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Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2022
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 June 30, 2022 and December 31, 2021.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
June 30, 2022December 31, 2021
Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
(In Thousands)
Assets
Residential loans, held-for-sale, at fair value$1,213,067 $1,213,067 $1,845,248 $1,845,248 
Residential loans, held-for-investment, at fair value5,365,531 5,365,531 5,747,150 5,747,150 
Business purpose loans, held-for-sale, at fair value505,171 505,171 358,309 358,309 
Business purpose loans, held-for-investment, at fair value4,697,766 4,697,766 4,432,680 4,432,680 
Consolidated Agency multifamily loans, at fair value443,114 443,114 473,514 473,514 
Real estate securities, at fair value284,278 284,278 377,411 377,411 
Servicer advance investments (1)
273,210 273,210 350,923 350,923 
MSRs (1)
23,560 23,560 12,438 12,438 
Excess MSRs (1)
40,803 40,803 44,231 44,231 
HEIs (1)
276,366 276,366 192,740 192,740 
Other investments (1)
10,869 10,869 12,663 12,663 
Cash and cash equivalents371,296 371,296 450,485 450,485 
Restricted cash72,558 72,558 80,999 80,999 
Derivative assets36,587 36,587 26,467 26,467 
REO (2)
7,813 9,170 36,126 39,272 
Margin receivable (2)
11,420 11,420 7,269 7,269 
Liabilities
Short-term debt $1,869,822 $1,869,822 $2,177,362 $2,177,362 
Margin payable (3)
15,023 15,023 24,368 24,368 
Guarantee obligations (3)
6,768 6,241 7,459 7,133 
HEI securitization non-controlling interest25,422 25,422 17,035 17,035 
Derivative liabilities6,591 6,591 3,317 3,317 
ABS issued, net
At fair value7,993,953 7,993,953 8,843,147 8,843,147 
At amortized cost590,193 569,731 410,410 410,471 
Other long-term debt, net (4)
1,104,050 1,101,622 988,483 989,570 
Convertible notes, net (4)
723,267 684,922 513,629 537,300 
Trust preferred securities and subordinated notes, net (4)
138,744 83,700 138,721 97,650 
(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)These liabilities are included in Long-Term debt, net of our consolidated balance sheets.
During the three and six months ended June 30, 2022, we elected the fair value option for zero and $5 million of securities, respectively, $1.15 billion and $3.26 billion of residential loans (principal balance), respectively, and $923 million and $1.84 billion of business purpose loans (principal balance), respectively. Additionally, during the three and six months ended June 30, 2022, we elected the fair value option for $57 million and $97 million of HEIs, respectively, and $3 million and $8 million of Other Investments, 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, fixed-rate securities rated investment grade or higher and HEIs.
The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at June 30, 2022 and December 31, 2021, 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
June 30, 2022Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$6,578,566 $— $— $6,578,566 
Business purpose loans5,202,938 — — 5,202,938 
Consolidated Agency multifamily loans443,114 — — 443,114 
Real estate securities284,278 — — 284,278 
Servicer advance investments273,210 — — 273,210 
MSRs23,560 — — 23,560 
Excess MSRs40,803 — — 40,803 
HEIs276,366 — — 276,366 
Other investments10,869 — — 10,869 
Derivative assets36,587 4,979 29,601 2,007 
Liabilities
HEI securitization non-controlling interest$25,422 $— $— $25,422 
Derivative liabilities6,591 3,619 2,445 527 
ABS issued7,993,953 — — 7,993,953 
December 31, 2021Carrying
Value		Fair 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 
Consolidated Agency 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 
Liabilities
HEI securitization non-controlling interest$17,035 $— $— $17,035 
Derivative liabilities3,317 1,563 1,251 503 
ABS issued8,843,147 — — 8,843,147 
The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2022.
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 InvestmentsExcess MSRsHEIsMSRs and Other Investments
(In Thousands)
Beginning balance -
   December 31, 2021		$7,592,398 $4,790,989 $473,514 $170,619 $206,792 $350,923 $44,231 $192,740 $25,101 
Acquisitions3,247,960 122,065 — 5,006 10,000 — — 97,389 8,293 
Originations— 1,721,032 — — — — — — — 
Sales(3,050,759)(331,750)— (23,329)— — — — (2,231)
Principal paydowns(551,470)(719,690)(3,971)(1,018)(25,015)(71,401)— (25,826)(30)
Gains (losses) in net income (loss), net(657,601)(378,745)(26,429)(17,498)11,730 (6,312)(3,428)12,063 6,875 
Unrealized losses in OCI, net— — — — (53,009)— — — — 
Other settlements, net (1)
(1,962)(963)— — — — — — (3,579)
Ending balance -
  June 30, 2022		$6,578,566 $5,202,938 $443,114 $133,780 $150,498 $273,210 $40,803 $276,366 $34,429 
Liabilities
Derivatives (2)
HEI Securitization Non-Controlling InterestABS
Issued
(In Thousands)
Beginning balance - December 31, 2021$4,130 $17,035 $8,843,147 
Acquisitions— — 952,711 
Principal paydowns— — (925,650)
Gains (losses) in net income (loss), net(51,265)6,218 (876,255)
Other settlements, net (1)
48,615 — — 
Ending balance - June 30, 2022$1,480 $23,253 $7,993,953 
(1)     Other settlements, net for residential and business purpose loans represents the transfer of loans to REO, and for derivatives, the transfer of the fair value of loan purchase and interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental business purpose loans, and for MSRs and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.
(2)     For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments, and interest rate lock commitments, are presented on a net basis.
The following table presents the portion of fair value gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at June 30, 2022 and 2021. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and six months ended June 30, 2022 and 2021 are not included in this presentation.
Table 5.4 – Portion of Net Fair Value Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at June 30, 2022 and 2021 Included in Net Income (Loss)
Included in Net Income (Loss)
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2022202120222021
Assets
Residential loans at Redwood$(15,995)$14,130 $(31,858)$10,481 
Business purpose loans(28,385)28,404 (36,566)40,003 
Net investments in consolidated Sequoia entities (1)
(6,222)4,693 (11,203)8,893 
Net investments in consolidated Freddie Mac SLST entities (1)
(36,014)36,137 (33,074)40,225 
Net investments in consolidated Freddie Mac K-Series entities (1)
(190)1,855 74 10,776 
Net investments in consolidated CAFL SFR entities (1)
(21,828)2,908 (17,780)2,556 
Net investment in consolidated HEI securitization entity (1)
3,371 — 13,000 — 
Trading securities(17,501)1,772 (19,884)2,262 
Servicer advance investments(3,231)(940)(6,313)(1,100)
MSRs4,248 (330)7,644 273 
Excess MSRs(2,220)(2,477)(3,428)(4,430)
HEIs at Redwood1,549 2,080 2,701 7,395 
Loan purchase and interest rate lock commitments2,056 14,550 2,007 14,171 
Liabilities
HEI securitization non-controlling interest $(2,170)$— $(8,388)$— 
Loan purchase commitments(488)(696)(527)(724)
(1)    Represents the portion of net fair value gains or losses included in our consolidated statements of income (loss) related to securitized loans, securitized HEIs, and the associated ABS issued at our consolidated securitization entities held at June 30, 2022 and 2021, which netted together represent the change in value of our investments at the consolidated VIEs accounted for under CFE election, excluding REO.
The following table presents information on assets recorded at fair value on a non-recurring basis at June 30, 2022. 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 June 30, 2022.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at June 30, 2022
Gain (Loss) for
June 30, 2022Carrying
Value		Fair Value Measurements UsingThree Months EndedSix Months Ended
(In Thousands)Level 1Level 2Level 3June 30, 2022June 30, 2022
Assets
REO$1,380 $— $— $1,380 $— $— 
Strategic investments17,240 — — 17,240 9,990 9,990 
The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and six months ended June 30, 2022 and 2021.
Table 5.6 – Market Valuation Gains and Losses, Net
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2022202120222021
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value$(24,517)$24,988 $(51,716)$48,100 
Residential loan purchase commitments(8,897)51,919 (50,520)(466)
Single-family rental loans held-for-sale, at fair value(40,034)25,222 (64,502)35,470 
Single-family rental loan interest rate lock commitments40 744 (685)744 
Bridge loans116 2,225 2,251 3,269 
Trading securities (1)
1,315 (1,095)4,101 (374)
Risk management derivatives, net25,387 (58,244)115,774 34,578 
Total mortgage banking activities, net (2)
$(46,590)$45,759 $(45,297)$121,321 
Investment Fair Value Changes, Net
Residential loans held-for-sale, at fair value (called Sequoia loans)$(8,010)$1,290 $(12,262)$1,607 
Bridge loans held-for-investment(9,559)(62)(11,702)3,242 
Trading securities(17,358)2,893 (21,600)23,521 
Servicer advance investments(3,231)(940)(6,312)(1,100)
Excess MSRs(2,220)(2,477)(3,428)(4,430)
Net investments in Legacy Sequoia entities (3)
(336)(216)(1,050)(915)
Net investments in Sequoia entities (3)
(5,886)4,906 (9,708)9,804 
Net investments in Freddie Mac SLST entities (3)
(35,940)36,316 (32,904)40,433 
Net investment in Freddie Mac K-Series entity (3)
(190)1,855 74 10,776 
Net investments in CAFL SFR entities (3)
(21,828)3,697 (17,780)3,411 
Net investment in HEI securitization entity (3)
1,201 — 4,612 — 
HEIs at Redwood1,596 2,080 2,788 7,395 
Other investments10,460 125 10,583 435 
Risk management derivatives, net4,395 — 6,368 — 
Credit (losses) recoveries on AFS securities(1,066)13 (1,771)388 
Total investment fair value changes, net$(87,972)$49,480 $(94,092)$94,567 
Other Income
MSRs$3,827 $(1,381)$6,795 $(2,247)
Total other income (4)
$3,827 $(1,381)$6,795 $(2,247)
Total Market Valuation Gains (Losses), Net$(130,735)$93,858 $(132,594)$213,641 
(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the 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, and other expenses that are components of Mortgage banking activities, net presented on our consolidated statements of income, as these amounts do not represent market valuation changes.
(3)Includes changes in fair value of the residential loans held-for-investment, securitized HEIs, REO and the ABS issued at the entities, which netted together represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election.
(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 June 30, 2022, 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, 2021.
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
June 30, 2022Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average(1)
Assets
Residential loans, at fair value:
Jumbo fixed-rate loans$714,777 Whole loan spread to swap rate217 -240 bps221 bps
Called loan dollar price$96 -$96 $96 
Jumbo loans committed to sell498,258 Whole loan committed sales price$97 -$99 $98 
Loans held by Legacy Sequoia (2)
208,788 Liability priceN/AN/A
Loans held by Sequoia (2)
3,525,459 Liability priceN/AN/A
Loans held by Freddie Mac SLST (2)
1,631,285 Liability priceN/AN/A
Business purpose loans:
Single-family rental loans505,171 Senior credit spread215 -235 bps220 bps
Subordinate credit spread260 -1,099 bps504 bps
Senior credit support39 -40 %39 %
IO discount rate8 -13 %9 %
Prepayment rate (annual CPR)3 -25 %6 %
Non-securitizable loan dollar price$80 -$100 $93 
Single-family rental loans held by CAFL (2)
3,046,277 Liability priceN/AN/A
Bridge loans1,651,489 Whole loan discount rate5 -15 %8 %
Senior credit spread325 -325 bps325 bps
Subordinate credit discount rate15 -15 %15 %
Senior credit support15 -15 %15 %
Multifamily loans held by Freddie Mac K-Series (2)
443,114 Liability priceN/AN/A
Trading and AFS securities284,278 Discount rate4 -18 %9  %
Prepayment rate (annual CPR)6 -65 %13  %
Default rate— -11 %1  %
Loss severity— -50 %25  %
CRT dollar price$74 -$88 $83 
Servicer advance investments273,210 Discount rate2 -4 %3 %
Prepayment rate (annual CPR)16 -30 %16 %
Expected remaining life (3)
5-5yrs5yrs
Mortgage servicing income— -18 bps9 bps
MSRs23,560 Discount rate11 -115 %11  %
Prepayment rate (annual CPR)5 -31 %9  %
Per loan annual cost to service$93 -$93 $93 
Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)
June 30, 2022Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average (1)
Assets (continued)
Excess MSRs40,803 Discount rate13 -19 %18 %
Prepayment rate (annual CPR)16 -35 %20 %
Excess mortgage servicing income8 -18 bps11 bps
HEI130,151 Discount rate10 -10 %10 %
Prepayment rate (annual CPR)1 -24 %17 %
Home price appreciation3 -4 %3 %
HEIs held by HEI securitization entity146,215 Liability priceN/AN/AN/A
REO1,380 Loss severity12 -25 %20 %
Liabilities
Residential loan purchase commitments, net 1,500 Whole loan spread to swap rate217 -240 bps224 bps
Pull-through rate18 -100 %68 %
Committed sales price$97 -$102 $97 
ABS issued (2):
At consolidated Sequoia entities3,496,329 Discount rate4 -18 %6  %
Prepayment rate (annual CPR)5 -27 %14  %
Default rate— -22 %1  %
Loss severity25 -50 %32  %
At consolidated CAFL SFR entities (4)
2,732,964 Discount rate2 -15 %5 %
Prepayment rate (annual CPR)— -3 %3 %
Default rate5 -28 %7 %
Loss severity30 -30 %30 %
At consolidated Freddie Mac SLST entities1,243,167 Discount rate4 -7 %5  %
Prepayment rate (annual CPR)6 -8 %6  %
Default rate7 -9 %8  %
Loss severity35 -35 %35  %
At consolidated Freddie Mac K-Series entities (4)
411,380 Discount rate3 -9 %4 %
At consolidated HEI securitization entity (4)
110,111 Discount rate8 -13 %9 %
Prepayment rate (annual CPR)20 -20 %20 %
Default rate12 -12 %12 %
Loss severity30 -30 %30 %
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 and HEIs held by consolidated entities was based on the fair value of the ABS issued by these entities and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At June 30, 2022, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities was $238 million, $307 million, $390 million, $32 million, and $15 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, 2021 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.
Certain of our Other investments (inclusive 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. As of June 30, 2022, the carrying value of these investments was $9 million, which was based on the investments' original cost.