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Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 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 September 30, 2015 and December 31, 2014.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities

		September 30, 2015								December 31, 2014
		Carrying Value				Fair Value				Carrying Value				Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale
At fair value		$	1,504,705			$	1,504,705			$	1,341,032			$	1,341,032
At lower of cost or fair value		1,446				1,645				1,488				1,669
Residential loans, held-for-investment (1)
At fair value		2,530,523				2,530,523				581,668				581,668
At amortized cost		—				—				1,474,386				1,381,918
Commercial loans, held-for-sale		80,756				80,756				166,234				166,234
Commercial loans, held-for-investment
At fair value		70,096				70,096				71,262				71,262
At amortized cost		317,305				322,535				329,431				334,876
Trading securities		114,211				114,211				111,606				111,606
Available-for-sale securities		971,013				971,013				1,267,624				1,267,624
MSRs		162,726				162,726				139,293				139,293
Cash and cash equivalents		235,362				235,362				269,730				269,730
Restricted cash		8,361				8,361				628				628
Accrued interest receivable		20,223				20,223				18,222				18,222
Derivative assets		38,623				38,623				16,417				16,417
REO (2)		3,902				4,620				4,391				4,703
Margin receivable (2)		97,685				97,685				65,374				65,374
FHLBC stock (2)		30,001				30,001				10,688				10,688
Guarantee asset (2)		5,120				5,120				7,201				7,201
Pledged collateral (2)		28,482				28,482				9,927				9,927
Liabilities
Short-term debt		$	1,872,793			$	1,872,793			$	1,793,825			$	1,793,825
Accrued interest payable		14,738				14,738				8,502				8,502
Guarantee obligation		13,394				12,123				7,201				7,201
Derivative liabilities		88,044				88,044				58,331				58,331
ABS issued (1)
Fair value		1,105,588				1,105,588				—				—
Amortized cost		73,207				73,207				1,545,119				1,446,605
FHLBC long-term borrowings		1,124,299				1,124,299				495,860				495,860
Commercial secured borrowings		65,578				65,578				66,707				66,707
Convertible notes		492,500				464,164				492,500				492,188
Other long-term debt		139,500				90,675				139,500				101,835

(1) Upon adoption of ASU 2014-13 on January 1, 2015, we began to record loans held-for-investment in, and ABS issued by, consolidated Sequoia entities 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 September 30, 2015, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

Table 5.2 – Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2015

September 30, 2015		Carrying Value				Fair Value Measurements Using
(In Thousands)						Level 1				Level 2				Level 3
Assets
Residential loans		$	4,035,228			$	—			$	236,314			$	3,798,914
Commercial loans		150,852				—				—				150,852
Trading securities		114,211				—				—				114,211
Available-for-sale securities		971,013				—				—				971,013
Derivative assets		38,623				8,910				19,580				10,133
MSRs		162,726				—				—				162,726
Pledged collateral		28,482				28,482				—				—
FHLBC stock		30,001				30,001				—				—
Guarantee asset		5,120				—				—				5,120
Liabilities
Derivative liabilities		$	88,044			$	15,182			$	72,415			$	447
Commercial secured borrowings		65,578				—				—				65,578
ABS issued		1,105,588				—				—				1,105,588

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 nine months ended September 30, 2015.

Table 5.3 – 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	(369,576		)		(584		)		(1,722		)		(101,944		)		—				—				—				(416		)		(201,885		)
Gains (losses) in net income, net	8,024				10,068				(15,970		)		43,860				(32,337		)		(1,954		)		51,638				(750		)		6,198
Unrealized losses in OCI, net	—				—				—				(15,789		)		—				—				—				—				—
Acquisitions	4,084,501				517,894				101,429				14,788				73,976				—				—				—				—
Sales	(2,968,446		)		(614,022		)		(81,132		)		(237,886		)		(18,206		)		—				—				—				(1,362		)
Other settlements, net	(4,272		)		—				—				360				—				(127		)		(43,071		)		37				421
Ending balance -   September 30, 2015	$	3,798,914			$	150,852			$	114,211			$	971,013			$	162,726			$	5,120			$	9,686			$	65,578			$	1,105,588

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

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at September 30, 2015 and 2014 Included in Net Income

		Included in Net Income
		Three Months Ended September 30,								Nine Months Ended September 30,
(In Thousands)		2015				2014				2015				2014
Assets
Residential loans at Redwood		$	16,451			$	7,280			$	12,115			$	8,524
Residential loans at consolidated Sequoia entities		(419		)		—				4,912				—
Commercial loans		3,175				2,009				1,971				2,009
Trading securities		(8,298		)		(1,882		)		(13,274		)		(16,033		)
Available-for-sale securities		(226		)		(188		)		(226		)		(434		)
MSRs		(25,523		)		3,509				(15,989		)		(3,184		)
Other assets - Guarantee asset		(1,098		)		—				(1,799		)		—
Liabilities
Loan purchase commitments		$	9,736			$	932			$	9,806			$	932
Commercial secured borrowing		(454		)		(420		)		750				1,339
ABS issued		300				—				(6,198		)		—

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 September 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 September 30, 2015.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 2015

																		Gain (Loss) for
September 30, 2015		Carrying Value				Fair Value Measurements Using												Three Months Ended				Nine Months Ended
(In Thousands)						Level 1				Level 2				Level 3				September 30, 2015				September 30, 2015
Assets
Residential loans, at lower of cost or fair value		$	1,099			$	—			$	—			$	1,099			$	1			$	2
REO		3,120				—				—				3,120				(621		)		(748		)

Market Valuation Gains and Losses, Net

																		Gain (Loss) for
September 30, 2015		Carrying Value				Fair Value Measurements Using												Three Months Ended				Nine Months Ended
(In Thousands)						Level 1				Level 2				Level 3				September 30, 2015				September 30, 2015
Assets
Residential loans, at lower of cost or fair value		$	1,099			$	—			$	—			$	1,099			$	1			$	2
REO		3,120				—				—				3,120				(621		)		(748		)

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

Table 5.6 – Market Valuation Gains and Losses, Net

		Three Months Ended September 30,								Nine Months Ended September 30,
(In Thousands)		2015				2014				2015				2014
Mortgage banking and investment activities, net
Residential loans held-for-sale, at fair value		$	11,010			$	13,489			$	9,892			$	34,608
Residential loan purchase and forward sale commitments		25,173				2,487				44,482				6,077
Residential loans held-for-investment, at Redwood		9,077				(991		)		5,170				(991		)
Consolidated Sequoia entities (1)		(500		)		(361		)		(2,277		)		(825		)
Commercial loans, at fair value		3,974				4,305				10,819				13,644
Trading securities		(8,783		)		(1,909		)		(15,946		)		(15,072		)
Impairments on AFS securities		(226		)		(188		)		(226		)		(565		)
Risk management derivatives, net		(52,749		)		(4,036		)		(60,060		)		(29,145		)
Guarantee asset		(1,297		)		—				(2,081		)		—
Other investments		199				—				282				—
Total mortgage banking and investment activities, net(2)		$	(14,122	)		$	12,796			$	(9,945	)		$	7,731
MSR Income (loss), net
MSRs		$	(28,496	)		$	2,321			$	(32,337	)		$	(5,944	)
Risk management derivatives, net		23,551				—				1,736				—
Total MSR income (loss), net (3)		$	(4,945	)		$	2,321			$	(30,601	)		$	(5,944	)
Total market valuation gains and losses, net		$	(19,067	)		$	15,117			$	(40,546	)		$	1,787

(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 are components 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 components of MSR Income (loss), net on our consolidated statements of income, as these amounts do not represent market valuation adjustments.

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.

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments

September 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		$	2,032,815			IO Multiple		3.8 - 4.0	x		3.8			x
						Prepayment rate (annual CPR)		12 - 15	%		14			%
						Senior spread to TBA price		$3.56 - $3.56			$	3.56
						Subordinate spread to swap rate		373 - 373	bps		373			bps
						Credit support		5 - 5	%		5			%
						Whole loan spread to TBA price		$2.90 - $4.27			$	4.08
Jumbo hybrid loans uncommitted to sell		158,149				Spread to swap rate		125 - 165	bps		138			bps
Jumbo loans committed to sell		437,704				Committed Sales Price		$102.1 - $103.0			$	102.4
Loans held by consolidated Sequoia entities (1)		1,170,246				Liability price		N/A			N/A
Residential loans, at lower of cost or fair value		1,099				Loss severity		13 - 30	%		21			%
Commercial loans, at fair value		150,852				Spread to swap rate		195 - 195	bps		195			bps
						Credit support		23 - 23	%		23			%
Trading and AFS securities		1,085,224				Discount rate		4 - 12	%		7			%
						Prepayment rate (annual CPR)		1 - 35	%		13			%
						Default rate		0 - 35	%		8			%
						Loss severity		20 - 65	%		34			%
						Credit support		0 - 49	%		4			%
MSRs		162,726				Discount rate		8 - 12	%		10			%
						Prepayment rate (annual CPR)		5 - 55	%		12			%
						Per loan annual cost to service		$72 - $82			$	78
Guarantee asset		5,120				Discount rate		10 - 10	%		10			%
						Prepayment rate (annual CPR)		16 - 16	%		16			%
REO		3,120				Loss severity		0 - 89	%		52			%
Loan purchase commitments, net (2)		9,687				MSR Multiple		0 - 5.0	x		3.0			x
						Fallout rate		2 - 98	%		34			%
Liabilities
ABS issued by consolidated Sequoia entities (1)		1,105,588				Discount rate		5 - 9	%		5			%
						Prepayment rate (annual CPR)		6 - 20	%		13			%
						Default rate		0 - 12	%		6			%
						Loss severity		20 - 32	%		27			%
						Credit support		0 - 70	%		12			%
Commercial secured financing		65,578				Spread to swap rate		194 - 195	bps		194			bps
						Credit support		23 - 23	%		23			%

(1) Upon adoption of ASU 2014-13 on January 1, 2015, we began to record loans held-for-investment in, and ABS issued by, consolidated Sequoia entities at fair value. In accordance with this new guidance, the fair value of the loans in these entities was 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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