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Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 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 December 31, 2015 and December 31, 2014.

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

		December 31, 2015								December 31, 2014
		Carrying Value				Fair Value				Carrying Value				Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale
At fair value		$	1,114,305			$	1,114,305			$	1,341,032			$	1,341,032
At lower of cost or fair value		1,433				1,635				1,488				1,669
Residential loans, held-for-investment (1)
At fair value		2,813,065				2,813,065				581,668				581,668
At amortized cost		—				—				1,474,386				1,381,918
Commercial loans, held-for-sale		39,141				39,141				166,234				166,234
Commercial loans, held-for-investment
At fair value		67,657				67,657				71,262				71,262
At amortized cost		295,849				300,824				329,431				334,876
Trading securities		404,011				404,011				111,606				111,606
Available-for-sale securities		829,245				829,245				1,267,624				1,267,624
MSRs		191,976				191,976				139,293				139,293
Cash and cash equivalents		220,229				220,229				269,730				269,730
Restricted cash		5,567				5,567				628				628
Accrued interest receivable		23,290				23,290				18,222				18,222
Derivative assets		16,393				16,393				16,417				16,417
REO (2)		4,896				5,282				4,391				4,703
Margin receivable (2)		83,191				83,191				65,374				65,374
FHLBC stock (2)		34,437				34,437				10,688				10,688
Guarantee asset (2)		5,697				5,697				7,201				7,201
Pledged collateral (2)		53,600				53,600				9,927				9,927
Liabilities
Short-term debt		$	1,855,003			$	1,855,003			$	1,793,825			$	1,793,825
Accrued interest payable		8,936				8,936				8,502				8,502
Margin payable		6,415				6,415				6,455				6,455
Guarantee obligation		22,704				22,702				7,201				7,201
Derivative liabilities		62,794				62,794				58,331				58,331
ABS issued (1)
Fair value		996,820				996,820				—				—
Amortized cost		53,137				53,137				1,545,119				1,446,605
FHLBC long-term borrowings		1,343,023				1,343,023				495,860				495,860
Commercial secured borrowings		63,152				63,152				66,707				66,707
Convertible notes		492,500				461,053				492,500				492,188
Other long-term debt		139,500				83,700				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 December 31, 2015 and December 31, 2014, 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

December 31, 2015		Carrying Value				Fair Value Measurements Using
(In Thousands)						Level 1				Level 2				Level 3
Assets
Residential loans		$	3,927,370			$	—			$	129,819			$	3,797,551
Commercial loans		106,798				—				—				106,798
Trading securities		404,011				—				—				404,011
Available-for-sale securities		829,245				—				—				829,245
Derivative assets		16,393				2,734				8,988				4,671
MSRs		191,976				—				—				191,976
Pledged collateral		53,600				53,600				—				—
FHLBC stock		34,437				—				34,437				—
Guarantee asset		5,697				—				—				5,697
Liabilities
Derivative liabilities		62,794				2,963				58,368				1,463
Commercial secured borrowings		63,152				—				—				63,152
ABS issued		996,820				—				—				996,820

December 31, 2014		Carrying Value				Fair Value Measurements Using
(In Thousands)						Level 1				Level 2				Level 3
Assets
Residential loans		$	1,922,700			$	—			$	244,716			$	1,677,984
Commercial loans		237,496				—				—				237,496
Trading securities		111,606				—				—				111,606
Available-for-sale securities		1,267,624				—				—				1,267,624
Derivative assets		16,417				6,654				8,603				1,160
MSRs		139,293				—				—				139,293
Pledged collateral		9,927				9,927				—				—
FHLBC Stock		10,688				—				10,688				—
Guarantee asset		7,201				—				—				7,201
Liabilities
Derivative liabilities		58,331				9,878				48,412				41
Commercial secured borrowings		66,707				—				—				66,707

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 years ended December 31, 2015 and December 31, 2014.

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
Acquisitions	5,231,532				617,519				399,990				33,370				95,281				—				—				—				—
Sales	(3,857,807		)		(754,636		)		(83,038		)		(366,373		)		(18,206		)		—				—				—				(1,362		)
Principal paydowns	(612,473		)		(780		)		(7,245		)		(131,387		)		—				—				—				(593		)		(312,800		)
Gains (losses) in net income, net	(6,071		)		7,199				(17,302		)		72,612				(24,392		)		(1,377		)		60,823				(3,011		)		8,366
Unrealized losses in OCI, net	—				—				—				(46,961		)		—				—				—				—				—
Other settlements, net (3)	(6,313		)		—				—				360				—				(127		)		(58,734		)		49				400
Ending balance - December 31, 2015	$	3,797,551			$	106,798			$	404,011			$	829,245			$	191,976			$	5,697			$	3,208			$	63,152			$	996,820

	Assets																												Liabilities
(In Thousands)	Residential Loans				Commercial Loans				Trading Securities				AFS Securities				MSRs				Guarantee Asset				Derivatives(1)				Commercial Secured Borrowings
Beginning balance - December 31, 2013	$	391,100			$	89,111			$	124,555			$	1,558,306			$	64,824			$	—			$	(379	)		$	—
Acquisitions	5,020,988				937,594				81,545				237,499				95,550				7,201				—				65,048
Sales	(3,746,417		)		(807,931		)		(64,393		)		(440,361		)		—				—				—				—
Principal paydowns	(42,657		)		(4,157		)		(5,934		)		(168,308		)		—				—				—				(374		)
Amortization income	—				—				—				32,774				—				—				—				—
Gains (losses) in net income, net	56,835				22,824				(24,167		)		23,412				(21,081		)		—				14,527				2,033
Unrealized gains in OCI, net	—				—				—				24,302				—				—				—				—
Other settlements, net (3)	(1,865		)		55				—				—				—				—				(13,029		)		—
Ending balance - December 31, 2014	$	1,677,984			$	237,496			$	111,606			$	1,267,624			$	139,293			$	7,201			$	1,119			$	66,707

(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.

(3) Other settlements, net for derivatives represents the transfer of the fair value of loan purchase commitments at the time loans are acquired to the basis of residential loans.

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 December 31, 2015, 2014, and 2013. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the years ended December 31, 2015, 2014, and 2013 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at December 31, 2015, 2014, and 2013 Included in Net Income

		Included in Net Income
		Years Ended December 31,
(In Thousands)		2015				2014				2013
Assets
Residential loans at Redwood		$	(5,541	)		$	16,512			$	(290	)
Residential loans at consolidated Sequoia entities		7,422				—				—
Commercial loans		(2,620		)		3,357				1,501
Trading securities		(13,391		)		(25,216		)		32,496
Available-for-sale securities		(246		)		(434		)		(1,108		)
MSRs		(3,471		)		(15,239		)		14,196
Loan purchase commitments		4,252				1,119				—
Guarantee asset		(1,504		)		—				—
Liabilities
Loan purchase commitments		$	—			$	—			$	(379	)
Commercial secured borrowing		3,011				2,033				—
ABS issued		(8,366		)		—				—

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 December 31, 2015 and December 31, 2014. 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 December 31, 2015 and December 31, 2014.

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

																		Gain (Loss) for Year Ended
December 31, 2015		Carrying Value				Fair Value Measurements Using
(In Thousands)						Level 1				Level 2				Level 3				December 31, 2015
Assets
Residential loans, at lower of cost or fair value		$	1,096			$	—			$	—			$	1,096			$	3
REO		2,395				—				—				2,395				(764		)
Liabilities
Guarantee obligation		4,414				—				—				4,414				—
																		Gain (Loss) for Year Ended
December 31, 2014		Carrying Value				Fair Value Measurements Using
(In Thousands)						Level 1				Level 2				Level 3				December 31, 2014
Assets
Residential loans, at lower of cost or fair value		$	1,104			$	—			$	—			$	1,104			$	(1	)
REO		2,069				—				—				2,069				(320		)
Liabilities
Guarantee obligation		7,201				—				—				7,201				—

Market Valuation Adjustments

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the years ended December 31, 2015, 2014, and 2013.

Table 5.6 – Market Valuation Gains and Losses, Net

		Years Ended December 31,
(In Thousands)		2015				2014				2013
Mortgage banking and investment activities, net
Residential loans held-for-sale, at fair value		$	3,712			$	51,312			$	(10,455	)
Residential loan purchase and forward sale commitments		50,234				13,891				(399		)
Residential loans held-for-investment at fair value, at Redwood		(6,337		)		(697		)		—
Consolidated Sequoia entities (1)		(1,192		)		(894		)		(612		)
Commercial loans, at fair value (2)		10,265				20,788				8,694
Trading securities		(17,279		)		(24,197		)		38,926
Impairments on AFS securities		(246		)		(565		)		(1,833		)
Risk management derivatives, net		(52,146		)		(38,959		)		51,385
Guarantee asset		(1,504		)		—				—
Other investments		(382		)		104				—
Total mortgage banking and investment activities, net(3)		$	(14,875	)		$	20,783			$	85,706
MSR Income (loss), net
MSRs		$	(24,392	)		$	(21,081	)		$	11,995
Risk management derivatives, net		(12,708		)		—				—
Total MSR income (loss), net (4)		$	(37,100	)		$	(21,081	)		$	11,995
Total market valuation gains and losses, net		$	(51,975	)		$	(298	)		$	97,701

(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) Commercial loans at fair value does not include commercial A-notes, which were sold in 2014, but did not qualify for sale treatment under GAAP. The market valuation gains and losses on the commercial A-notes and associated commercial secured borrowings net to zero in each period presented.

(3) 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.

(4) 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

December 31, 2015		Fair Value															Weighted Average
(Dollars in Thousands, except input values)						Unobservable Input		Range
Assets
Residential loans, at fair value:
Jumbo fixed rate loans		$	1,936,062			Whole loan spread to TBA price		$	3.10		-	$	4.53				$	4.27
Jumbo hybrid loans		206,309				Prepayment rate (Annual CPR)		15			-	15			%		15			%
						Spread to swap rate		125			-	165			bps		138			bps
Jumbo loans committed to sell		633,310				Committed Sales Price		$	102.56		-	$	102.61				$	102.58
Loans held by consolidated Sequoia entities (1)		1,021,870				Liability price						N/A					N/A
Residential loans, at lower of cost or fair value		1,096				Loss severity		13			-	30			%		21			%
Commercial loans, at fair value		106,798				Spread to swap rate		221			-	221			bps		221			bps
						Credit support		26			-	26			%		26			%
Trading and AFS securities		1,233,256				Discount rate		5			-	12			%		6			%
						Prepayment rate (annual CPR)		1			-	35			%		12			%
						Default rate		0			-	35			%		6			%
						Loss severity		20			-	65			%		29			%
						Credit support		0			-	48			%		4			%
MSRs		191,976				Discount rate		9			-	12			%		10			%
						Prepayment rate (annual CPR)		5			-	60			%		10			%
						Per loan annual cost to service		$	72		-	$	82				$	79
Guarantee asset		5,697				Discount rate		11			-	11			%		11			%
						Prepayment rate (annual CPR)		12			-	12			%		12			%
REO		2,395				Loss severity		0			-	89			%		51			%
Loan purchase commitments, net (2)		3,208				MSR Multiple		0			-	6			x		3.4			x
						Fallout rate		1			-	99			%		25			%
						Whole loan spread to TBA price		3.10			-	4.38					4.16
						Prepayment rate (Annual CPR)		15			-	15					15			%
						Spread to swap rate		125			-	165			bps		137			bps
Liabilities
ABS issued(1)		996,820				Discount rate		5			-	9			%		5			%
						Prepayment rate (annual CPR)		2			-	23			%		12			%
						Default rate		1			-	12			%		7			%
						Loss severity		20			-	32			%		27			%
						Credit support		—			-	33			%		9			%
Commercial secured financing		63,152				Spread to swap rate		219			-	220			bps		220			bps
						Credit support		25		%	-	25			%		25			%

Notes to Table 5.7

(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 (ABS) 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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Tabular disclosure of quantitative information about the inputs used in the fair value measurement of assets. This disclosure may include, but is not limited to, the fair value of the asset, valuation technique used to measure fair value, the inputs used to measure fair value, the ranges of the inputs, and the weighted averages of the inputs.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-SubTopic 10
-Section 50
-Paragraph 2
-Subparagraph (bbb)
-URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258

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X

- Definition

Tabular disclosure of assets and liabilities, including [financial] instruments measured at fair value that are classified in stockholders' equity, if any, that are measured at fair value on a recurring basis. The disclosures contemplated herein include the fair value measurements at the reporting date by the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3).

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-SubTopic 10
-Section 50
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19190-110258

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