Principles of Consolidation (Tables)

6 Months Ended

Jun. 30, 2017

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



(Dollars in Thousands)	June 30, 2017		December 31, 2016
Residential loans, held-for-investment	$	707,686	$	791,636
Restricted cash	148		148
Accrued interest receivable	925		1,000
Other assets	4,645		5,533
Total Assets	$	713,404	$	798,317
Accrued interest payable	$	531	$	518
Asset-backed securities issued	692,606		773,462
Total Liabilities	$	693,137	$	773,980

Number of VIEs	20		20

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 six months ended June 30, 2017 and 2016.

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



	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2017		2016		2017		2016
Principal balance of loans transferred	$	348,599	$	344,890	$	1,384,123	$	344,890
Trading securities retained, at fair value	10,287		—		30,990		—
AFS securities retained, at fair value	1,905		1,834		7,060		1,834
MSRs recognized	—		2,131		7,123		2,131

The following table summarizes the cash flows during the three and six months ended June 30, 2017 and 2016 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

Table 4.3 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2017			2016			2017			2016
Proceeds from new transfers	$	351,485		$	352,042		$	1,373,509		$	352,042
MSR fees received	3,698			3,401			7,173			6,924
Funding of compensating interest, net	(41		)	(77		)	(79		)	(156		)
Cash flows received on retained securities	6,588			6,739			12,961			17,930

The following table presents the key weighted-average assumptions used to measure MSRs and securities retained at the date of securitization for securitizations completed during the three and six months ended June 30, 2017 and 2016.

Table 4.4 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended June 30, 2017					Three Months Ended June 30, 2016
At Date of Securitization	MSRs	Senior Securities		Subordinate Securities		MSRs		Subordinate Securities
Prepayment rates	N/A	10	%	10	%	20	%	15	%
Discount rates	N/A	14	%	5	%	11	%	7	%
Credit loss assumptions	N/A	0.25	%	0.25	%	N/A		0.25	%



	Six Months Ended June 30, 2017						Six Months Ended June 30, 2016
At Date of Securitization	MSRs		Senior Securities		Subordinate Securities		MSRs		Subordinate Securities
Prepayment rates	9	%	10	%	10	%	20	%	15	%
Discount rates	11	%	12	%	5	%	11	%	7	%
Credit loss assumptions	N/A		0.25	%	0.25	%	N/A		0.25	%

Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents additional information at June 30, 2017 and December 31, 2016, 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, 2017		December 31, 2016
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	69,825	$	41,909
Subordinate securities, classified as AFS	216,269		234,025
Mortgage servicing rights	61,616		58,800
Maximum loss exposure ⁽¹⁾	$	347,710	$	334,734
Assets transferred:
Principal balance of loans outstanding	$	7,760,334	$	6,870,398
Principal balance of loans 30+ days delinquent	18,144		21,427

(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 June 30, 2017 and December 31, 2016.

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



June 30, 2017	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at June 30, 2017	$	61,616		$	29,040		$	257,054
Expected life (in years)⁽²⁾	7			6			13
Prepayment speed assumption (annual CPR)⁽²⁾	10		%	11		%	11		%
Decrease in fair value from:
10% adverse change	$	2,150		$	1,224		$	794
25% adverse change	5,161			2,910			1,976
Discount rate assumption⁽²⁾	11		%	9		%	6		%
Decrease in fair value from:
100 basis point increase	$	2,326		$	1,144		$	22,023
200 basis point increase	4,483			2,205			40,929
Credit loss assumption ⁽²⁾	N/A			0.25		%	0.25		%
Decrease in fair value from:
10% higher losses	N/A			$	4		$	1,348
25% higher losses	N/A			8			3,364



December 31, 2016	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at December 31, 2016	$	58,800		$	26,618		$	249,317
Expected life (in years)⁽²⁾	7			6			12
Prepayment speed assumption (annual CPR)⁽²⁾	11		%	8		%	12		%
Decrease in fair value from:
10% adverse change	$	2,226		$	1,075		$	997
25% adverse change	5,284			2,569			2,494
Discount rate assumption⁽²⁾	11		%	8		%	6		%
Decrease in fair value from:
100 basis point increase	$	2,088		$	1,105		$	19,574
200 basis point increase	4,032			2,128			36,574
Credit loss assumption ⁽²⁾	N/A			0.25		%	0.25		%
Decrease in fair value from:
10% higher losses	N/A			$	19		$	1,174
25% higher losses	N/A			49			2,933


(1)	Senior securities included $29 million and $27 million of interest only securities at June 30, 2017 and December 31, 2016, 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 June 30, 2017, grouped by security type.

Table 4.7 – Third-Party Sponsored VIE Summary



(Dollars in Thousands)	June 30, 2017
Mortgage-Backed Securities
Senior	$	147,923
Re-REMIC	73,337
Subordinate	711,149
Total Investments in Third-Party Sponsored VIEs	$	932,409

- 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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