Multifamily Loans

9 Months Ended

Sep. 30, 2018

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 September 30, 2018 and December 31, 2017.

Table 6.1 – Classifications and Carrying Values of Residential Loans



September 30, 2018			Legacy		Sequoia
(In Thousands)	Redwood		Sequoia		Choice		Total
Held-for-sale
At fair value	$	866,331	$	—	$	—	$	866,331
At lower of cost or fair value	113		—		—		113
Total held-for-sale	866,444		—		—		866,444
Held-for-investment at fair value	2,320,662		553,958		2,181,195		5,055,815
Total Residential Loans	$	3,187,106	$	553,958	$	2,181,195	$	5,922,259



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 September 30, 2018, we owned mortgage servicing rights associated with $2.53 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 September 30, 2018, we owned 1,232 loans held-for-sale at fair value with an aggregate unpaid principal balance of $859 million and a fair value of $866 million, 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 September 30, 2018, one of these loans with a fair value of $0.6 million was greater than 90 days delinquent and none of these loans were 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 and nine months ended September 30, 2018, we purchased $1.79 billion and $5.52 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $1.90 billion and $5.83 billion (principal balance) of loans, respectively, for which we recorded net market valuation gains of $6 million and $16 million, respectively, through Mortgage banking activities, net on our consolidated statements of income. At September 30, 2018, loans held-for-sale with a market value of $622 million were pledged as collateral under short-term borrowing agreements.

During the three and nine months ended September 30, 2017, we purchased $1.43 billion and $3.72 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $1.05 billion and $3.08 billion (principal balance) of loans, respectively, for which we recorded net market valuation gains of $15 million and $29 million, respectively, through Mortgage banking activities, net on our consolidated statements of income.

At Lower of Cost or Fair Value

At September 30, 2018 and December 31, 2017, we held two and four residential loans, respectively, at the lower of cost or fair value with $0.2 million and $1 million in outstanding principal balance, respectively, and carrying values of $0.1 million and $1 million, respectively. At September 30, 2018, none of these loans were greater than 90 days delinquent or in foreclosure. At 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 September 30, 2018, we owned 3,259 held-for-investment loans at Redwood with an aggregate unpaid principal balance of $2.36 billion and a fair value of $2.32 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 September 30, 2018, two of these loans with a total fair value of $1 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 and nine months ended September 30, 2018, we transferred loans with a fair value of $116 million and $204 million, respectively, from held-for-sale to held-for-investment. During the three and nine months ended September 30, 2018, we transferred loans with a fair value of $16 million from held-for-investment to held-for-sale. During the three and nine months ended September 30, 2018, we recorded net market valuation losses of $17 million and $71 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income. At September 30, 2018, loans with a fair value of $2.27 billion were pledged as collateral under a borrowing agreement with the FHLBC.

During the three and nine months ended September 30, 2017, we transferred loans with a fair value of $78 million and $326 million, respectively, from held-for-sale to held-for-investment. During both the three and nine months ended September 30, 2017, we transferred loans with a fair value of $98 million from held-for-investment to held-for-sale. During the three and nine months ended September 30, 2017, we recorded net market valuation gains of $3 million and $9 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income.

At September 30, 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 Fair Isaac Corporation ("FICO") score of borrowers backing these loans was 769 (at origination) and the weighted average loan-to-value ("LTV") ratio of these loans was 66% (at origination). At September 30, 2018, these loans were comprised of 87% 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 4.20%.

At Consolidated Legacy Sequoia Entities

At September 30, 2018, we consolidated 2,777 held-for-investment loans at consolidated Legacy Sequoia entities, with an aggregate unpaid principal balance of $581 million and a fair value of $554 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 September 30, 2018 and December 31, 2017, the unpaid principal balance of loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $16 million and $25 million, respectively, of which the unpaid principal balance of loans in foreclosure was $8 million and $10 million, respectively. During the three and nine months ended September 30, 2018, we recorded net market valuation gains of $4 million and $37 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income. During the three and nine months ended September 30, 2017, we recorded net market valuation gains of $4 million and $24 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 September 30, 2018, we consolidated 2,928 held-for-investment loans at the consolidated Sequoia Choice entities, with an aggregate unpaid balance of $2.16 billion and a fair value of $2.18 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 744, the weighted average LTV ratio of these loans was 75%, and the loans were all first lien and prime-quality. At September 30, 2018, one of these loans with an unpaid principal balance of $1 million was 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 and nine months ended September 30, 2018, we transferred loans with a fair value of $796 million and $1.78 billion, respectively, from held-for-sale to held-for-investment associated with Choice securitizations. During the three and nine months ended September 30, 2018, we recorded net market valuation losses of $13 million and $25 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 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.

Business Purpose Loans

Our business purpose loans include single-family rental loans and fix-and-flip loans. At September 30, 2018, all of our outstanding business purpose loans were acquired from a related party, 5 Arches LLC ("5 Arches"). See Note 11 for information on our equity investment in 5 Arches. The following table summarizes the classifications and carrying values of the business purpose loans owned at Redwood at September 30, 2018 and December 31, 2017.

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans



(In Thousands)	September 30, 2018		December 31, 2017
Single-family rental loans, held-for-sale at fair value	$	20,105	$	—
Fix-and-flip loans, held-for-investment at fair value	95,515		—
Total Business Purpose Loans	$	115,620	$	—

Single-Family Rental Loans Held-for-Sale at Fair Value

Under an agreement with 5 Arches, we have exclusive access to their single-family rental loan production through April 2019. At September 30, 2018, we owned four single-family rental loans purchased under this agreement with an aggregate unpaid principal balance of $20 million and a fair value of $20 million. At September 30, 2018, none of these loans were greater than 90 days delinquent or in foreclosure. During both the three and nine months ended September 30, 2018, we purchased $20 million (principal balance) of loans, for which we elected the fair value option, and we did not sell any loans. During both the three and nine months ended September 30, 2018, we recorded a net market valuation loss of $0.1 million on single-family rental loans held-for-sale at fair value through Mortgage banking activities, net on our consolidated statements of income. At September 30, 2018, loans held-for-sale with a market value of $20 million were pledged as collateral under short-term borrowing agreements.

The outstanding single-family rental loans held-for-sale at September 30, 2018 were first lien, fixed-rate loans with maturities of five, seven, or ten years. At September 30, 2018, the weighted average coupon of our single-family rental loans was 5.71% and the weighted average loan term was seven years. At origination, the weighted average LTV ratio of these loans was 65% and the weighted average debt service coverage ratio ("DSCR") was 1.25.

Fix-and-Flip Loans Held-for-Investment at Fair Value

At September 30, 2018, we owned 128 fix-and-flip loans held-for-investment with an aggregate unpaid principal balance of $95 million and a fair value of $96 million. At September 30, 2018, two of these loans with an aggregate unpaid principal balance of $1 million were greater than 90 days delinquent and none of these loans were in foreclosure. During both the three and nine months ended September 30, 2018, we purchased $106 million (principal balance) of loans, and we did not sell any loans. During both the three and nine months ended September 30, 2018, we recorded a net market valuation gain of less than $0.1 million on fix-and-flip loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income. At September 30, 2018, loans with a market value of $92 million were pledged as collateral under short-term borrowing agreements.

The outstanding fix-and-flip loans held-for-investment at September 30, 2018 were first lien, fixed-rate, interest-only loans with a weighted average coupon of 9.14% and original maturities of 6 to 24 months. At origination, the weighted average FICO score of borrowers backing these loans was 718, the weighted average LTV ratio of these loans was 76%, and the estimated rehabilitated LTV ratio was 57%.

Multifamily Loans

During the third quarter of 2018, we invested in multifamily subordinate securities issued by two Freddie Mac K-Series securitization trusts and were required to consolidate the underlying multifamily loans owned at these entities for financial reporting purposes in accordance with GAAP. At September 30, 2018, we consolidated 80 held-for-investment multifamily loans, with an aggregate unpaid balance of $963 million and a fair value of $942 million. We did not own or consolidate any multifamily loans at December 31, 2017. The outstanding multifamily loans held-for-investment at the Freddie Mac K-Series entities at September 30, 2018 were first lien, fixed-rate loans that were originated in 2015 and 2016 and had original loan terms of seven to ten years and an original weighted average LTV ratio of 69%. At September 30, 2018, the weighted average coupon of these multifamily loans was 4.15% and the weighted average loan term was seven years. At September 30, 2018, none of these loans were greater than 90 days delinquent or in foreclosure.

During both the three and nine months ended September 30, 2018, we recorded a net market valuation loss of $4 million 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 ABS issued associated with the securitizations. The net impact to our income statement associated with our economic investment in the securities of the Freddie Mac K-Series securitization entities is presented in Note 5.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

+ References + Details