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Real Estate Securities | 9 Months Ended
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Sep. 30, 2021
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 September 30, 2021 and December 31, 2020. Table 9.1 – Fair Values of Real Estate Securities by Type
(In Thousands) |  | September 30, 2021 |  | December 31, 2020
Trading |  | $ | 153,010 |  |  | $ | 125,667 |
Available-for-sale |  | 200,276 |  |  | 218,458 |
Total Real Estate Securities |  | $ | 353,286 |  |  | $ | 344,125 |
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. Subordinate securities are all interests below mezzanine. Exclusive of 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 September 30, 2021 and December 31, 2020. Table 9.2 – Fair Value of Trading Securities by Position
(In Thousands) |  | September 30, 2021 |  | December 31, 2020
Senior |  |  |  |
Interest-only securities (1) |  | $ | 22,494 |  |  | $ | 28,464 |
Total Senior |  | 22,494 |  |  | 28,464 |
Mezzanine |  |  |  |
Sequoia securities |  | — |  |  | 3,649 |
Total Mezzanine |  | — |  |  | 3,649 |
Subordinate |  |  |  |
RPL securities |  | 64,845 |  |  | 47,448 |
Multifamily securities |  | 11,298 |  |  | 5,592 |
Other third-party residential securities |  | 54,373 |  |  | 40,514 |
Total Subordinate |  | 130,516 |  |  | 93,554 |
Total Trading Securities |  | $ | 153,010 |  |  | $ | 125,667 |
(1)Includes $15 million and $13 million of Sequoia certificated mortgage servicing rights at September 30, 2021 and December 31, 2020, respectively. The following table presents the unpaid principal balance of trading securities by position and collateral type at September 30, 2021 and December 31, 2020. Table 9.3 – Unpaid Principal Balance of Trading Securities by Position
(In Thousands) |  | September 30, 2021 |  | December 31, 2020
Senior (1) |  | $ | — |  |  | $ | — |
Mezzanine |  | — |  |  | 3,577 |
Subordinate |  | 216,771 |  |  | 242,278 |
Total Trading Securities |  | $ | 216,771 |  |  | $ | 245,855 |
(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 three and nine months ended September 30, 2021 and 2020. Table 9.4 – Trading Securities Activity
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Principal balance of securities acquired |  | $ | 10,750 |  |  | $ | 11,000 |  |  | $ | 28,380 |  |  | $ | 77,721 |
Principal balance of securities sold |  | 750 |  |  | 15,903 |  |  | 53,561 |  |  | 720,517 |
Net market valuation gains (losses) recorded (1) |  | 1,578 |  |  | (3,600) |  |  | 24,725 |  |  | (224,679) |
(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 September 30, 2021 and December 31, 2020. Table 9.5 – Fair Value of Available-for-Sale Securities by Position
(In Thousands) |  | September 30, 2021 |  | December 31, 2020
Mezzanine |  |  |  |
Other third-party residential securities |  | $ | — |  |  | $ | 2,014 |
Total Mezzanine |  | — |  |  | 2,014 |
Subordinate |  |  |  |
Sequoia securities |  | 128,874 |  |  | 136,475 |
Multifamily securities |  | 31,320 |  |  | 43,663 |
Other third-party residential securities |  | 40,082 |  |  | 36,306 |
Total Subordinate |  | 200,276 |  |  | 216,444 |
Total AFS Securities |  | $ | 200,276 |  |  | $ | 218,458 |
The following table provides the activity of available-for-sale securities during the three and nine months ended September 30, 2021 and 2020. Table 9.6 – Available-for-Sale Securities Activity
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Fair value of securities acquired |  | $ | — |  |  | $ | 25,483 |  |  | $ | 1,600 |  |  | $ | 56,664 |
Fair value of securities sold |  | — |  |  | — |  |  | 4,785 |  |  | 55,193 |
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 September 30, 2021, we had $28 million of AFS securities with contractual maturities less than five years, $4 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 September 30, 2021 and December 31, 2020. Table 9.7 – Carrying Value of AFS Securities
September 30, 2021 |  |  |  |  |  |
(In Thousands) |  |  |  | Mezzanine |  | Subordinate |  | Total
Principal balance |  |  |  | $ | — |  |  | $ | 238,459 |  |  | $ | 238,459 |
Credit reserve |  |  |  | — |  |  | (29,448) |  |  | (29,448) |
Unamortized discount, net |  |  |  | — |  |  | (88,108) |  |  | (88,108) |
Amortized cost |  |  |  | — |  |  | 120,903 |  |  | 120,903 |
Gross unrealized gains |  |  |  | — |  |  | 79,406 |  |  | 79,406 |
Gross unrealized losses |  |  |  | — |  |  | (33) |  |  | (33) |
CECL allowance |  |  |  | — |  |  | — |  |  | — |
Carrying Value |  |  |  | $ | — |  |  | $ | 200,276 |  |  | $ | 200,276 |
December 31, 2020 |  |  |  |  |  |
(In Thousands) |  |  |  | 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 allowance |  |  |  | — |  |  | (388) |  |  | (388) |
Carrying Value |  |  |  | $ | 2,014 |  |  | $ | 216,444 |  |  | $ | 218,458 |
The following table presents the changes for the three and nine months ended September 30, 2021, 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
|  | Three Months Ended September 30, 2021 |  | Nine Months Ended September 30, 2021
|  | Credit Reserve |  | Unamortized Discount, Net |  | Credit Reserve |  | Unamortized Discount, Net
(In Thousands) |  |  |  |
Beginning balance |  | $ | 40,349 |  |  | $ | 90,216 |  |  | $ | 44,967 |  |  | $ | 95,718 |
Amortization of net discount |  | — |  |  | (6,437) |  |  | — |  |  | (9,620) |
Realized credit losses |  | (184) |  |  | — |  |  | (433) |  |  | — |
Acquisitions |  | — |  |  | — |  |  | 2,825 |  |  | 1,208 |
Sales, calls, other |  | (320) |  |  | (6,068) |  |  | (1,312) |  |  | (15,797) |
Transfers to (release of) credit reserves, net |  | (10,397) |  |  | 10,397 |  |  | (16,599) |  |  | 16,599 |
Ending Balance |  | $ | 29,448 |  |  | $ | 88,108 |  |  | $ | 29,448 |  |  | $ | 88,108 |
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 September 30, 2021 and December 31, 2020. 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) |  |  |  |  |  |
September 30, 2021 |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,600 |  |  | $ | (33) |  |  | $ | 1,567 |
December 31, 2020 |  | 9,129 |  |  | (1,047) |  |  | 7,920 |  |  | — |  |  | — |  |  | — |
At September 30, 2021, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 84 AFS securities, of which one was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2020, 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. Evaluating AFS Securities for Credit Losses Gross unrealized losses on our AFS securities were $33 thousand at September 30, 2021. 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 September 30, 2021, 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 September 30, 2021, our current expected credit loss ("CECL") allowance related to our AFS securities was zero. 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 September 30, 2021. Table 9.10 – Significant Credit Quality Indicators
September 30, 2021 |  |  |  | Subordinate Securities
Default rate |  |  |  | N/A
Loss severity |  |  |  | N/A
The following table details the activity related to the allowance for credit losses for AFS securities for the three and nine months ended September 30, 2021. Table 9.11 – Rollforward of Allowance for Credit Losses
|  | Three Months Ended September 30, 2021 |  | Nine Months Ended September 30, 2021
(In Thousands) |  |
Beginning balance allowance for credit losses |  | $ | — |  |  | $ | 388 |
Additions to allowance for credit losses on securities for which credit losses were not previously recorded |  | — |  |  | — |
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period |  | — |  |  | (388) |
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 |  | $ | — |  |  | $ | — |
Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income (loss). The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and nine months ended September 30, 2021 and 2020. Table 9.12 – Gross Realized Gains and Losses on AFS Securities
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Gross realized gains - sales |  | $ | — |  |  | $ | — |  |  | $ | 1,507 |  |  | $ | 8,779 |
Gross realized gains - calls |  | 6,389 |  |  | — |  |  | 15,484 |  |  | — |
Gross realized losses - sales |  | — |  |  | — |  |  | — |  |  | (4,144) |
Total Realized Gains on Sales and Calls of AFS Securities, net |  | $ | 6,389 |  |  | $ | — |  |  | $ | 16,991 |  |  | $ | 4,635 |
During the three months ended September 30, 2021, we called two of our unconsolidated Sequoia entities, and purchased $66 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $6 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). During the nine months ended September 30, 2021, we called six of our unconsolidated Sequoia entities, and purchased $167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $15 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss).

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