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Basis of Presentation | 12 Months Ended
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Dec. 31, 2020
Accounting Policies [Abstract] |
Basis of Presentation | Basis of PresentationThe consolidated financial statements presented herein are at December 31, 2020 and December 31, 2019, and for the years ended December 31, 2020, 2019, and 2018. These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — and the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the Company at December 31, 2020 and 2019, and results of operations for all periods presented have been made. Principles of Consolidation In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities issued prior to 2012 where we maintain an ongoing involvement ("Legacy Sequoia"), as well as entities formed in connection with the securitization of Redwood Choice expanded-prime loans ("Sequoia Choice"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations in which we have invested. Finally, we consolidated the assets and liabilities of certain CoreVest American Finance Lender ("CAFL") securitizations beginning in the fourth quarter of 2019, in connection with our acquisition of CoreVest. Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have purchased or retained, although for the consolidated Sequoia and CAFL entities we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. For financial reporting purposes, the underlying loans owned at the consolidated Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment at fair value, the underlying loans at the consolidated Freddie Mac K-Series are shown under Multifamily loans held-for-investment, at fair value, and the underlying single-family rental loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment, at fair value, on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income (loss), we recorded interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as other income and expenses associated with these entities' activities. See Note 14 for further discussion on ABS issued. During the first quarter of 2020, we sold subordinate securities (and transferred directing certificate holder status as a result of these sales) issued by four of these Freddie Mac K-Series securitization trusts and determined that we should derecognize the associated assets and liabilities of each of these entities for financial reporting purposes. We deconsolidated $3.86 billion of multifamily loans and other assets and $3.72 billion of multifamily ABS issued and other liabilities, for which we realized market valuation losses of $72 million, which were recorded through Investment fair value changes, net on our consolidated statements of income (loss) for the three months ended March 31, 2020. We also consolidate two partnerships ("Servicing Investment" entities) through which we have invested in servicing-related assets. We maintain an 80% ownership interest in each entity and have determined that we are the primary beneficiary of these partnerships. Beginning in the first quarter of 2019, we consolidated 5 Arches, an originator of business purpose loans, pursuant to the exercise of our purchase option and the acquisition of the remaining equity in the company. In the fourth quarter of 2019, we acquired and consolidated CoreVest, an originator and portfolio manager of business purpose loans. See Note 4 for further discussion on principles of consolidation. Use of Estimates The preparation of financial statements requires us to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material. Acquisitions In May 2018, Redwood acquired a 20% minority interest in 5 Arches, an originator of business purpose loans, for $10 million in cash, with a one-year option to purchase all remaining equity in the company. On March 1, 2019, we completed the acquisition of the remaining 80% interest in 5 Arches. At closing, we paid approximately $13 million of cash, with the remaining $27 million in consideration to be paid in a mix of cash and Redwood common stock over a two-year period. A liability resulting from the contingent consideration arrangement with 5 Arches was initially recorded at its acquisition-date fair value of $25 million as part of total consideration for the acquisition of 5 Arches. The contingent earn-out payments were classified as a contingent consideration liability and carried at fair value prior to March 31, 2020. During the three months ended March 31, 2020, we made a cash payment of $11 million and granted $3 million of Redwood common stock in connection with the first anniversary of the purchase date. Additionally, as a result of an amendment to the agreement, we reclassified the contingent liability to a deferred liability, as the remaining payments became payable on a set timetable without any remaining contingencies. At December 31, 2020, the carrying value of this deferred liability was $15 million and was recorded as a component of Accrued expenses and other liabilities on our consolidated balance sheets. During the years ended December 31, 2020 and 2019, we recorded $0.2 million and $3 million of contingent consideration expense, respectively, through Other expenses on our consolidated statements of income (loss). See Note 16 for additional information on our contingent consideration liability. In October 2019, we acquired CoreVest, an originator and portfolio manager of business purpose loans. Aggregate consideration for this acquisition totaled approximately $492 million, net of in-place financing on existing assets. The consideration consisted of $482 million of cash and $10 million of restricted stock awards issued to the CoreVest management team. Based on the terms of the equity interest purchase agreement, we determined that the $10 million of shares should be accounted for as compensation expense for post-combination services, and therefore, it is not included in the GAAP purchase price allocated to the assets and liabilities acquired. See Note 21 for additional information related to the restricted stock awards issued in connection with the CoreVest acquisition. During 2019, we accounted for the acquisitions of 5 Arches and CoreVest under the acquisition method of accounting pursuant to ASC 805. We performed the purchase price allocations and recorded underlying assets acquired and liabilities assumed based on their estimated fair values using the information available as of each acquisition date, with the excess of the purchase price allocated to goodwill. Through December 31, 2020, there were no significant changes to our purchase price allocations, which are summarized in the following table. Table 2.1 – Purchase Price Allocations
(In Thousands) |  | 5 Arches |  | CoreVest
Acquisition Date |  | March 1, 2019 |  | October 15, 2019
Purchase price: |  |  |  |
Cash |  | $ | 12,575 |  |  | $ | 482,311 |
Contingent consideration, at fair value |  | 24,621 |  |  | — |
Purchase option, at fair value |  | 5,082 |  |  | — |
Equity method investment, at fair value |  | 8,052 |  |  | — |
Total consideration |  | $ | 50,330 |  |  | $ | 482,311 |
Allocated to: |  |  |  |
Business purpose loans, at fair value |  | $ | 2,022 |  |  | $ | 2,610,490 |
Cash and cash equivalents |  | 2,128 |  |  | 30,685 |
Restricted cash |  | 9,082 |  |  | — |
Other assets |  | 5,473 |  |  | 67,420 |
Goodwill |  | 28,747 |  |  | 59,928 |
Intangible assets |  | 24,800 |  |  | 56,500 |
Deferred tax asset |  | — |  |  | 2,577 |
Total assets acquired |  | 72,252 |  |  | 2,827,600 |
Asset-backed securities issued, at fair value |  | — |  |  | 1,656,023 |
Short-term debt, net |  | 3,800 |  |  | 663,275 |
Accrued expenses and other liabilities |  | 13,920 |  |  | 25,991 |
Deferred tax liability |  | 4,202 |  |  | — |
Total liabilities assumed |  | 21,922 |  |  | 2,345,289 |
Total net assets acquired |  | $ | 50,330 |  |  | $ | 482,311 |
Because we owned a 20% noncontrolling interest in 5 Arches immediately before obtaining full control, we remeasured our initial minority investment and purchase option at their acquisition-date fair values using the income approach, which resulted in a gain of $2 million that was recorded in Other income on our consolidated statements of income during the three months ended March 31, 2019. We recognized $2 million of acquisition costs related our acquisitions of 5 Arches and CoreVest during the year ended December 31, 2019. These costs primarily related to accounting, consulting, and legal expenses and are included in our General and administrative expenses on our consolidated statements of income. In connection with the acquisitions of 5 Arches and CoreVest, we identified and recorded finite-lived intangible assets totaling $25 million and $57 million, respectively. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at December 31, 2020 and December 31, 2019. Table 2.2 – Intangible Assets – Activity
|  | Intangible Assets at Acquisition |  | Accumulated Amortization at December 31, 2020 |  | Carrying Value at December 31, 2020 |  | Weighted Average Amortization Period (in years)
(Dollars in Thousands) |  |  |  |
Borrower network |  | $ | 45,300 |  |  | $ | (7,819) |  |  | $ | 37,481 |  |  | 7
Broker network |  | 18,100 |  |  | (6,637) |  |  | 11,463 |  |  | 5
Non-compete agreements |  | 9,500 |  |  | (4,431) |  |  | 5,069 |  |  | 3
Tradenames |  | 4,000 |  |  | (1,860) |  |  | 2,140 |  |  | 3
Developed technology |  | 1,800 |  |  | (1,088) |  |  | 712 |  |  | 2
Loan administration fees on existing loan assets |  | 2,600 |  |  | (2,600) |  |  | — |  |  | 1
Total |  | $ | 81,300 |  |  | $ | (24,435) |  |  | $ | 56,865 |  |  | 6
|  | Intangible Assets at Acquisition |  | Accumulated Amortization at December 31, 2019 |  | Carrying Value at December 31, 2019 |  | Weighted Average Amortization Period (in years)
(Dollars in Thousands) |  |  |  |
Borrower network |  | $ | 45,300 |  |  | $ | (1,348) |  |  | $ | 43,952 |  |  | 7
Broker network |  | 18,100 |  |  | (3,017) |  |  | 15,083 |  |  | 5
Non-compete agreements |  | 9,500 |  |  | (1,264) |  |  | 8,236 |  |  | 3
Tradenames |  | 4,000 |  |  | (527) |  |  | 3,473 |  |  | 3
Developed technology |  | 1,800 |  |  | (188) |  |  | 1,612 |  |  | 2
Loan administration fees on existing loan assets |  | 2,600 |  |  | (2,167) |  |  | 433 |  |  | 1
Total |  | $ | 81,300 |  |  | $ | (8,511) |  |  | $ | 72,789 |  |  | 6
All of our intangible assets are amortized on a straight-line basis. For the years ended December 31, 2020 and 2019, we recorded intangible asset amortization expense of $16 million and $9 million, respectively. Estimated future amortization expense is summarized in the table below. Table 2.3 – Intangible Asset Amortization Expense by Year
(In Thousands) |  |  |  |  |  | December 31, 2020
2021 |  |  |  |  |  | $ | 15,304 |
2022 |  |  |  |  |  | 12,800 |
2023 |  |  |  |  |  | 10,091 |
2024 |  |  |  |  |  | 7,073 |
2025 and thereafter |  |  |  |  |  | 11,597 |
Total Future Intangible Asset Amortization |  |  |  |  |  | $ | 56,865 |
We recorded total goodwill of $89 million in 2019 as a result of the total consideration exceeding the fair value of the net assets acquired from 5 Arches and CoreVest. The goodwill was attributed to the expected business synergies and expansion into business purpose loan markets, as well as access to the knowledgeable and experienced workforces continuing to provide services to the business. Of the total goodwill recorded, $75 million is deductible for tax purposes. For reporting purposes, we included the intangible assets and goodwill from these acquisitions within the Business Purpose Lending segment. During the first quarter of 2020, as a result of the deterioration in economic conditions caused by the spread of the COVID-19 pandemic (the "pandemic"), and its impact on our business, including a significant decline in the market price of our common stock, we determined that it was more likely than not that the fair value of our Business Purpose Lending reporting unit was lower than its carrying amount, including goodwill. Based on this analysis, we determined that an interim goodwill impairment test should be performed as of March 31, 2020 and prepared updated cash flow projections for the reporting unit, resulting in a reduction in the long-term forecasts of profitability for our Business Purpose Lending reporting unit as compared to the prior year forecasts. Using these projections, we concluded that the fair value of our Business Purpose Lending reporting unit was less than its carrying value, including goodwill. As a result of this evaluation, we recorded a non-cash $89 million goodwill impairment expense through Other expenses on our consolidated statements of income (loss) during the three months ended March 31, 2020. In conjunction with our assessment of goodwill, we also assessed our intangible assets for impairment at March 31, 2020 and determined they were not impaired. On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at December 31, 2020. The following unaudited pro forma financial information presents Net interest income, Non-interest income, and Net income of Redwood, 5 Arches, and CoreVest combined, for the year ended December 31, 2019, as if the acquisitions occurred as of January 1, 2018. These pro forma amounts have been adjusted to include the amortization of intangible assets and acquisition-related compensation expense for both periods, and to exclude the income statement impacts related to our equity method investment in 5 Arches. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated financial results of operations that would have been reported if the acquisitions had been completed as of January 1, 2018 and should not be taken as indicative of our future consolidated results of operations. Table 2.4 – Unaudited Pro Forma Financial Information
|  |  |  | Year Ended
(In Thousands) |  |  |  | December 31, 2019
Supplementary pro forma information: |  |  |  |
Net interest income |  |  |  | $ | 167,680 |
Non-interest income |  |  |  | 193,519 |
Net income |  |  |  | 185,896 |

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