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Principles of Consolidation (Tables)

3 Months Ended

Mar. 31, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

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

Table 4.1 – Assets and Liabilities of Consolidated VIEs



March 31, 2020	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
Residential loans, held-for-investment	$	316,677	$	1,932,658	$	2,131,125	$	—	$	—	$	—	$	4,380,460
Business purpose residential loans, held-for-investment	—		—		—		—		2,248,665		—		2,248,665
Multifamily loans, held-for-investment	—		—		—		470,484		—		—		470,484
Other investments	—		—		—		—		—		314,394		314,394
Cash and cash equivalents	—		—		—		—		—		2,886		2,886
Restricted cash	143		15		—		—		—		11,810		11,968
Accrued interest receivable	580		8,574		7,184		1,390		10,803		5,567		34,098
Other assets	952		—		1,050		—		5,749		—		7,751
Total Assets	$	318,352	$	1,941,247	$	2,139,359	$	471,874	$	2,265,217	$	334,657	$	7,470,706
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	258,931	$	258,931
Accrued interest payable	351		6,920		5,251		1,230		8,188		205		22,145
Accrued expenses and other liabilities	—		15		—		—		—		16,305		16,320
Asset-backed securities issued	312,201		1,790,094		1,825,000		447,699		2,086,870		—		6,461,864
Total Liabilities	$	312,552	$	1,797,029	$	1,830,251	$	448,929	$	2,095,058	$	275,441	$	6,759,260

Number of VIEs	20		9		2		1		11		3		46



December 31, 2019	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
Residential loans, held-for-investment	$	407,890	$	2,291,463	$	2,367,215	$	—	$	—	$	—	$	5,066,568
Business purpose residential loans, held-for-investment	—		—		—		—		2,192,552		—		2,192,552
Multifamily loans, held-for-investment	—		—		—		4,408,524		—		—		4,408,524
Other investments	—		—		—		—		—		184,802		184,802
Cash and cash equivalents	—		—		—		—		—		9,015		9,015
Restricted cash	143		27		—		—		—		21,766		21,936
Accrued interest receivable	655		9,824		7,313		13,539		9,572		4,869		45,772
Other assets	460		—		445		—		1,795		—		2,700
Total Assets	$	409,148	$	2,301,314	$	2,374,973	$	4,422,063	$	2,203,919	$	220,452	$	11,931,869
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	152,554	$	152,554
Accrued interest payable	395		7,732		5,374		12,887		7,485		187		34,060
Accrued expenses and other liabilities	—		27		—		—		—		14,956		14,983
Asset-backed securities issued	402,465		2,037,198		1,918,322		4,156,239		2,001,251		—		10,515,475
Total Liabilities	$	402,860	$	2,044,957	$	1,923,696	$	4,169,126	$	2,008,736	$	167,697	$	10,717,072

Number of VIEs	20		9		2		5		10		3		49

The following table presents income (loss) from these VIEs for the three months ended March 31, 2020 and 2019.

Table 4.2 – Income (Loss) from Consolidated VIEs



	Three Months Ended March 31, 2020
	Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series			CAFL			Servicing Investment			Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series			CAFL			Servicing Investment			Total Consolidated VIEs
Interest income	$	3,194		$	25,083		$	21,986		$	40,172		$	30,010		$	4,083		$	124,528
Interest expense	(2,522		)	(21,510		)	(16,176		)	(38,348		)	(21,939		)	(1,577		)	(102,072		)
Net interest income	672			3,573			5,810			1,824			8,071			2,506			22,456
Non-interest income
Investment fair value changes, net	(391		)	(69,668		)	(142,161		)	(86,509		)	(67,846		)	(11,884		)	(378,459		)
Total non-interest income, net	(391		)	(69,668		)	(142,161		)	(86,509		)	(67,846		)	(11,884		)	(378,459		)
General and administrative expenses	—			—			—			—			—			(31		)	(31		)
Other expenses	—			—			—			—			—			1,882			1,882
Income (Loss) from Consolidated VIEs	$	281		$	(66,095	)	$	(136,351	)	$	(84,685	)	$	(59,775	)	$	(7,527	)	$	(354,152	)



	Three Months Ended March 31, 2019
	Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series			CAFL		Servicing Investment			Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia			Sequoia Choice			Freddie Mac SLST			Freddie Mac K-Series			CAFL		Servicing Investment			Total Consolidated VIEs
Interest income	$	4,853		$	25,662		$	11,794		$	21,388		$	—	$	3,346		$	67,043
Interest expense	(4,115		)	(22,113		)	(8,747		)	(20,320		)	—		(3,613		)	(58,908		)
Net interest income	738			3,549			3,047			1,068			—		(267		)	8,135
Non-interest income
Investment fair value changes, net	(374		)	3,265			6,365			3,119			—		1,430			13,805
Total non-interest income, net	(374		)	3,265			6,365			3,119			—		1,430			13,805
General and administrative expenses	—			—			—			—			—		(30		)	(30		)
Other expenses	—			—			—			—			—		(227		)	(227		)
Income from Consolidated VIEs	$	364		$	6,814		$	9,412		$	4,187		$	—	$	906		$	21,683

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 months ended March 31, 2020 and 2019.

Table 4.3 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended March 31,
(In Thousands)	2020		2019
Principal balance of loans transferred	$	1,573,703	$	348,257
Trading securities retained, at fair value	43,362		1,716
AFS securities retained, at fair value	3,198		885

The following table summarizes the cash flows during the three months ended March 31, 2020 and 2019 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

Table 4.4 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended March 31,
(In Thousands)	2020			2019
Proceeds from new transfers	$	1,610,761		$	352,371
MSR fees received	2,690			3,060
Funding of compensating interest, net	(92		)	(90		)
Cash flows received on retained securities	6,581			7,546

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 months ended March 31, 2020 and 2019.

Table 4.5 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended March 31, 2020				Three Months Ended March 31, 2019
At Date of Securitization	Senior IO Securities		Subordinate Securities		Senior IO Securities		Subordinate Securities
Prepayment rates	41	%	13	%	16	%	14	%
Discount rates	16	%	6	%	14	%	8	%
Credit loss assumptions	0.21	%	0.22	%	0.20	%	0.20	%

Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents additional information at March 31, 2020 and December 31, 2019, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.6 – Unconsolidated VIEs Sponsored by Redwood



(In Thousands)	March 31, 2020		December 31, 2019
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	54,894	$	88,425
Subordinate securities, classified as AFS	77,433		140,649
Mortgage servicing rights	22,482		40,254
Maximum loss exposure ⁽¹⁾	$	154,809	$	269,328
Assets transferred:
Principal balance of loans outstanding	$	11,181,034	$	10,299,442
Principal balance of loans 30+ days delinquent	40,930		41,809

(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 March 31, 2020 and December 31, 2019.

Table 4.7 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood



March 31, 2020	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at March 31, 2020	$	22,482		$	26,980		$	105,347
Expected life (in years)⁽²⁾	4			3			14
Prepayment speed assumption (annual CPR)⁽²⁾	21		%	28		%	15		%
Decrease in fair value from:
10% adverse change	$	1,760		$	2,414		$	1,404
25% adverse change	4,278			5,954			3,836
Discount rate assumption⁽²⁾	13		%	18		%	10		%
Decrease in fair value from:
100 basis point increase	$	611		$	549		$	8,088
200 basis point increase	1,188			1,072			15,165
Credit loss assumption ⁽²⁾	N/A			0.22		%	0.22		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	1,107
25% higher losses	N/A			—			2,723



December 31, 2019	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at December 31, 2019	$	40,254		$	48,765		$	180,309
Expected life (in years)⁽²⁾	6			6			14
Prepayment speed assumption (annual CPR)⁽²⁾	11		%	14		%	16		%
Decrease in fair value from:
10% adverse change	$	1,643		$	1,908		$	205
25% adverse change	3,913			5,086			1,434
Discount rate assumption⁽²⁾	11		%	12		%	5		%
Decrease in fair value from:
100 basis point increase	$	1,447		$	1,079		$	18,127
200 basis point increase	2,795			2,482			33,630
Credit loss assumption ⁽²⁾	N/A			0.21		%	0.21		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	1,804
25% higher losses	N/A			—			4,520


(1)	Senior securities included $27 million and $49 million of interest-only securities at March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, grouped by asset type.

Table 4.8 – Third-Party Sponsored VIE Summary



(In Thousands)	March 31, 2020		December 31, 2019
Mortgage-Backed Securities
Senior	$	12,580	$	127,094
Mezzanine	25,867		508,195
Subordinate	122,689		235,510
Total Mortgage-Backed Securities	161,136		870,799
Excess MSR	16,339		16,216
Total Investments in Third-Party Sponsored VIEs	$	177,475	$	887,015

- 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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