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Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2016

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 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)
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.

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 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)						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)						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

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 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)
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.

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 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		)

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 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)						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			$	—

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 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.

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

March 31, 2016		Fair Value															Weighted Average
(Dollars in Thousands, except Input Values)						Unobservable Input		Range
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.

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