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Real Estate Securities | 12 Months Ended
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Dec. 31, 2020
Investments, Debt and Equity Securities [Abstract] |
Real Estate Securities | Real Estate Securities We invest in real estate securities that we create and retain from our Sequoia securitizations or acquire from third parties. The following table presents the fair values of our real estate securities by type at December 31, 2020 and December 31, 2019. Table 9.1 – Fair Values of Real Estate Securities by Type
(In Thousands) |  | December 31, 2020 |  | December 31, 2019
Trading |  | $ | 125,667 |  |  | $ | 860,540 |
Available-for-sale |  | 218,458 |  |  | 239,334 |
Total Real Estate Securities |  | $ | 344,125 |  |  | $ | 1,099,874 |
Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. Mezzanine securities are interests that are generally subordinate to senior securities in their rights to receive cash flows, and have subordinate securities below them that are first to absorb losses. Many of our mezzanine classified securities were initially rated AA through BBB- and issued in 2012 or later. Subordinate securities are all interests below mezzanine. Excluding our re-performing loan securities, nearly all of our residential securities are supported by collateral that was designated as prime at the time of issuance. Trading Securities We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities, and our residential securities also include securities backed by re-performing loans ("RPL"). The following table presents the fair value of trading securities by position and collateral type at December 31, 2020 and December 31, 2019. Table 9.2 – Fair Value of Trading Securities by Position
(In Thousands) |  | December 31, 2020 |  | December 31, 2019
Senior |  |  |  |
Interest-only securities (1) |  | $ | 28,464 |  |  | $ | 64,010 |
RPL securities |  | — |  |  | 39,337 |
Other third-party residential securities |  | — |  |  | 46,720 |
Total Senior |  | 28,464 |  |  | 150,067 |
Mezzanine |  |  |  |
Sequoia securities |  | 3,649 |  |  | 39,660 |
Multifamily securities |  | — |  |  | 395,256 |
Other third-party residential securities |  | — |  |  | 103,573 |
Total Mezzanine |  | 3,649 |  |  | 538,489 |
Subordinate |  |  |  |
RPL securities |  | 47,448 |  |  | 76,102 |
Multifamily securities |  | 5,592 |  |  | — |
Other third-party residential securities |  | 40,514 |  |  | 95,882 |
Total Subordinate |  | 93,554 |  |  | 171,984 |
Total Trading Securities |  | $ | 125,667 |  |  | $ | 860,540 |
(1)Includes $13 million and $36 million of Sequoia certificated mortgage servicing rights as of December 31, 2020, and December 31, 2019, respectively. The following table presents the unpaid principal balance of trading securities by position and collateral type at December 31, 2020 and December 31, 2019. Table 9.3 – Unpaid Principal Balance of Trading Securities by Position
(In Thousands) |  | December 31, 2020 |  | December 31, 2019
Senior (1) |  | $ | — |  |  | $ | 83,591 |
Mezzanine |  | 3,577 |  |  | 536,831 |
Subordinate |  | 242,278 |  |  | 301,908 |
Total Trading Securities |  | $ | 245,855 |  |  | $ | 922,330 |
(1)Our senior trading securities include interest-only securities, for which there is no principal balance. The following table provides the activity of trading securities during the years ended December 31, 2020 and 2019. Table 9.4 – Trading Securities Activity
|  | Year Ended December 31,
(In Thousands) |  | 2020 |  | 2019
Principal balance of securities acquired |  | $ | 79,921 |  |  | $ | 366,848 |
Principal balance of securities sold |  | 744,914 |  |  | 592,502 |
Net market valuation gains (losses) recorded (1) |  | (230,731) |  |  | 56,046 |
(1)Net market valuation gains (losses) on trading securities are recorded through Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income (loss). AFS Securities The following table presents the fair value of our available-for-sale securities by position and collateral type at December 31, 2020 and December 31, 2019. Table 9.5 – Fair Value of Available-for-Sale Securities by Position
(In Thousands) |  | December 31, 2020 |  | December 31, 2019
Senior |  |  |  |
Other third-party residential securities |  | $ | — |  |  | $ | 25,792 |
Total Senior |  | — |  |  | 25,792 |
Mezzanine |  |  |  |
Sequoia securities |  | — |  |  | 4,320 |
Multifamily securities |  | — |  |  | 5,123 |
Other third-party residential securities |  | 2,014 |  |  | 4,244 |
Total Mezzanine |  | 2,014 |  |  | 13,687 |
Subordinate |  |  |  |
Sequoia securities |  | 136,475 |  |  | 136,330 |
Multifamily securities |  | 43,663 |  |  | 3,749 |
Other third-party residential securities |  | 36,306 |  |  | 59,776 |
Total Subordinate |  | 216,444 |  |  | 199,855 |
Total AFS Securities |  | $ | 218,458 |  |  | $ | 239,334 |
The following table provides the activity of available-for-sale securities during the years ended December 31, 2020 and 2019. Table 9.6 – Available-for-Sale Securities Activity
|  | Year Ended December 31,
(In Thousands) |  | 2020 |  | 2019
Fair value of securities acquired |  | $ | 57,652 |  |  | $ | 26,538 |
Fair value of securities sold |  | 55,192 |  |  | 110,070 |
Net realized gains recorded |  | 4,635 |  |  | 17,582 |
We often purchase AFS securities at a discount to their outstanding principal balances. To the extent we purchase an AFS security that has a likelihood of incurring a loss, we do not amortize into income the portion of the purchase discount that we do not expect to collect due to the inherent credit risk of the security. We may also expense a portion of our investment in the security to the extent we believe that principal losses will exceed the purchase discount. We designate any amount of unpaid principal balance that we do not expect to receive and thus do not expect to earn or recover as a credit reserve on the security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method. At December 31, 2020, we had $41 million of AFS securities with contractual maturities less than five years, $3 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years. The following table presents the components of carrying value (which equals fair value) of AFS securities at December 31, 2020 and December 31, 2019. Table 9.7 – Carrying Value of AFS Securities
December 31, 2020 |  |  |  |  |  |  |  |
(In Thousands) |  | Senior |  | Mezzanine |  | Subordinate |  | Total
Principal balance |  | $ | — |  |  | $ | 2,000 |  |  | $ | 281,284 |  |  | $ | 283,284 |
Credit reserve |  | — |  |  | — |  |  | (44,967) |  |  | (44,967) |
Unamortized discount, net |  | — |  |  | — |  |  | (95,718) |  |  | (95,718) |
Amortized cost |  | — |  |  | 2,000 |  |  | 140,599 |  |  | 142,599 |
Gross unrealized gains |  | — |  |  | 14 |  |  | 77,280 |  |  | 77,294 |
Gross unrealized losses |  | — |  |  | — |  |  | (1,047) |  |  | (1,047) |
CECL credit allowance |  | — |  |  | — |  |  | (388) |  |  | (388) |
Carrying Value |  | $ | — |  |  | $ | 2,014 |  |  | $ | 216,444 |  |  | $ | 218,458 |
December 31, 2019 |  |  |  |  |  |  |  |
(In Thousands) |  | Senior |  | Mezzanine |  | Subordinate |  | Total
Principal balance |  | $ | 26,331 |  |  | $ | 13,512 |  |  | $ | 264,234 |  |  | $ | 304,077 |
Credit reserve |  | (533) |  |  | — |  |  | (32,407) |  |  | (32,940) |
Unamortized discount, net |  | (10,427) |  |  | (527) |  |  | (113,301) |  |  | (124,255) |
Amortized cost |  | 15,371 |  |  | 12,985 |  |  | 118,526 |  |  | 146,882 |
Gross unrealized gains |  | 10,450 |  |  | 702 |  |  | 81,329 |  |  | 92,481 |
Gross unrealized losses |  | (29) |  |  | — |  |  | — |  |  | (29) |
Carrying Value |  | $ | 25,792 |  |  | $ | 13,687 |  |  | $ | 199,855 |  |  | $ | 239,334 |
The following table presents the changes for the years ended December 31, 2020 and 2019, in unamortized discount and designated credit reserves on residential AFS securities. Table 9.8 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities
|  | Year Ended December 31, 2020 |  | Year Ended December 31, 2019
|  | Credit Reserve |  | Unamortized Discount, Net |  | Credit Reserve |  | Unamortized Discount, Net
(In Thousands) |  |  |  |
Beginning balance |  | $ | 32,940 |  |  | $ | 124,255 |  |  | $ | 41,370 |  |  | $ | 151,200 |
Amortization of net discount |  | — |  |  | (6,538) |  |  | — |  |  | (7,921) |
Realized credit losses |  | (2,282) |  |  | — |  |  | (2,606) |  |  | — |
Acquisitions |  | 7,248 |  |  | 2,634 |  |  | 3,712 |  |  | 1,910 |
Sales, calls, other |  | (731) |  |  | (16,841) |  |  | (9,453) |  |  | (21,017) |
Impairments |  | — |  |  | — |  |  | — |  |  | — |
Transfers to (release of) credit reserves, net |  | 7,792 |  |  | (7,792) |  |  | (83) |  |  | 83 |
Ending Balance |  | $ | 44,967 |  |  | $ | 95,718 |  |  | $ | 32,940 |  |  | $ | 124,255 |
AFS Securities with Unrealized Losses The following table presents the components comprising the total carrying value of residential AFS securities that were in a gross unrealized loss position at December 31, 2020 and December 31, 2019. Table 9.9 – Components of Fair Value of AFS Securities by Holding Periods
|  | Less Than 12 Consecutive Months |  | 12 Consecutive Months or Longer
|  | Amortized Cost |  | Unrealized Losses |  | Fair Value |  | Amortized Cost |  | Unrealized Losses |  | Fair Value
(In Thousands) |  |  |  |  |  |
December 31, 2020 |  | $ | 9,129 |  |  | $ | (1,047) |  |  | $ | 7,920 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
December 31, 2019 |  | — |  |  | — |  |  | — |  |  | 5,830 |  |  | (29) |  |  | 5,801 |
At December 31, 2020, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 96 AFS securities, of which five were in an unrealized loss position and zero were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2019, our consolidated balance sheet included 107 AFS securities, of which one was in an unrealized loss position and one was in a continuous unrealized loss position for 12 consecutive months or longer. Evaluating AFS Securities for Credit Losses Gross unrealized losses on our AFS securities were $1 million at December 31, 2020. Pursuant to our adoption of ASU 2016-13, "Financial Instruments - Credit Losses" in the first quarter of 2020, we evaluate all securities in an unrealized loss position to determine if the impairment is credit-related (resulting in an allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At December 31, 2020, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral. At December 31, 2020, our allowance for credit losses related to our AFS securities was $0.4 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of security credit losses. The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at December 31, 2020. Table 9.10 – Significant Credit Quality Indicators
December 31, 2020 |  |  |  | Subordinate Securities
Default rate |  |  |  | 0.5%
Loss severity |  |  |  | 23%
The following table details the activity related to the allowance for credit losses for AFS securities held at December 31, 2020. Table 9.11 – Rollforward of Allowance for Credit Losses
|  | Year Ended
(In Thousands) |  | December 31, 2020
Beginning balance allowance for credit losses |  | $ | — |
Transition impact from adoption of ASU 2016-13, "Financial Instruments - Credit Losses" |  | — |
Additions to allowance for credit losses on securities for which credit losses were not previously recorded |  | 1,864 |
Additional increases or decreases to the allowance for credit losses on securities that had an allowance recorded in a previous period |  | (1,476) |
Allowance on purchased financial assets with credit deterioration |  | — |
Reduction to allowance for securities sold during the period |  | — |
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell |  | — |
Write-offs charged against allowance |  | — |
Recoveries of amounts previously written off |  | — |
Ending balance of allowance for credit losses |  | $ | 388 |
Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. The following table presents the gross realized gains and losses on sales and calls of AFS securities for the years ended December 31, 2020, 2019, and 2018. Table 9.12 – Gross Realized Gains and Losses on AFS Securities
|  | Years Ended December 31,
(In Thousands) |  | 2020 |  | 2019 |  | 2018
Gross realized gains - sales |  | $ | 8,779 |  |  | $ | 17,582 |  |  | $ | 27,127 |
Gross realized gains - calls |  | 5 |  |  | 6,239 |  |  | 43 |
Gross realized losses - sales |  | (4,144) |  |  | — |  |  | (129) |
Total Realized Gains on Sales and Calls of AFS Securities, net |  | $ | 4,640 |  |  | $ | 23,821 |  |  | $ | 27,041 |

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