Principles of Consolidation (Tables)

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Assets and Liabilities of Consolidated VIEs

The following table presents a summary of the assets and liabilities of these VIEs.

Table 4.1 – Assets and Liabilities of Consolidated VIEs



September 30, 2018	Legacy Sequoia		Sequoia Choice		Freddie Mac K-Series		Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia		Sequoia Choice		Freddie Mac K-Series		Total Consolidated VIEs
Residential loans, held-for-investment	$	553,958	$	2,181,195	$	—	$	2,735,153
Multifamily loans, held-for-investment	—		—		942,165		942,165
Restricted cash	147		11		—		158
Accrued interest receivable	860		9,046		2,843		12,749
REO	2,915		—		—		2,915
Total Assets	$	557,880	$	2,190,252	$	945,008	$	3,693,140
Accrued interest payable	$	590	$	7,643	$	2,606	$	10,839
Accrued expenses and other liabilities	—		11		—		11
Asset-backed securities issued	544,923		1,986,456		875,606		3,406,985
Total Liabilities	$	545,513	$	1,994,110	$	878,212	$	3,417,835

Number of VIEs	20		6		2		28



December 31, 2017	Legacy Sequoia		Sequoia Choice		Freddie Mac K-Series		Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia		Sequoia Choice		Freddie Mac K-Series		Total Consolidated VIEs
Residential loans, held-for-investment	$	632,817	$	620,062	$	—	$	1,252,879
Restricted cash	147		4		—		151
Accrued interest receivable	867		2,524		—		3,391
REO	3,353		—		—		3,353
Total Assets	$	637,184	$	622,590	$	—	$	1,259,774
Accrued interest payable	$	537	$	2,031	$	—	$	2,568
Accrued expenses and other liabilities	—		4		—		4
Asset-backed securities issued	622,445		542,140		—		1,164,585
Total Liabilities	$	622,982	$	544,175	$	—	$	1,167,157

Number of VIEs	20		2		—		22

Securitization Activity Related to Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents information related to securitization transactions that occurred during the three and nine months ended September 30, 2018 and 2017.

Table 4.2 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2018		2017		2018		2017
Principal balance of loans transferred	$	327,511	$	839,264	$	2,735,644	$	2,223,387
Trading securities retained, at fair value	2,583		24,617		48,831		55,607
AFS securities retained, at fair value	776		4,416		6,728		11,476
MSRs recognized	—		—		—		7,123

The following table summarizes the cash flows during the three and nine months ended September 30, 2018 and 2017 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

Table 4.3 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2018			2017			2018			2017
Proceeds from new transfers	$	329,231		$	839,642		$	2,723,012		$	2,213,151
MSR fees received	3,405			3,631			10,216			10,804
Funding of compensating interest, net	(46		)	(35		)	(102		)	(114		)
Cash flows received on retained securities	7,267			6,882			21,720			19,843

The following table presents the key weighted-average assumptions used to measure MSRs and securities retained at the date of securitization for securitizations completed during the three and nine months ended September 30, 2018 and 2017.

Table 4.4 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended September 30, 2018					Three Months Ended September 30, 2017
At Date of Securitization	MSRs	Senior IO Securities		Subordinate Securities		MSRs	Senior IO Securities		Subordinate Securities
Prepayment rates	N/A	9	%	9	%	N/A	11	%	10	%
Discount rates	N/A	14	%	7	%	N/A	14	%	5	%
Credit loss assumptions	N/A	0.20	%	0.20	%	N/A	0.25	%	0.25	%



	Nine Months Ended September 30, 2018					Nine Months Ended September 30, 2017
At Date of Securitization	MSRs	Senior IO Securities		Subordinate Securities		MSRs		Senior IO Securities		Subordinate Securities
Prepayment rates	N/A	9	%	10	%	9	%	10	%	10	%
Discount rates	N/A	14	%	5	%	11	%	13	%	5	%
Credit loss assumptions	N/A	0.20	%	0.20	%	N/A		0.25	%	0.25	%

Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents additional information at September 30, 2018 and December 31, 2017, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.5 – Unconsolidated VIEs Sponsored by Redwood



(In Thousands)	September 30, 2018		December 31, 2017
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	130,598	$	101,426
Subordinate securities, classified as AFS	163,870		219,255
Mortgage servicing rights	62,325		60,980
Maximum loss exposure ⁽¹⁾	$	356,793	$	381,661
Assets transferred:
Principal balance of loans outstanding	$	10,349,405	$	8,364,148
Principal balance of loans 30+ days delinquent	19,625		27,926

(1)

Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities and MSRs retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization.

Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at September 30, 2018 and December 31, 2017.

Table 4.6 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood



September 30, 2018	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at September 30, 2018	$	62,325		$	62,996		$	231,472
Expected life (in years)⁽²⁾	9			8			15
Prepayment speed assumption (annual CPR)⁽²⁾	7		%	9		%	9		%
Decrease in fair value from:
10% adverse change	$	1,631		$	2,156		$	547
25% adverse change	3,974			5,145			1,361
Discount rate assumption⁽²⁾	11		%	11		%	6		%
Decrease in fair value from:
100 basis point increase	$	2,469		$	2,383		$	22,243
200 basis point increase	4,812			4,592			41,116
Credit loss assumption ⁽²⁾	N/A			0.20		%	0.20		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	559
25% higher losses	N/A			—			4,220



December 31, 2017	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at December 31, 2017	$	60,980		$	33,773		$	286,908
Expected life (in years)⁽²⁾	8			6			13
Prepayment speed assumption (annual CPR)⁽²⁾	9		%	10		%	11		%
Decrease in fair value from:
10% adverse change	$	2,022		$	1,371		$	611
25% adverse change	4,839			3,289			1,506
Discount rate assumption⁽²⁾	11		%	11		%	5		%
Decrease in fair value from:
100 basis point increase	$	2,386		$	1,158		$	25,827
200 basis point increase	4,597			2,265			47,885
Credit loss assumption ⁽²⁾	N/A			0.25		%	0.25		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	1,551
25% higher losses	N/A			—			3,873


(1)	Senior securities included $63 million and $34 million of interest-only securities at September 30, 2018 and December 31, 2017, respectively.


(2)	Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.

Schedule of Third-Party Sponsored VIE Summary

The following table presents a summary of our interests in third-party VIEs at September 30, 2018, grouped by security type.

Table 4.7 – Third-Party Sponsored VIE Summary



(Dollars in Thousands)	September 30, 2018		December 31, 2017
Mortgage-Backed Securities
Senior	$	214,655	$	216,066
Mezzanine	538,847		508,010
Subordinate	422,114		431,753
Total Investments in Third-Party Sponsored VIEs	$	1,175,616	$	1,155,829

- Definition

Tabular disclosure of the significant judgments and assumptions made in determining whether a variable interest (as defined) held by the entity requires the variable interest entity (VIE) (as defined) to be consolidated and (or) disclose information about its involvement with the VIE, individually or in aggregate (as applicable); the nature of restrictions, if any, on the consolidated VIE's assets and on the settlement of its liabilities reported by an entity in its statement of financial position, including the carrying amounts of such assets and liabilities; the nature of, and changes in, the risks associated with involvement in the VIE; how involvement with the VIE affects the entity's financial position, financial performance, and cash flows; the lack of recourse if creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the primary beneficiary (if applicable); the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, if any, that could require the entity to provide financial support to the VIE, including events or circumstances that could expose the entity to a loss; the methodology used by the entity for determining whether or not it is the primary beneficiary of the variable interest entity; the significant factors considered and judgments made in determining that the power to direct the activities of a VIE that most significantly impact the VIE's economic performance are shared (as defined); the carrying amounts and classification of assets and liabilities of the VIE included in the statement of financial position; the entity's maximum exposure to loss, if any, as a result of its involvement with the VIE, including how the maximum exposure is determined and significant sources of the entity's exposure to the VIE; a comparison of the carrying amounts of the assets and liabilities and the entity's maximum exposure to loss; information about any liquidity arrangements, guarantees, and (or) other commitments by third parties that may affect the fair value or risk of the entity's variable interest in the VIE; whether or not the entity has provided financial support or other support (explicitly or implicitly) to the VIE that it was not previously contractually required to provide or whether the entity intends to provide that support, including the type and amount of the support and the primary reasons for providing the support; and supplemental information the entity determines necessary to provide.

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