Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2018

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, 2018 and December 31, 2017.

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



	March 31, 2018				December 31, 2017
	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	$	1,129,890	$	1,129,890	$	1,427,052	$	1,427,052
At lower of cost or fair value	295		388		893		993
Residential loans, held-for-investment
At fair value	4,015,555		4,015,555		3,687,265		3,687,265
Trading securities	907,432		907,432		968,844		968,844
Available-for-sale securities	450,288		450,288		507,666		507,666
MSRs	66,496		66,496		63,598		63,598
Cash and cash equivalents	178,562		178,562		144,663		144,663
Restricted cash	2,406		2,406		2,144		2,144
Accrued interest receivable	27,257		27,257		27,013		27,013
Derivative assets	63,544		63,544		15,718		15,718
REO ⁽¹⁾	3,115		4,651		3,354		3,806
Margin receivable⁽¹⁾	50,200		50,200		85,044		85,044
FHLBC stock ⁽¹⁾	43,393		43,393		43,393		43,393
Guarantee asset⁽¹⁾	3,055		3,055		2,869		2,869
Pledged collateral⁽¹⁾	42,290		42,290		42,615		42,615
Liabilities
Short-term debt facilities	$	1,254,076	$	1,254,076	$	1,688,412	$	1,688,412
Accrued interest payable	23,492		23,492		18,435		18,435
Margin payable ⁽²⁾	16,878		16,878		390		390
Guarantee obligation ⁽²⁾	18,931		18,551		19,487		18,878
Derivative liabilities	56,201		56,201		63,081		63,081
ABS issued at fair value, net	1,542,087		1,542,087		1,164,585		1,164,585
FHLBC long-term borrowings	1,999,999		1,999,999		1,999,999		1,999,999
Convertible notes, net	687,426		691,535		686,759		692,369
Trust preferred securities and subordinated notes, net	138,547		106,020		138,535		103,230


(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 March 31, 2018 and December 31, 2017, 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, 2018	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	5,145,445	$	—	$	—	$	5,145,445
Trading securities	907,432		—		—		907,432
Available-for-sale securities	450,288		—		—		450,288
Derivative assets	63,544		8,625		50,919		4,000
MSRs	66,496		—		—		66,496
Pledged collateral	42,290		42,290		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	3,055		—		—		3,055

Liabilities
Derivative liabilities	$	56,201	$	5,814	$	46,513	$	3,874
ABS issued	1,542,087		—		—		1,542,087



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

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, 2018.

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, 2017	$	5,114,317		$	968,844		$	507,666		$	63,598	$	2,869	$	1,714		$	1,164,585
Acquisitions	1,814,944			140,560			3,905			—		—		—			441,741
Sales	(1,594,521		)	(193,130		)	(50,742		)	—		—		—			—
Principal paydowns	(175,525		)	(5,834		)	(10,412		)	—		—		—			(84,974		)
Gains (losses) in net income, net	(12,502		)	(3,008		)	13,423			2,898		186		(6,923		)	20,735
Unrealized losses in OCI, net	—			—			(13,552		)	—		—		—			—
Other settlements, net ⁽²⁾	(1,268		)	—			—			—		—		5,335			—
Ending Balance - March 31, 2018	$	5,145,445		$	907,432		$	450,288		$	66,496	$	3,055	$	126		$	1,542,087


(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 settlement of forward sale commitments and 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, 2018 and 2017. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2018 and 2017 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, 2018 and 2017 Included in Net Income



	Included in Net Income
	Three Months Ended March 31,
(In Thousands)	2018			2017
Assets
Residential loans at Redwood	$	(42,195	)	$	3,723
Residential loans at consolidated Sequoia entities	20,548			8,414
Trading securities	(3,951		)	10,051
Available-for-sale securities	—			(117		)
MSRs	3,933			(916		)
Loan purchase commitments	3,919			4,823
Other assets - Guarantee asset	186			(246		)

Liabilities
Loan purchase commitments	$	(2,554	)	$	—
Loan forward sale commitments	(1,269		)	—
ABS issued	(20,735		)	(10,538		)

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, 2018. 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 March 31, 2018.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2018



									Gain (Loss) for
March 31, 2018	Carrying Value		Fair Value Measurements Using						Three Months Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		March 31, 2018
Assets
Residential loans, at lower of cost or fair value	$	251	$	—	$	—	$	251	$	1
REO	2,034		—		—		2,034		(146		)

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, 2018 and 2017.

Table 5.6 – Market Valuation Gains and Losses, Net



	Three Months Ended March 31,
(In Thousands)	2018			2017
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	4,774		$	8,532
Residential loan purchase and forward sale commitments	(6,968		)	10,265
Risk management derivatives, net	28,432			(1,400		)
Total mortgage banking activities, net ⁽¹⁾	$	26,238		$	17,397
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood	$	(38,985	)	$	(2,333	)
Trading securities	(2,955		)	11,143
Net investments in Legacy Sequoia entities ⁽²⁾	(8		)	(1,810		)
Net investments in Sequoia Choice entities ⁽²⁾	(86		)	—
Risk-sharing investments	(139		)	(205		)
Risk management derivatives, net	43,782			(5,127		)
Impairments on AFS securities	—			(117		)
Total investment fair value changes, net	$	1,609		$	1,551
MSR Income (Loss), Net
MSRs	$	2,892		$	(3,070	)
Risk management derivatives, net	(5,139		)	(749		)
Total MSR loss, net ⁽³⁾	$	(2,247	)	$	(3,819	)
Total Market Valuation Gains, Net	$	25,600		$	15,129


(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, 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, 2018	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	$	3,162,491	Whole loan spread to TBA price	$	1.78	-	$	2.97		$	2.90
			Whole loan spread to swap rate	160		-	210		bps	200		bps

Jumbo hybrid loans	258,789		Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate	90		-	165		bps	148		bps

Jumbo loans committed to sell	84,395		Whole loan committed sales price	$	100.56	-	$	101.32		$	101.12

Loans held by Legacy Sequoia ⁽¹⁾	626,151		Liability price				N/A			N/A

Loans held by Sequoia Choice ⁽¹⁾	1,013,619		Liability price				N/A			N/A

Residential loans, at lower of cost or fair value	251		Loss severity	30		-	30		%	30		%

Trading and AFS securities	1,357,720		Discount rate	3		-	14		%	6		%
			Prepayment rate (annual CPR)	—		-	50		%	9		%
			Default rate	—		-	27		%	3		%
			Loss severity	—		-	40		%	22		%

MSRs	66,496		Discount rate	11		-	29		%	11		%
			Prepayment rate (annual CPR)	6		-	27		%	7		%
			Per loan annual cost to service	$	79	-	$	82		$	82

Guarantee asset	3,055		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	9		-	9		%	9		%

REO	2,260		Loss severity	12		-	43		%	26		%

Loan purchase commitments, net ⁽²⁾	1,395		MSR multiple	1.0		-	5.2		x	3.4		x
			Pull-through rate	9		-	100		%	68		%
			Whole loan spread to TBA price	$	1.78	-	$	2.78		$	2.77
			Whole loan spread to swap rate - fixed rate	201		-	201		bps	201		bps
			Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate - hybrid	90		-	165		bps	119		bps

Liabilities
ABS issued⁽¹⁾	1,542,087		Discount rate	3		-	15		%	4		%
			Prepayment rate (annual CPR)	8		-	25		%	18		%
			Default rate	—		-	16		%	3		%
			Loss severity	20		-	54		%	22		%

Loan forward sale commitments	1,269		Whole loan spread to TBA price	$	2.80		$	2.80		$	2.80


(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.