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Fair Value of Financial Instruments (Tables)
 9 Months Ended
Sep. 30, 2017
Fair Value Disclosures [Abstract]  
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, 2017 and December 31, 2016.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
 
 
September 30, 2017
 
December 31, 2016
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
(In Thousands)
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Residential loans, held-for-sale
 
 
 
 
 
 
 
 
At fair value
 
$
924,594

 
$
924,594

 
$
834,193

 
$
834,193

At lower of cost or fair value
 
1,087

 
1,227

 
1,206

 
1,365

Residential loans, held-for-investment
 
 
 
 
 
 
 
 
At fair value
 
3,259,239

 
3,259,239

 
3,052,652

 
3,052,652

Trading securities
 
820,134

 
820,134

 
445,687

 
445,687

Available-for-sale securities
 
536,138

 
536,138

 
572,752

 
572,752

MSRs
 
62,928

 
62,928

 
118,526

 
118,526

Cash and cash equivalents
 
257,611

 
257,611

 
212,844

 
212,844

Restricted cash
 
26,258

 
26,258

 
8,623

 
8,623

Accrued interest receivable
 
21,256

 
21,256

 
18,454

 
18,454

Derivative assets
 
11,948

 
11,948

 
36,595

 
36,595

REO (1)
 
3,020

 
3,441

 
5,533

 
5,560

Margin receivable (1)
 
93,679

 
93,679

 
68,038

 
68,038

FHLBC stock (1)
 
43,393

 
43,393

 
43,393

 
43,393

Guarantee asset (1)
 
3,049

 
3,049

 
4,092

 
4,092

Commercial loans (1)
 
—

 
—

 
2,700

 
2,700

Pledged collateral (1)
 
42,933

 
42,933

 
42,875

 
42,875

Liabilities
 
 
 
 
 
 
 
 
Short-term debt facilities
 
$
988,054

 
$
988,054

 
$
791,539

 
$
791,539

Accrued interest payable
 
18,836

 
18,836

 
9,608

 
9,608

Margin payable
 
841

 
841

 
12,783

 
12,783

Guarantee obligation
 
20,101

 
19,682

 
21,668

 
22,181

Derivative liabilities
 
65,238

 
65,238

 
66,329

 
66,329

ABS issued at fair value, net
 
944,288

 
944,288

 
773,462

 
773,462

FHLBC long-term borrowings
 
1,999,999

 
1,999,999

 
1,999,999

 
1,999,999

Convertible notes, net
 
686,058

 
705,703

 
482,195

 
493,365

Trust preferred securities and subordinated notes, net
 
138,524

 
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 September 30, 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
September 30, 2017
 
Carrying
Value
 
Fair Value Measurements Using
(In Thousands)
 
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
Residential loans
 
$
4,183,833

 
$
—

 
$
—

 
$
4,183,833

Trading securities
 
820,134

 
—

 
—

 
820,134

Available-for-sale securities
 
536,138

 
—

 
—

 
536,138

Derivative assets
 
11,948

 
3,010

 
3,942

 
4,996

MSRs
 
62,928

 
—

 
—

 
62,928

Pledged collateral
 
42,933

 
42,933

 
—

 
—

FHLBC stock
 
43,393

 
—

 
43,393

 
—

Guarantee asset
 
3,049

 
—

 
—

 
3,049

 
 
 
 
 
 
 
 
 
Liabilities
 


 
 
 
 
 
 
Derivative liabilities
 
$
65,238

 
$
4,369

 
$
57,994

 
$
2,875

ABS issued
 
944,288

 
—

 
—

 
944,288



December 31, 2016
 
Carrying
Value
 
Fair Value Measurements Using
(In Thousands)
 
 
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 nine months ended September 30, 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)
 
 
 
 
 
 
 
Beginning balance -
   December 31, 2016
 
$
3,886,845

 
$
445,687

 
$
572,752

 
$
118,526

 
$
4,092

 
$
(486
)
 
$
773,462

Acquisitions
 
3,791,471

 
444,073

 
31,654

 
7,957

 
—

 
—

 
286,898

Sales
 
(3,147,707
)
 
(87,092
)
 
(60,801
)
 
(52,966
)
 
—

 
—

 
—

Principal paydowns
 
(405,888
)
 
(13,219
)
 
(42,325
)
 
—

 
—

 
—

 
(146,358
)
Gains (losses) in net income, net
 
62,290

 
30,685

 
24,011

 
(10,589
)
 
(1,043
)
 
33,686

 
30,286

Unrealized losses in OCI, net
 
—

 
—

 
10,847

 
—

 
—

 
—

 
—

Other settlements, net (2)
 
(3,178
)
 
—

 
—

 
—

 
—

 
(31,079
)
 
—

Ending Balance -
  September 30, 2017
 
$
4,183,833

 
$
820,134

 
$
536,138

 
$
62,928

 
$
3,049

 
$
2,121

 
$
944,288

(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 September 30, 2017 and 2016. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 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 September 30, 2017 and 2016 Included in Net Income
 
 
Included in Net Income
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2017
 
2016
 
2017
 
2016
Assets
 
 
 
 
 
 
 
 
Residential loans at Redwood
 
$
14,359

 
$
3,818

 
$
24,227

 
$
32,202

Residential loans at consolidated Sequoia entities
 
3,497

 
9,200

 
22,949

 
(18,864
)
Trading securities
 
(36
)
 
8,646

 
24,452

 
978

Available-for-sale securities
 
(3
)
 
—

 
(248
)
 
(305
)
MSRs
 
317

 
6,549

 
(1,005
)
 
(36,738
)
Loan purchase commitments
 
2,117

 
5,381

 
2,121

 
5,896

Other assets - Guarantee asset
 
(239
)
 
307

 
(1,043
)
 
(2,070
)
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
ABS issued
 
$
(7,771
)
 
$
10,522

 
$
(30,286
)
 
$
(14,419
)
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, 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 September 30, 2017.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 2017
 
 
 
 
 
 
 
 
 
 
Gain (Loss) for
September 30, 2017
 
Carrying
Value
 
Fair Value Measurements Using
 
Three Months Ended
 
Nine Months Ended
(In Thousands)
 
 
Level 1
 
Level 2
 
Level 3
 
September 30, 2017
 
September 30, 2017
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Residential loans, at lower of cost or fair value
 
$
866

 
$
—

 
$
—

 
$
866

 
$
18

 
$
21

REO
 
1,725

 
—

 
—

 
1,725

 
—

 
(81
)
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, 2017 and 2016.
Table 5.6 – Market Valuation Gains and Losses, Net
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2017
 
2016
 
2017
 
2016
Mortgage Banking Activities, Net
 
 
 
 
 
 
 
 
Residential loans held-for-sale, at fair value
 
$
14,859

 
$
650

 
$
29,175

 
$
11,948

Residential loan purchase commitments
 
13,276

 
12,021

 
33,947

 
35,508

Commercial loans, at fair value
 
—

 
—

 
—

 
433

Sequoia securities
 
—

 
—

 
—

 
1,455

Risk management derivatives, net
 
(7,077
)
 
(3,287
)
 
(13,787
)
 
(25,281
)
Total mortgage banking activities, net (1)
 
$
21,058

 
$
9,384

 
$
49,335

 
$
24,063

Investment Fair Value Changes, Net
 
 
 
 
 
 
 
 
Residential loans held-for-investment, at Redwood
 
$
2,881

 
$
(655
)
 
$
8,902

 
$
22,161

Trading securities
 
607

 
8,898

 
30,676

 
3,728

Valuation adjustments on commercial loans
held-for-sale
 
—

 
(307
)
 
300

 
(307
)
Net investments in Legacy Sequoia entities (2)
 
(1,045
)
 
(255
)
 
(3,842
)
 
(2,086
)
Net investment in Sequoia Choice entity (2)
 
(256
)
 
—

 
(256
)
 
—

Risk sharing investments
 
(267
)
 
15

 
(985
)
 
(689
)
Risk management derivatives, net
 
(1,592
)
 
4,222

 
(24,557
)
 
(41,188
)
Impairments on AFS securities
 
(4
)
 
—

 
(248
)
 
(305
)
Total investment fair value changes, net
 
$
324

 
$
11,918

 
$
9,990

 
$
(18,686
)
MSR Income (Loss), Net
 
 
 
 
 
 
 
 
MSRs
 
$
(1,351
)
 
$
1,380

 
$
(10,842
)
 
$
(70,489
)
Risk management derivatives, net
 
(422
)
 
(6,336
)
 
1,869

 
55,874

Total MSR loss, net (3)
 
$
(1,773
)
 
$
(4,956
)
 
$
(8,973
)
 
$
(14,615
)
Total Market Valuation Gains (Losses), Net
 
$
19,609

 
$
16,346

 
$
50,352

 
$
(9,238
)
(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)
Includes changes in fair value of the residential loans held-for-sale, REO and the ABS issued at the entities, which netted together represent the change in value of our retained investments at the consolidated VIEs.
(3)
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
September 30, 2017
 
Fair
Value
 
 
 
Input Values
(Dollars in Thousands, except Input Values)
 
 
Unobservable Input
 
Range
 
 
Weighted
Average
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Residential loans, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
Jumbo fixed-rate loans
 
$
2,450,845

 
Whole loan spread to TBA price
 
$
2.13

-
$
3.15

 
 
$
3.13

 
 
 
 
 
Whole loan spread to swap rate
 
180

-
270

bps
 
265

bps
 
 
 
 
 
 
 
 
 
 
 
 
 
Jumbo hybrid loans
 
168,138

 
Prepayment rate (annual CPR)
 
15

-
15

%
 
15

%
 
 
 
 
Whole loan spread to swap rate
 
100

-
190

bps
 
163

bps
 
 
 
 
 
 
 
 
 
 
 
 
 
Jumbo loans committed to sell
 
574,413

 
Whole loan committed sales price
 
$
102.42

-
$
103.08

 
 
$
102.89

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held by Legacy
Sequoia (1)
 
673,134

 
Liability price
 
 
 
N/A

 
 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held by Sequoia
Choice (1)
 
317,303

 
Liability price
 
 
 
N/A

 
 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential loans, at lower of cost or fair value
 
866

 
Loss severity
 
13

-
30

%
 
18

%
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading and AFS securities
 
1,356,272

 
Discount rate
 
2

-
25

%
 
5

 %
 
 
 
 
Prepayment rate (annual CPR)
 
—

-
50

%
 
10

 %
 
 
 
 
Default rate
 
—

-
32

%
 
3

 %
 
 
 
 
Loss severity
 
—

-
40

%
 
22

 %
 
 
 
 
 
 
 
 
 
 
 
 
 
MSRs
 
62,928

 
Discount rate
 
10

-
35

%
 
11

 %
 
 
 
 
Prepayment rate (annual CPR)
 
5

-
31

%
 
9

 %
 
 
 
 
Per loan annual cost to service
 
$
82

-
$
84

 
 
$
82

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
 
3,049

 
Discount rate
 
11

-
11

%
 
11

%
 
 
 
 
Prepayment rate (annual CPR)
 
14

-
14

%
 
14

%
 
 
 
 
 
 
 
 
 
 
 
 
 
REO
 
1,725

 
Loss severity
 
4

-
39

%
 
18

%
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan purchase commitments, net (2)
 
2,121

 
MSR multiple
 
1.9

-
5.1

x
 
3.8

x
 
 
 
 
Pull-through rate
 
13

-
100

%
 
72

%
 
 
 
 
Whole loan spread to TBA price
 
$
2.13

-
$
3.10

 
 
$
3.07

 
 
 
 
 
Whole loan spread to swap rate - fixed rate
 
180

-
270

bps
 
268

bps
 
 
 
 
Prepayment rate (annual CPR)
 
15

-
15

%
 
15

%
 
 
 
 
Whole loan spread to swap rate - hybrid
 
100

-
190

bps
 
133

bps
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
ABS issued: (1)
 
944,288

 
Discount rate
 
3

-
15

%
 
4

 %
 
 
 
 
Prepayment rate (annual CPR)
 
11

-
20

%
 
18

 %
 
 
 
 
Default rate
 
—

-
12

%
 
5

 %
 
 
 
 
Loss severity
 
20

-
32

%
 
26

 %
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.