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Fair Value of Financial Instruments
 12 Months Ended
Dec. 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 December 31, 2021 and 2020.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
December 31, 2021December 31, 2020
Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value$1,845,248 $1,845,248 $176,604 $176,604 
Residential loans, held-for-investment5,747,150 5,747,150 4,072,410 4,072,410 
Business purpose loans, held-for-sale358,309 358,309 245,394 245,394 
Business purpose loans, held-for-investment4,432,680 4,432,680 3,890,959 3,890,959 
Multifamily loans473,514 473,514 492,221 492,221 
Real estate securities377,411 377,411 344,125 344,125 
Servicer advance investments (1)
350,923 350,923 231,489 231,489 
MSRs (1)
12,438 12,438 8,815 8,815 
Excess MSRs (1)
44,231 44,231 34,418 34,418 
HEIs (1)
192,740 192,740 42,440 42,440 
Other investments (1)
12,663 12,663 18,847 18,847 
Cash and cash equivalents450,485 450,485 461,260 461,260 
Restricted cash80,999 80,999 83,190 83,190 
Derivative assets26,467 26,467 53,238 53,238 
REO (2)
36,126 39,272 8,413 9,229 
Margin receivable (2)
7,269 7,269 4,758 4,758 
FHLBC stock (2)
10 10 5,000 5,000 
Pledged collateral (2)
— — 1,177 1,177 
Liabilities
Short-term debt $2,177,362 $2,177,362 $522,609 $522,609 
Margin payable (3)
24,368 24,368 — — 
Guarantee obligation (3)
7,459 7,133 10,039 7,843 
Point HEI non-controlling interest17,035 17,035 — — 
Derivative liabilities3,317 3,317 16,072 16,072 
ABS issued net
Fair value8,843,147 8,843,147 6,900,362 6,900,362 
Amortized cost410,410 410,471 200,299 204,892 
Other long-term debt, net (4)
988,483 989,570 774,726 783,570 
Convertible notes, net (4)
513,629 537,300 511,085 499,865 
Trust preferred securities and subordinated notes, net (4)
138,721 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.
(4)The liabilities are included in Long-Term debt, net of our consolidated balance sheets.
During the years ended December 31, 2021 and 2020, we elected the fair value option for $59 million and $108 million of securities, respectively, $12.92 billion and $4.37 billion of residential loans (principal balance), respectively, $2.22 billion and $1.40 billion of business purpose loans (principal balance), respectively, $197 million and $179 million of servicer advance investments, respectively, $18 million and $11 million of excess MSRs, respectively, $15 million and $0.5 million of other financial instruments, respectively. Additionally, during the years ended December 31, 2021 and 2020, we elected the fair value option for $155 million and $4 million of HEIs, respectively. 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, 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 December 31, 2021 and 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
December 31, 2021Carrying ValueFair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$7,592,398 $— $— $7,592,398 
Business purpose loans4,790,989 — — 4,790,989 
Multifamily loans473,514 — — 473,514 
Real estate securities377,411 — — 377,411 
Servicer advance investments350,923 — — 350,923 
MSRs12,438 — — 12,438 
Excess MSRs44,231 — — 44,231 
HEIs192,740 — — 192,740 
Other investments17,574 — — 17,574 
Derivative assets26,467 2,906 18,928 4,633 
FHLBC stock10 — 10 — 
Liabilities
Derivative liabilities$3,317 $1,563 $1,251 $503 
ABS issued8,843,147 — — 8,843,147 
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 
HEIs42,440 — — 42,440 
Derivative assets53,238 18,260 19,951 15,027 
Pledged collateral1,177 1,177 — — 
FHLBC stock5,000 — 5,000 — 
Liabilities
Derivative liabilities16,072 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 years ended December 31, 2021 and 2020.
Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets
Residential LoansBusiness
Purpose
Loans		Multifamily
Loans		Trading SecuritiesAFS
Securities		Servicer Advance InvestmentsExcess MSRsHEIsMSRs and Other Investments
(In Thousands)
Beginning balance - December 31, 2020$4,249,014 $4,136,353 $492,221 $125,667 $218,458 $231,489 $34,418 $42,440 $27,662 
Acquisitions13,139,907 136,685 — 58,917 19,100 196,583 17,830 155,023 15,215 
Originations— 2,150,539 — — — — — — — 
Sales(8,449,328)(211,113)— (34,802)(4,785)— — — — 
Principal paydowns(1,360,649)(1,307,566)(7,639)(2,713)(57,953)(76,223)— (19,395)(14,751)
Gains (losses) in net income (loss), net16,688 (77,357)(11,068)23,550 40,735 (926)(8,017)13,774 (2,846)
Unrealized losses in OCI, net— — — — (8,763)— — — — 
Other settlements, net (1)
(3,234)(36,552)— — — — — 898 (179)
Ending balance - December 31, 2021$7,592,398 $4,790,989 $473,514 $170,619 $206,792 $350,923 $44,231 $192,740 $25,101 
Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis (continued)
Liabilities
Derivatives (2)
Point HEI Non-Controlling InterestABS
Issued
(In Thousands)
Beginning balance - December 31, 2020$14,450 — $6,900,362 
Acquisitions— 16,639 4,202,070 
Principal paydowns— — (1,922,313)
Gains (losses) in net income (loss), net10,437 396 (336,972)
Other settlements, net (1)
(20,757)— — 
Ending balance - December 31, 2021$4,130 $17,035 $8,843,147 
 Assets
(In Thousands)Residential
Loans		Business Purpose LoansMultifamily LoansTrading
Securities		AFS
Securities		Servicer Advance InvestmentsExcess MSRs 
HEIs		MSRs and Other Investments
Beginning balance - December 31, 2019$7,714,745 $3,506,743 $4,408,524 $860,540 $239,334 $169,204 $31,814 $45,085 $67,313 
Acquisitions4,483,473 — — 108,249 57,652 179,419 10,906 3,517 450 
Originations— 1,431,251 — — — — — — — 
Sales(6,262,958)(135,800)— (603,529)(55,192)— — — — 
Principal paydowns(1,552,171)(753,026)(7,703)(8,687)(17,924)(107,527)— (4,278)(5,843)
Deconsolidations— — (3,849,779)— — — — — — 
Gains (losses) in net income, net(132,307)99,590 (58,821)(230,906)10,792 (9,607)(8,302)(1,884)(34,258)
Unrealized gains in OCI, net— — — — (16,204)— — — — 
Other settlements, net (1)
(1,768)(12,405)— — — — — — — 
Ending balance - December 31, 2020$4,249,014 $4,136,353 $492,221 $125,667 $218,458 $231,489 $34,418 $42,440 $27,662 
 Liabilities
(In Thousands)
Derivatives (2)
Contingent ConsiderationABS
 Issued
Beginning balance - December 31, 2019$8,860 $28,484 $10,515,475 
Acquisitions— — 1,478,589 
Principal paydowns— (13,353)(1,487,958)
Deconsolidations— — (3,706,789)
Gains (losses) in net income, net56,972 (446)101,045 
Other settlements, net (1)
(51,382)(14,685)— 
Ending balance - December 31, 2020$14,450 $— $6,900,362 
(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. Other settlements, net for contingent consideration reflects the reclassification from a contingent liability to a deferred liability during the period due to an amendment in the underlying agreement. See Note 16 for further discussion. Other settlements, net for trading securities relates to the consolidation of Freddie Mac K-Series securitization entities.
(2)     For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments, forward sale 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 December 31, 2021, 2020, and 2019. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the years ended December 31, 2021, 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 December 31, 2021, 2020, and 2019 Included in Net Income
Included in Net Income
Years Ended December 31,
(In Thousands)202120202019
Assets
Residential loans at Redwood$5,886 $1,138 $67,470 
Business purpose loans9,444 9,420 14,603 
Net investments in consolidated Sequoia entities (1)
12,455 (14,646)4,529 
Net investments in consolidated Freddie Mac SLST entities (1)
62,124 (21,220)27,225 
Net investments in consolidated Freddie Mac K-Series entities (1)
11,599 (9,309)21,430 
Net investments in consolidated CAFL SFR entities (1)
8,198 (37,062)(14,681)
Net investments in consolidated Point HEI entity (1)
614 — — 
Trading securities738 (83,327)18,865 
Available-for-sale securities— (388)— 
Servicer advance investments(926)(8,902)3,001 
MSRs629 (17,545)(11,957)
Excess MSRs(8,017)(8,302)(3,260)
HEIs at Redwood212 (1,884)842 
Loan purchase and interest rate lock commitments4,633 15,027 10,190 
Liabilities
Non-controlling interest in consolidated Point HEI entity$(396)$— $— 
Loan purchase commitments(503)$(577)$(1,290)
Contingent consideration— — (3,217)
(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 December 31, 2021, 2020, and 2019, which netted together represent the change in value of our investments at the consolidated VIEs. The net gain attributable for the Point HEI entity excludes valuation change in the non-controlling interest in consolidated Point HEI entity, which is separately shown in Table 5.4 above.
The following table presents information on assets recorded at fair value on a non-recurring basis at December 31, 2021 and 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 December 31, 2021 and 2020.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Gain (Loss) for
Year Ended
December 31, 2021Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3December 31, 2021
Assets
REO$588 $— $— $588 $(217)
Gain (Loss) for
Year Ended
December 31, 2020Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3December 31, 2020
Assets
REO$1,117 $— $— $1,117 $(157)
The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income (loss) for the years ended December 31, 2021, 2020, and 2019.
Table 5.6 – Market Valuation Gains and Losses, Net
Years Ended December 31,
(In Thousands)202120202019
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value$73,332 $(15,477)$3,267 
Residential loan purchase and forward sale commitments10,401 56,761 60,260 
Single-family rental loans held-for-sale, at fair value63,206 82,169 15,043 
Single-family rental loan purchase and interest rate lock commitments666 341 1,961 
Bridge loans8,253 (4,998)4,518 
Trading securities (1)
(352)(4,535)— 
Risk management derivatives, net41,060 (47,779)(15,723)
Total mortgage banking activities, net (2)
$196,566 $66,482 $69,326 
Investment Fair Value Changes, Net
Residential loans held-for-investment at Redwood$2,812 $(93,314)$58,891 
Single-family rental loans held-for-investment— (20,806)272 
Bridge loans held-for-investment(65)(10,629)(2,139)
Trading securities23,935 (226,196)56,046 
Servicer advance investments(925)(8,901)3,001 
Excess MSRs(8,017)(8,302)(3,260)
Net investments in Legacy Sequoia entities (3)
(1,558)(1,513)(1,545)
Net investments in Sequoia entities (3)
14,176 (13,244)6,947 
Net investments in Freddie Mac SLST entities (3)
62,374 (21,160)27,206 
Net investments in Freddie Mac K-Series entities (3)
11,599 (81,039)21,430 
Net investments in CAFL entities (3)
10,271 (36,754)(3,636)
Net investments in Point HEI entities (3)
218 — — 
HEIs at Redwood13,207 (1,883)— 
Other investments(366)(5,167)(544)
Risk management derivatives, net— (59,142)(127,169)
Change in allowance for credit losses on AFS securities388 (388)— 
Total investment fair value changes, net$128,049 $(588,438)$35,500 
Other Income
MSRs$(3,182)$(33,409)$(18,856)
Risk management derivatives, net— 13,966 8,595 
Gain on re-measurement of 5 Arches investment— — 2,441 
Total other income (4)
$(3,182)$(19,443)$(7,820)
Total Market Valuation (Losses) Gains, Net$321,433 $(541,399)$97,006 
(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.
Valuation Policy
We maintain policies that specify the methodologies we use to value different types of financial instruments. Significant changes to the valuation methodologies are reviewed by members of senior management to confirm the changes are appropriate and reasonable. Valuations based on information from external sources are performed on an instrument-by-instrument basis with the resulting amounts analyzed individually against internal calculations as well as in the aggregate by product type classification. Initial valuations are performed by our portfolio management groups using the valuation processes described below. Our finance department then independently reviews all fair value estimates to ensure they are reasonable. Finally, members of senior management review all fair value estimates, including an analysis of the methodology and valuation changes from prior reporting periods.
Valuation Process
We estimate fair values for financial assets or liabilities based on available inputs observed in the marketplace as well as unobservable inputs. We primarily use two pricing valuation techniques: market comparable pricing and discounted cash flow analysis. Market comparable pricing is used to determine the estimated fair value of certain instruments by incorporating known inputs and performance metrics, such as observed prepayment rates, delinquencies, severities, credit support, recent transaction prices, pending transactions, or prices of other similar instruments. Discounted cash flow analysis techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of an instrument and then discounting those cash flows at a rate of return that results in an estimate of fair value. After considering all available indications of the appropriate rate of return that market participants would require, we consider the reasonableness of the range indicated by the results to determine an estimate that is most representative of fair value. We also consider counterparty credit quality and risk as part of our fair value assessments.
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
December 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$1,200,322 Prepayment rate (annual CPR)20 -20 %20 %
Whole loan spread to TBA price$2.56 -$2.56 $2.56 
Whole loan spread to swap rate185 -185 bps185 bps
Called loan dollar price$102 -$102 $102 
Jumbo loans committed to sell644,926 Whole loan committed sales price$101.91 -$102.58 $102.19 
Loans held by Legacy Sequoia (2)
230,455 Liability priceN/AN/A
Loans held by Sequoia (2)
3,628,465 Liability priceN/AN/A
Loans held by Freddie Mac
SLST (2)
1,888,230 Liability priceN/AN/A
Business purpose loans:
Single-family rental loans358,309 Senior credit spread85 -110 bps91 bps
Subordinate credit spread125 -1,517 bps362 bps
Senior credit support36 -36 %36 %
IO discount rate8 -14 %9 %
Prepayment rate (annual CPR)3 -3 %3 %
Non-securitizable loan dollar price$78 -$103 $99 
Single-family rental loans held by CAFL3,488,074 Liability priceN/AN/A
Bridge loans944,606 Discount rate4 -15 %6 %
Multifamily loans held by Freddie Mac K-Series (2)
473,514 Liability priceN/AN/A
Trading and AFS securities377,411 Discount rate2 -47 %7  %
Prepayment rate (annual CPR)7 -50 %26  %
Default rate— -27 %4  %
Loss severity— -50 %24  %
CRT dollar price$96 -$112 $103 
Servicer advance investments350,923 Discount rate2 -4 %3 %
Prepayment rate (annual CPR)17 -30 %18 %
Expected remaining life (3)
4-5yrs5yrs
Mortgage servicing income2 -18 bps11 bps
MSRs12,438 Discount rate12 -15 %13  %
Prepayment rate (annual CPR)6 -79 %24  %
Per loan annual cost to service$95 -$95 $95 
Excess MSRs44,231 Discount rate13 -19 %17 %
Prepayment rate (annual CPR)19 -31 %22 %
Excess mortgage servicing amount9 -17 bps11 bps
Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)
December 31, 2021Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRangeWeighted
Average
Assets (continued)
Shared Home Appreciation Options$33,187 Discount rate10 -10 %10 %
Prepayment rate (annual CPR)1 -24 %17 %
Home Price Appreciation3 -4 %3 %
HEIs held by Point HEI entity$159,553 Liability priceN/AN/A
REO588 Loss severity9 -100 %17 %
Residential loan purchase commitments, net3,464 Prepayment rate (annual CPR)20 -20 %20 %
Whole loan spread to TBA price $2.56 -$2.56 $2.56 
Whole loan spread to swap rate185 -185 bps185 bps
Pull-through rate7 -100 %69 %
Committed sales price$101.97 -$102.62 $102.07 
Single-family rental interest rate lock commitments666 Senior credit spread85 -85 bps85 bps
Subordinate credit spread125 -1,517 bps450 bps
Senior credit support30 -30 %30 %
IO discount rate8 -8 %8 %
Prepayment rate (annual CPR)3 -3 %3 %
Pull-through rate100 100 %100 %
Liabilities
ABS issued (2)
At consolidated Sequoia entities3,610,929 Discount rate1 -18 %4  %
Prepayment rate (annual CPR)7 -50 %28  %
Default rate— -37 %1  %
Loss severity25 -50 %32  %
At consolidated CAFL SFR entities (4)
3,207,444 Discount rate1 -12 %3 %
Prepayment rate (annual CPR)3 -3 %3 %
Default rate5 -20 %8 %
Loss severity30 -30 %30 %
At consolidated Freddie Mac SLST entities1,445,507 Discount rate2 -7 %3  %
Prepayment rate (annual CPR)6 -8 %6  %
Default rate9 -10 %9  %
Loss severity35 -35 %35  %
At consolidated Freddie Mac K-Series entities (4)
441,857 Discount rate1 -8 %2 %
At consolidated Point HEI entities(4)
137,410 Discount rate4 -15 %5 %
Prepayment rate (annual CPR)20 -20 %20 %
Default rate6 -6 %6 %
Loss severity25 -25 %25 %
Home price appreciation3 -4 %3 %
Footnotes to Table 5.7
(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 December 31, 2021, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and Point HEI entities was $248 million, $302 million, $445 million, $32 million, and $10 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
A description of the instruments measured at fair value as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy is listed herein. 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.
Residential loans, business purpose loans, multifamily loans and HEI at consolidated entities
We have elected to account for most of our consolidated securitization entities as collateralized financing entities in accordance with GAAP. A CFE is a variable interest entity that holds financial assets and issues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets or fair value of the financial liabilities. Pursuant to this guidance, we use the fair value of the ABS issued by the CFEs (which we determined to be more observable) to determine the fair value of the loans held at these entities, whereby the net assets we consolidate in our financial statements related to these entities represent the estimated fair value of our retained interests in the CFEs. 
Residential loans at Redwood
Estimated fair values for residential loans are determined using models that incorporate various observable inputs, including pricing information from whole loan sales and securitizations. Certain significant inputs in these models are considered unobservable and are therefore Level 3 in nature. Significant pricing inputs obtained from market whole loan transaction activity include indicative spreads to indexed TBA prices and indexed swap rates for fixed-rate loans and indexed swap rates for hybrid loans (Level 3). Significant pricing inputs obtained from market securitization activity include indicative spreads to indexed TBA prices for senior MBS and indexed swap rates for subordinate MBS, senior credit support levels, and assumed future prepayment rates (Level 3). These assets would generally decrease in value based upon an increase in the credit spread, prepayment speed, or credit support assumptions.
Business purpose loans
Business purpose loans include single-family rental loans and bridge loans. Significant inputs in the valuation analysis for these assets are predominantly Level 3 in nature, due to the lack of readily available market quotes and related inputs.
Estimated fair values for our securitizable single-family rental loans are determined using models that incorporate various inputs, including pricing information from market comparable securitizations. Certain significant inputs in these models are considered unobservable and are therefore Level 3 in nature. Significant pricing inputs obtained from market activity include indicative spreads to indexed swap rates for senior and subordinate MBS, IO MBS discount rates, senior credit support levels, and assumed future prepayment rates (Level 3). These assets would generally decrease in value based upon an increase in the credit spread, prepayment speed, or credit support assumptions. Non-securitizable single-family rental loans are generally comprised of performing loans that cannot be securitized and certain delinquent loans, and are valued at a dollar price that is informed by various market data, including the estimated fair value of the collateral securing the loan, for which we typically receive third-party appraisals (Level 3).
Prices for our bridge loans are determined using discounted cash flow modeling, which incorporates a primary significant unobservable input of discount rate. Cash flows for performing loans are generally based on contractual loan terms, whereas cash flows for delinquent loans are generally based on the estimated fair value of the underlying collateral, for which we typically receive third-party appraisals (Level 3). These assets would generally decrease in value based upon an increase in the discount rate.
Real estate securities
Real estate securities include residential, multifamily, and other mortgage-backed securities that are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis for these assets are predominantly Level 3 in nature, due to the lack of readily available market quotes and related inputs. For real estate securities, we utilize both market comparable pricing and discounted cash flow analysis valuation techniques. Relevant market indicators that are factored into the analysis include bid/ask spreads, the amount and timing of credit losses, interest rates, and collateral prepayment rates. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3). These cash flow models use significant unobservable inputs such as a discount rate, prepayment rate, default rate and loss severity. The estimated fair value of our securities would generally decrease based upon an increase in discount rate, default rates, loss severities, or a decrease in prepayment rates.
Derivative assets and liabilities
Our derivative instruments include swaps, swaptions, TBAs, interest rate futures, loan purchase commitments, and forward sale commitments. Fair values of derivative instruments are determined using quoted prices from active markets, when available, or from valuation models and are supported by valuations provided by dealers active in derivative markets. Fair values of TBAs and interest rate futures are generally obtained using quoted prices from active markets (Level 1). Our derivative valuation models for swaps and swaptions require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates, and correlations of certain inputs. Model inputs can generally be verified and model selection does not involve significant management judgment (Level 2).
LPC, IRLC and FSC fair values for residential jumbo and single-family rental loans are estimated based on the estimated fair values of the underlying loans (as described in "Residential loans at Redwood" and "Business purpose loans" above). In addition, fair values for LPCs and IRLCs are estimated based on the probability that the mortgage loan will be purchased or originated (the "Pull-through rate") (Level 3).
Servicer advance investments
Estimated fair values for servicer advance investments are determined through internal pricing models that estimate future cash flows and utilize certain significant inputs that are considered unobservable and are therefore Level 3 in nature. Our estimations of cash flows include the combined cash flows of all of the components that comprise the servicer advance investments: existing advances, the requirement to purchase future advances, the recovery of advances, and the right to a portion of the associated mortgage servicing fee ("mortgage servicing income"). The valuation technique is based on discounted cash flows. Significant inputs used in the valuations include prepayment rate (of the loans underlying the investments), mortgage servicing income, servicer advance WAL (the weighted-average expected remaining life of servicer advances), and discount rate. These assets would generally decrease in value based upon an increase in prepayment rates, an increase in servicer advance WAL, an increase in discount rate, or a decrease in mortgage servicing income.
MSRs
MSRs include the rights to service jumbo residential mortgage loans. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. Changes in the fair value of MSRs occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputs and assumptions. Estimated fair values are based on applying the inputs to generate the net present value of estimated future MSR income (Level 3). These discounted cash flow models utilize certain significant unobservable inputs including market discount rates, assumed future prepayment rates of serviced loans, and the market cost of servicing. An increase in these unobservable inputs would generally reduce the estimated fair value of the MSRs.
Excess MSRs
Estimated fair values for excess MSRs are determined through internal pricing models that estimate future cash flows and utilize certain significant inputs that are considered unobservable and are therefore Level 3 in nature. The valuation technique is based on discounted cash flows. Significant unobservable inputs used in the valuations include prepayment rate (of the loans underlying the investments), the amount of excess servicing income expected to be received ("excess mortgage servicing income"), and discount rate. These assets would generally decrease in value based upon an increase in prepayment rates or discount rate, or a decrease in excess mortgage servicing income.
HEI at Redwood
Estimated fair values for home equity investment contracts are determined through internal pricing models that estimate future cash flows and utilize certain significant unobservable inputs such as forecasted home price appreciation, prepayment rates, default rate, loss severity and discount rate, and are therefore Level 3 in nature. The valuation technique is based on discounted cash flows. An increase in discount rate, default rate or loss severity, or a decrease in expected future home values combined with a decrease in prepayment rates, would generally reduce the estimated fair value of the HEIs.
Other Investments
Certain of our Other investments (comprised of strategic investments in early-stage start-up companies) are Level 3 financial instruments that we account for under the fair value option. These investments generally take the form of equity or debt with conversion features and do not have readily determinable fair values. We initially record these investments at cost and adjust their fair value based on observable price changes, such as follow-on capital raises or secondary sales, and will also evaluate impacts to valuation from changing market conditions and underlying business performance.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less and money market fund investments which are generally invested in U.S. government securities and are available to us on a daily basis. Fair values equal carrying values (Level 1).
Restricted cash
Restricted cash primarily includes interest-earning cash balances related to risk-sharing transactions with the Agencies, cash held in association with borrowings from the FHLBC, cash held at Servicing Investment entities, and cash held at consolidated Sequoia entities for the purpose of distribution to investors and reinvestment. Due to the short-term nature of the restrictions, fair values approximate carrying values (Level 1).
Accrued interest receivable and payable
Accrued interest receivable and payable includes interest due on our assets and payable on our liabilities. Due to the short-term nature of when these interest payments will be received or paid, fair values approximate carrying values (Level 1).
Real estate owned
Real estate owned ("REO") includes properties owned in satisfaction of foreclosed loans. Fair values are determined using available market quotes, appraisals, broker price opinions, comparable properties, or other indications of value (Level 3).
Margin receivable
Margin receivable reflects cash collateral we have posted with our various derivative and debt counterparties as required to satisfy margin requirements. Fair values approximate carrying values (Level 2).
Short-term debt
Short-term debt includes our credit facilities for residential and business purpose loans and real estate securities as well as non-recourse short-term borrowings used to finance servicer advance investments. As these borrowings are secured and subject to margin calls and as the rates on these borrowings reset frequently to market rates, we believe that carrying values approximate fair values (Level 2).
ABS issued
ABS issued includes asset-backed securities issued through the Legacy Sequoia, Sequoia, and CAFL securitization entities, as well as securities issued by certain third-party Freddie Mac K-Series and SLST securitization entities that we consolidate. These instruments are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. For ABS issued, we utilize both market comparable pricing and discounted cash flow analysis valuation techniques. Relevant market indicators factored into the analysis include bid/ask spreads, the amount and timing of collateral credit losses, interest rates, and collateral prepayment rates. Estimated fair values incorporate market indicators as well as other significant unobservable inputs to generate discounted cash flows (Level 3). These cash flow models use significant unobservable inputs such as discount rate, prepayment rate, default rate, and loss severity. A decrease in credit losses or discount rates, or an increase in prepayment rates, would generally cause the fair value of the ABS issued to decrease (i.e., become a larger liability).
Financial Instruments Carried at Amortized Cost
Guarantee obligations
In association with our risk-sharing transactions with the Agencies, we have made certain guarantees which are carried on our balance sheet at amortized cost (Level 3).
ABS issued
We account for certain ABS issued by securitizations we consolidate at amortized cost (Level 3).
Subordinate securities financing facilities
Borrowings under our subordinate securities financing facilities are secured by real estate securities and carried at unpaid principal balance net of any unamortized deferred issuance costs (Level 3).
Non-Recourse Business Purpose Loan Financing Facilities
Borrowings under our non-recourse business purpose loans financing facilities are secured by bridge loans and other BPL investments and carried at unpaid principal balance net of any unamortized deferred issuance costs (Level 3).
Recourse Business Purpose Loan Financing Facilities
Borrowings under our recourse business purpose loan financing facilities are secured by bridge loans and single-family rental loans and carried at unpaid principal balance net of any unamortized deferred issuance costs (Level 3).
Recourse Revolving Debt Facility
Borrowings under our recourse revolving debt facility are secured by MSRs and certificated mortgage servicing rights and carried at unpaid principal balance (Level 3).
Convertible notes
Convertible notes include unsecured convertible and exchangeable senior notes that are carried at their unpaid principal balance net of any unamortized deferred issuance costs. The fair value of the convertible notes is determined using quoted prices in generally active markets (Level 2).
Trust preferred securities and subordinated notes
Trust preferred securities and subordinated notes are carried at their unpaid principal balance net of any unamortized deferred issuance costs (Level 3).