Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2017

Carrying Values and Estimated 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 December 31, 2017 and December 31, 2016.

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



	December 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	$	1,427,052	$	1,427,052	$	834,193	$	834,193
At lower of cost or fair value	893		993		1,206		1,365
Residential loans, held-for-investment
At fair value	3,687,265		3,687,265		3,052,652		3,052,652
Trading securities	968,844		968,844		445,687		445,687
Available-for-sale securities	507,666		507,666		572,752		572,752
MSRs	63,598		63,598		118,526		118,526
Cash and cash equivalents	144,663		144,663		212,844		212,844
Restricted cash	2,144		2,144		8,623		8,623
Accrued interest receivable	27,013		27,013		18,454		18,454
Derivative assets	15,718		15,718		36,595		36,595
REO ⁽¹⁾	3,354		3,806		5,533		5,560
Margin receivable⁽¹⁾	85,044		85,044		68,038		68,038
FHLBC stock ⁽¹⁾	43,393		43,393		43,393		43,393
Guarantee asset⁽¹⁾	2,869		2,869		4,092		4,092
Commercial loans⁽¹⁾	—		—		2,700		2,700
Pledged collateral⁽¹⁾	42,615		42,615		42,875		42,875
Liabilities
Short-term debt facilities	$	1,688,412	$	1,688,412	$	791,539	$	791,539
Accrued interest payable	18,435		18,435		9,608		9,608
Margin payable ⁽²⁾	390		390		12,783		12,783
Guarantee obligation ⁽²⁾	19,487		18,878		21,668		22,181
Derivative liabilities	63,081		63,081		66,329		66,329
ABS issued at fair value, net	1,164,585		1,164,585		773,462		773,462
FHLBC long-term borrowings	1,999,999		1,999,999		1,999,999		1,999,999
Convertible notes, net	686,759		692,369		482,195		493,365
Trust preferred securities and subordinated notes, net	138,535		103,230		138,489		96,255


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


(2)	These liabilities are included in Accrued expenses and other liabilities 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 December 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



December 31, 2017	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	5,114,317	$	—	$	—	$	5,114,317
Trading securities	968,844		—		—		968,844
Available-for-sale securities	507,666		—		—		507,666
Derivative assets	15,718		134		10,164		5,420
MSRs	63,598		—		—		63,598
Pledged collateral	42,615		42,615		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	2,869		—		—		2,869

Liabilities
Derivative liabilities	$	63,081	$	3,808	$	55,567	$	3,706
ABS issued	1,164,585		—		—		1,164,585



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 years ended December 31, 2017 and 2016.

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	5,741,427			640,760			39,700			8,026			—			—			567,099
Sales	(3,982,683		)	(137,886		)	(90,440		)	(52,788		)	—			—			—
Principal paydowns	(573,168		)	(19,224		)	(58,554		)	—			—			—			(205,163		)
Gains (losses) in net income, net	46,119			39,507			31,892			(10,166		)	(1,223		)	37,220			29,187
Unrealized losses in OCI, net	—			—			12,316			—			—			—			—
Other settlements, net⁽²⁾	(4,223		)	—			—			—			—			(35,020		)	—
Ending balance - December 31, 2017	$	5,114,317		$	968,844		$	507,666		$	63,598		$	2,869		$	1,714		$	1,164,585



	Assets																					Liabilities
(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	4,747,564			37,625			292,875			34,520			25,362			—			—			—			—
Sales	(3,813,538		)	(81,523		)	(244,219		)	(252,696		)	(62,440		)	—			—			—			—
Principal paydowns	(806,081		)	(476		)	(17,827		)	(62,229		)	—			—			—			(306		)	(208,215		)
Gains (losses) in net income, net	(33,893		)	2,791			10,847			48,399			(36,372		)	(1,605		)	30,193			2,369			(8,275		)
Unrealized gains in OCI, net	—			—			—			(24,487		)	—			—			—			—			—
Other settlements, net ⁽²⁾	(4,758		)	(65,215		)	—			—			—			—			(33,887		)	(65,215		)	(6,868		)
Ending balance - December 31, 2016	$	3,886,845		$	—		$	445,687		$	572,752		$	118,526		$	4,092		$	(486	)	$	—		$	773,462


(1)	For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase and forward sale commitments, are presented on a net basis.

(2)

Other settlements, net for residential loans represents the transfer of loans to REO, and for derivatives, 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 and commercial loans, the reduction in 2016 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 December 31, 2017, 2016, and 2015. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the years ended December 31, 2017, 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 December 31, 2017, 2016, and 2015 Included in Net Income



	Included in Net Income
	Years Ended December 31,
(In Thousands)	2017			2016			2015
Assets
Residential loans at Redwood	$	523		$	(17,370	)	$	(5,541	)
Residential loans at consolidated Sequoia entities	17,727			(14,391		)	7,422
Commercial loans	—			—			(2,620		)
Trading securities	28,612			7,184			(13,391		)
Available-for-sale securities	(1,011		)	(368		)	(246		)
MSRs	1,277			42,964			(3,471		)
Loan purchase commitments	3,243			—			4,252
Loan forward sale commitments	2,177			—			—
Other assets - Guarantee asset	(1,223		)	(1,605		)	(1,504		)

Liabilities
Loan purchase commitments	$	(3,706	)	$	(486	)	$	—
Commercial secured borrowing	—			—			3,011
ABS issued	(29,187		)	8,275			(8,366		)

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 December 31, 2017 and December 31, 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 sheets at December 31, 2017 and December 31, 2016.

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



									Gain (Loss) for Year Ended
December 31, 2017	Carrying Value		Fair Value Measurements Using						Gain (Loss) for Year Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		December 31, 2017
Assets
Residential loans, at lower of cost or fair value	$	854	$	—	$	—	$	854	$	22
REO	2,034		—		—		2,034		(393		)

									Gain (Loss) for Year Ended
December 31, 2016	Carrying Value		Fair Value Measurements Using						Gain (Loss) for Year Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		December 31, 2016
Assets
Residential loans, at lower of cost or fair value	$	867	$	—	$	—	$	867	$	(17	)
Commercial loans, at lower of cost or fair value	2,700		—		—		2,700		(300		)
REO	5,207		—		—		5,207		(1,831		)

Market Valuation Adjustments

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the years ended December 31, 2017, 2016, and 2015.

Table 5.6 – Market Valuation Gains and Losses, Net



	Years Ended December 31,
(In Thousands)	2017			2016			2015
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	31,493		$	5,786		$	3,712
Residential loan purchase and forward sale commitments	37,880			25,613			50,234
Commercial loans, at fair value	—			433			10,265
Sequoia securities	—			1,455			(15,261		)
Risk management derivatives, net	(17,529		)	3,158			(42,468		)
Total mortgage banking activities, net ⁽¹⁾	$	51,844		$	36,445		$	6,482
Investment Fair Value Changes, Net
Residential loans held-for-investment at Redwood	$	(5,765	)	$	(23,102	)	$	(6,337	)
Trading securities	39,526			9,666			(2,019		)
Valuation adjustments on commercial loans held-for-sale	300			(307		)	—
Net investments in Legacy Sequoia entities ⁽²⁾	(8,027		)	(4,200		)	(1,192		)
Net investments in Sequoia Choice entities ⁽²⁾	(323		)	—			—
Risk-sharing investments	(1,484		)	(1,151		)	(1,886		)
Risk management derivatives, net	(12,842		)	(9,112		)	(9,677		)
Impairments on AFS securities	(1,011		)	(368		)	(246		)
Total investment fair value changes, net	$	10,374		$	(28,574	)	$	(21,357	)
MSR Income (Loss), Net
MSRs	$	(10,166	)	$	(36,372	)	$	(24,392	)
Risk management derivatives, net	(568		)	15,584			(12,708		)
Total MSR loss, net ⁽³⁾	$	(10,734	)	$	(20,788	)	$	(37,100	)
Total Market Valuation Gains (Losses), Net	$	51,484		$	(12,917	)	$	(51,975	)


(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-investment, 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 (loss), 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



December 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	$	3,372,329	Whole loan spread to TBA price	$	2.25	-	$	3.11		$	3.09
			Whole loan spread to swap rate	175		-	225		bps	224		bps

Jumbo hybrid loans	251,847		Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate	100		-	185		bps	159		bps

Jumbo loans committed to sell	237,262		Whole loan committed sales price	$	100.78	-	$	103.01		$	101.42

Loans held by Legacy Sequoia ⁽¹⁾	632,817		Liability price				N/A			N/A

Loans held by Sequoia Choice ⁽¹⁾	620,062		Liability price				N/A			N/A

Residential loans, at lower of cost or fair value	854		Loss severity	12		-	30		%	18		%

Trading and AFS securities	1,476,510		Discount rate	3		-	15		%	5		%
			Prepayment rate (annual CPR)	—		-	50		%	10		%
			Default rate	—		-	27		%	3		%
			Loss severity	—		-	40		%	22		%

MSRs	63,598		Discount rate	10		-	130		%	11		%
			Prepayment rate (annual CPR)	5		-	26		%	9		%
			Per loan annual cost to service	$	79	-	$	82		$	82

Guarantee asset	2,869		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	13		-	13		%	13		%

REO	2,034		Loss severity	6		-	42		%	21		%

Liabilities

Loan purchase commitments, net ⁽²⁾	462		MSR multiple	1.7		-	5.1		x	3.6		x
			Pull-through rate	9		-	100		%	75		%
			Whole loan spread to TBA price	$	2.25	-	$	3.10		$	3.06
			Whole loan spread to swap rate - fixed rate	175		-	225		bps	225		bps
			Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate - hybrid	100		-	185		bps	151		bps

ABS issued ⁽¹⁾	1,164,585		Discount rate	3		-	15		%	4		%
			Prepayment rate (annual CPR)	8		-	25		%	17		%
			Default rate	—		-	16		%	3		%
			Loss severity	20		-	54		%	23		%


(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.