Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2018

Carrying Values and Estimated 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 December 31, 2018 and December 31, 2017.

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



	December 31, 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	$	1,048,690	$	1,048,690	$	1,427,052	$	1,427,052
At lower of cost or fair value	111		131		893		993
Residential loans, held-for-investment	6,205,941		6,205,941		3,687,265		3,687,265
Business purpose residential loans	141,258		141,258		—		—
Multifamily loans	2,144,598		2,144,598		—		—
Trading securities	1,118,612		1,118,612		968,844		968,844
Available-for-sale securities	333,882		333,882		507,666		507,666
Servicer advance investments ⁽¹⁾	300,468		300,468		—		—
MSRs ⁽¹⁾	60,281		60,281		63,598		63,598
Participation in loan warehouse facility ⁽¹⁾	39,703		39,703		—		—
Excess MSRs ⁽¹⁾	27,312		27,312		—		—
Cash and cash equivalents	175,764		175,764		144,663		144,663
Restricted cash	29,313		29,313		2,144		2,144
Accrued interest receivable	47,105		47,105		27,013		27,013
Derivative assets	35,789		35,789		15,718		15,718
REO ⁽²⁾	3,943		4,396		3,354		3,806
Margin receivable⁽²⁾	100,773		100,773		85,044		85,044
FHLBC stock ⁽²⁾	43,393		43,393		43,393		43,393
Guarantee asset⁽²⁾	2,618		2,618		2,869		2,869
Pledged collateral⁽²⁾	42,433		42,433		42,615		42,615
Liabilities
Short-term debt facilities	$	1,937,920	$	1,937,920	$	1,688,412	$	1,688,412
Short-term debt - servicer advance financing	262,740		262,740		—		—
Accrued interest payable	42,528		42,528		18,435		18,435
Margin payable ⁽³⁾	835		835		390		390
Guarantee obligation ⁽³⁾	16,711		16,774		19,487		18,878
Derivative liabilities	84,855		84,855		63,081		63,081
ABS issued at fair value	5,410,073		5,410,073		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	633,196		618,271		686,759		692,369
Trust preferred securities and subordinated notes, net	138,582		102,533		138,535		103,230


(1)	These investments are included in Other investments on our consolidated balance sheets.


(2)	These assets are included in Other assets on our consolidated balance sheets.


(3)	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 December 31, 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



December 31, 2018	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	7,254,631	$	—	$	—	$	7,254,631
Business purpose residential loans	141,258		—		—		141,258
Multifamily loans	2,144,598		—		—		2,144,598
Trading securities	1,118,612		—		—		1,118,612
Available-for-sale securities	333,882		—		—		333,882
Servicer advance investments	300,468		—		—		300,468
MSRs	60,281		—		—		60,281
Excess MSRs	27,312		—		—		27,312
Derivative assets	35,789		4,665		28,211		2,913
Pledged collateral	42,433		42,433		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	2,618		—		—		2,618

Liabilities
Derivative liabilities	$	84,855	$	13,215	$	70,908	$	732
ABS issued	5,410,073		—		—		5,410,073



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 years ended December 31, 2018 and December 31, 2017.

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



	Assets
	Residential Loans			Business Purpose Residential Loans			Multifamily Loans			Trading Securities			AFS Securities			Servicer Advance Investments			MSRs			Excess MSRs		Guarantee Asset
(In Thousands)	Residential Loans			Business Purpose Residential Loans			Multifamily Loans			Trading Securities			AFS Securities			Servicer Advance Investments			MSRs			Excess MSRs		Guarantee Asset
Beginning balance - December 31, 2017	$	5,114,317		$	—		$	—		$	968,844		$	507,666		$	—		$	63,598		$	—	$	2,869
Acquisitions	8,338,724			167,777			2,099,916			653,739			7,739			395,813			328			25,489		—
Sales	(5,425,168		)	—			—			(438,304		)	(143,644		)	—			(1,077		)	—		—
Principal paydowns	(814,122		)	(27,382		)	(1,873		)	(40,050		)	(44,446		)	(94,644		)	—			—		—
Gains (losses) in net income, net	44,627			863			46,555			(8,436		)	41,051			(701		)	(2,568		)	1,823		(251		)
Unrealized losses in OCI, net	—			—			—			—			(34,484		)	—			—			—		—
Other settlements, net⁽²⁾	(3,747		)	—			—			(17,181		)	—			—			—			—		—
Ending balance - December 31, 2018	$	7,254,631		$	141,258		$	2,144,598		$	1,118,612		$	333,882		$	300,468		$	60,281		$	27,312	$	2,618

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



				Liabilities
	Derivatives ⁽¹⁾			ABS Issued
(In Thousands)	Derivatives ⁽¹⁾			ABS Issued
Beginning balance - December 31, 2017	$	1,714		$	1,164,585
Acquisitions	—			4,613,168
Principal paydowns	—			(459,173		)
Gains (losses) in net income, net	(1,214		)	91,493
Other settlements, net⁽²⁾	1,681			—
Ending balance - December 31, 2018	$	2,181		$	5,410,073



	Assets																		Liabilities
(In Thousands)	Residential Loans			Trading Securities			AFS Securities			MSRs			Guarantee Asset			Derivatives ⁽¹⁾			ABS Issued
Beginning balance - December 31, 2016	$	3,886,845		$	445,687		$	572,752		$	118,526		$	4,092		$	(486	)	$	773,462
Acquisitions	5,741,427			640,760			39,700			8,026			—			—			567,099
Sales	(3,982,683		)	(137,886		)	(90,440		)	(52,788		)	—			—			—
Principal paydowns	(573,168		)	(19,224		)	(58,554		)	—			—			—			(205,163		)
Gains (losses) in net income, net	46,119			39,507			31,892			(10,166		)	(1,223		)	37,220			29,187
Unrealized gains in OCI, net	—			—			12,316			—			—			—			—
Other settlements, net ⁽²⁾	(4,223		)	—			—			—			—			(35,020		)	—
Ending balance - December 31, 2017	$	5,114,317		$	968,844		$	507,666		$	63,598		$	2,869		$	1,714		$	1,164,585


(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 second half of 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 December 31, 2018, 2017, and 2016. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the years ended December 31, 2018, 2017, and 2016 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at December 31, 2018, 2017, and 2016 Included in Net Income



	Included in Net Income
	Years Ended December 31,
(In Thousands)	2018			2017			2016
Assets
Residential loans at Redwood	$	(17,757	)	$	523		$	(17,370	)
Residential loans at consolidated Sequoia entities	24,799			17,727			(14,391		)
Residential loans at consolidated Freddie Mac SLST entity	21,295			—			—
Business purpose residential loans	445			—			—
Multifamily loans at consolidated Freddie Mac K-Series entities	46,555			—			—
Trading securities	(12,256		)	28,612			7,184
Available-for-sale securities	(89		)	(1,011		)	(368		)
Servicer advance investments	(702		)	—			—
MSRs	1,942			1,277			42,964
Excess MSRs	1,824			—			—
Loan purchase commitments	2,913			3,243			—
Loan forward sale commitments	—			2,177			—
Other assets - Guarantee asset	(251		)	(1,223		)	(1,605		)

Liabilities
Loan purchase commitments	$	(732	)	$	(3,706	)	$	(486	)
ABS issued	(71,468		)	(29,187		)	8,275

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 December 31, 2018 and December 31, 2017. 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 December 31, 2018 and December 31, 2017.

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



									Gain (Loss) for Year Ended
December 31, 2018	Carrying Value		Fair Value Measurements Using						Gain (Loss) for Year Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		December 31, 2018
Assets
REO	$	2,225	$	—	$	—	$	2,225	$	(131	)

									Gain (Loss) for Year Ended
December 31, 2017	Carrying Value		Fair Value Measurements Using						Gain (Loss) for Year Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		December 31, 2017
Assets
Residential loans, at lower of cost or fair value	$	854	$	—	$	—	$	854	$	22
REO	2,034		—		—		2,034		(393		)

Market Valuation Adjustments

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the years ended December 31, 2018, 2017, and 2016.

Table 5.6 – Market Valuation Gains and Losses, Net



	Years Ended December 31,
(In Thousands)	2018			2017			2016
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	23,144		$	31,493		$	5,786
Single-family rental loans held-for-sale, at fair value	453			—			—
Residential loan purchase and forward sale commitments	(1,336		)	37,880			25,613
Commercial loans, at fair value	—			—			433
Sequoia securities	—			—			1,455
Risk management derivatives, net	34,739			(17,529		)	3,158
Total mortgage banking activities, net ⁽¹⁾	$	57,000		$	51,844		$	36,445
Investment Fair Value Changes, Net
Residential loans held-for-investment at Redwood	$	(29,573	)	$	(5,765	)	$	(23,102	)
Residential bridge loans held-for-investment	(29		)	—			—
Trading securities	(8,055		)	39,526			9,666
Commercial loans held-for-sale	—			300			(307		)
Servicer advance investments	(701		)	—			—
Excess MSRs	1,823			—			—
Net investments in Legacy Sequoia entities ⁽²⁾	(1,016		)	(8,027		)	(4,200		)
Net investments in Sequoia Choice entities ⁽²⁾	443			(323		)	—
Net investment in Freddie Mac SLST entity ⁽²⁾	1,271			—			—
Net investments in Freddie Mac K-Series entities ⁽²⁾	931			—			—
Risk-sharing investments	(434		)	(1,484		)	(1,151		)
Risk management derivatives, net	9,740			(12,842		)	(9,112		)
Impairments on AFS securities	(89		)	(1,011		)	(368		)
Total investment fair value changes, net	$	(25,689	)	$	10,374		$	(28,574	)
Other Income, Net
MSRs	$	(2,508	)	$	(10,166	)	$	(36,372	)
Risk management derivatives, net	(4,734		)	(568		)	15,584
Total other income, net ⁽³⁾	$	(7,242	)	$	(10,734	)	$	(20,788	)
Total Market Valuation Gains (Losses), Net	$	24,069		$	51,484		$	(12,917	)


(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



December 31, 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	$	2,738,346	Whole loan spread to TBA price	$	1.89	-	$	2.52		$	2.21
			Whole loan spread to swap rate	70		-	220		bps	200		bps

Jumbo hybrid loans	396,274		Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate	50		-	125		bps	86		bps

Jumbo loans committed to sell	298,002		Whole loan committed sales price	$	100.69	-	$	101.66		$	100.70

Loans held by Legacy Sequoia ⁽¹⁾	519,958		Liability price				N/A			N/A

Loans held by Sequoia Choice ⁽¹⁾	2,079,382		Liability price				N/A			N/A

Loans held by Freddie Mac SLST	1,222,669		Liability price				N/A			N/A

Business purpose residential loans:
Single-family rental loans	28,460		IO discount rate	12		-	12		%	12		%
			Prepayment rate (annual CPR)	2		-	10		%	3		%
			Senior credit spread	115		-	115		bps	115		bps
			Subordinate credit spread	165		-	994		bps	302		bps
			Senior credit support	32		-	32		%	32		%

Residential bridge loans	112,798		Discount rate	7			8		%	7		%

Multifamily loans held by Freddie Mac K-Series ⁽¹⁾	2,144,598		Liability price				N/A			N/A

Trading and AFS securities	1,452,494		Discount rate	3		-	14		%	6		%
			Prepayment rate (annual CPR)	—		-	60		%	10		%
			Default rate	—		-	27		%	2		%
			Loss severity	—		-	40		%	21		%

Servicer advance investments	300,468		Discount rate	5		-	5		%	5		%
			Prepayment rate (annual CPR)	8		-	16		%	14		%
			Expected remaining life ⁽²⁾	1		-	1		year	1		year
			Mortgage servicing amount	7		-	14		bps	10		bps

MSRs	60,281		Discount rate	11		-	29		%	11		%
			Prepayment rate (annual CPR)	4		-	29		%	7		%
			Per loan annual cost to service	$	82	-	$	82		$	82

Excess MSRs	27,312		Discount rate	12		-	19		%	17		%
			Prepayment rate (annual CPR)	8		-	15		%	11		%
			Excess mortgage servicing amount	7		-	18		bps	11		bps

Guarantee asset	2,618		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	8		-	8		%	8		%

REO	2,225		Loss severity	2		-	50		%	18		%

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)



December 31, 2018	Fair Value			Input Values
(Dollars in Thousands, except Input Values)	Fair Value		Unobservable Input	Range						Weighted Average
Assets (continued)
Loan purchase commitments, net	$	2,181	MSR multiple	0.8		-	4.9		x	2.7		x
			Pull-through rate	10		-	98		%	69		%
			Whole loan spread to TBA price	$	1.89	-	$	2.52		$	2.51
			Whole loan spread to swap rate - fixed rate	70		-	220		bps	198		bps
			Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate - hybrid	60		-	100		bps	77		bps
Liabilities
ABS issued ⁽¹⁾
At consolidated Sequoia entities	2,397,250		Discount rate	4		-	15		%	4		%
			Prepayment rate (annual CPR)	8		-	50		%	18		%
			Default rate	—		-	14		%	2		%
			Loss severity	20		-	44		%	21		%

At consolidated Freddie Mac SLST entity	993,748		Discount rate	3		-	4		%	3		%
			Prepayment rate (annual CPR)	6		-	6		%	6		%
			Default rate	2		-	2		%	2		%
			Loss severity	30		-	30		%	30		%

At consolidated Freddie Mac K-Series entities	2,019,075		Discount rate	3		-	9		%	3		%
			Prepayment rate (annual CPR)	—		-	—		%	—		%
			Default rate	1		-	1		%	1		%
			Loss severity	20		-	20		%	20		%


(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.


(2)	Represents the estimated average duration of outstanding servicer advances at a given point in time (not taking into account new advances made with respect to the pool).