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Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2015

Fair Value Disclosures [Abstract]

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 June 30, 2015 and December 31, 2014.

		June 30, 2015								December 31, 2014
		Carrying Value				Fair Value				Carrying Value				Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale
At fair value		$	890,623			$	890,623			$	1,341,032			$	1,341,032
At lower of cost or fair value		1,458				1,655				1,488				1,669
Residential loans, held-for-investment (1)
At fair value		2,394,399				2,394,399				581,668				581,668
At amortized cost		—				—				1,474,386				1,381,918
Commercial loans, held-for-sale		165,853				165,853				166,234				166,234
Commercial loans, held-for-investment
At fair value		69,763				69,763				71,262				71,262
At amortized cost		315,715				321,038				329,431				334,876
Trading securities		116,141				116,141				111,606				111,606
Available-for-sale securities		1,041,458				1,041,458				1,267,624				1,267,624
MSRs		168,462				168,462				139,293				139,293
Cash and cash equivalents		226,426				226,426				269,730				269,730
Restricted cash		2,389				2,389				628				628
Accrued interest receivable		16,151				16,151				18,222				18,222
Derivative assets		26,252				26,252				16,417				16,417
REO (2)		4,410				5,081				4,391				4,703
Margin receivable (2)		71,392				71,392				65,374				65,374
FHLBC stock (2)		30,001				30,001				10,688				10,688
Guarantee asset (2)		6,417				6,417				7,201				7,201
Pledged collateral (2)		10,194				10,194				9,927				9,927
Liabilities
Short-term debt		$	1,367,062			$	1,367,062			$	1,793,825			$	1,793,825
Accrued interest payable		8,291				8,291				8,502				8,502
Guarantee obligation		6,146				6,417				7,201				7,201
Derivative liabilities		54,109				54,109				58,331				58,331
ABS issued (1)
Fair value		1,173,336				1,173,336				—				—
Amortized cost		88,786				89,231				1,545,119				1,446,605
FHLBC borrowings		882,122				882,122				495,860				495,860
Commercial secured borrowings		65,232				65,232				66,707				66,707
Convertible notes		492,500				475,700				492,500				492,188
Other long-term debt		139,500				101,138				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 June 30, 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 June 30, 2015

June 30, 2015		Carrying Value				Fair Value Measurements Using
(In Thousands)						Level 1				Level 2				Level 3
Assets
Residential loans		$	3,285,022			$	—			$	248,157			$	3,036,865
Commercial loans		235,616				—				—				235,616
Trading securities		116,141				—				—				116,141
Available-for-sale securities		1,041,458				—				—				1,041,458
Derivative assets		26,252				7,625				13,621				5,006
MSRs		168,462				—				—				168,462
Pledged collateral		10,194				10,194				—				—
FHLBC stock		30,001				30,001				—				—
Guarantee asset		6,417				—				—				6,417
Liabilities
Derivative liabilities		54,109				5,726				43,983				4,400
Commercial secured borrowings		65,232				—				—				65,232
ABS issued		1,173,336				—				—				1,173,336

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 six months ended June 30, 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)
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	(247,699		)		(463		)		(827		)		(61,265		)		—				—				—				(295		)		(135,799		)
Gains (losses) in net income, net	(6,661		)		5,640				(7,187		)		29,424				(3,842		)		(855		)		23,321				(1,204		)		6,498
Unrealized losses in OCI, net	—				—				—				(7,050		)		—				—				—				—				—
Acquisitions	2,519,029				350,384				92,006				14,788				51,217				—				—				—				—
Sales	(2,273,308		)		(357,441		)		(79,457		)		(202,423		)		(18,206		)		—				—				—				—
Other settlements, net	(3,179		)		—				—				360				—				71				(23,834		)		24				421
Ending balance -   June 30, 2015	$	3,036,865			$	235,616			$	116,141			$	1,041,458			$	168,462			$	6,417			$	606			$	65,232			$	1,173,336

(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 June 30, 2015 and 2014. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and six months ended June 30, 2015 and 2014 are not included in this presentation.

Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at June 30, 2015 and 2014 Included in Net Income

		Included in Net Income
		Three Months Ended June 30,								Six Months Ended June 30,
(In Thousands)		2015				2014				2015				2014
Assets
Residential loans at Redwood		$	(7,508	)		$	11,755			$	(5,441	)		$	11,964
Residential loans at consolidated Sequoia entities		2,476				—				5,331				—
Commercial loans		(1,565		)		2,008				(56		)		2,008
Trading securities		4,601				(9,257		)		(5,254		)		(13,688		)
Available-for-sale securities		—				(264		)		—				(377		)
MSRs		21,296				(4,974		)		10,277				(7,236		)
Other assets - Guarantee asset		228				—				(700		)		—
Liabilities
Loan purchase commitments		(3,810		)		1,707				(1,826		)		1,707
Commercial secured borrowing		2,713				1,759				1,204				1,759
ABS issued		(3,552		)		—				(6,498		)		—

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 June 30, 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 June 30, 2015.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at June 30, 2015

																		Gain (Loss) for
June 30, 2015		Carrying Value				Fair Value Measurements Using												Three Months Ended			Six Months Ended
(In Thousands)						Level 1				Level 2				Level 3				June 30, 2015			June 30, 2015
Assets
Residential loans, at lower of cost or fair value		$	1,102			$	—			$	—			$	1,102			$	1		$	1
REO		1,017				—				—				1,017				(170		)	(175		)

Market Valuation Gains and Losses, Net

The following table presents the net gains and losses recorded in each line item of our consolidated statements of income for the three and six months ended June 30, 2015 and 2014.

Market Valuation Gains and Losses, Net

		Three Months Ended June 30,								Six Months Ended June 30,
(In Thousands)		2015				2014				2015				2014
Mortgage banking and investment activities, net
Residential loans, at fair value		$	(3,176	)		$	13,994			$	(1,118	)		$	21,119
Consolidated Sequoia entities (1)		(684		)		(321		)		(1,777		)		(464		)
Residential loans held-for-investment, at Redwood		(5,885		)		—				(3,907		)		—
Commercial loans, at fair value		987				5,714				6,845				9,340
Trading securities		6,927				(8,733		)		(7,162		)		(13,164		)
Risk management derivatives, net		4,645				(12,300		)		(7,311		)		(25,108		)
Impairments on AFS securities		—				(264		)		—				(377		)
Guarantee asset		299				—				(784		)		—
Loan purchase and forward sale commitments		1,054				3,582				19,309				3,590
Other investments		(71		)		—				83				—
Total mortgage banking and investment activities, net(2)		$	4,096			$	1,672			$	4,178			$	(5,064	)
MSR Income (loss), net
MSRs		$	15,675			$	(5,553	)		$	(3,842	)		$	(8,265	)
Risk management derivatives, net		(21,814		)		—				(21,814		)		—
Total MSR income (loss), net (3)		$	(6,139	)		$	(5,553	)		$	(25,656	)		$	(8,265	)
Total market valuation gains and losses, net		$	(2,043	)		$	(3,881	)		$	(21,478	)		$	(13,329	)

(1) 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 includes 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 combined amount represents the estimated change in value of our retained interests in these entities. See Note 3 for further discussion.

(2) Mortgage banking and investment activities, net presented above does not include fee income or provisions for repurchases that is a component of mortgage banking and investment activities, net presented on our consolidated statements of income, as these amounts do not represent market valuation changes.

(3) MSR Income (loss), net presented above does not include net fee income or provisions for repurchases that are a component of MSR Income (loss), net on our consolidated statements of income.

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

June 30, 2015		Fair Value									Weighted Average
(Dollars in Thousands, except input values)						Unobservable Input		Range
Assets
Residential loans, at fair value:
Jumbo fixed rate loans uncommitted to sell		$	1,267,521			IO Multiple		4.3 - 5.0	x		4.4			x
						Prepayment rate (Annual CPR)		12 - 15	%		14			%
						Senior spread to TBA price		$3.50 - $3.50			$	3.50
						Subordinate spread to swap rate		310 - 310	bps		310			bps
						Credit support		5 - 5	%		5			%
						Whole loan spread to TBA price		$2.90 - $4.15			$	4.00
Jumbo hybrid loans uncommitted to sell		181,279				Prepayment rate (Annual CPR)		15 - 15	%		15			%
						Spread to swap rate		125 - 160	bps		129			bps
Jumbo loans committed to sell		350,951				Committed Sales Price		$101 - $102			$	102
	Loans held by consolidated Sequoia entities (1)		1,237,114				Liability price		N/A			N/A
Residential loans, at lower of cost or fair value		1,102				Loss severity		13 - 30	%		20			%
Commercial loans, at fair value		235,616				Spread to swap rate		168 - 169	bps		168			bps
						Credit support		23 - 23	%		23			%
Trading and AFS securities		1,157,599				Discount rate		4 - 12	%		6			%
						Prepayment rate (Annual CPR)		1 - 35	%		13			%
						Default rate		0 - 35	%		8			%
						Loss severity		20 - 65	%		34			%
						Credit support		0 - 49	%		5			%
MSRs		168,462				Discount rate		8 - 11	%		10			%
						Prepayment rate (Annual CPR)		4 - 60	%		9			%
						Per loan annual cost to service		$72 - $82			$	78
Guarantee asset		6,417				Discount rate		11 - 11	%		11			%
						Prepayment rate (Annual CPR)		5 - 27	%		12			%
REO		1,017				Loss severity		19 - 76	%		55			%
Loan purchase commitments, net (2)		605				MSR Multiple		0 - 4	x		3.0			x
						Fallout rate		2 - 97	%		26			%
Liabilities
ABS issued by consolidated Sequoia entities (1)		1,173,336				Discount rate		5 - 8	%		5			%
						Prepayment rate (Annual CPR)		0 - 31	%		13			%
						Default rate		0 - 12	%		6			%
						Loss severity		20 - 32	%		26			%
						Credit support		0 - 69	%		11			%
Commercial secured financing		65,232				Spread to swap rate		168 - 168	bps		168			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.

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