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Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2020

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 March 31, 2020 and December 31, 2019.

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



	March 31, 2020				December 31, 2019
	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	$	2,330,566	$	2,330,566	$	536,385	$	536,509
Residential loans, held-for-investment	4,380,460		4,380,460		7,178,465		7,178,465
Business purpose residential loans, held-for-sale	415,333		415,333		331,565		331,565
Business purpose residential loans, held-for-investment	3,048,409		3,048,409		3,175,178		3,175,178
Multifamily loans	470,484		470,484		4,408,524		4,408,524
Trading securities	164,219		164,219		860,540		860,540
Available-for-sale securities	129,243		129,243		239,334		239,334
Servicer advance investments ⁽¹⁾	298,946		298,946		169,204		169,204
MSRs ⁽¹⁾	23,616		23,616		42,224		42,224
Excess MSRs ⁽¹⁾	31,788		31,788		31,814		31,814
Shared home appreciation options⁽¹⁾	40,642		40,642		45,085		45,085
Cash and cash equivalents	378,233		378,233		196,966		196,966
Restricted cash	25,752		25,752		93,867		93,867
Accrued interest receivable	57,215		57,215		71,058		71,058
Derivative assets	90,717		90,717		35,701		35,701
REO ⁽²⁾	14,366		15,714		9,462		10,389
Margin receivable⁽²⁾	93,745		93,745		209,776		209,776
FHLBC stock ⁽²⁾	43,393		43,393		43,393		43,393
Guarantee asset⁽²⁾	905		905		1,686		1,686
Pledged collateral⁽²⁾	33,191		33,191		32,945		32,945
Liabilities
Short-term debt facilities	$	2,082,717	$	2,082,717	$	2,176,591	$	2,176,591
Short-term debt - servicer advance financing	258,931		258,931		152,554		152,554
Accrued interest payable	40,102		40,102		60,655		60,655
Margin payable ⁽³⁾	1,283		1,283		1,700		1,700
Guarantee obligation ⁽³⁾	13,395		12,382		14,009		13,754
Contingent consideration ⁽³⁾	14,819		14,819		28,484		28,484
Derivative liabilities	114,614		114,614		163,424		163,424
ABS issued at fair value	6,461,864		6,461,864		10,515,475		10,515,475
FHLBC long-term borrowings	1,367,681		1,367,681		1,999,999		1,999,999
Other long-term debt, net	315,583		317,498		183,520		184,666
Convertible notes, net	631,857		359,875		631,125		661,985
Trust preferred securities and subordinated notes, net	138,640		27,900		138,628		99,045


(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 March 31, 2020 and December 31, 2019, 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



March 31, 2020	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	6,711,025	$	—	$	—	$	6,711,025
Business purpose residential loans	3,463,742		—		—		3,463,742
Multifamily loans	470,484		—		—		470,484
Trading securities	164,219		—		—		164,219
Available-for-sale securities	129,243		—		—		129,243
Servicer advance investments	298,946		—		—		298,946
MSRs	23,616		—		—		23,616
Excess MSRs	31,788		—		—		31,788
Shared home appreciation options	40,642		—		—		40,642
Derivative assets	90,717		90,717		—		—
Pledged collateral	33,191		33,191		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	905		—		—		905

Liabilities
Contingent consideration	$	14,819	$	—	$	—	$	14,819
Derivative liabilities	114,614		110,648		—		3,966
ABS issued	6,461,864		—		—		6,461,864



December 31, 2019	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	7,714,745	$	—	$	—	$	7,714,745
Business purpose residential loans	3,506,743		—		—		3,506,743
Multifamily loans	4,408,524		—		—		4,408,524
Trading securities	860,540		—		—		860,540
Available-for-sale securities	239,334		—		—		239,334
Servicer advance investments	169,204		—		—		169,204
MSRs	42,224		—		—		42,224
Excess MSRs	31,814		—		—		31,814
Shared home appreciation options	45,085		—		—		45,085
Derivative assets	35,701		6,531		19,020		10,150
Pledged collateral	32,945		32,945		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	1,686		—		—		1,686

Liabilities
Contingent consideration	$	28,484	$	—	$	—	$	28,484
Derivative liabilities	163,424		13,368		148,766		1,290
ABS issued	10,515,475		—		—		10,515,475

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 three months ended March 31, 2020.

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			Shared Home Appreciation Options
(In Thousands)	Residential Loans			Business Purpose Residential Loans			Multifamily Loans			Trading Securities			AFS Securities			Servicer Advance Investments			MSRs			Excess MSRs			Shared Home Appreciation Options
Beginning balance - December 31, 2019	$	7,714,745		$	3,506,743		$	4,408,524		$	860,540		$	239,334		$	169,204		$	42,224		$	31,814		$	45,085
Acquisitions	2,695,846			—			—			67,639			31,181			158,618			—			9,468			3,517
Originations	—			486,710			—			—			—			—			—			—			—
Sales	(2,729,161		)	(42,802		)	—			(493,126		)	(46,457		)	—			—			—			—
Principal paydowns	(490,439		)	(161,896		)	(5,830		)	(7,507		)	(4,445		)	(22,815		)	—			—			(406		)
Deconsolidations	—			—			(3,849,779		)	—			—			—			—			—			—
Gains (losses) in net (loss) income, net	(478,743		)	(320,528		)	(82,431		)	(263,327		)	(90,370		)	(6,061		)	(18,608		)	(9,494		)	(7,554		)
Other settlements, net ⁽¹⁾	(1,223		)	(4,485		)	—			—			—			—			—			—			—
Ending balance - March 31, 2020	$	6,711,025		$	3,463,742		$	470,484		$	164,219		$	129,243		$	298,946		$	23,616		$	31,788		$	40,642

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



	Assets						Liabilities
	Guarantee Asset			Derivatives ⁽²⁾			Contingent Consideration			ABS Issued
(In Thousands)	Guarantee Asset			Derivatives ⁽²⁾			Contingent Consideration			ABS Issued
Beginning balance - December 31, 2019	$	1,686		$	8,860		$	28,484		$	10,515,475
Acquisitions	—			—			—			377,164
Principal paydowns	—			—			(13,353		)	(363,696		)
Deconsolidations	—			—			—			(3,706,789		)
Gains (losses) in net (loss) income, net	(781		)	18,005			(312		)	(360,290		)
Other settlements, net ⁽¹⁾	—			(30,831		)	—			—
Ending balance - March 31, 2020	$	905		$	(3,966	)	$	14,819		$	6,461,864


(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 or interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental loans.


(2)	For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments and interest rate lock 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 (loss) that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at March 31, 2020 and 2019. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2020 and 2019 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at March 31, 2020 and 2019 Included in Net Income



	Included in Net Income
	Three Months Ended March 31,
(In Thousands)	2020			2019
Assets
Residential loans at Redwood	$	(102,867	)	$	35,801
Residential loans at consolidated Sequoia entities	(179,499		)	14,472
Residential loans at consolidated Freddie Mac SLST entities	(193,035		)	23,527
Business purpose residential loans	(68,864		)	1,050
Single-family rental loans at consolidated CAFL entities	(271,917		)	—
Multifamily loans at consolidated Freddie Mac K-Series entity	(10,351		)	34,372
Trading securities	(136,359		)	21,543
Servicer advance investments	(6,062		)	1,008
MSRs	(16,640		)	(4,295		)
Excess MSRs	(9,494		)	(437		)
Shared home appreciation options	(7,554		)	—
Loan purchase and interest rate lock commitments	—			4,962
Other assets - Guarantee asset	(781		)	(277		)

Liabilities
Loan purchase commitments	$	(3,967	)	$	(753	)
Contingent consideration	(312		)	—
ABS issued	360,640			(60,182		)

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 March 31, 2020. 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 March 31, 2020.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2020



									Gain (Loss) for
March 31, 2020	Carrying Value		Fair Value Measurements Using						Three Months Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		March 31, 2020
Assets
REO	$	4,456	$	—	$	—	$	4,456	$	(476	)

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 months ended March 31, 2020 and 2019.

Table 5.6 – Market Valuation Gains and Losses, Net



	Three Months Ended March 31,
(In Thousands)	2020			2019
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	(13,480	)	$	3,533
Residential loan purchase and forward sale commitments	21,435			11,311
Single-family rental loans held-for-sale, at fair value	11,467			1,603
Single-family rental loan purchase and interest rate lock commitments	341			141
Residential bridge loans	(3,934		)	86
Risk management derivatives, net	(52,832		)	(4,984		)
Total mortgage banking activities, net ⁽¹⁾	$	(37,003	)	$	11,690
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood	$	(93,636	)	$	28,108
Single-family rental loans held-for-investment	(23,028		)	—
Residential bridge loans held-for-investment	(38,602		)	(303		)
Trading securities	(263,325		)	21,860
Servicer advance investments	(6,062		)	1,008
Excess MSRs	(9,494		)	(437		)
Net investments in Legacy Sequoia entities ⁽²⁾	(391		)	(374		)
Net investments in Sequoia Choice entities ⁽²⁾	(69,669		)	3,265
Net investments in Freddie Mac SLST entities ⁽²⁾	(142,162		)	6,365
Net investments in Freddie Mac K-Series entities ⁽²⁾	(86,509		)	3,119
Net investments in CAFL entities ⁽²⁾	(67,846		)	—
Other investments	(9,441		)	(77		)
Risk management derivatives, net	(59,142		)	(42,375		)
Credit losses on AFS securities	(1,525		)	—
Total investment fair value changes, net	$	(870,832	)	$	20,159
Other Income
MSRs	$	(18,608	)	$	(5,102	)
Risk management derivatives, net	13,966			2,251
Gain on re-measurement of 5 Arches investment	—			2,441
Total other income ⁽³⁾	$	(4,642	)	$	(410	)
Total Market Valuation (Losses) Gains, Net	$	(912,477	)	$	31,439


(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 (loss), 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 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



March 31, 2020	Fair Value			Input Values
(Dollars in Thousands, except Input Values)	Fair Value		Unobservable Input	Range						Weighted Average⁽⁵⁾
Assets
Residential loans, at fair value:
Jumbo fixed-rate loans	$	86,053	Dollar price	$	74.38	-	$	99.50		$	96.73

Jumbo hybrid loans	97,956		Dollar price	$	90.00	-	$	99.00		$	97.78

Jumbo loans committed to sell	2,146,557		Whole loan committed sales price	$	95.00	-	$	103.50		$	98.32

Loans held by Legacy Sequoia ⁽¹⁾	316,677		Liability price				N/A			N/A

Loans held by Sequoia Choice ⁽¹⁾	1,932,658		Liability price				N/A			N/A

Loans held by Freddie Mac SLST ⁽¹⁾	2,131,125		Liability price				N/A			N/A

Business purpose residential loans:
Single-family rental loans	415,333		Senior credit spread	290		-	290		bps	290		bps
			Subordinate credit spread	400		-	2,700		bps	688		bps
			Senior credit support	32		-	47		%	34		%
			IO discount rate	14		-	14		%	14		%
			Prepayment rate (annual CPR)	5		-	5		%	5		%

Single-family rental loans held by CAFL	2,248,665		Liability price				N/A			N/A

Residential bridge loans	799,744		Discount rate	9		-	17		%	12		%

Multifamily loans held by Freddie Mac K-Series ⁽¹⁾	470,484		Liability price				N/A			N/A

Trading and AFS securities	293,462		Discount rate	5		-	51		%	17		%
			Prepayment rate (annual CPR)	6		-	34		%	12		%
			Default rate	—		-	7		%	1		%
			Loss severity	—		-	50		%	9		%

Servicer advance investments	298,946		Discount rate	5		-	5		%	5		%
			Prepayment rate (annual CPR)	8		-	14		%	14		%
			Expected remaining life ⁽²⁾	2		-	2		years	2		years
			Mortgage servicing income	8		-	13		bps	10		bps

MSRs	23,616		Discount rate	13		-	13		%	13		%
			Prepayment rate (annual CPR)	8		-	63		%	21		%
			Per loan annual cost to service	$	95	-	$	95		$	95

Excess MSRs	31,788		Discount rate	18		-	26		%	22		%
			Prepayment rate (annual CPR)	9		-	14		%	11		%
			Excess mortgage servicing income	8		-	17		bps	12		bps

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



March 31, 2020	Fair Value			Input Values
(Dollars in Thousands, except Input Values)	Fair Value		Unobservable Input	Range						Weighted Average ⁽⁵⁾
Assets (continued)
Shared home appreciation options	$	40,642	Discount rate	18		-	18		%	18		%
			Prepayment rate (annual CPR)	10		-	30		%	23		%
			Home price appreciation	3		-	3		%	3		%

Guarantee asset	905		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	37		-	37		%	37		%

REO	4,456		Loss severity	3		-	55		%	32		%

Liabilities
Residential loan purchase commitments, net	196		Committed sales price	$	95.50	-	$	95.50		$	95.50
			Pull-through rate	100		-	100		%	100		%

ABS issued ⁽¹⁾:
At consolidated Sequoia entities	2,102,295		Discount rate	3		-	32		%	6		%
			Prepayment rate (annual CPR)	15		-	43		%	25		%
			Default rate	—		-	15		%	1		%
			Loss severity	—		-	50		%	19		%

At consolidated Freddie Mac SLST entities	1,825,000		Discount rate	3		-	17		%	4		%
			Prepayment rate (annual CPR)	6		-	6		%	6		%
			Default rate	17		-	18		%	17		%
			Loss severity	30		-	30		%	30		%

At consolidated Freddie Mac K-Series entities ⁽⁴⁾	447,699		Discount rate	2		-	20		%	3		%
			Non-IO prepayment rate (annual CPR)	—		-	—		%	—		%
			IO prepayment rate (annual CPY/CPP)	100		-	100		%	100		%

At consolidated CAFL entities ⁽⁴⁾	2,086,870		Discount rate	1		-	68		%	6		%
			Prepayment rate (annual CPR)	—		-	5		%	—		%

Contingent consideration	14,819		Discount rate	23		-	23		%	23		%
			Probability of outcomes ⁽³⁾	100		-	100		%	100		%

(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. At March 31, 2020, the fair value of securities we owned at the consolidated Sequoia, Freddie Mac SLST, Freddie Mac K-Series, and CAFL entities was $148 million, $307 million, $23 million, and $167 million, respectively.


(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.

(4)

As a market convention, certain securities are priced to a no-loss yield and therefore do not include default and loss severity assumptions.