread to swap rate	315 - 315	bps	315		bps
			Credit support	8 - 8	%	8		%
			Whole loan spread to TBA price	$3.10 - 4.50		$	4.35

Jumbo hybrid loans priced to whole loan market and uncommitted to sell	137,168		Prepayment rate (Annual CPR)	15 - 15	%	15		%
			Spread to swap rate	125 - 165	bps	134		bps

Jumbo loans priced to whole loan market and committed to sell	421,226		Committed Sales Price	$102 - 103		$	103


Loans held by consolidated Sequoia entities ⁽¹⁾	1,304,426		Liability price	N/A		N/A

Residential loans, at lower of cost or fair value	1,103		Loss severity	13 - 30	%	20		%

Commercial loans, at fair value	127,026		Spread to swap rate	147 - 156	bps	154		bps
			Credit support	22 - 23	%	23		%

Trading and AFS securities	1,285,243		Discount rate	4 - 12	%	6		%
			Prepayment rate (Annual CPR)	1 - 35	%	12		%
			Default rate	0 - 35	%	8		%
			Loss severity	20 - 64	%	34		%
			Credit support	0 - 48	%	10		%

MSRs	120,324		Discount rate	9 - 11	%	10		%
			Prepayment rate (Annual CPR)	4 - 60	%	14		%
			Per loan annual cost to service	$ 72 - 82		$	77

Guarantee asset	6,118		Discount rate	11 - 11	%	11		%
			Prepayment rate (Annual CPR)	5 - 27	%	12		%

REO	3,410		Loss severity	31 - 66	%	46		%

Loan purchase commitments, net ⁽²⁾	7,425		MSR Multiple	0.0 - 5.7	x	3.5		x
			Fallout rate	2 - 98	%	33		%

Liabilities
ABS issued by consolidated Sequoia entities ⁽¹⁾	1,239,065		Discount rate	4 -8	%	5		%
			Prepayment rate (Annual CPR)	0 - 31	%	13		%
			Default rate	0 - 12	%	6		%
			Loss severity	20 - 32	%	26		%
			Credit support	0 - 65	%	11		%

Commercial secured financing	68,077		Spread to swap rate	156 - 156	bps	156		bps
			Credit support	23 - 23	%	23		%

(1) Upon adoption of ASU 2014-13 on January 1, 2015, loans held-for-investment in, and ABS issued by, consolidated Sequoia entities began to be recorded at fair value. In accordance with this new guidance, the fair value of the loans in these entities were based on the fair value of the liabilities issued by these entities, which we determined were more readily observable. See Note 3 for further discussion.

(2) For the purpose of this presentation, loan purchase commitment assets and liabilities are presented net.

- Definition

Tabular disclosure of the fair value measurement of assets using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and gains or losses recognized in other comprehensive income (loss), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs), by class of asset.

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- Definition

Tabular disclosure of the fair value of financial instruments, including financial assets and financial liabilities, and the measurements of those instruments, assets, and liabilities.

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