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Principles of Consolidation | 6 Months Ended
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Jun. 30, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Principles of Consolidation | Principles of Consolidation GAAP requires us to consider whether securitizations we sponsor and other transfers of financial assets should be treated as sales or financings, as well as whether any VIEs that we hold variable interests in – for example, certain legal entities often used in securitization and other structured finance transactions – should be included in our consolidated financial statements. The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods. Analysis of Consolidated VIEs At June 30, 2016, the VIEs we are required to consolidate include certain Sequoia securitization entities and the Commercial Securitization entity. During the second quarter of 2016, the debt of the Commercial Securitization was repaid. In addition, we consolidated the Residential Resecuritization from its creation in 2011 through the fourth quarter of 2015, when the VIE was dissolved. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although we are exposed to certain financial risks associated with our role as a sponsor, manager, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. The following table presents a summary of the assets and liabilities of these VIEs. Intercompany balances have been eliminated for purposes of this presentation. Table 4.1 – Assets and Liabilities of Consolidated VIEs
June 30, 2016 |  | Sequoia Entities |  | Commercial Securitization |  | Total
(Dollars in Thousands) |  |  |
Residential loans, held-for-investment |  | $ | 880,197 |  |  | $ | — |  |  | $ | 880,197 |
Restricted cash |  | 147 |  |  | 131 |  |  | 278 |
Accrued interest receivable |  | 1,058 |  |  | — |  |  | 1,058 |
Other assets |  | 6,493 |  |  | — |  |  | 6,493 |
Total Assets |  | $ | 887,895 |  |  | $ | 131 |  |  | $ | 888,026 |
Accrued interest payable |  | $ | 528 |  |  | $ | 100 |  |  | $ | 628 |
Asset-backed securities issued |  | 859,628 |  |  | — |  |  | 859,628 |
Total Liabilities |  | $ | 860,156 |  |  | $ | 100 |  |  | $ | 860,256 |
Number of VIEs |  | 20 |  |  | 1 |  |  | 21 |
December 31, 2015 |  | Sequoia Entities |  | Commercial Securitization |  | Total
(Dollars in Thousands) |  |  |
Residential loans, held-for-investment |  | $ | 1,021,870 |  |  | $ | — |  |  | $ | 1,021,870 |
Commercial loans, held-for-investment |  | — |  |  | 166,016 |  |  | 166,016 |
Restricted cash |  | 228 |  |  | 137 |  |  | 365 |
Accrued interest receivable |  | 1,131 |  |  | 1,297 |  |  | 2,428 |
Other assets |  | 4,895 |  |  | — |  |  | 4,895 |
Total Assets |  | $ | 1,028,124 |  |  | $ | 167,450 |  |  | $ | 1,195,574 |
Accrued interest payable |  | $ | 555 |  |  | $ | 249 |  |  | $ | 804 |
Accrued expenses and other liabilities |  | 100 |  |  | — |  |  | 100 |
Asset-backed securities issued, net |  | 996,820 |  |  | 53,137 |  |  | 1,049,957 |
Total Liabilities |  | $ | 997,475 |  |  | $ | 53,386 |  |  | $ | 1,050,861 |
Number of VIEs |  | 21 |  |  | 1 |  |  | 22 |
Analysis of Unconsolidated VIEs with Continuing Involvement Since 2012, we have transferred residential loans to 27 Sequoia securitization entities sponsored by us and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For the transferred loans where we held the servicing rights prior to the transfer and continue to hold the servicing rights, we recorded MSRs on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining residential MSRs (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained. The following table presents information related to securitization transactions that occurred during the three and six months ended June 30, 2016 and 2015. Table 4.2 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
(In Thousands) |  | 2016 |  | 2015 |  | 2016 |  | 2015
Principal balance of loans transferred |  | $ | 344,890 |  |  | $ | 699,655 |  |  | $ | 344,890 |  |  | $ | 1,038,451 |
Trading securities retained, at fair value |  | — |  |  | 29,966 |  |  | — |  |  | 33,389 |
AFS securities retained, at fair value |  | 1,834 |  |  | 3,450 |  |  | 1,834 |  |  | 6,309 |
MSRs recognized |  | 2,131 |  |  | 6,002 |  |  | 2,131 |  |  | 7,874 |
The following table summarizes the cash flows during the three and six months ended June 30, 2016 and 2015 between us and the unconsolidated VIEs sponsored by us. Table 4.3 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
(In Thousands) |  | 2016 |  | 2015 |  | 2016 |  | 2015
Proceeds from new transfers |  | $ | 352,042 |  |  | $ | 676,596 |  |  | $ | 352,042 |  |  | $ | 1,018,312 |
MSR fees received |  | 3,401 |  |  | 3,700 |  |  | 6,924 |  |  | 7,470 |
Funding of compensating interest |  | (77 | ) |  | (107 | ) |  | (156 | ) |  | (197 | )
Cash flows received on retained securities |  | 6,739 |  |  | 10,706 |  |  | 17,930 |  |  | 23,351 |
The following table presents the key weighted-average assumptions used to measure MSRs and securities retained at the date of securitization. Table 4.4 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood
|  | Three Months Ended June 30, 2016 |  | Three Months Ended June 30, 2015
At Date of Securitization |  | MSRs |  | Subordinate Securities |  | MSRs |  | Senior Securities |  | Subordinate Securities
Prepayment rate |  | 20 | % |  | 15 | % |  | 13 | % |  | 8 | % |  | 8 | %
Discount rates |  | 11 | % |  | 7 | % |  | 11 | % |  | 3 | % |  | 6 | %
Credit loss assumptions |  | N/A |  |  | 0.25 | % |  | N/A |  |  | 0.25 | % |  | 0.25 | %
|  | Six Months Ended June 30, 2016 |  | Six Months Ended June 30, 2015
At Date of Securitization |  | MSRs |  | Subordinate Securities |  | MSRs |  | Senior Securities |  | Subordinate Securities
Prepayment rate |  | 20 | % |  | 15 | % |  | 15 | % |  | 8 | % |  | 8 | %
Discount rates |  | 11 | % |  | 7 | % |  | 11 | % |  | 3 | % |  | 6 | %
Credit loss assumptions |  | N/A |  |  | 0.25 | % |  | N/A |  |  | 0.25 | % |  | 0.25 | %
The following table presents additional information at June 30, 2016 and December 31, 2015, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012. Table 4.5 – Unconsolidated VIEs Sponsored by Redwood
(In Thousands) |  | June 30, 2016 |  | December 31, 2015
On-balance sheet assets, at fair value: |  |  |  |
Interest-only, senior and subordinate securities, classified as trading |  | $ | 29,679 |  |  | $ | 258,697 |
Senior and subordinate securities, classified as AFS |  | 255,618 |  |  | 272,715 |
Mortgage servicing rights |  | 30,976 |  |  | 56,984 |
Maximum loss exposure (1) |  | $ | 316,273 |  |  | $ | 588,396 |
Assets transferred: |  |  |  |
Principal balance of loans outstanding |  | $ | 7,030,007 |  |  | $ | 7,318,167 |
Principal balance of delinquent loans 30+ days delinquent |  | 12,684 |  |  | 18,300 |
(1) | Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities and MSRs retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization.
The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at June 30, 2016 and December 31, 2015. Table 4.6 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood
June 30, 2016 |  | MSRs |  | Senior Securities (1) |  | Subordinate Securities
(Dollars in Thousands) |  |  |
Fair value at June 30, 2016 |  | $ | 30,976 |  |  | $ | 17,710 |  |  | $ | 267,587 |
Expected life (in years) (2) |  | 5 |  |  | 4 |  |  | 11 |
Prepayment speed assumption (annual CPR) (2) |  | 28 | % |  | 12 | % |  | 13 | %
Decrease in fair value from: |  |  |  |  |  |
10% adverse change |  | $ | 2,390 |  |  | $ | 688 |  |  | $ | 885 |
25% adverse change |  | 5,631 |  |  | 1,648 |  |  | 2,229 |
Discount rate assumption (2) |  | 11 | % |  | 21 | % |  | 6 | %
Decrease in fair value from: |  |  |  |  |  |
100 basis point increase |  | $ | 706 |  |  | $ | 442 |  |  | $ | 20,724 |
200 basis point increase |  | 1,373 |  |  | 862 |  |  | 38,779 |
Credit loss assumption (2) |  | N/A |  |  | 0.25 | % |  | 0.25 | %
Decrease in fair value from: |  |  |  |  |  |
10% higher losses |  | N/A |  |  | $ | 8 |  |  | $ | 1,225 |
25% higher losses |  | N/A |  |  | 21 |  |  | 3,074 |
December 31, 2015 |  | MSRs |  | Senior Securities (1) |  | Subordinate Securities
(Dollars in Thousands) |  |  |
Fair value at December 31, 2015 |  | $ | 56,984 |  |  | $ | 248,570 |  |  | $ | 282,842 |
Expected life (in years) (2) |  | 7 |  |  | 5 |  |  | 12 |
Prepayment speed assumption (annual CPR) (2) |  | 11 | % |  | 10 | % |  | 12 | %
Decrease in fair value from: |  |  |  |  |  |
10% adverse change |  | $ | 2,868 |  |  | $ | 2,042 |  |  | $ | 901 |
25% adverse change |  | 6,119 |  |  | 4,810 |  |  | 2,278 |
Discount rate assumption (2) |  | 11 | % |  | 5 | % |  | 6 | %
Decrease in fair value from: |  |  |  |  |  |
100 basis point increase |  | $ | 2,711 |  |  | $ | 10,029 |  |  | $ | 21,981 |
200 basis point increase |  | 4,745 |  |  | 19,365 |  |  | 41,156 |
Credit loss assumption (2) |  | N/A |  |  | 0.25 | % |  | 0.25 | %
Decrease in fair value from: |  |  |  |  |  |
10% higher losses |  | N/A |  |  | $ | 35 |  |  | $ | 1,244 |
25% higher losses |  | N/A |  |  | 86 |  |  | 3,129 |
(1) | Senior securities included $18 million and $31 million of interest only securities at June 30, 2016 and December 31, 2015, respectively.
(2) | Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.
Analysis of Third-Party VIEs Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at June 30, 2016, grouped by security type. Table 4.7 – Third-Party Sponsored VIE Summary
(Dollars in Thousands) |  | June 30, 2016
Mortgage Backed Securities |  |
Senior |  | $ | 78,747 |
Re-REMIC |  | 165,707 |
Subordinate |  | 354,050 |
Total Investments in Third-Party Sponsored VIEs |  | $ | 598,504 |
We determined that we are not the primary beneficiary of any third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them. Our assessments of whether we are required to consolidate a VIE may change in subsequent reporting periods based upon changing facts and circumstances pertaining to each VIE. Any related accounting changes could result in a material impact to our financial statements.

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- Definition The entire disclosure for a variable interest entity (VIE), including but not limited to, judgments and assumptions in determining whether to consolidate and in identifying the primary beneficiary, gain (loss) recognized on the initial consolidation of the VIE, terms of arrangements, amounts and classification of the VIE's assets and liabilities, and the entity's maximum exposure to loss. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 5A -URI http://asc.fasb.org/extlink&oid=52262685&loc=SL6759159-111685 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=52262685&loc=d3e5728-111685 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=52262685&loc=d3e5710-111685 + Details
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