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Summary of Significant Accounting Policies | 9 Months Ended
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Sep. 30, 2015
Accounting Policies [Abstract] |
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Significant Accounting Policies Included in Note 3 to the Consolidated Financial Statements of our 2014 Annual Report on Form 10-K is a summary of our significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the company’s consolidated financial condition and results of operations for the three and nine months ended September 30, 2015. Recent Accounting Pronouncements Adoption of ASU 2014-13 In November 2014, the FASB issued ASU 2014-13, “Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity” ("ASU 2014-13"). This update provides a measurement alternative to companies that consolidate collateralized financing entities ("CFEs"). Under the new guidance, companies can measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets or fair value of the financial liabilities. This guidance is effective in the first quarter 2016 with early adoption permitted at the beginning of an annual period. The guidance can be applied either retrospectively to all relevant prior periods or by a modified retrospective approach with a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption. On January 1, 2015, we elected to early adopt ASU 2014-13, as we determined this measurement alternative more accurately reflects our economic interests in, and financial results from, certain consolidated financing entities. We adopted the measurement alternative under this standard only for our consolidated Sequoia entities, which qualify under the standard as CFEs. We did not elect the measurement alternative for our Residential Resecuritization or our Commercial Resecuritization, and will continue to account for the assets and liabilities in these CFEs in accordance with existing accounting guidance. Under the provisions of ASU 2014-13, we use the fair value of the liabilities issued by the Sequoia CFEs (which we determined to be more observable) to determine the fair value of the assets, whereby the net assets we consolidate in our financial statements related to these entities represents the estimated fair value of our retained interests in the Sequoia CFEs. Similarly, the periodic net market valuation adjustments we record on our income statement from the consolidated assets and liabilities of the CFEs represents the change in fair value of our retained interests in the Sequoia CFEs. Using the modified retrospective approach, we recorded a cumulative-effect adjustment to equity of $10 million through retained earnings as of January 1, 2015. This cumulative-effect adjustment represents the net effect of adjusting the assets and liabilities of the Sequoia CFEs from amortized historical cost to fair value. Subsequent to the adoption of ASU 2014-13, the consolidated assets and liabilities of the Sequoia CFEs are both carried at fair value, with the periodic net changes in fair value recorded on our income statement, in mortgage banking and investment activities, net. The following table presents the assets and liabilities of the consolidated Sequoia entities at December 31, 2014 prior to the adoption of ASU 2014-13, the adjustments required to adopt the new standard, and the adjusted balances at January 1, 2015. Table 3.1 – Impact of Adoption of ASU 2014-13 on Balance Sheet (1)
(In Millions) |  | December 31, 2014 |  | ASU 2014-13 Adjustment |  | January 1, 2015
Loan Principal |  | $ | 1,486 |  |  | $ | — |  |  | $ | 1,486 |
Loan unamortized premium |  | 13 |  |  | (13 | ) |  | — |
Allowance for loan losses |  | (21 | ) |  | 21 |  |  | — |
Loan market valuation adjustment |  | — |  |  | (113 | ) |  | (113 | )
Residential loans held-for-investment |  | 1,478 |  |  | (105 | ) |  | 1,373 |
Deferred bond issuance costs |  | 1 |  |  | (1 | ) |  | — |
Other assets |  | 5 |  |  | — |  |  | 5 |
Total assets |  | 1,482 |  |  | (105 | ) |  | 1,377 |
ABS issued principal |  | 1,428 |  |  | — |  |  | 1,428 |
ABS issued unamortized discount |  | (10 | ) |  | 10 |  |  | — |
ABS market valuation adjustment |  | — |  |  | (125 | ) |  | (125 | )
Total liabilities |  | 1,418 |  |  | (115 | ) |  | 1,303 |
Redwood's investment in consolidated Sequoia entities |  | $ | 64 |  |  | $ | 10 |  |  | $ | 74 |
(1) | Certain totals may not foot due to rounding.
Other Recent Accounting Pronouncements In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This new guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. This new guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The new guidance is required to be applied on a retrospective basis. We plan to adopt this new guidance by the required date and will reclassify our deferred securities issuance costs that we currently present on the face of our consolidated balance sheets and present them as debt discounts. In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis.” This new guidance provides a new scope exception for certain money market funds, makes targeted amendments to the current consolidation guidance, and ends the deferral granted to investment companies from applying the VIE guidance. This new guidance is effective for annual periods beginning after December 15, 2015. Early adoption is allowed, including in any interim period. We are evaluating the impact of adopting this new standard. In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This new guidance amends the accounting guidance for “repo-to-maturity” transactions and repurchase agreements executed as repurchase financings. In addition, the new standard requires a transferor to disclose more information about certain transactions, including those in which it retains substantially all of the exposure to the economic returns of the underlying transferred asset over the transaction’s term. This new guidance is effective in the first interim reporting period beginning after December 15, 2014. However, for repurchase and securities lending transactions reported as secured borrowings, the new standard’s enhanced disclosures are effective for annual periods beginning after December 15, 2014 and interim periods beginning after March 15, 2015. We adopted the new guidance, as required, in the first quarter of 2015 and adopted the disclosure requirements in the second quarter of 2015, as required, which are included in Note 12 of these notes to our consolidated financial statements. The adoption in the first quarter of 2015 did not have a material impact on our financial statements, as we did not have repo-to-maturity transactions outstanding. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The update modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. In July 2015, the FASB approved a one year deferral of the effective date. Accordingly, the update is effective for us in the first quarter of 2018 with retrospective application to prior periods presented or as a cumulative effect adjustment in the period of adoption. Early adoption is permitted in the first quarter of 2017. We are evaluating the impact the update will have on our consolidated financial statements. In January 2014, the FASB issued ASU 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” This update to the receivable guidance clarifies when a creditor is considered to have received physical possession of residential real estate resulting from an in substance repossession or foreclosure. In addition, the amendments require disclosure of both: (i) the amount of foreclosed residential real estate property held by the creditor; and (ii) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The update requires the guidance to be applied using either a modified retrospective transition method or a prospective transition method for interim and annual periods beginning after December 15, 2014, with early adoption permitted. We adopted this standard in the first quarter of 2015, as required, and it did not have a material impact on our financial statements. Balance Sheet Netting Certain of our derivatives and short-term debt are subject to master netting arrangements or similar agreements. Under GAAP, in certain circumstances we may elect to present certain financial assets, liabilities and related collateral subject to master netting arrangements in a net position on our consolidated balance sheets. However, we do not report any of these financial assets or liabilities on a net basis, and instead present them on a gross basis on our consolidated balance sheets. The table below presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at September 30, 2015 and December 31, 2014. Table 3.2 – Offsetting of Financial Assets, Liabilities, and Collateral
|  | Gross Amounts of Recognized Assets (Liabilities) |  | Gross Amounts Offset in Consolidated Balance Sheet |  | Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet |  | Gross Amounts Not Offset in Consolidated Balance Sheet (1) |  | Net Amount
September 30, 2015 (In Thousands) |  |  |  |  | Financial Instruments |  | Cash Collateral (Received) Pledged |
Assets (2) |  |  |  |  |  |  |  |  |  |  |  |
Interest rate agreements |  | $ | 16,788 |  |  | $ | — |  |  | $ | 16,788 |  |  | $ | (9,932 | ) |  | $ | (6,856 | ) |  | $ | — |
Credit default index swaps |  | 2,792 |  |  | — |  |  | 2,792 |  |  | — |  |  | — |  |  | 2,792 |
TBAs |  | 8,910 |  |  | — |  |  | 8,910 |  |  | (8,659 | ) |  | — |  |  | 251 |
Total Assets |  | $ | 28,490 |  |  | $ | — |  |  | $ | 28,490 |  |  | $ | (18,591 | ) |  | $ | (6,856 | ) |  | $ | 3,043 |
Liabilities (2) |  |  |  |  |  |  |  |  |  |  |  |
Interest rate agreements |  | $ | (72,415 | ) |  | $ | — |  |  | $ | (72,415 | ) |  | $ | 9,932 |  |  | $ | 59,933 |  |  | $ | (2,550 | )
TBAs |  | (14,994 | ) |  | — |  |  | (14,994 | ) |  | 8,659 |  |  | 3,868 |  |  | (2,467 | )
Futures |  | (188 | ) |  | — |  |  | (188 | ) |  | — |  |  | 188 |  |  | — |
Loan warehouse debt |  | (1,271,610 | ) |  | — |  |  | (1,271,610 | ) |  | 1,271,610 |  |  | — |  |  | — |
Security repurchase agreements |  | (475,494 | ) |  | — |  |  | (475,494 | ) |  | 475,494 |  |  | — |  |  | — |
Total Liabilities |  | $ | (1,834,701 | ) |  | $ | — |  |  | $ | (1,834,701 | ) |  | $ | 1,765,695 |  |  | $ | 63,989 |  |  | $ | (5,017 | )
|  | Gross Amounts of Recognized Assets (Liabilities) |  | Gross Amounts Offset in Consolidated Balance Sheet |  | Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet |  | Gross Amounts Not Offset in Consolidated Balance Sheet (1) |  | Net Amount
December 31, 2014 (In Thousands) |  |  |  |  | Financial Instruments |  | Cash Collateral (Received) Pledged |
Assets (2) |  |  |  |  |  |  |  |  |  |  |  |
Interest rate agreements |  | $ | 7,006 |  |  | $ | — |  |  | $ | 7,006 |  |  | $ | (1,160 | ) |  | $ | (4,360 | ) |  | $ | 1,486 |
Credit default index swaps |  | 1,598 |  |  | — |  |  | 1,598 |  |  | — |  |  | (375 | ) |  | 1,223 |
TBAs |  | 6,653 |  |  | — |  |  | 6,653 |  |  | (5,815 | ) |  | — |  |  | 838 |
Total Assets |  | $ | 15,257 |  |  | $ | — |  |  | $ | 15,257 |  |  | $ | (6,975 | ) |  | $ | (4,735 | ) |  | $ | 3,547 |
Liabilities (2) |  |  |  |  |  |  |  |  |  |  |  |
Interest rate agreements |  | $ | (48,173 | ) |  | $ | — |  |  | $ | (48,173 | ) |  | $ | 1,160 |  |  | $ | 47,013 |  |  | $ | — |
TBAs |  | (9,506 | ) |  | — |  |  | (9,506 | ) |  | 5,815 |  |  | 2,715 |  |  | (976 | )
Futures |  | (372 | ) |  | — |  |  | (372 | ) |  | — |  |  | 372 |  |  | — |
Loan warehouse debt |  | (1,185,316 | ) |  | — |  |  | (1,185,316 | ) |  | 1,185,316 |  |  | — |  |  | — |
Security repurchase agreements |  | (608,509 | ) |  | — |  |  | (608,509 | ) |  | 608,509 |  |  | — |  |  | — |
Total Liabilities |  | $ | (1,851,876 | ) |  | $ | — |  |  | $ | (1,851,876 | ) |  | $ | 1,800,800 |  |  | $ | 50,100 |  |  | $ | (976 | )
(1) | Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty (which may, in certain circumstances, be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.
(2) | Interest rate agreements, TBAs, and futures are components of derivatives instruments on our consolidated balances sheets. Loan warehouse debt, which is secured by residential and commercial mortgage loans, and security repurchase agreements are components of short-term debt on our consolidated balance sheets.
For each category of financial instrument set forth in the table above, the assets and liabilities resulting from individual transactions within that category between us and a counterparty are subject to a master netting arrangement or similar agreement with that counterparty that provides for individual transactions to be aggregated and treated as a single transaction. For certain categories of these instruments, some of our transactions are cleared and settled through one or more clearinghouses that are substituted as our counterparty. References herein to master netting arrangements or similar agreements include the arrangements and agreements governing the clearing and settlement of these transactions through the clearinghouses. In the event of the termination and close-out of any of those transactions, the corresponding master netting agreement or similar agreement provides for settlement on a net basis. Any such settlement would include the proceeds of the liquidation of any corresponding collateral, subject to certain limitations on termination, settlement, and liquidation of collateral that may apply in the event of the bankruptcy or insolvency of a party. Such limitations should not inhibit the eventual practical realization of the principal benefits of those transactions or the corresponding master netting arrangement or similar agreement and any corresponding collateral.

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