Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2017

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 March 31, 2017 and December 31, 2016.

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



	March 31, 2017				December 31, 2016
	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	$	375,407	$	375,407	$	834,193	$	834,193
At lower of cost or fair value	1,200		1,354		1,206		1,365
Residential loans, held-for-investment
At fair value	3,095,634		3,095,634		3,052,652		3,052,652
Trading securities	591,152		591,152		445,687		445,687
Available-for-sale securities	574,788		574,788		572,752		572,752
MSRs	111,013		111,013		118,526		118,526
Cash and cash equivalents	221,781		221,781		212,844		212,844
Restricted cash	1,929		1,929		8,623		8,623
Accrued interest receivable	17,645		17,645		18,454		18,454
Derivative assets	26,660		26,660		36,595		36,595
REO ⁽¹⁾	3,953		4,183		5,533		5,560
Margin receivable⁽¹⁾	83,229		83,229		68,038		68,038
FHLBC stock ⁽¹⁾	43,393		43,393		43,393		43,393
Guarantee asset⁽¹⁾	3,846		3,846		4,092		4,092
Commercial loans ⁽¹⁾	2,700		2,700		2,700		2,700
Pledged collateral⁽¹⁾	42,916		42,916		42,875		42,875
Liabilities
Short-term debt	$	563,773	$	563,773	$	791,539	$	791,539
Accrued interest payable	16,035		16,035		9,608		9,608
Margin payable	3,394		3,394		12,783		12,783
Guarantee obligation	21,082		21,764		21,668		22,181
Derivative liabilities	66,867		66,867		66,329		66,329
ABS issued at fair value, net	728,391		728,391		773,462		773,462
FHLBC long-term borrowings	1,999,999		1,999,999		1,999,999		1,999,999
Convertible notes, net	482,994		496,820		482,195		493,365
Trust preferred securities and subordinated notes, net	138,501		101,138		138,489		96,255


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

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, 2017 and December 31, 2016, 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, 2017	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	3,471,041	$	—	$	—	$	3,471,041
Trading securities	591,152		—		—		591,152
Available-for-sale securities	574,788		—		—		574,788
Derivative assets	26,660		9,548		11,552		5,560
MSRs	111,013		—		—		111,013
Pledged collateral	42,916		42,916		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	3,846		—		—		3,846

Liabilities
Derivative liabilities	$	66,867	$	9,798	$	56,296	$	773
ABS issued	728,391		—		—		728,391



December 31, 2016	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	3,886,845	$	—	$	—	$	3,886,845
Trading securities	445,687		—		—		445,687
Available-for-sale securities	572,752		—		—		572,752
Derivative assets	36,595		8,300		24,980		3,315
MSRs	118,526		—		—		118,526
Pledged collateral	42,875		42,875		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	4,092		—		—		4,092

Liabilities
Derivative liabilities	$	66,329	$	5,609	$	56,919	$	3,801
ABS issued	773,462		—		—		773,462

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, 2017.

Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis



	Assets																		Liabilities
	Residential Loans			Trading Securities			AFS Securities			MSRs			Guarantee Asset			Derivatives⁽¹⁾			ABS Issued
(In Thousands)	Residential Loans			Trading Securities			AFS Securities			MSRs			Guarantee Asset			Derivatives⁽¹⁾			ABS Issued
Beginning balance - December 31, 2016	$	3,886,845		$	445,687		$	572,752		$	118,526		$	4,092		$	(486	)	$	773,462
Acquisitions	1,108,332			145,396			25,333			7,485			—			—			—
Sales	(1,377,574		)	(8,279		)	(18,456		)	(11,928		)	—			—			—
Principal paydowns	(160,102		)	(2,836		)	(14,693		)	—			—			—			(55,609		)
Gains (losses) in net income, net	14,504			11,184			10,848			(3,070		)	(246		)	10,265			10,538
Unrealized losses in OCI, net	—			—			(996		)	—			—			—			—
Other settlements, net⁽²⁾	(964		)	—			—			—			—			(4,992		)	—
Ending Balance - March 31, 2017	$	3,471,041		$	591,152		$	574,788		$	111,013		$	3,846		$	4,787		$	728,391


(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, 2017 and 2016. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2017 and 2016 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, 2017 and 2016 Included in Net Income



	Included in Net Income
	Three Months Ended March 31,
(In Thousands)	2017			2016
Assets
Residential loans at Redwood	$	3,723		$	27,285
Residential loans at consolidated Sequoia entities	8,414			(35,656		)
Commercial loans	—			2,171
Trading securities	10,051			(6,135		)
Available-for-sale securities	(117		)	—
MSRs	(916		)	(30,834		)
Loan purchase commitments	4,823			4,644
Other assets - Guarantee asset	(246		)	(1,425		)

Liabilities
Commercial secured borrowing	—			2,171
ABS issued	(10,538		)	33,515

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, 2017. 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, 2017.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2017



									Gain (Loss) for
March 31, 2017	Carrying Value		Fair Value Measurements Using						Three Months Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		March 31, 2017
Assets
Residential loans, at lower of cost or fair value	$	862	$	—	$	—	$	862	$	2
Commercial loans, at lower of cost or fair value	2,700		—		—		2,700		—
REO	3,255		—		—		3,255		(674		)

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 months ended March 31, 2017 and 2016.

Table 5.6 – Market Valuation Gains and Losses, Net



	Three Months Ended March 31,
(In Thousands)	2017			2016
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	8,532		$	5,439
Residential loan purchase commitments	10,265			12,635
Commercial loans, at fair value	—			433
Sequoia securities	—			1,484
Risk management derivatives, net	(1,400		)	(12,754		)
Total mortgage banking activities, net ⁽¹⁾	$	17,397		$	7,237
Investment Fair Value Changes, Net
Residential loans held-for-investment at Redwood	$	(2,333	)	$	23,463
Trading securities	11,143			(5,601		)
Net investments in consolidated Sequoia entities	(1,810		)	(1,580		)
Risk sharing investments	(205		)	(10		)
Risk management derivatives, net	(5,127		)	(35,810		)
Impairments on AFS securities	(117		)	—
Total investment fair value changes, net	$	1,551		$	(19,538	)
MSR Income (Loss), Net
MSRs	$	(3,070	)	$	(44,604	)
Risk management derivatives, net	(749		)	41,057
Total MSR loss, net ⁽²⁾	$	(3,819	)	$	(3,547	)
Total Market Valuation Gains (Losses), Net	$	15,129		$	(15,848	)


(1)	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.


(2)	MSR income (loss), net presented above does not include net fee income or provisions for repurchases that are components of MSR income, net on our consolidated statements of income, as these amounts do not represent market valuation adjustments.

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, 2017	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	$	2,438,357	Whole loan spread to TBA price	$	3.00	-	$	4.13		$	3.76
			Whole loan spread to swap rate	190		-	285		bps	271		bps

Jumbo hybrid loans	66,842		Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate	115		-	230		bps	171		bps

Jumbo loans committed to sell	220,221		Whole loan committed sales price	$	100.27	-	$	102.23		$	102.07

Loans held by consolidated Sequoia entities⁽¹⁾	745,621		Liability price				N/A			N/A

Residential loans, at lower of cost or fair value	862		Loss severity	15		-	30		%	20		%

Trading and AFS securities	1,165,940		Discount rate	4		-	12		%	8		%
			Prepayment rate (annual CPR)	1		-	56		%	17		%
			Default rate	—		-	19		%	2		%
			Loss severity	20		-	64		%	22		%
			Credit support	—		-	48		%	3		%

MSRs	111,013		Discount rate	10		-	16		%	11		%
			Prepayment rate (annual CPR)	4		-	34		%	9		%
			Per loan annual cost to service	$	82	-	$	82		$	82

Guarantee asset	3,846		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	10		-	10		%	10		%

REO	3,255		Loss severity	6		-	100		%	34		%

Loan purchase commitments, net ⁽²⁾	4,787		MSR multiple	0.7		-	5.5		x	3.5		x
			Pull-through rate	12		-	100		%	69		%
			Whole loan spread to TBA price	$	2.84	-	$	4.13		$	4.09
			Whole loan spread to swap rate - fixed rate	190		-	285		bps	280		bps
			Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate - hybrid	115		-	230		bps	141		bps

Liabilities
ABS issued ⁽¹⁾	728,391		Discount rate	4		-	8		%	5		%
			Prepayment rate (annual CPR)	2		-	20		%	16		%
			Default rate	1		-	12		%	7		%
			Loss severity	20		-	32		%	27		%
			Credit support	—		-	80		%	9		%


(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.