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Fair Value of Financial Instruments
 3 Months Ended
Mar. 31, 2021
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments Fair Value of Financial Instruments
For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an asset or liability that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value.
In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.
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, 2021 and December 31, 2020.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
March 31, 2021December 31, 2020
Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value$996,476 $996,476 $176,604 $176,604 
Residential loans, held-for-investment3,705,324 3,705,324 4,072,410 4,072,410 
Business purpose loans, held-for-sale333,110 333,110 245,394 245,394 
Business purpose loans, held-for-investment3,839,010 3,839,010 3,890,959 3,890,959 
Multifamily loans489,545 489,545 492,221 492,221 
Real estate securities364,320 364,320 344,125 344,125 
Servicer advance investments (1)
206,525 206,525 231,489 231,489 
MSRs (1)
7,945 7,945 8,815 8,815 
Excess MSRs (1)
32,465 32,465 34,418 34,418 
Shared home appreciation options (1)
45,823 45,823 42,440 42,440 
Cash and cash equivalents426,019 426,019 461,260 461,260 
Restricted cash95,775 95,775 83,190 83,190 
Derivative assets129,924 129,924 53,238 53,238 
REO (2)
15,829 18,176 8,413 9,229 
Margin receivable (2)
16,283 16,283 4,758 4,758 
FHLBC stock (2)
5,000 5,000 5,000 5,000 
Pledged collateral (2)
— — 1,177 1,177 
Liabilities
Short-term debt $1,253,882 $1,253,882 $522,609 $522,609 
Margin payable (3)
84,306 84,306 — — 
Guarantee obligation (3)
9,238 6,782 10,039 7,843 
Derivative liabilities73,178 73,178 16,072 16,072 
ABS issued, net
Fair value6,475,472 6,475,472 6,900,362 6,900,362 
Amortized cost196,205 200,157 200,299 204,892 
FHLBC long-term borrowings1,000 1,000 1,000 1,000 
Other long-term debt, net786,869 793,421 774,726 783,570 
Convertible notes, net 511,707 522,423 511,085 499,865 
Trust preferred securities and subordinated notes, net
138,686 97,650 138,674 80,910 
(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.
During the three months ended March 31, 2021, we elected the fair value option for $22 million of securities, $3.10 billion of residential loans (principal balance), and $386 million of business purpose loans (principal balance). We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, for business purpose bridge loans we hold for investment, as well as for certain securities we purchase, including IO securities and fixed-rate securities rated investment grade or higher.
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, 2021 and December 31, 2020, 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, 2021Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$4,701,800 $— $— $4,701,800 
Business purpose loans4,172,120 — — 4,172,120 
Multifamily loans489,545 — — 489,545 
Real estate securities364,320 — — 364,320 
Servicer advance investments206,525 — — 206,525 
MSRs7,945 — — 7,945 
Excess MSRs32,465 — — 32,465 
Shared home appreciation options45,823 — — 45,823 
Derivative assets129,924 40,800 87,960 1,164 
FHLBC stock5,000 — 5,000 — 
Liabilities
Derivative liabilities$73,178 $38,072 $— $35,106 
ABS issued6,475,472 — — 6,475,472 
December 31, 2020Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$4,249,014 $— $— $4,249,014 
Business purpose loans4,136,353 — — 4,136,353 
Multifamily loans492,221 — — 492,221 
Real estate securities344,125 — — 344,125 
Servicer advance investments231,489 — — 231,489 
MSRs8,815 — — 8,815 
Excess MSRs34,418 — — 34,418 
Shared home appreciation options42,440 — — 42,440 
Derivative assets53,238 18,260 19,951 15,027 
Pledged collateral1,177 1,177 — — 
FHLBC stock5,000 — 5,000 — 
Liabilities
Derivative liabilities$16,072 $15,495 $— $577 
ABS issued6,900,362 — — 6,900,362 
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, 2021.
Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets
Residential LoansBusiness Purpose
Loans		Multifamily LoansTrading SecuritiesAFS
Securities		Servicer Advance InvestmentsMSRsExcess MSRsShared Home Appreciation Options
(In Thousands)
Beginning balance -
   December 31, 2020		$4,249,014 $4,136,353 $492,221 $125,667 $218,458 $231,489 $8,815 $34,418 $42,440 
Acquisitions3,146,682 — — 22,429 1,078 — — — — 
Originations— 386,327 — — — — — — — 
Sales(2,348,126)(8,877)— (23,546)(2,200)— — — — 
Principal paydowns(369,393)(282,289)(1,946)(509)(11,238)(24,804)— — (1,932)
Gains (losses) in net income (loss), net24,898 (45,987)(730)21,349 4,596 (160)(870)(1,953)5,315 
Unrealized losses in OCI, net— — — — 8,236 — — — — 
Other settlements, net (1)
(1,275)(13,407)— — — — — — — 
Ending balance -
   March 31, 2021		$4,701,800 $4,172,120 $489,545 $145,390 $218,930 $206,525 $7,945 $32,465 $45,823 
Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis (continued)
Liabilities
Derivatives (2)
ABS
Issued
(In Thousands)
Beginning balance - December 31, 2020$14,450 $6,900,362 
Acquisitions— 147,086 
Principal paydowns— (494,234)
Gains (losses) in net income (loss), net(52,761)(77,742)
Other settlements, net (1)
4,369 — 
Ending balance - March 31, 2021$(33,942)$6,475,472 
(1)    Other settlements, net for residential and business purpose loans represents the transfer of loans to REO, and for derivatives, the settlement of forward sale commitments and the transfer of the fair value of loan purchase or interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental loans.
(2)    For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments and interest rate lock commitments, are presented on a net basis.
The following table presents the portion of gains or losses included in our consolidated statements of income (loss) that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at March 31, 2021 and 2020. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2021 and 2020 are not included in this presentation.
Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at March 31, 2021 and 2020 Included in Net Income
Included in Net Income
Three Months Ended March 31,
(In Thousands)20212020
Assets
Residential loans at Redwood$(9,978)$(102,867)
Business purpose loans5,104 (68,864)
Net investments in consolidated Sequoia entities (1)
4,201 (179,499)
Net investments in consolidated Freddie Mac SLST entities (1)
4,088 (193,035)
Net investments in consolidated Freddie Mac K-Series entity (1)
8,921 (10,351)
Net investments in consolidated CAFL entities (1)
370 (271,917)
Trading securities490 (136,359)
Servicer advance investments(160)(6,062)
MSRs756 (16,640)
Excess MSRs(1,952)(9,494)
Shared home appreciation options5,315 (7,554)
Loan purchase and interest rate lock commitments1,053 — 
Liabilities
Loan purchase commitments$(35,661)$(3,967)
Contingent consideration— (312)
(1)    Represents the portion of net gains or losses included in our consolidated statements of income (loss) related to loans and the associated ABS issued at our consolidated securitization entities held at March 31, 2021 and 2020, which netted together represent the change in value of our investments at the consolidated VIEs, excluding REO.
The following table presents information on assets recorded at fair value on a non-recurring basis at March 31, 2021. 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, 2021.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2021
Gain (Loss) for
March 31, 2021Carrying
Value		Fair Value Measurements UsingThree Months Ended
(In Thousands)Level 1Level 2Level 3March 31, 2021
Assets
REO$1,316 $— $— $1,316 $(3)
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, 2021 and 2020.
Table 5.6 – Market Valuation Gains and Losses, Net
Three Months Ended March 31,
(In Thousands)20212020
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value$23,112 $(13,480)
Residential loan purchase and forward sale commitments(52,385)21,435 
Single-family rental loans held-for-sale, at fair value10,248 11,467 
Single-family rental loan purchase and interest rate lock commitments— 341 
Bridge loans1,044 (3,934)
Trading securities (1)
721 — 
Risk management derivatives, net92,822 (52,832)
Total mortgage banking activities, net (2)
$75,562 $(37,003)
Investment Fair Value Changes, Net
Residential loans at Redwood$317 $(93,636)
Single-family rental loans held-for-investment— (23,028)
Bridge loans held-for-investment3,304 (38,602)
Trading securities20,628 (263,325)
Servicer advance investments(160)(6,062)
Excess MSRs(1,953)(9,494)
Net investments in Legacy Sequoia entities (3)
(699)(391)
Net investments in Sequoia Choice entities (3)
4,898 (69,669)
Net investments in Freddie Mac SLST entities (3)
4,117 (142,162)
Net investment in Freddie Mac K-Series entity (3)
8,921 (86,509)
Net investments in CAFL entities (3)
(286)(67,846)
Shared home appreciation options5,315 (7,554)
Other investments310 (1,887)
Risk management derivatives, net— (59,142)
Credit recoveries (losses) on AFS securities375 (1,525)
Total investment fair value changes, net$45,087 $(870,832)
Other Income
MSRs$(866)$(18,608)
Risk management derivatives, net— 13,966 
Total other income (4)
$(866)$(4,642)
Total Market Valuation Gains (Losses), Net$119,783 $(912,477)
(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the mark-to-market risks associated with our residential mortgage banking operations.
(2)Mortgage banking activities, net presented above does not include fee income from loan originations or acquisitions, provisions for repurchases expense, and other expenses 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.
(3)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.
(4)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.
At March 31, 2021, our valuation policy and processes had not changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2020. 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, 2021Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average(1)
Assets
Residential loans, at fair value:
Jumbo fixed-rate loans$422,819 Prepayment rate (annual CPR)20 -20 %20 %
Whole loan spread to TBA price$3.75 -$3.75 $3.75 
Whole loan spread to swap rate250 -250 bps250 bps
Jumbo loans committed to sell573,657 Whole loan committed sales price$100.68 -$103.28 $101.50 
Loans held by Legacy Sequoia (2)
274,861 Liability priceN/AN/A
Loans held by Sequoia Choice (2)
1,276,112 Liability priceN/AN/A
Loans held by Freddie Mac SLST (2)
2,154,351 Liability priceN/AN/A
Business purpose loans:
Single-family rental loans333,110 Senior credit spread75 -75 bps75 bps
Subordinate credit spread120 -1,598 bps312 bps
Senior credit support33 -33 %33 %
IO discount rate7 -10 %8 %
Prepayment rate (annual CPR)3 -3 %3 %
Non-securitizable loan dollar price$86 -$102 $99 
Single-family rental loans held by CAFL3,212,526 Liability priceN/AN/A
Bridge loans626,484 Discount rate6 -15 %8 %
Multifamily loans held by Freddie Mac K-Series (2)
489,545 Liability priceN/AN/A
Trading and AFS securities364,320 Discount rate3 -27 %8  %
Prepayment rate (annual CPR)7 -65 %28  %
Default rate— -25 %4  %
Loss severity— -50 %20  %
CRT dollar price$90 -$112 $98 
Servicer advance investments206,525 Discount rate3 -3 %3 %
Prepayment rate (annual CPR)20 -30 %20 %
Expected remaining life (3)
4-4years4years
Mortgage servicing income— -14 bps8 bps
MSRs7,945 Discount rate12 -12 %12  %
Prepayment rate (annual CPR)9 -100 %39  %
Per loan annual cost to service$97 -$97 $97 
Excess MSRs32,465 Discount rate14 -17 %16 %
Prepayment rate (annual CPR)20 -28 %23 %
Excess mortgage servicing income8 -17 bps11 bps
Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)
March 31, 2021Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average (1)
Assets (continued)
Shared home appreciation options$45,823 Discount rate13 -13 %13 %
Prepayment rate (annual CPR)14 -24 %17 %
Home price appreciation3 -4 %3 %
REO1,316 Loss severity4 -53 %%25 %
Liabilities
Residential loan purchase commitments, net 33,942 Committed sales price$98.53 -$102.15 $100.13 
Pull-through rate22 -100 %76 %
Whole loan spread to TBA price$3.75 -$3.75 $3.75 
Whole loan spread to swap rate 250 -250 bps250 bps
Prepayment rate (annual CPR)20 -20 %20 %
MSR multiple— -3.8 x2.8 x
ABS issued (2):
At consolidated Sequoia entities1,325,920 Discount rate1 -19 %3  %
Prepayment rate (annual CPR)8 -54 %31  %
Default rate— -31 %2  %
Loss severity30 -50 %32  %
At consolidated Freddie Mac SLST entities1,725,235 Discount rate1 -7 %3 %
Prepayment rate (annual CPR)6 -8 %6 %
Default rate6 -12 %8 %
Loss severity35 -35 %35 %
At consolidated Freddie Mac K-Series entities (4)
460,565 Discount rate1 -10 %2  %
At consolidated CAFL entities (4)
2,963,752 Discount rate1 -20 %3 %
Prepayment rate (annual CPR)3 -3 %3 %
Default rate3 -17 %11 %
Loss severity30 -30 %30 %
(1)The weighted average input values for all loan types are based on the unpaid principal balance. The weighted average input values for all other assets and liabilities are based on relative fair value.
(2)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, 2021, the fair value of securities we owned at the consolidated Sequoia, Freddie Mac SLST, Freddie Mac K-Series, and CAFL entities was $226 million, $431 million, $29 million, and $261 million, respectively.
(3)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).
(4)As a market convention, certain securities are priced to a no-loss yield and therefore do not include default and loss severity assumptions.
Determination of Fair Value
We generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, a significant increase or decrease in any of these inputs - such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions - in isolation would likely result in a significantly lower or higher fair value measurement.
Included in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2020 is a more detailed description of our financial instruments measured at fair value and their significant inputs, as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy.