Principles of Consolidation (Tables)

9 Months Ended

Sep. 30, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Assets and Liabilities of Consolidated VIEs

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



September 30, 2016	Sequoia Entities
(Dollars in Thousands)	Sequoia Entities
Residential loans, held-for-investment	$	839,976
Restricted cash	148
Accrued interest receivable	1,030
Other assets	6,245
Total Assets	$	847,399
Accrued interest payable	$	523
Asset-backed securities issued	819,868
Total Liabilities	$	820,391

Number of VIEs	20



December 31, 2015	Sequoia Entities		Commercial Securitization		Total
(Dollars in Thousands)	Sequoia Entities		Commercial Securitization		Total
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

Securitization Activity Related to Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents information related to securitization transactions that occurred during the three and nine months ended September 30, 2016 and 2015.

Table 4.2 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2016		2015		2016		2015
Principal balance of loans transferred	$	348,537	$	—	$	693,427	$	1,038,451
Trading securities retained, at fair value	—		—		—		33,389
AFS securities retained, at fair value	1,839		—		3,673		6,309
MSRs recognized	1,971		—		4,102		7,874

The following table summarizes the cash flows during the three and nine months ended September 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 September 30,						Nine Months Ended September 30,
(In Thousands)	2016			2015			2016			2015
Proceeds from new transfers	$	356,497		$	—		$	708,539		$	1,018,312
MSR fees received	3,473			3,817			10,397			11,287
Funding of compensating interest	(98		)	(86		)	(254		)	(283		)
Cash flows received on retained securities	6,384			8,190			24,314			31,541

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 September 30, 2016				Three Months Ended September 30, 2015
At Date of Securitization	MSRs		Subordinate Securities		MSRs		Senior Securities		Subordinate Securities
Prepayment rate	24	%	15	%	N/A		N/A		N/A
Discount rates	11	%	7	%	N/A		N/A		N/A
Credit loss assumptions	N/A		0.25	%	N/A		N/A		N/A

	Nine Months Ended September 30, 2016				Nine Months Ended September 30, 2015
At Date of Securitization	MSRs		Subordinate Securities		MSRs		Senior Securities		Subordinate Securities
Prepayment rate	22	%	15	%	14	%	8	%	8	%
Discount rates	11	%	7	%	11	%	3	%	6	%
Credit loss assumptions	N/A		0.25	%	N/A		0.25	%	0.25	%

Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents additional information at September 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)	September 30, 2016		December 31, 2015
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	31,271	$	258,697
Subordinate securities, classified as AFS	237,248		272,715
Mortgage servicing rights	35,609		56,984
Maximum loss exposure ⁽¹⁾	$	304,128	$	588,396
Assets transferred:
Principal balance of loans outstanding	$	6,990,350	$	7,318,167
Principal balance of delinquent loans 30+ days delinquent	19,775		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.

Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated Variable Interest Entity's Sponsored by Redwood

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 September 30, 2016 and December 31, 2015.

Table 4.6 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood



September 30, 2016	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at September 30, 2016	$	35,609		$	19,098		$	249,421
Expected life (in years)⁽²⁾	5			5			12
Prepayment speed assumption (annual CPR)⁽²⁾	25		%	14		%	14		%
Decrease in fair value from:
10% adverse change	$	2,414		$	893		$	955
25% adverse change	5,687			2,119			2,364
Discount rate assumption⁽²⁾	11		%	15		%	5		%
Decrease in fair value from:
100 basis point increase	$	861		$	551		$	19,395
200 basis point increase	1,674			1,072			36,292
Credit loss assumption ⁽²⁾	N/A			0.25		%	0.25		%
Decrease in fair value from:
10% higher losses	N/A			$	11		$	1,220
25% higher losses	N/A			27			3,048



December 31, 2015	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
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 $19 million and $31 million of interest only securities at September 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.

Schedule of Third-Party Sponsored VIE Summary

The following table presents a summary of our interests in third-party VIEs at September 30, 2016, grouped by security type.

Table 4.7 – Third-Party Sponsored VIE Summary



(Dollars in Thousands)	September 30, 2016
Mortgage Backed Securities
Senior	$	76,685
Re-REMIC	161,234
Subordinate	430,471
Total Investments in Third-Party Sponsored VIEs	$	668,390

- Definition

Tabular disclosure of the significant judgments and assumptions made in determining whether a variable interest (as defined) held by the entity requires the variable interest entity (VIE) (as defined) to be consolidated and (or) disclose information about its involvement with the VIE, individually or in aggregate (as applicable); the nature of restrictions, if any, on the consolidated VIE's assets and on the settlement of its liabilities reported by an entity in its statement of financial position, including the carrying amounts of such assets and liabilities; the nature of, and changes in, the risks associated with involvement in the VIE; how involvement with the VIE affects the entity's financial position, financial performance, and cash flows; the lack of recourse if creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the primary beneficiary (if applicable); the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, if any, that could require the entity to provide financial support to the VIE, including events or circumstances that could expose the entity to a loss; the methodology used by the entity for determining whether or not it is the primary beneficiary of the variable interest entity; the significant factors considered and judgments made in determining that the power to direct the activities of a VIE that most significantly impact the VIE's economic performance are shared (as defined); the carrying amounts and classification of assets and liabilities of the VIE included in the statement of financial position; the entity's maximum exposure to loss, if any, as a result of its involvement with the VIE, including how the maximum exposure is determined and significant sources of the entity's exposure to the VIE; a comparison of the carrying amounts of the assets and liabilities and the entity's maximum exposure to loss; information about any liquidity arrangements, guarantees, and (or) other commitments by third parties that may affect the fair value or risk of the entity's variable interest in the VIE; whether or not the entity has provided financial support or other support (explicitly or implicitly) to the VIE that it was not previously contractually required to provide or whether the entity intends to provide that support, including the type and amount of the support and the primary reasons for providing the support; and supplemental information the entity determines necessary to provide.

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