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Fair Value of Financial Instruments (Tables)
 6 Months Ended
Jun. 30, 2018
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 June 30, 2018 and December 31, 2017.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
 
 
June 30, 2018
 
December 31, 2017
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
(In Thousands)
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Residential loans, held-for-sale
 
 
 
 
 
 
 
 
At fair value
 
$
1,104,545

 
$
1,104,545

 
$
1,427,052

 
$
1,427,052

At lower of cost or fair value
 
115

 
135

 
893

 
993

Residential loans, held-for-investment
 
 
 
 
 
 
 
 
At fair value
 
4,386,510

 
4,386,510

 
3,687,265

 
3,687,265

Trading securities
 
1,054,295

 
1,054,295

 
968,844

 
968,844

Available-for-sale securities
 
399,641

 
399,641

 
507,666

 
507,666

Cash and cash equivalents
 
184,779

 
184,779

 
144,663

 
144,663

Restricted cash
 
15,285

 
15,285

 
2,144

 
2,144

Accrued interest receivable
 
29,066

 
29,066

 
27,013

 
27,013

Derivative assets
 
65,645

 
65,645

 
15,718

 
15,718

MSRs (1)
 
64,674

 
64,674

 
63,598

 
63,598

REO (1)
 
2,649

 
3,534

 
3,354

 
3,806

Margin receivable (1)
 
49,538

 
49,538

 
85,044

 
85,044

FHLBC stock (1)
 
43,393

 
43,393

 
43,393

 
43,393

Guarantee asset (1)
 
2,936

 
2,936

 
2,869

 
2,869

Pledged collateral (1)
 
42,201

 
42,201

 
42,615

 
42,615

Participation in loan warehouse facility (1)
 
41,658

 
41,658

 
—

 
—

Liabilities
 
 
 
 
 
 
 
 
Short-term debt facilities
 
$
1,426,288

 
$
1,426,288

 
$
1,688,412

 
$
1,688,412

Accrued interest payable
 
21,925

 
21,925

 
18,435

 
18,435

Margin payable (2)
 
7,282

 
7,282

 
390

 
390

Guarantee obligation (2)
 
18,124

 
17,903

 
19,487

 
18,878

Derivative liabilities
 
55,929

 
55,929

 
63,081

 
63,081

ABS issued at fair value, net
 
1,929,662

 
1,929,662

 
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
 
631,663

 
639,204

 
686,759

 
692,369

Trust preferred securities and subordinated notes, net
 
138,559

 
107,415

 
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 June 30, 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
June 30, 2018
 
Carrying
Value
 
Fair Value Measurements Using
(In Thousands)
 
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
Residential loans
 
$
5,491,055

 
$
—

 
$
—

 
$
5,491,055

Trading securities
 
1,054,295

 
—

 
—

 
1,054,295

Available-for-sale securities
 
399,641

 
—

 
—

 
399,641

Derivative assets
 
65,645

 
3,186

 
59,468

 
2,991

MSRs
 
64,674

 
—

 
—

 
64,674

Pledged collateral
 
42,201

 
42,201

 
—

 
—

FHLBC stock
 
43,393

 
—

 
43,393

 
—

Guarantee asset
 
2,936

 
—

 
—

 
2,936

 
 
 
 
 
 
 
 
 
Liabilities
 


 
 
 
 
 
 
Derivative liabilities
 
$
55,929

 
$
6,498

 
$
44,730

 
$
4,701

ABS issued
 
1,929,662

 
—

 
—

 
1,929,662



December 31, 2017
 
Carrying
Value
 
Fair Value Measurements Using
(In Thousands)
 
 
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 six months ended June 30, 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)
 
 
 
 
 
 
 
Beginning balance -
   December 31, 2017
 
$
5,114,317

 
$
968,844

 
$
507,666

 
$
63,598

 
$
2,869

 
$
1,714

 
$
1,164,585

Acquisitions
 
3,766,510

 
361,535

 
5,952

 
—

 
—

 
—

 
925,845

Sales
 
(3,002,879
)
 
(260,119
)
 
(92,110
)
 
(1,077
)
 
—

 
—

 
—

Principal paydowns
 
(365,392
)
 
(11,748
)
 
(22,226
)
 
—

 
—

 
—

 
(181,782
)
Gains (losses) in net income, net
 
(19,665
)
 
(4,217
)
 
21,930

 
2,153

 
67

 
(9,681
)
 
21,014

Unrealized losses in OCI, net
 
—

 
—

 
(21,571
)
 
—

 
—

 
—

 
—

Other settlements, net (2)
 
(1,836
)
 
—

 
—

 
—

 
—

 
6,257

 
—

Ending Balance -
   June 30, 2018
 
$
5,491,055

 
$
1,054,295

 
$
399,641

 
$
64,674

 
$
2,936

 
$
(1,710
)
 
$
1,929,662

(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 June 30, 2018 and 2017. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and six months ended June 30, 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 June 30, 2018 and 2017 Included in Net Income
 
 
Included in Net Income
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands)
 
2018
 
2017
 
2018
 
2017
Assets
 
 
 
 
 
 
 
 
Residential loans at Redwood
 
$
(12,981
)
 
$
16,506

 
$
(51,029
)
 
$
19,738

Residential loans at consolidated Sequoia entities
 
367

 
11,038

 
20,914

 
19,452

Trading securities
 
(1,989
)
 
15,880

 
(6,011
)
 
24,529

Available-for-sale securities
 
(56
)
 
(128
)
 
(56
)
 
(245
)
MSRs
 
689

 
(2,038
)
 
4,610

 
(1,354
)
Loan purchase commitments
 
2,835

 
994

 
2,901

 
1,111

Other assets - Guarantee asset
 
(120
)
 
(558
)
 
66

 
(804
)
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Loan purchase commitments
 
$
(4,646
)
 
$
—

 
$
(4,687
)
 
$
—

ABS issued
 
(279
)
 
(11,977
)
 
(21,014
)
 
(22,516
)
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 June 30, 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 June 30, 2018.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at June 30, 2018
 
 
 
 
 
 
 
 
 
 
Gain (Loss) for
June 30, 2018
 
Carrying
Value
 
Fair Value Measurements Using
 
Three Months Ended
 
Six Months Ended
(In Thousands)
 
 
Level 1
 
Level 2
 
Level 3
 
June 30, 2018
 
June 30, 2018
Assets
 
 
 
 
 
 
 
 
 
 
 
 
REO
 
$
1,841

 
$
—

 
$
—

 
$
1,841

 
$
(4
)
 
$
(127
)
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 six months ended June 30, 2018 and 2017.
Table 5.6 – Market Valuation Gains and Losses, Net
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In Thousands)
 
2018
 
2017
 
2018
 
2017
Mortgage Banking Activities, Net
 
 
 
 
 
 
 
 
Residential loans held-for-sale, at fair value
 
$
6,122

 
$
5,784

 
$
10,896

 
$
14,316

Residential loan purchase and forward sale commitments
 
(2,758
)
 
10,406

 
(9,726
)
 
20,671

Risk management derivatives, net
 
6,150

 
(5,310
)
 
34,582

 
(6,710
)
Total mortgage banking activities, net (1)
 
$
9,514

 
$
10,880

 
$
35,752

 
$
28,277

Investment Fair Value Changes, Net
 
 
 
 
 
 
 
 
Residential loans held-for-investment, at Redwood
 
$
(15,010
)
 
$
8,354

 
$
(53,995
)
 
$
6,021

Trading securities
 
(930
)
 
18,926

 
(3,885
)
 
30,069

Valuation adjustments on commercial loans
held-for-sale
 
—

 
300

 
—

 
300

Net investments in Legacy Sequoia entities (2)
 
(720
)
 
(987
)
 
(728
)
 
(2,797
)
Net investments in Sequoia Choice entities (2)
 
1,072

 
—

 
986

 
—

Risk-sharing investments
 
(209
)
 
(513
)
 
(348
)
 
(718
)
Risk management derivatives, net
 
16,742

 
(17,838
)
 
60,524

 
(22,965
)
Impairments on AFS securities
 
(56
)
 
(127
)
 
(56
)
 
(244
)
Total investment fair value changes, net
 
$
889

 
$
8,115

 
$
2,498

 
$
9,666

Other Income, Net
 
 
 
 
 
 
 
 
MSRs
 
$
(745
)
 
$
(6,421
)
 
$
2,147

 
$
(9,491
)
MSR risk management derivatives, net
 
(1,122
)
 
3,040

 
(6,261
)
 
2,291

Total other income, net (3)
 
$
(1,867
)
 
$
(3,381
)
 
$
(4,114
)
 
$
(7,200
)
Total Market Valuation Gains, Net
 
$
8,536

 
$
15,614

 
$
34,136

 
$
30,743

(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)
Other income, net presented above does not include net MSR fee income or provisions for repurchases for MSRs, 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
June 30, 2018
 
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
 
$
2,676,132

 
Whole loan spread to TBA price
 
$
2.00

-
$
3.28

 
 
$
2.97

 
 
 
 
 
Whole loan spread to swap rate
 
90

-
206

bps
 
202

bps
 
 
 
 
 
 
 
 
 
 
 
 
 
Jumbo hybrid loans
 
276,844

 
Prepayment rate (annual CPR)
 
15

-
15

%
 
15

%
 
 
 
 
Whole loan spread to swap rate
 
75

-
160

bps
 
133

bps
 
 
 
 
 
 
 
 
 
 
 
 
 
Jumbo loans committed to sell
 
464,905

 
Whole loan committed sales price
 
$
100.58

-
$
101.94

 
 
$
101.45

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held by Legacy
Sequoia (1)
 
592,029

 
Liability price
 
 
 
N/A

 
 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held by Sequoia
Choice (1)
 
1,481,145

 
Liability price
 
 
 
N/A

 
 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading and AFS securities
 
1,453,936

 
Discount rate
 
3

-
14

%
 
6

 %
 
 
 
 
Prepayment rate (annual CPR)
 
—

-
50

%
 
9

 %
 
 
 
 
Default rate
 
—

-
27

%
 
2

 %
 
 
 
 
Loss severity
 
—

-
40

%
 
22

 %
 
 
 
 
 
 
 
 
 
 
 
 
 
MSRs
 
64,674

 
Discount rate
 
11

-
43

%
 
11

 %
 
 
 
 
Prepayment rate (annual CPR)
 
6

-
26

%
 
7

 %
 
 
 
 
Per loan annual cost to service
 
$
82

-
$
82

 
 
$
82

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
 
2,936

 
Discount rate
 
11

-
11

%
 
11

%
 
 
 
 
Prepayment rate (annual CPR)
 
8

-
8

%
 
8

%
 
 
 
 
 
 
 
 
 
 
 
 
 
REO
 
1,841

 
Loss severity
 
13

-
43

%
 
29

%
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
ABS issued (1)
 
1,929,662

 
Discount rate
 
3

-
15

%
 
4

 %
 
 
 
 
Prepayment rate (annual CPR)
 
8

-
32

%
 
19

 %
 
 
 
 
Default rate
 
—

-
8

%
 
2

 %
 
 
 
 
Loss severity
 
20

-
60

%
 
21

 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan purchase commitments, net (2)
 
1,710

 
MSR multiple
 
1.0

-
5.3

x
 
3.5

x
 
 
 
 
Pull-through rate
 
13

-
100

%
 
72

%
 
 
 
 
Whole loan spread to TBA price
 
$
2.25

-
$
3.28

 
 
$
3.28

 
 
 
 
 
Whole loan spread to swap rate - fixed rate
 
90

-
206

bps
 
204

bps
 
 
 
 
Prepayment rate (annual CPR)
 
15

-
15

%
 
15

%
 
 
 
 
Whole loan spread to swap rate - hybrid
 
75

-
140

bps
 
107

bps
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.