Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2016

Carrying Values and 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 September 30, 2016 and December 31, 2015.

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



	September 30, 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	$	1,187,240	$	1,187,240	$	1,114,305	$	1,114,305
At lower of cost or fair value	1,274		1,459		1,433		1,635
Residential loans, held-for-investment
At fair value	3,122,650		3,122,650		2,813,065		2,813,065
Commercial loans, held-for-sale
At fair value	—		—		39,141		39,141
At lower of cost or fair value	30,400		32,239		—		—
Commercial loans, held-for-investment
At fair value	—		—		67,657		67,657
At amortized cost	—		—		295,849		300,824
Trading securities	341,269		341,269		404,011		404,011
Available-for-sale securities	595,641		595,641		829,245		829,245
MSRs	106,009		106,009		191,976		191,976
Cash and cash equivalents	221,372		221,372		220,229		220,229
Restricted cash	2,044		2,044		5,567		5,567
Accrued interest receivable	20,054		20,054		23,290		23,290
Derivative assets	36,880		36,880		16,393		16,393
REO ⁽¹⁾	6,245		6,342		4,896		5,282
Margin receivable⁽¹⁾	96,650		96,650		83,191		83,191
FHLBC stock ⁽¹⁾	43,393		43,393		34,437		34,437
Guarantee asset⁽¹⁾	3,627		3,627		5,697		5,697
Pledged collateral⁽¹⁾	43,802		43,802		53,600		53,600
Liabilities
Short-term debt	$	1,117,405	$	1,117,405	$	1,855,003	$	1,855,003
Accrued interest payable	15,518		15,518		8,936		8,936
Margin payable	13,313		13,313		6,415		6,415
Guarantee obligation	23,011		21,968		22,704		22,702
Derivative liabilities	100,117		100,117		62,794		62,794
ABS issued, net ⁽²⁾
Fair value	819,868		819,868		996,820		996,820
Amortized cost	—		—		52,595		53,137
FHLBC long-term borrowings	1,999,999		1,999,999		1,343,023		1,343,023
Commercial secured borrowings	—		—		63,152		63,152
Convertible notes, net ⁽²⁾	481,396		496,719		483,119		461,053
Trust preferred securities and subordinated notes, net ⁽²⁾	138,478		83,700		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 trust preferred securities and subordinated notes, each 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 September 30, 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



September 30, 2016	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	4,309,890	$	—	$	—	$	4,309,890
Trading securities	341,269		—		—		341,269
Available-for-sale securities	595,641		—		—		595,641
Derivative assets	36,880		1,771		29,073		6,036
MSRs	106,009		—		—		106,009
Pledged collateral	43,802		43,802		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	3,627		—		—		3,627

Liabilities
Derivative liabilities	$	100,117	$	4,389	$	95,171	$	557
ABS issued	819,868		—		—		819,868



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

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 nine months ended September 30, 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	3,615,003			37,625			187,149			28,888			22,941			—			—			—			—
Sales	(2,544,595		)	(81,523		)	(241,208		)	(241,232		)	(38,419		)	—			—			—			—
Principal paydowns	(569,591		)	(476		)	(13,591		)	(47,387		)	—			—			—			(306		)	(155,662		)
Gains (losses) in net income, net	13,126			2,791			4,908			41,537			(70,489		)	(2,070		)	41,110			2,369			(14,419		)
Unrealized losses in OCI, net	—			—			—			(15,410		)	—			—			—			—			—
Other settlements, net ⁽²⁾	(1,604		)	(65,215		)	—			—			—			—			(38,839		)	(65,215		)	(6,871		)
Ending Balance - September 30, 2016	$	4,309,890		$	—		$	341,269		$	595,641		$	106,009		$	3,627		$	5,479		$	—		$	819,868


(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. For commercial secured borrowings, the reduction represents the derecognition of our commercial secured borrowings and related commercial A-note investments upon sale of the associated B-notes.

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 September 30, 2016 and 2015. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 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 September 30, 2016 and 2015 Included in Net Income



	Included in Net Income
	Three Months Ended September 30,					Nine Months Ended September 30,
(In Thousands)	2016		2015			2016			2015
Assets
Residential loans at Redwood	$	3,818	$	16,451		$	32,202		$	12,115
Residential loans at consolidated Sequoia entities	9,200		(419		)	(18,864		)	4,912
Commercial loans	—		3,175			—			1,971
Trading securities	8,646		(8,298		)	978			(13,274		)
Available-for-sale securities	—		(226		)	(305		)	(226		)
MSRs	6,549		(25,523		)	(36,738		)	(15,989		)
Loan purchase commitments	5,381		—			5,896			—
Other assets - Guarantee asset	307		(1,098		)	(2,070		)	(1,799		)

Liabilities
Loan purchase commitments	$	—	$	9,736		$	—		$	9,806
Commercial secured borrowing	—		(454		)	—			750
ABS issued	10,522		300			(14,419		)	(6,198		)

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 September 30, 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 September 30, 2016.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 2016



									Gain (Loss) for
September 30, 2016	Carrying Value		Fair Value Measurements Using						Three Months Ended			Nine Months Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		September 30, 2016			September 30, 2016
Assets
Residential loans, at lower of cost or fair value	$	954	$	—	$	—	$	954	$	3		$	36
Commercial loans, at lower of cost or fair value	2,700		—		—		2,700		(300		)	(300		)
REO	1,989		—		—		1,989		(139		)	(351		)

Market Valuation Gains and Losses, Net

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and nine months ended September 30, 2016 and 2015.

Table 5.6 – Market Valuation Gains and Losses, Net



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2016			2015			2016			2015
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	650		$	11,010		$	11,948		$	9,892
Residential loan purchase and forward sale commitments	12,021			25,173			35,508			44,482
Commercial loans, at fair value ⁽¹⁾	—			3,974			433			10,819
Sequoia securities	—			—			1,455			(14,359		)
Risk management derivatives, net	(3,287		)	(40,110		)	(25,281		)	(43,674		)
Total mortgage banking activities, net ⁽²⁾	$	9,384		$	47		$	24,063		$	7,160
Investment Fair Value Changes, Net
Residential loans held-for-investment at Redwood	$	(655	)	$	9,077		$	22,161		$	5,170
Trading securities	8,898			(8,784		)	3,728			(1,587		)
Valuation adjustments on commercial loans held-for-sale	(307		)	—			(307		)	—
Net investments in consolidated Sequoia entities	(255		)	(500		)	(2,086		)	(2,277		)
Risk sharing investments	15			(1,098		)	(689		)	(1,799		)
Risk management derivatives, net	4,222			(12,638		)	(41,188		)	(16,386		)
Impairments on AFS securities	—			(226		)	(305		)	(226		)
Total investment fair value changes, net	$	11,918		$	(14,169	)	$	(18,686	)	$	(17,105	)
MSR Income (Loss), Net
MSRs	$	1,380		$	(28,496	)	$	(70,489	)	$	(32,337	)
Risk management derivatives, net	(6,336		)	23,551			55,874			1,736
Total MSR loss, net ⁽³⁾	$	(4,956	)	$	(4,945	)	$	(14,615	)	$	(30,601	)
Total Market Valuation Gains (Losses), Net	$	16,346		$	(19,067	)	$	(9,238	)	$	(40,546	)


(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



September 30, 2016	Fair Value			Input Values
(Dollars in Thousands, except Input Values)	Fair Value		Unobservable Input	Range						Weighted Average
Assets
Residential loans, at fair value:
Jumbo fixed rate loans	$	2,404,070	Whole loan spread to TBA price	$	3.04	-	$	4.35		$	4.31
			Whole loan spread to swap rate	275		-	325		bps	324		bps

Jumbo hybrid loans	160,047		Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate	130		-	275		bps	150		bps

Jumbo loans committed to sell	905,797		Whole loan committed sales price	$	101.42	-	$	103.08		$	102.22
			IO multiple	2.8		-	2.8		x	2.8		x
			Prepayment rate (annual CPR)	15		-	15		%	15		%
			Senior spread to TBA price	$	2.13	-	$	2.13		$	2.13
			Subordinate spread to swap rate	200		-	857		bps	313		bps
			Credit support	5		-	5		%	5		%

Loans held by consolidated Sequoia entities⁽¹⁾	839,976		Liability price				N/A			N/A

Residential loans, at lower of cost or fair value	954		Loss severity	15		-	30		%	17		%

Trading and AFS securities	936,910		Discount rate	5		-	12		%	7		%
			Prepayment rate (annual CPR)	1		-	41		%	18		%
			Default rate	0		-	35		%	2		%
			Loss severity	20		-	65		%	21		%
			Credit support	0		-	48		%	3		%

MSRs	106,009		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	9		-	25		%	18		%
			Per loan annual cost to service	$	72	-	$	82		$	78

Guarantee asset	3,627		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	18		-	18		%	18		%

REO	5,396		Loss severity	2		-	100		%	21		%

Loan purchase commitments, net ⁽²⁾	5,479		MSR multiple	0.9		-	4.7		x	2.7		x
			Fallout rate	2		-	85		%	28		%
			Whole loan spread to TBA price	$	3.04	-	$	4.20		$	4.16
			Whole loan spread to swap rate - fixed rate	275		-	325		bps	324		bps
			Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate - hybrid	130		-	275		bps	156		bps

Liabilities
ABS issued	819,868		Discount rate	5		-	9		%	5		%
			Prepayment rate (annual CPR)	2		-	20		%	15		%
			Default rate	1		-	12		%	7		%
			Loss severity	20		-	32		%	27		%
			Credit support	0		-	22		%	13		%

Footnotes to Table 5.7


(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.