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Other Assets and Liabilities | 9 Months Ended
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Sep. 30, 2018
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract] |
Other Assets and Liabilities | Other Assets and Liabilities Other assets at September 30, 2018 and December 31, 2017, are summarized in the following table. Table 11.1 – Components of Other Assets
(In Thousands) |  | September 30, 2018 |  | December 31, 2017
Mortgage servicing rights |  | $ | 63,785 |  |  | $ | 63,598 |
Security purchase deposit |  | 57,982 |  |  | — |
Margin receivable |  | 48,655 |  |  | 85,044 |
FHLBC stock |  | 43,393 |  |  | 43,393 |
Pledged collateral |  | 42,127 |  |  | 42,615 |
Participation in loan warehouse facility |  | 39,219 |  |  | — |
Investment receivable |  | 36,463 |  |  | 1,147 |
Investment in 5 Arches |  | 10,772 |  |  | — |
Fixed assets and leasehold improvements (1) |  | 5,409 |  |  | 2,645 |
REO |  | 2,915 |  |  | 3,354 |
Guarantee asset |  | 2,885 |  |  | 2,869 |
Other |  | 12,270 |  |  | 13,899 |
Total Other Assets |  | $ | 365,875 |  |  | $ | 258,564 |
(1) | Fixed assets and leasehold improvements had a basis of $10 million and accumulated depreciation of $5 million at September 30, 2018.
Accrued expenses and other liabilities at September 30, 2018 and December 31, 2017 are summarized in the following table. Table 11.2 – Components of Accrued Expenses and Other Liabilities
(In Thousands) |  | September 30, 2018 |  | December 31, 2017
Margin payable |  | $ | 33,950 |  |  | $ | 390 |
Accrued compensation |  | 18,485 |  |  | 24,025 |
Guarantee obligations |  | 17,423 |  |  | 19,487 |
Deferred tax liabilities |  | 11,764 |  |  | 11,764 |
Residential loan and MSR repurchase reserve |  | 4,709 |  |  | 4,916 |
Unsettled trades |  | 4,071 |  |  | 13 |
Accrued income taxes payable |  | 3,313 |  |  | — |
Legal reserve |  | 2,000 |  |  | 2,000 |
Other |  | 6,563 |  |  | 5,134 |
Total Accrued Expenses and Other Liabilities |  | $ | 102,278 |  |  | $ | 67,729 |
Mortgage Servicing Rights We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The majority of our investments in MSRs were made through the retention of servicing rights associated with the residential jumbo mortgage loans that we acquired and subsequently transferred to third parties. We hold our MSR investments at our taxable REIT subsidiary. At September 30, 2018 and December 31, 2017, our MSRs had a fair value of $64 million for both periods, and were associated with loans with an aggregate principal balance of $5.02 billion and $5.56 billion, respectively. The following table presents activity for MSRs for the three and nine months ended September 30, 2018 and 2017. Table 11.3 – Activity for MSRs
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Balance at beginning of period |  | $ | 64,674 |  |  | $ | 63,770 |  |  | $ | 63,598 |  |  | $ | 118,526 |
Additions |  | — |  |  | 256 |  |  | — |  |  | 7,957 |
Sales |  | — |  |  | — |  |  | (1,077 | ) |  | (52,966 | )
Changes in fair value due to: |  |  |  |  |  |  |  |
Changes in assumptions (1) |  | 1,099 |  |  | 563 |  |  | 6,388 |  |  | (3,450 | )
Other changes (2) |  | (1,988 | ) |  | (1,661 | ) |  | (5,124 | ) |  | (7,139 | )
Balance at End of Period |  | $ | 63,785 |  |  | $ | 62,928 |  |  | $ | 63,785 |  |  | $ | 62,928 |
(1) | Primarily reflects changes in prepayment assumptions due to changes in market interest rates.
(2) | Represents changes due to the realization of expected cash flows.
The following table presents the components of our MSR income for the three and nine months ended September 30, 2018 and 2017. Table 11.4 – Components of MSR Income, net
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Servicing income |  | $ | 4,004 |  |  | $ | 3,872 |  |  | $ | 11,601 |  |  | $ | 17,290 |
Cost of sub-servicer |  | (324 | ) |  | (476 | ) |  | (1,254 | ) |  | (2,515 | )
Net servicing fee income |  | 3,680 |  |  | 3,396 |  |  | 10,347 |  |  | 14,775 |
Market valuation changes of MSRs |  | (823 | ) |  | (1,351 | ) |  | 1,324 |  |  | (10,842 | )
Market valuation changes of associated derivatives |  | (890 | ) |  | (422 | ) |  | (7,151 | ) |  | 1,869 |
MSR reversal of provision for repurchases |  | — |  |  | (8 | ) |  | 277 |  |  | 304 |
MSR Income, Net (1) |  | $ | 1,967 |  |  | $ | 1,615 |  |  | $ | 4,797 |  |  | $ | 6,106 |
(1) | MSR income, net is included in Other income, net on our consolidated statements of income.
Security Purchase Deposit In the third quarter of 2018, we entered into an agreement with Freddie Mac to purchase mortgage-backed securities to be issued in a securitization transaction sponsored by Freddie Mac that is expected to close in the fourth quarter of 2018. Pursuant to the terms of this agreement, we plan to acquire subordinate securities backed by a pool of seasoned re-performing residential first lien mortgage loans. We deposited $58 million with Freddie Mac towards the purchase price of these securities at the time we entered into this agreement. See Note 15 for further discussion of this agreement with Freddie Mac. Margin Receivable and Payable Margin receivable and payable resulted from margin calls between us and our counterparties under derivatives, master repurchase agreements, and warehouse facilities, whereby we or the counterparty posted collateral. FHLBC Stock In accordance with our FHLB-member subsidiary's borrowing agreement with the FHLBC, our subsidiary is required to purchase and hold stock in the FHLBC. See Note 3 and Note 14 for additional information on this borrowing agreement. Participation in Loan Warehouse Facility In the second quarter of 2018, we invested in a subordinated participation in a revolving mortgage loan warehouse credit facility of one of our loan sellers. While our interest is subordinated, it is secured by the loans collateralizing the facility and we have recourse to the loan seller. We account for this subordinated participation interest as a loan receivable at amortized cost, and all associated interest income is recorded as a component of Other interest income in our consolidated statements of income. We monitor the credit quality of the warehouse line of credit and utilize such information in our evaluation of the appropriateness of the allowance for credit losses. As of September 30, 2018, we determined no allowance for credit losses was required for this receivable. Investment in 5 Arches On May 1, 2018, we acquired a 20% minority interest in 5 Arches for $10 million, which included a one-year option to purchase all remaining equity in the company for a combination of cash and stock totaling $40 million. 5 Arches is an originator and asset manager of business-purpose residential mortgage loans, including loans to investors in single-family rental properties, bridge loans for investors in multifamily properties, and fix-and-flip loans. In connection with this investment, we also entered into a loan flow purchase agreement, which gives us exclusive access to 5 Arches' single-family rental loan production for a one-year period. See Note 7 for discussion on our business purpose loan portfolio and the loans we have acquired from 5 Arches. We account for our ownership interest in 5 Arches using the equity method of accounting as we are able to exert significant influence over but do not control the activities of the investee. At September 30, 2018, the carrying amount of our investment in 5 Arches was $7 million. We account for our purchase option as a cost method investment, which had a carrying value of $4 million at September 30, 2018. We have elected to record our share of earnings or losses from 5 Arches on a one-quarter lag. During the three months ended September 30, 2018, we recorded $0.2 million of gross income associated with this investment and, including amortization of certain intangible assets, recorded $0.1 million of net earnings in Other income, net on our consolidated statements of income. Guarantee Asset, Pledged Collateral, and Guarantee Obligations The pledged collateral, guarantee asset, and guarantee obligations presented in the tables above are related to our risk-sharing arrangements with Fannie Mae and Freddie Mac. In accordance with these arrangements, we are required to pledge collateral to secure our guarantee obligations. See Note 15 for additional information on our risk-sharing arrangements. Investment Receivable At September 30, 2018, investment receivable primarily consisted of $35 million of trade receivables related to real estate securities sales. In accordance with our policy to record purchases and sales of securities on the trade date, if the trade and settlement of a purchase or sale crosses over a quarterly reporting period, we will record an investment receivable for sales and an unsettled trades liability for purchases. REO The carrying value of REO at September 30, 2018 was $3 million, which includes the net effect of $2 million related to transfers into REO during the nine months ended September 30, 2018, offset by $3 million of REO liquidations, and $0.3 million of unrealized gains resulting from market valuation adjustments. At September 30, 2018 and December 31, 2017, there were 10 and 14 REO properties, respectively, recorded on our consolidated balance sheets, all of which were owned at consolidated Legacy Sequoia entities. Legal and Repurchase Reserves See Note 15 for additional information on the legal and residential repurchase reserves.

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