Fair Value of Financial Instruments

For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an asset or liability that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value.

In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.

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, 2016 and December 31, 2015.

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



	March 31, 2016				December 31, 2015
	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	$	439,674	$	439,674	$	1,114,305	$	1,114,305
At lower of cost or fair value	1,402		1,594		1,433		1,635
Residential loans, held-for-investment ⁽¹⁾
At fair value	3,273,980		3,273,980		2,813,065		2,813,065
Commercial loans, held-for-sale	—		—		39,141		39,141
Commercial loans, held-for-investment
At fair value	69,674		69,674		67,657		67,657
At amortized cost	294,219		301,488		295,849		300,824
Trading securities	221,571		221,571		404,011		404,011
Available-for-sale securities	698,356		698,356		829,245		829,245
MSRs	126,620		126,620		191,976		191,976
Cash and cash equivalents	305,115		305,115		220,229		220,229
Restricted cash	2,137		2,137		5,567		5,567
Accrued interest receivable	19,766		19,766		23,290		23,290
Derivative assets	31,975		31,975		16,393		16,393
REO ⁽²⁾	4,884		5,475		4,896		5,282
Margin receivable⁽²⁾	107,941		107,941		83,191		83,191
FHLBC stock ⁽²⁾	44,071		44,071		34,437		34,437
Guarantee asset⁽²⁾	4,272		4,272		5,697		5,697
Pledged collateral⁽²⁾	59,664		59,664		53,600		53,600
Liabilities
Short-term debt	$	804,175	$	804,175	$	1,855,003	$	1,855,003
Accrued interest payable	15,522		15,522		8,936		8,936
Margin payable	14,247		14,247		6,415		6,415
Guarantee obligation	24,896		23,595		22,704		22,702
Derivative liabilities	97,468		97,468		62,794		62,794
ABS issued, net ^{(1) (2)}
Fair value	907,023		907,023		996,820		996,820
Amortized cost	51,341		51,680		52,595		53,137
FHLBC long-term borrowings	1,999,999		1,999,999		1,343,023		1,343,023
Commercial secured borrowings	65,181		65,181		63,152		63,152
Convertible notes, net ⁽²⁾	479,798		453,396		483,119		461,053
Trust preferred securities and subordinated notes, net ⁽²⁾	138,454		80,910		138,443		83,700


(1)	These assets are included in other assets on our consolidated balance sheets.


(2)	On January 1, 2016, we adopted ASU 2015-03 and began to present ABS issued, convertible notes, and other long-term debt net of deferred debt issuance costs. See Note 3 for further discussion.

During the three months ended March 31, 2016, we elected the fair value option for $48 million of residential subordinate securities, $1.19 billion of residential loans (principal balance), $38 million of commercial loans (principal balance), and $9 million of MSRs. We anticipate electing the fair value option for all future purchases of residential loans that we intend to sell to third parties or transfer to securitizations as well as for MSRs purchased or retained from sales of residential loans.

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, 2016 and December 31, 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



March 31, 2016	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	3,713,654	$	—	$	1,387	$	3,712,267
Commercial loans	69,674		—		—		69,674
Trading securities	221,571		—		—		221,571
Available-for-sale securities	698,356		—		—		698,356
Derivative assets	31,975		2,843		24,188		4,944
MSRs	126,620		—		—		126,620
Pledged collateral	59,664		59,664		—		—
FHLBC stock	44,071		—		44,071		—
Guarantee asset	4,272		—		—		4,272

Liabilities
Derivative liabilities	$	97,468	$	5,063	$	92,100	$	305
Commercial secured borrowings	65,181		—		—		65,181
ABS issued	907,023		—		—		907,023



December 31, 2015	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		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

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, 2016.

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)	Residential Loans			Commercial Loans			Trading Securities			AFS Securities			MSRs			Guarantee Asset			Derivatives⁽¹⁾			Commercial Secured Borrowings			ABS Issued
Beginning balance - December 31, 2015	$	3,797,551		$	106,798		$	404,011		$	829,245		$	191,976		$	5,697		$	3,208		$	63,152		$	996,820
Acquisitions	1,020,846			37,626			47,760			15,585			8,807			—			—			—			—
Sales	(941,790		)	(77,183		)	(220,123		)	(125,911		)	(29,559		)	—			—			—			—
Principal paydowns	(161,241		)	(171		)	(5,718		)	(16,683		)	—			—			—			(155		)	(49,411		)
Gains (losses) in net income, net	(7,934		)	2,604			(4,359		)	17,314			(44,604		)	(1,425		)	15,606			2,171			(33,515		)
Unrealized losses in OCI, net	—			—			—			(21,194		)	—			—			—			—			—
Other settlements, net ⁽²⁾	4,835			—			—			—			—			—			(14,175		)	13			(6,871		)
Ending balance - March 31, 2016	$	3,712,267		$	69,674		$	221,571		$	698,356		$	126,620		$	4,272		$	4,639		$	65,181		$	907,023


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


(2)	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.

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, 2016 and 2015. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2016 and 2015 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at March 31, 2016 and 2015 Included in Net Income



	Included in Net Income
	Three Months Ended March 31,
(In Thousands)	2016			2015
Assets
Residential loans at Redwood	$	27,285		$	5,464
Residential loans at consolidated Sequoia entities	(35,656		)	1,179
Commercial loans	2,171			2,959
Trading securities	(6,135		)	(13,790		)
MSRs	(30,834		)	(11,769		)
Loan purchase commitments	4,644			7,422
Other assets - Guarantee asset	(1,425		)	(1,083		)

Liabilities
Commercial secured borrowing	2,171			(1,509		)
ABS issued	(33,515		)	(2,946		)

The following table presents information on assets recorded at fair value on a non-recurring basis at March 31, 2016. 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 consolidated balance sheet at March 31, 2016.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2016



									Gain (Loss) for
March 31, 2016	Carrying Value		Fair Value Measurements Using						Three Months Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		March 31, 2016
Assets
Residential loans, at lower of cost or fair value	$	1,076	$	—	$	—	$	1,076	$	(16	)
REO	1,285		—		—		1,285		(252		)

Liabilities
Guarantee obligation	$	928	$	—	$	—	$	928	$	—

The following table presents the net gains and losses recorded in each line item of our consolidated statements of income for the three months ended March 31, 2016 and 2015.

Table 5.6 – Market Valuation Gains and Losses, Net



	Three Months Ended March 31,
(In Thousands)	2016			2015
Mortgage banking activities, net
Residential loans held-for-sale, at fair value	$	5,439		$	2,056
Residential loan purchase and forward sale commitments	12,635			18,256
Commercial loans, at fair value ⁽¹⁾	433			5,857
Sequoia securities	1,484			(14,359		)
Risk management derivatives, net	(12,754		)	(10,583		)
Total mortgage banking activities, net ⁽²⁾	$	7,237		$	1,227
Investment fair value changes, net
Residential loans held-for-investment at Redwood	$	23,463		$	1,980
Net investments in consolidated Sequoia entities	(1,580		)	(1,093		)
Trading securities	(5,601		)	270
Risk management derivatives, net	(35,810		)	(1,374		)
Risk sharing investments	(10		)	(928		)
Total investment fair value changes, net	$	(19,538	)	$	(1,145	)
MSR income (loss), net
MSRs	$	(44,604	)	$	(19,517	)
Risk management derivatives, net	41,057			—
Total MSR loss, net ⁽³⁾	$	(3,547	)	$	(19,517	)
Total Market Valuation Losses, Net	$	(15,848	)	$	(19,435	)


(1)	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.


(2)	Mortgage banking activities, net presented above does not include fee income or provisions for repurchases that are components of Mortgage banking 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. In addition, we did not specifically identify derivatives used to hedge MSRs in the first quarter of 2015. See Note 2 for additional detail.

At March 31, 2016, our valuation policy and processes had not changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2015. 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



March 31, 2016	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	$	2,494,912	Whole loan spread to TBA price	$	3.13		-	$	4.35		$	4.12

Jumbo hybrid loans	83,124		Prepayment rate (annual CPR)	15			-	15		%	15		%
			Spread to swap rate	130			-	180		bps	151		bps

Jumbo loans committed to sell	204,204		Committed Sales Price	$	101.91		-	$	102.30		$	102.14

Loans held by consolidated Sequoia entities⁽¹⁾	930,027		Liability price					N/A			N/A

Residential loans, at lower of cost or fair value	1,076		Loss severity	15			-	30		%	29		%

Commercial loans, at fair value	69,674		Spread to swap rate	212			-	212		bps	212		bps
			Credit support	25			-	25		%	25		%

Trading and AFS securities	919,927		Discount rate	5			-	12		%	6		%
			Prepayment rate (annual CPR)	1			-	35		%	14		%
			Default rate	—			-	35		%	3		%
			Loss severity	20			-	65		%	23		%
			Credit support	—			-	48		%	4		%

MSRs	126,620		Discount rate	8			-	13		%	10		%
			Prepayment rate (annual CPR)	4			-	60		%	15		%
			Per loan annual cost to service	$	72		-	$	82		$	78

Guarantee asset	4,272		Discount rate	11			-	11		%	11		%
			Prepayment rate (annual CPR)	19			-	19		%	19		%

REO	1,285		Loss severity	11			-	93		%	35		%

Loan purchase commitments, net ⁽²⁾	4,639		MSR Multiple	0.3			-	6.6		x	2.8		x
			Fallout rate	2			-	98		%	44		%
			Whole loan spread to TBA price	3.35			-	4.35			4.16
			Prepayment rate (annual CPR)	15			-	15		%	15		%
			Spread to swap rate	130			-	180		bps	154		bps

Liabilities
ABS issued	907,023		Discount rate	5			-	9		%	5		%
			Prepayment rate (annual CPR)	5			-	20		%	12		%
			Default rate	1			-	12		%	7		%
			Loss severity	20			-	32		%	27		%
			Credit support	—			-	33		%	9		%

Commercial secured borrowings	65,181		Spread to swap rate	212			-	212		bps	212		bps
			Credit support	25		%	-	25		%	25		%


(1)	The fair value of the loans held by consolidated Sequoia entities was based on the fair value of the ABS issued by these entities, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.


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

Determination of Fair Value

A description of the instruments measured at fair value as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy is listed herein. We generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, a significant increase or decrease in any of these inputs – such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions – in isolation would likely result in a significantly lower or higher fair value measurement.

Residential loans

Estimated fair values for residential loans are determined using models that incorporate various observable inputs, including pricing information from recent securitizations and whole loan sales. Certain significant inputs in these models are considered unobservable and are therefore Level 3 in nature. Pricing inputs obtained from market securitization activity include indicative spreads to indexed TBA prices for senior residential mortgage-backed securities ("RMBS") and indexed swap rates for subordinate RMBS (Level 3). Pricing inputs obtained from market whole loan transaction activity include indicative spreads to indexed to be announced ("TBA") prices for fixed-rate loans and indexed swap rates for hybrid loans (Level 3). Other observable inputs include benchmark interest rates, and prepayment rates. At March 31, 2016, our jumbo fixed-rate loans were priced exclusively using whole loan sale inputs. These assets would generally decrease in value based upon an increase in the credit spread, prepayment speed, or credit support assumptions.

Estimated fair values for conforming loans are determined based upon quoted market prices (Level 2). Conforming loans are mortgage loans that conform to Agency guidelines. As necessary, these values are adjusted for servicing value, market conditions and liquidity.

Commercial loans

Estimated fair values for senior commercial loans held-for-sale are determined by an exit price to securitization. Certain significant inputs in the valuation analysis are Level 3 in nature. Relevant market indicators that are factored into the analyses include pricing points for current third-party commercial mortgage-backed securities (“CMBS”) sales, pricing points for secondary sales of CMBS, yields for synthetic instruments that use CMBS bonds as an underlying index, indexed swap yields, credit rating agency guidance on expected credit enhancement levels for newly issued CMBS transactions, and interest rates (Level 3). In certain cases, commercial senior mortgage loans are valued based on third-party offers for the loans for purchase into securitization (Level 2). The estimated fair value of our senior commercial loans would generally decrease based upon an increase in credit spreads or required credit support.

Estimated fair values for mezzanine commercial loans are determined by both market comparable pricing and discounted cash flow analysis valuation techniques (Level 3). Our discounted cash flow models utilize certain significant unobservable inputs including the underwritten net operating income and debt coverage ratio assumptions and actual performance relative to those underwritten metrics as well as estimated market discount rates. An increase in market discount rates would generally reduce the estimated fair value of the commercial loans.

Real estate securities

Real estate securities include residential, commercial, and other asset-backed securities that are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis are predominantly Level 3 in nature, due to the lack of readily available market quotes and related inputs. For real estate securities, we utilize both market comparable pricing and discounted cash flow analysis valuation techniques. Relevant market indicators that are factored into the analyses include bid/ask spreads, the amount and timing of credit losses, interest rates, and collateral prepayment rates. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3). These cash flow models use significant unobservable inputs such as a discount rate, prepayment rate, default rate, loss severity and credit support. The estimated fair value of our securities would generally decrease based upon an increase in default rates, serious delinquencies, or a decrease in prepayment rates or credit support.

As part of our securities valuation process, we request and consider indications of value from third-party securities dealers. For purposes of pricing our securities at March 31, 2016, we received dealer price indications on 68% of our securities, representing 84% of our carrying value. In the aggregate, our internal valuations of the securities for which we received dealer price indications were within 1% of the aggregate average dealer valuations. Once we receive the price indications from dealers, they are compared to other relevant market inputs, such as actual or comparable trades, and the results of our discounted cash flow analysis. In circumstances where relevant market inputs cannot be obtained, increased reliance on discounted cash flow analysis and management judgment are required to estimate fair value.

Derivative assets and liabilities

Our derivative instruments include swaps, swaptions, TBAs, financial futures, CMBX credit default index swaps, loan purchase commitments ("LPCs"), and forward sale commitments ("FSCs"). Fair values of derivative instruments are determined using quoted prices from active markets, when available, or from valuation models and are supported by valuations provided by dealers active in derivative markets. Fair values of TBAs and financial futures are generally obtained using quoted prices from active markets (Level 1). Our derivative valuation models for swaps and swaptions require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates, and correlations of certain inputs. Model inputs can generally be verified and model selection does not involve significant management judgment (Level 2).

LPC fair values for conforming loans are estimated based on quoted Agency mortgage-backed securities ("MBS") prices, estimates of the fair value of the MSRs we expect to retain in the sale of the loans, and the probability that the mortgage loan will be purchased (Level 3). FSC fair values for conforming loans are obtained using quoted Agency prices. LPC fair values for jumbo loans are estimated based on the estimated fair values of the underlying loans (as described in "Residential loans" above) as well as the probability that the mortgage loan will be purchased (Level 3).

For other derivatives, valuations are based on various factors such as liquidity, bid/ask spreads, and credit considerations for which we rely on available market inputs. In the absence of such inputs, management’s best estimate is used (Level 3).

MSRs

MSRs include the rights to service jumbo and conforming residential mortgage loans. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. These inputs include market discount rates, prepayment rates of serviced loans, and the market cost of servicing. Changes in the fair value of MSRs occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputs and assumptions. Estimated fair values are based on applying the inputs to generate the net present value of estimated future MSR income (Level 3). These discounted cash flow models utilize certain significant unobservable inputs including prepayment rate and discount rate assumptions. An increase in these unobservable inputs would generally reduce the estimated fair value of the MSRs.

As part of our MSR valuation process, we received a valuation estimate from a third-party valuations firm. In the aggregate, our internal valuation of the MSRs were within 1% of the third-party valuation.

FHLBC Stock

Our Federal Home Loan Bank ("FHLB") member subsidiary is required to purchase Federal Home Loan Bank of Chicago ("FHLBC") stock under a borrowing agreement between our FHLB-member subsidiary and the FHLBC. Under this agreement, the stock is redeemable at face value, which represents the carrying value and fair value of the stock (Level 2).

Guarantee Asset

The guarantee asset represents the estimated fair value of cash flows we are contractually entitled to receive related to a risk sharing arrangement with Fannie Mae. Significant inputs in the valuation analysis are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant inputs include prepayment rates and market discount rate (Level 3). An increase in prepayment speed or market discount rate would generally reduce the estimated fair value of the guarantee asset.

Pledged Collateral

Pledged collateral consists of cash and U.S. Treasury securities held by a custodian in association with certain agreements we have entered into. Treasury securities are carried at their fair value, which is determined using quoted prices in active markets
(Level 1).

Cash and cash equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. Fair values equal carrying values (Level 1).

Restricted cash

Restricted cash primarily includes interest-earning cash balances at consolidated Sequoia entities and at the Residential Resecuritization and Commercial Securitization entities for the purpose of distribution to investors and reinvestment. Due to the short-term nature of the restrictions, fair values approximate carrying values (Level 1).

Accrued interest receivable and payable

Accrued interest receivable and payable includes interest due on our assets and payable on our liabilities. Due to the short-term nature of when these interest payments will be received or paid, fair values approximate carrying values (Level 1).

REO

REO includes properties owned in satisfaction of foreclosed loans. Fair values are determined using available market quotes, appraisals, broker price opinions, comparable properties, or other indications of value (Level 3).

Margin receivable

Margin receivable reflects cash collateral we have posted with our various derivative and debt counterparties as required to satisfy margin requirements. Fair values approximate carrying values (Level 2).

Guarantee Obligations

In association with our risk sharing transactions with the Agencies, we have made certain guarantees. For these transactions, at the close of each delivery period, or at quarter-end for open delivery periods, we recognize a liability representing the fair value of the guarantee obligations we assumed. Fair values of guarantee obligations are determined using internal models that incorporate certain significant inputs that are considered unobservable and are therefore Level 3 in nature. Pricing inputs include prepayment assumptions, loss assumptions, and discount rates. An increase in discount rates or loss rates, or a decrease in prepayment rates, would reduce the estimated fair value of the guarantee obligations.

Short-term debt

Short-term debt includes our credit facilities that mature within one year. As these borrowings are secured and subject to margin calls and as the rates on these borrowings reset frequently to market rates, we believe that carrying values approximate fair values (Level 2).

ABS issued

ABS issued includes asset-backed securities issued through the Sequoia, Residential Resecuritization, and Commercial Securitization entities. These instruments are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. For ABS issued, we utilize both market comparable pricing and discounted cash flow analysis valuation techniques. Relevant market indicators factored into the analyses include bid/ask spreads, the amount and timing of collateral credit losses, interest rates, and collateral prepayment rates. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3). These liabilities would generally decrease in value (become a larger liability) if credit losses decreased or if the prepayment rate or discount rate were to increase.

FHLBC Borrowings

FHLBC borrowings include amounts borrowed from the FHLBC that are secured, generally by residential mortgage loans. As these borrowings are secured and subject to margin calls and as the rates on these borrowings reset frequently to market rates, we believe that carrying values approximate fair values (Level 2).

Commercial secured borrowings

Commercial secured borrowings represent liabilities recognized as a result of transfers of portions of senior commercial mortgage loans to third parties that do not meet the criteria for sale treatment under GAAP and are accounted for as secured borrowings. Fair values for commercial secured borrowings are based on the fair values of the senior commercial loans associated with the borrowings (Level 3).

Convertible notes

Convertible notes include unsecured convertible and exchangeable senior notes. Fair values are determined using quoted prices in active markets (Level 2).

Trust preferred securities and subordinated notes

Estimated fair values of trust preferred securities and subordinated notes are determined using discounted cash flow analysis valuation techniques. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3).