Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2019

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 June 30, 2019 and December 31, 2018.

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



	June 30, 2019				December 31, 2018
	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	$	1,056,178	$	1,056,178	$	1,048,690	$	1,048,690
At lower of cost or fair value	109		128		111		131
Residential loans, held-for-investment	6,227,078		6,227,078		6,205,941		6,205,941
Business purpose residential loans	250,854		250,854		141,258		141,258
Multifamily loans	3,749,657		3,749,657		2,144,598		2,144,598
Trading securities	1,205,389		1,205,389		1,118,612		1,118,612
Available-for-sale securities	272,097		272,097		333,882		333,882
Servicer advance investments ⁽¹⁾	259,222		259,222		300,468		300,468
MSRs ⁽¹⁾	47,396		47,396		60,281		60,281
Participation in loan warehouse facility ⁽¹⁾	—		—		39,703		39,703
Excess MSRs ⁽¹⁾	33,620		33,620		27,312		27,312
Cash and cash equivalents	218,145		218,145		175,764		175,764
Restricted cash	33,953		33,953		29,313		29,313
Accrued interest receivable	54,265		54,265		47,105		47,105
Derivative assets	26,609		26,609		35,789		35,789
REO ⁽²⁾	6,305		6,509		3,943		4,396
Margin receivable⁽²⁾	211,199		211,199		100,773		100,773
FHLBC stock ⁽²⁾	43,393		43,393		43,393		43,393
Guarantee asset⁽²⁾	1,999		1,999		2,618		2,618
Pledged collateral⁽²⁾	42,913		42,913		42,433		42,433
Liabilities
Short-term debt facilities	$	2,026,418	$	2,026,418	$	1,937,920	$	1,937,920
Short-term debt - servicer advance financing	236,231		236,231		262,740		262,740
Accrued interest payable	47,092		47,092		42,528		42,528
Margin payable ⁽³⁾	—		—		835		835
Guarantee obligation ⁽³⁾	15,744		15,456		16,711		16,774
Contingent consideration ⁽³⁾	24,932		24,932		—		—
Derivative liabilities	173,847		173,847		84,855		84,855
ABS issued at fair value	6,913,129		6,913,129		5,410,073		5,410,073
FHLBC long-term borrowings	1,999,999		1,999,999		1,999,999		1,999,999
Convertible notes, net	634,805		639,849		633,196		618,271
Trust preferred securities and subordinated notes, net	138,605		97,650		138,582		102,533


(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 June 30, 2019 and December 31, 2018, 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



June 30, 2019	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	7,283,256	$	—	$	—	$	7,283,256
Business purpose residential loans	250,854		—		—		250,854
Multifamily loans	3,749,657		—		—		3,749,657
Trading securities	1,205,389		—		—		1,205,389
Available-for-sale securities	272,097		—		—		272,097
Servicer advance investments	259,222		—		—		259,222
MSRs	47,396		—		—		47,396
Excess MSRs	33,620		—		—		33,620
Derivative assets	26,609		1,784		19,258		5,567
Pledged collateral	42,913		42,913		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	1,999		—		—		1,999

Liabilities
Contingent consideration	$	24,932	$	—	$	—	$	24,932
Derivative liabilities	173,847		4,639		168,436		772
ABS issued	6,913,129		—		—		6,913,129



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

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 six months ended June 30, 2019.

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, 2018	$	7,254,631		$	141,258		$	2,144,598		$	1,118,612		$	333,882		$	300,468		$	60,281		$	27,312		$	2,618
Acquisitions	2,583,951			29,093			1,481,554			240,478			8,954			68,976			868			6,810			—
Originations	—			169,562			—			—			—			—			—			—			—
Sales	(2,088,273		)	(43,548		)	—			(174,216		)	(67,001		)	—			—			—			—
Principal paydowns	(614,975		)	(43,931		)	(7,516		)	(14,836		)	(24,207		)	(111,662		)	—			—			—
Gains (losses) in net income, net	147,969			3,416			131,021			40,302			17,503			1,440			(13,753		)	(502		)	(619		)
Unrealized losses in OCI, net	—			—			—			—			2,966			—			—			—			—
Other settlements, net ⁽¹⁾	(47		)	(4,996		)	—			(4,951		)	—			—			—			—			—
Ending Balance - June 30, 2019	$	7,283,256		$	250,854		$	3,749,657		$	1,205,389		$	272,097		$	259,222		$	47,396		$	33,620		$	1,999

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



				Liabilities
	Derivatives ⁽²⁾			Contingent Consideration		ABS Issued
(In Thousands)	Derivatives ⁽²⁾			Contingent Consideration		ABS Issued
Beginning balance - December 31, 2018	$	2,181		$	—	$	5,410,073
Acquisitions	—			24,621		1,738,537
Principal paydowns	—			—		(416,791		)
Gains (losses) in net income, net	28,908			311		181,310
Other settlements, net ⁽¹⁾	(26,294		)	—		—
Ending Balance - June 30, 2019	$	4,795		$	24,932	$	6,913,129

(1)

Other settlements, net for residential and business purpose 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 trading securities relates to the consolidation of a Freddie Mac K-Series entity during the second quarter of 2019.


(2)	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.

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 June 30, 2019 and 2018. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and six months ended June 30, 2019 and 2018 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at June 30, 2019 and 2018 Included in Net Income



	Included in Net Income
	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2019			2018			2019			2018
Assets
Residential loans at Redwood	$	48,575		$	(12,981	)	$	80,615		$	(51,029	)
Residential loans at consolidated Sequoia entities	6,772			367			21,243			20,914
Residential loans at consolidated Freddie Mac SLST entity	31,477			—			55,005			—
Business purpose residential loans	3,038			—			4,032			—
Multifamily loans at consolidated Freddie Mac K-Series entities	96,649			—			131,020			—
Trading securities	17,771			(1,989		)	38,658			(6,011		)
Available-for-sale securities	—			(56		)	—			(56		)
Servicer advance investments	432			—			1,440			—
MSRs	(7,334		)	689			(11,518		)	4,610
Excess MSRs	(66		)	—			(502		)	—
Loan purchase commitments	5,534			2,835			5,567			2,901
Other assets - Guarantee asset	(277		)	(120		)	(196		)	66

Liabilities
Loan purchase commitments	$	(756	)	$	(4,646	)	$	(772	)	$	(4,687	)
ABS issued	(121,127		)	(279		)	(181,310		)	(21,014		)

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 June 30, 2019. 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 June 30, 2019.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at June 30, 2019



									Gain (Loss) for
June 30, 2019	Carrying Value		Fair Value Measurements Using						Three Months Ended			Six Months Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		June 30, 2019			June 30, 2019
Assets
REO	$	5,732	$	—	$	—	$	5,732	$	(150	)	$	(422	)

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 six months ended June 30, 2019 and 2018.

Table 5.6 – Market Valuation Gains and Losses, Net



	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2019			2018			2019			2018
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	3,379		$	6,122		$	6,912		$	10,896
Residential loan purchase and forward sale commitments	16,888			(2,758		)	28,199			(9,726		)
Single-family rental loans held-for-sale, at fair value	1,313			—			2,917			—
Single-family rental loan purchase commitments	569			—			709			—
Residential bridge loans	1,012			—			1,098			—
Risk management derivatives, net	(7,431		)	6,150			(12,415		)	34,582
Total mortgage banking activities, net ⁽¹⁾	$	15,730		$	9,514		$	27,420		$	35,752
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood	$	35,548		$	(15,010	)	$	63,656		$	(53,995	)
Residential bridge loans held-for-investment	(318		)	—			(621		)	—
Trading securities	18,442			(930		)	40,302			(3,885		)
Servicer advance investments	432			—			1,440			—
Excess MSRs	(65		)	—			(502		)	—
REO	(139		)	—			(139		)	—
Net investments in Legacy Sequoia entities ⁽²⁾	(123		)	(720		)	(497		)	(728		)
Net investments in Sequoia Choice entities ⁽²⁾	2,879			1,072			6,144			986
Net investment in Freddie Mac SLST entity ⁽²⁾	8,037			—			14,402			—
Net investments in Freddie Mac K-Series entities ⁽²⁾	3,246			—			6,365			—
Risk-sharing investments	(61		)	(209		)	(138		)	(348		)
Risk management derivatives, net	(64,740		)	16,742			(107,115		)	60,524
Impairments on AFS securities	—			(56		)	—			(56		)
Total investment fair value changes, net	$	3,138		$	889		$	23,297		$	2,498
Other Income (Expense), Net
MSRs	$	(8,653	)	$	(745	)	$	(13,753	)	$	2,147
Risk management derivatives, net	6,517			(1,122		)	8,768			(6,261		)
Gain on re-measurement of 5 Arches investment	—			—			2,440			—
Total other expense, net ⁽³⁾	$	(2,136	)	$	(1,867	)	$	(2,545	)	$	(4,114	)
Total Market Valuation Gains, Net	$	16,732		$	8,536		$	48,172		$	34,136


(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 investments at the consolidated VIEs.

(3)

Other income (expense), 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



June 30, 2019	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	$	2,724,429	Prepayment rate (annual CPR)	20		-	20		%	20		%
			Whole loan spread to TBA price	$	1.55	-	$	1.55		$	1.55
			Whole loan spread to swap rate	80		-	365		bps	179		bps

Jumbo hybrid loans	344,151		Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate	65		-	360		bps	141		bps

Jumbo loans committed to sell	374,481		Whole loan committed sales price	$	101.84	-	$	103.08		$	102.12

Loans held by Legacy Sequoia ⁽¹⁾	457,750		Liability price				N/A			N/A

Loans held by Sequoia Choice ⁽¹⁾	2,147,356		Liability price				N/A			N/A

Loans held by Freddie Mac SLST ⁽¹⁾	1,235,089		Liability price				N/A			N/A

Business purpose residential loans:
Single-family rental loans	91,501		IO discount rate	12		-	12		%	12		%
			Prepayment rate (annual CPR)	2		-	10		%	5		%
			Senior credit spread	95		-	95		bps	95		bps
			Subordinate credit spread	140		-	1,200		bps	306		bps
			Senior credit support	35		-	35		%	35		%

Residential bridge loans	159,353		Discount rate	7		-	8		%	7		%

Multifamily loans held by Freddie Mac K-Series ⁽¹⁾	3,749,657		Liability price				N/A			N/A

Trading and AFS securities	1,477,486		Discount rate	3		-	14		%	5		%
			Prepayment rate (annual CPR)	—		-	60		%	10		%
			Default rate	—		-	20		%	2		%
			Loss severity	—		-	40		%	21		%

Servicer advance investments	259,222		Discount rate	4		-	4		%	4		%
			Prepayment rate (annual CPR)	8		-	15		%	14		%
			Expected remaining life ⁽²⁾	2		-	2		years	2		years
			Mortgage servicing income	6		-	14		bps	10		bps

MSRs	47,396		Discount rate	11		-	17		%	11		%
			Prepayment rate (annual CPR)	5		-	45		%	12		%
			Per loan annual cost to service	$	82	-	$	82		$	82

Excess MSRs	33,620		Discount rate	11		-	16		%	14		%
			Prepayment rate (annual CPR)	8		-	14		%	11		%
			Excess mortgage servicing income	8		-	17		bps	12		bps

Guarantee asset	1,999		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	15		-	15		%	15		%

REO	5,732		Loss severity	3		-	52		%	7		%

Loan purchase commitments, net	4,707		MSR multiple	0.7		-	4.6		x	2.2		x
			Pull-through rate	7		-	100		%	70		%
			Whole loan spread to TBA price	$	0.61	-	$	1.55		$	1.54
			Whole loan spread to swap rate - fixed rate	115		-	365		bps	228		bps
			Prepayment rate (annual CPR)	15		-	20		%	18		%
			Whole loan spread to swap rate - hybrid	90		-	345		bps	129		bps

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



June 30, 2019	Fair Value		Input Values
(Dollars in Thousands, except Input Values)	Fair Value	Unobservable Input	Range				Weighted Average
Liabilities
ABS issued ⁽¹⁾:
At consolidated Sequoia entities	2,378,306	Discount rate	3	-	15	%	4	%
		Prepayment rate (annual CPR)	8	-	49	%	19	%
		Default rate	—	-	9	%	2	%
		Loss severity	20	-	22	%	21	%

At consolidated Freddie Mac SLST entity	991,766	Discount rate	3	-	8	%	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	3,543,057	Discount rate	2	-	9	%	3	%
		Prepayment rate (annual CPR)	—	-	—	%	—	%
		Default rate	1	-	1	%	1	%
		Loss severity	20	-	20	%	20	%

Contingent consideration	24,932	Discount rate	23	-	23	%	23	%
		Probability of outcomes ⁽³⁾	—	-	100	%	90	%


(1)	The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, 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).

(3)

Represents the probability of a full payout of contingent purchase consideration.