Residential Loans

We acquire residential loans from third-party originators and may sell or securitize these loans or hold them for investment. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia entities at March 31, 2018 and December 31, 2017.

Table 6.1 – Classifications and Carrying Values of Residential Loans



March 31, 2018			Legacy		Sequoia
(In Thousands)	Redwood		Sequoia		Choice		Total
Held-for-sale
At fair value	$	1,129,890	$	—	$	—	$	1,129,890
At lower of cost or fair value	295		—		—		295
Total held-for-sale	1,130,185		—		—		1,130,185
Held-for-investment at fair value	2,375,785		626,151		1,013,619		4,015,555
Total Residential Loans	$	3,505,970	$	626,151	$	1,013,619	$	5,145,740



December 31, 2017			Legacy		Sequoia
(In Thousands)	Redwood		Sequoia		Choice		Total
Held-for-sale
At fair value	$	1,427,052	$	—	$	—	$	1,427,052
At lower of cost or fair value	893		—		—		893
Total held-for-sale	1,427,945		—		—		1,427,945
Held-for-investment at fair value	2,434,386		632,817		620,062		3,687,265
Total Residential Loans	$	3,862,331	$	632,817	$	620,062	$	5,115,210

At March 31, 2018, we owned mortgage servicing rights associated with $2.81 billion (principal balance) of consolidated residential loans purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our consolidated balance sheets. We contract with licensed sub-servicers that perform servicing functions for these loans.

Residential Loans Held-for-Sale

At Fair Value

At March 31, 2018, we owned 1,598 loans held-for-sale at fair value with an aggregate unpaid principal balance of $1.12 billion and a fair value of $1.13 billion, compared to 2,009 loans with an aggregate unpaid principal balance of $1.41 billion and a fair value of $1.43 billion at December 31, 2017. At March 31, 2018, none of these loans were greater than 90 days delinquent or in foreclosure. At December 31, 2017, one of these loans with a fair value of $0.5 million was greater than 90 days delinquent and none of these loans were in foreclosure.

During the three months ended March 31, 2018 and 2017, we purchased $1.80 billion and $1.09 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $2.01 billion and $1.36 billion (principal balance) of loans, respectively, for which we recorded a net market valuation gain of $5 million and a net market valuation loss of $9 million, respectively, through Mortgage banking activities, net on our consolidated statements of income. At March 31, 2018, loans held-for-sale with a market value of $718 million were pledged as collateral under short-term borrowing agreements.

At Lower of Cost or Fair Value

At March 31, 2018 and December 31, 2017, we held three and four residential loans, respectively, at the lower of cost or fair value with $0.4 million and $1 million in outstanding principal balance, respectively, and carrying values of $0.3 million and $1 million, respectively. At both March 31, 2018 and December 31, 2017, one of these loans with an unpaid principal balance of $0.3 million was greater than 90 days delinquent and none of these loans were in foreclosure.

Residential Loans Held-for-Investment at Fair Value

At Redwood

At March 31, 2018, we owned 3,279 held-for-investment loans at Redwood with an aggregate unpaid principal balance of $2.39 billion and a fair value of $2.38 billion, compared to 3,292 loans with an aggregate unpaid principal balance of $2.41 billion and a fair value of $2.43 billion at December 31, 2017. At March 31, 2018, three of these loans with a total unpaid principal balance of $2 million were greater than 90 days delinquent and none of these loans were in foreclosure. At December 31, 2017, none of these loans were greater than 90 days delinquent or in foreclosure.

During the three months ended March 31, 2018 and 2017, we transferred loans with a fair value of $56 million and $185 million, respectively, from held-for-sale to held-for-investment. During both the three months ended March 31, 2018 and 2017, we did not transfer loans from held-for-investment to held-for-sale. During the three months ended March 31, 2018 and 2017, we recorded net market valuation losses of $39 million and $2 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income. At March 31, 2018, loans with a fair value of $2.37 billion were pledged as collateral under a borrowing agreement with the FHLBC.

At March 31, 2018, the outstanding loans held-for-investment at Redwood were prime-quality, first lien loans, of which 96% were originated between 2013 and 2018, and 4% were originated in 2012 and prior years. The weighted average FICO score of borrowers backing these loans was 771 (at origination) and the weighted average loan-to-value ("LTV") ratio of these loans was 66% (at origination). At March 31, 2018, these loans were comprised of 90% fixed-rate loans with a weighted average coupon of 4.08%, and the remainder were hybrid or ARM loans with a weighted average coupon of 4.10%.

At Consolidated Legacy Sequoia Entities

At March 31, 2018, we owned 3,059 held-for-investment loans at consolidated Legacy Sequoia entities, with an aggregate unpaid principal balance of $662 million and a fair value of $626 million, as compared to 3,178 loans at December 31, 2017, with an aggregate unpaid principal balance of $698 million and a fair value of $633 million. At origination, the weighted average FICO score of borrowers backing these loans was 728, the weighted average LTV ratio of these loans was 66%, and the loans were nearly all first lien and prime-quality.

At March 31, 2018 and December 31, 2017, the unpaid principal balance of loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $23 million and $25 million, respectively, of which the unpaid principal balance of loans in foreclosure was $9 million and $10 million, respectively. During the three months ended March 31, 2018 and 2017, we recorded net market valuation gains of $29 million and $8 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income. Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the associated ABS issued. The net impact to our income statement associated with our retained economic investment in the Legacy Sequoia securitization entities is presented in Note 5.

At Consolidated Sequoia Choice Entities

At March 31, 2018, we owned 1,335 held-for-investment loans at the consolidated Sequoia Choice entities, with an aggregate unpaid balance of $996 million and a fair value of $1.01 billion, as compared to 806 loans at December 31, 2017 with an aggregate unpaid principal balance of $605 million and a fair value of $620 million. At origination, the weighted average FICO score of borrowers backing these loans was 742, the weighted average LTV ratio of these loans was 74%, and the loans were all first lien and prime-quality. At both March 31, 2018 and December 31, 2017, none of these loans were greater than 90 days delinquent or in foreclosure.

During the three months ended March 31, 2018, we transferred loans with a fair value of $452 million from held-for-sale to held-for-investment associated with Choice securitizations. Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans are based on the estimated fair value of the ABS issued associated with Choice securitizations. The net impact to our income statement associated with our retained economic investment in the Sequoia Choice securitization entities is presented in Note 5.