Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 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 September 30, 2018 and December 31, 2017.

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



	September 30, 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	$	866,331	$	866,331	$	1,427,052	$	1,427,052
At lower of cost or fair value	113		133		893		993
Residential loans, held-for-investment
At fair value	5,055,815		5,055,815		3,687,265		3,687,265
Business purpose loans	115,620		115,620		—		—
Multifamily loans	942,165		942,165		—		—
Trading securities	1,108,243		1,108,243		968,844		968,844
Available-for-sale securities	361,841		361,841		507,666		507,666
Cash and cash equivalents	173,516		173,516		144,663		144,663
Restricted cash	27,253		27,253		2,144		2,144
Accrued interest receivable	35,644		35,644		27,013		27,013
Derivative assets	87,219		87,219		15,718		15,718
MSRs ⁽¹⁾	63,785		63,785		63,598		63,598
REO ⁽¹⁾	2,915		3,490		3,354		3,806
Margin receivable⁽¹⁾	48,655		48,655		85,044		85,044
FHLBC stock ⁽¹⁾	43,393		43,393		43,393		43,393
Guarantee asset⁽¹⁾	2,885		2,885		2,869		2,869
Pledged collateral⁽¹⁾	42,127		42,127		42,615		42,615
Participation in loan warehouse facility ⁽¹⁾	39,219		39,219		—		—
Liabilities
Short-term debt	$	1,424,275	$	1,424,275	$	1,688,412	$	1,688,412
Accrued interest payable	31,076		31,076		18,435		18,435
Margin payable ⁽²⁾	33,950		33,950		390		390
Guarantee obligation ⁽²⁾	17,423		17,409		19,487		18,878
Derivative liabilities	42,724		42,724		63,081		63,081
ABS issued at fair value, net	3,406,985		3,406,985		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	632,401		639,684		686,759		692,369
Trust preferred securities and subordinated notes, net	138,570		108,113		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 September 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



September 30, 2018	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	5,922,146	$	—	$	—	$	5,922,146
Business purpose loans	115,620		—		—		115,620
Multifamily loans	942,165		—		—		942,165
Trading securities	1,108,243		—		—		1,108,243
Available-for-sale securities	361,841		—		—		361,841
Derivative assets	87,219		7,031		78,006		2,182
MSRs	63,785		—		—		63,785
Pledged collateral	42,127		42,127		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	2,885		—		—		2,885

Liabilities
Derivative liabilities	$	42,724	$	1,744	$	38,581	$	2,399
ABS issued	3,406,985		—		—		3,406,985



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 nine months ended September 30, 2018.

Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis



	Assets																							Liabilities
	Residential Loans			Business Purpose Loans			Multifamily Loans			Trading Securities			AFS Securities			MSRs			Guarantee Asset		Derivatives⁽¹⁾			ABS Issued
(In Thousands)	Residential Loans			Business Purpose Loans			Multifamily 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	5,570,683			126,214			946,650			522,293			6,728			—			—		—			2,539,451
Sales	(4,135,911		)	—			—			(348,054		)	(118,423		)	(1,077		)	—		—			—
Principal paydowns	(587,162		)	(10,912		)	(286		)	(25,847		)	(35,431		)	—			—		—			(305,529		)
Gains (losses) in net income, net	(37,641		)	318			(4,199		)	2,098			32,494			1,264			16		(8,093		)	8,478
Unrealized losses in OCI, net	—			—			—			—			(31,193		)	—			—		—			—
Other settlements, net ⁽²⁾	(2,140		)	—			—			(11,091		)	—			—			—		6,162			—
Ending Balance - September 30, 2018	$	5,922,146		$	115,620		$	942,165		$	1,108,243		$	361,841		$	63,785		$	2,885	$	(217	)	$	3,406,985


(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. Other settlements, net for our trading securities relates to the consolidation of the Freddie Mac K-Series entities during the three months ended September 30, 2018.

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 September 30, 2018 and 2017. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 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 September 30, 2018 and 2017 Included in Net Income



	Included in Net Income
	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2018			2017			2018			2017
Assets
Residential loans at Redwood	$	(18,100	)	$	14,359		$	(70,316	)	$	24,227
Residential loans at consolidated Sequoia entities	(8,978		)	3,497			11,936			22,949
Business purpose loans	(20		)	—			(20		)	—
Multifamily loans at consolidated Freddie Mac K-Series entities	(4,199		)	—			(4,199		)	—
Trading securities	3,821			(36		)	(1,956		)	24,452
Available-for-sale securities	(33		)	(3		)	(90		)	(248		)
MSRs	337			317			4,861			(1,005		)
Loan purchase commitments	2,168			2,117			2,157			2,121
Other assets - Guarantee asset	(51		)	(239		)	15			(1,043		)

Liabilities
Loan purchase commitments	$	(2,314	)	$	—		$	(2,388	)	$	—
ABS issued	12,536			(7,771		)	(8,478		)	(30,286		)

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 September 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 September 30, 2018.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 2018



									Gain (Loss) for
September 30, 2018	Carrying Value		Fair Value Measurements Using						Three Months Ended			Nine Months Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		September 30, 2018			September 30, 2018
Assets
REO	$	1,804	$	—	$	—	$	1,804	$	(37	)	$	(162	)

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 nine months ended September 30, 2018 and 2017.

Table 5.6 – Market Valuation Gains and Losses, Net



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2018			2017			2018			2017
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	5,626		$	14,859		$	16,522		$	29,175
Single-family rental loans held-for-sale, at fair value	(121		)	—			(121		)	—
Residential loan purchase and forward sale commitments	1,610			13,276			(8,116		)	33,947
Risk management derivatives, net	3,796			(7,077		)	38,378			(13,787		)
Total mortgage banking activities, net ⁽¹⁾	$	10,911		$	21,058		$	46,663		$	49,335
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood	$	(17,063	)	$	2,881		$	(71,058	)	$	8,902
Fix-and-flip loans held-for-investment	53			—			53			—
Trading securities	6,314			607			2,429			30,676
Valuation adjustments on commercial loans held-for-sale	—			—			—			300
Net investments in Legacy Sequoia entities ⁽²⁾	(248		)	(1,045		)	(976		)	(3,842		)
Net investments in Sequoia Choice entities ⁽²⁾	(943		)	(256		)	43			(256		)
Net investments in Freddie Mac K-Series entities ⁽²⁾	511			—			511			—
Risk-sharing investments	(126		)	(267		)	(474		)	(985		)
Risk management derivatives, net	21,867			(1,592		)	82,391			(24,557		)
Impairments on AFS securities	(33		)	(4		)	(89		)	(248		)
Total investment fair value changes, net	$	10,332		$	324		$	12,830		$	9,990
Other Income, Net
MSRs	$	(823	)	$	(1,351	)	$	1,324		$	(10,842	)
MSR risk management derivatives, net	(890		)	(422		)	(7,151		)	1,869
Total other income, net ⁽³⁾	$	(1,713	)	$	(1,773	)	$	(5,827	)	$	(8,973	)
Total Market Valuation Gains, Net	$	19,530		$	19,609		$	53,666		$	50,352


(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



September 30, 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	$	2,729,424	Whole loan spread to TBA price	$	1.84	-	$	2.80		$	2.77
			Whole loan spread to swap rate	90		-	198		bps	193		bps

Jumbo hybrid loans	319,029		Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate	75		-	155		bps	125		bps

Jumbo loans committed to sell	138,540		Whole loan committed sales price	$	100.98	-	$	101.15		$	101.08

Loans held by Legacy Sequoia ⁽¹⁾	553,958		Liability price				N/A			N/A

Loans held by Sequoia Choice ⁽¹⁾	2,181,195		Liability price				N/A			N/A

Business purpose loans:
Single-family rental loans	20,105		Whole loan spread to swap rate	247		-	247		bps	247		bps
			Prepayment rate (annual CPR)	3		-	3		%	3		%

Fix-and-flip loans	95,515		Discount rate	7		-	8		%	7		%

Multifamily loans held by Freddie Mac K-Series ⁽¹⁾	942,165		Liability price				N/A			N/A

Trading and AFS securities	1,470,084		Discount rate	3		-	15		%	6		%
			Prepayment rate (annual CPR)	—		-	50		%	8		%
			Default rate	—		-	27		%	2		%
			Loss severity	—		-	40		%	22		%

MSRs	63,785		Discount rate	11		-	67		%	11		%
			Prepayment rate (annual CPR)	4		-	22		%	7		%
			Per loan annual cost to service	$	82	-	$	82		$	82

Guarantee asset	2,885		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	7		-	7		%	7		%

REO	1,804		Loss severity	13		-	45		%	30		%

Liabilities
ABS issued ⁽¹⁾:
At consolidated Sequoia entities	2,531,379		Discount rate	3		-	15		%	4		%
			Prepayment rate (annual CPR)	8		-	32		%	19		%
			Default rate	—		-	8		%	2		%
			Loss severity	20		-	20		%	20		%

At consolidated Freddie Mac K-Series entities	875,606		Discount rate	3			9		%	4		%
			Prepayment rate (annual CPR)	—			—		%	—		%
			Default rate	1			1		%	1		%
			Loss severity	20			20		%	20		%

Loan purchase commitments, net	217		MSR multiple	1.0		-	5.4		x	3.5		x
			Pull-through rate	16		-	100		%	72		%
			Whole loan spread to TBA price	$	2.69	-	$	2.69		$	2.69
			Whole loan spread to swap rate - fixed rate	90		-	198		bps	196		bps
			Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate - hybrid	75		-	155		bps	99		bps

Footnote to Table 5.7


(1)	The fair value of the loans held by consolidated 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.