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Principles of Consolidation | 9 Months Ended
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Sep. 30, 2022
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Principles of Consolidation | Principles of Consolidation GAAP requires us to consider whether securitizations we sponsor and other transfers of financial assets should be treated as sales or financings, as well as whether any VIEs that we hold variable interests in – for example, certain legal entities often used in securitization and other structured finance transactions – should be included in our consolidated financial statements. The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods. Analysis of Consolidated VIEs At September 30, 2022, we consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for certain securitizations, we are exposed to financial risks associated with our role as a sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. We also consolidate two Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At September 30, 2022, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 11 for a further description of these entities and the investments they hold and Note 13 for additional information on the minority partner’s non-controlling interest. Additionally, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 14 for additional information on the servicer advance financing. During 2021, we consolidated a HEI securitization entity formed to invest in HEIs that we determined was a VIE and for which we determined we were the primary beneficiary. At September 30, 2022 and December 31, 2021, we owned a portion of the subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 13 for additional information on non-controlling interests in the entity. We consolidate the HEI securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. For certain of our consolidated VIEs, we have elected to account for the assets and liabilities of these entities as collateralized financing entities ("CFE"). 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. The net equity in an entity accounted for under the CFE election effectively represents the fair value of the beneficial interests we own in the entity. In addition to our consolidated VIEs for which we made the CFE election, we consolidate certain VIEs for which we did not make the CFE election, and elected to account for the ABS issued by these entities at amortized cost. These include our CAFL Bridge securitizations, Freddie Mac SLST re-securitization, and Servicing Investment entities. The following table presents a summary of the assets and liabilities of our consolidated VIEs. Table 4.1 – Assets and Liabilities of Consolidated VIEs
September 30, 2022 |  | Legacy Sequoia |  | Sequoia |  | CAFL(1) |  | Freddie Mac SLST(1) |  | Freddie Mac K-Series |  | Servicing Investment |  | HEI |  | Total Consolidated VIEs
(Dollars in Thousands) |  |  |  |  |  |  |  |
Residential loans, held-for-investment |  | $ | 198,161 |  |  | $ | 3,237,170 |  |  | $ | — |  |  | $ | 1,482,964 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 4,918,295 |
Business purpose loans, held-for-investment |  | — |  |  | — |  |  | 3,531,229 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 3,531,229 |
Consolidated Agency multifamily loans |  | — |  |  | — |  |  | — |  |  | — |  |  | 427,458 |  |  | — |  |  | — |  |  | 427,458 |
Home equity investments |  |  |  |  |  |  |  |  |  |  |  |  |  | 139,728 |  |  | 139,728 |
Other investments |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 307,723 |  |  | — |  |  | 307,723 |
Cash and cash equivalents |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 15,923 |  |  | — |  |  | 15,923 |
Restricted cash |  | 92 |  |  | 78 |  |  | 15,889 |  |  | — |  |  | — |  |  | 18,569 |  |  | 3,540 |  |  | 38,168 |
Accrued interest receivable |  | 226 |  |  | 11,295 |  |  | 17,497 |  |  | 5,247 |  |  | 1,299 |  |  | 720 |  |  | — |  |  | 36,284 |
Other assets |  | 407 |  |  | — |  |  | 24,084 |  |  | 2,544 |  |  | — |  |  | 7,270 |  |  | 50 |  |  | 34,355 |
Total Assets |  | $ | 198,886 |  |  | $ | 3,248,543 |  |  | $ | 3,588,699 |  |  | $ | 1,490,755 |  |  | $ | 428,757 |  |  | $ | 350,205 |  |  | $ | 143,318 |  |  | $ | 9,449,163 |
Short-term debt |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 233,104 |  |  | $ | — |  |  | $ | 233,104 |
Accrued interest payable |  | 224 |  |  | 9,003 |  |  | 11,202 |  |  | 3,630 |  |  | 1,173 |  |  | 348 |  |  | — |  |  | 25,580 |
Accrued expenses and other liabilities |  | (58) |  |  | 80 |  |  | 1,903 |  |  | — |  |  | — |  |  | 24,223 |  |  | 24,354 |  |  | 50,502 |
Asset-backed securities issued |  | 197,354 |  |  | 3,013,249 |  |  | 3,179,487 |  |  | 1,249,041 |  |  | 395,411 |  |  | — |  |  | 104,751 |  |  | 8,139,293 |
Total Liabilities |  | $ | 197,520 |  |  | $ | 3,022,332 |  |  | $ | 3,192,592 |  |  | $ | 1,252,671 |  |  | $ | 396,584 |  |  | $ | 257,675 |  |  | $ | 129,105 |  |  | $ | 8,448,479 |
Value of our investments in VIEs(1) |  | $ | 1,214 |  |  | $ | 223,920 |  |  | $ | 393,015 |  |  | $ | 236,467 |  |  | $ | 32,047 |  |  | $ | 92,530 |  |  | $ | 14,213 |  |  | $ | 993,406 |
Number of VIEs |  | 20 |  |  | 17 |  |  | 19 |  |  | 3 |  |  | 1 |  |  | 3 |  |  | 1 |  |  | 64 |
December 31, 2021 |  | Legacy Sequoia |  | Sequoia |  | CAFL(1) |  | Freddie Mac SLST(1) |  | Freddie Mac K-Series |  | Servicing Investment |  | HEI |  | Total Consolidated VIEs
(Dollars in Thousands) |  |  |  |  |  |  |  |
Residential loans, held-for-investment |  | $ | 230,455 |  |  | $ | 3,628,465 |  |  | $ | — |  |  | $ | 1,888,230 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 5,747,150 |
Business purpose loans, held-for-investment |  | — |  |  | — |  |  | 3,766,316 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 3,766,316 |
Consolidated Agency multifamily loans |  | — |  |  | — |  |  | — |  |  | — |  |  | 473,514 |  |  | — |  |  | — |  |  | 473,514 |
Other investments |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 384,754 |  |  | 159,553 |  |  | 544,307 |
Cash and cash equivalents |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 6,481 |  |  | — |  |  | 6,481 |
Restricted cash |  | 148 |  |  | 5 |  |  | 15,221 |  |  | — |  |  | — |  |  | 25,420 |  |  | 5,292 |  |  | 46,086 |
Accrued interest receivable |  | 210 |  |  | 10,885 |  |  | 15,737 |  |  | 5,792 |  |  | 1,315 |  |  | 1,462 |  |  | — |  |  | 35,401 |
Other assets |  | 61 |  |  | — |  |  | 32,510 |  |  | 2,028 |  |  | — |  |  | 7,177 |  |  | 50 |  |  | 41,826 |
Total Assets |  | $ | 230,874 |  |  | $ | 3,639,355 |  |  | $ | 3,829,784 |  |  | $ | 1,896,050 |  |  | $ | 474,829 |  |  | $ | 425,294 |  |  | $ | 164,895 |  |  | $ | 10,661,081 |
Short-term debt |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 294,447 |  |  | $ | — |  |  | $ | 294,447 |
Accrued interest payable |  | 99 |  |  | 8,452 |  |  | 11,030 |  |  | 4,055 |  |  | 1,190 |  |  | 192 |  |  | — |  |  | 25,018 |
Accrued expenses and other liabilities |  | — |  |  | 5 |  |  | 1,171 |  |  | — |  |  | — |  |  | 28,115 |  |  | 17,034 |  |  | 46,325 |
Asset-backed securities issued |  | 227,881 |  |  | 3,383,048 |  |  | 3,474,898 |  |  | 1,588,463 |  |  | 441,857 |  |  | — |  |  | 137,410 |  |  | 9,253,557 |
Total Liabilities |  | $ | 227,980 |  |  | $ | 3,391,505 |  |  | $ | 3,487,099 |  |  | $ | 1,592,518 |  |  | $ | 443,047 |  |  | $ | 322,754 |  |  | $ | 154,444 |  |  | $ | 9,619,347 |
Value of our investments in VIEs(1) |  | $ | 2,634 |  |  | $ | 245,417 |  |  | $ | 339,419 |  |  | $ | 301,795 |  |  | $ | 31,657 |  |  | $ | 102,540 |  |  | $ | 10,451 |  |  | $ | 1,033,913 |
Number of VIEs |  | 20 |  |  | 16 |  |  | 16 |  |  | 3 |  |  | 1 |  |  | 3 |  |  | 1 |  |  | 60 |
(1)Value of our investments in VIEs, as presented in this table, represent the fair value of our economic interests in the VIEs only for consolidated VIEs we account for under the CFE election. CAFL includes SFR loan securitizations we account for under the CFE election and two bridge loan securitizations for which we did not make the CFE election. As of September 30, 2022 and December 31, 2021, the fair value of our interests in the CAFL SFR securitizations were $314 million and $302 million, respectively, and the remaining values were associated with our interests in the CAFL Bridge securitizations, for which the ABS issued is carried at amortized historical cost. Freddie Mac SLST includes securitizations we account for under the CFE election and also includes ABS issued in relation to a resecuritization of the securities we own in the consolidated Freddie Mac SLST VIEs, that we account for at amortized historical cost. As of September 30, 2022 and December 31, 2021, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election were $335 million and $445 million, respectively, with the difference from the tables above representing ABS issued and carried at amortized historical cost. The following table presents income (loss) from these VIEs for the three and nine months ended September 30, 2022 and 2021. Table 4.2 – Income (Loss) from Consolidated VIEs
|  | Three Months Ended September 30, 2022
|  | Legacy Sequoia |  | Sequoia |  | CAFL |  | Freddie Mac SLST |  | Freddie Mac K-Series |  | Servicing Investment |  | HEI |  | Total Consolidated VIEs
(Dollars in Thousands) |  |  |  |  |  |  |  |
Interest income |  | $ | 1,475 |  |  | $ | 31,587 |  |  | $ | 61,439 |  |  | $ | 16,098 |  |  | $ | 4,762 |  |  | $ | 7,800 |  |  | $ | — |  |  | $ | 123,161 |
Interest expense |  | (1,486) |  |  | (27,541) |  |  | (44,804) |  |  | (12,829) |  |  | (4,377) |  |  | (2,606) |  |  | — |  |  | (93,643) |
Net interest income |  | (11) |  |  | 4,046 |  |  | 16,635 |  |  | 3,269 |  |  | 385 |  |  | 5,194 |  |  | — |  |  | 29,518 |
Non-interest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment fair value changes, net |  | (328) |  |  | (10,936) |  |  | (4,527) |  |  | (41,892) |  |  | 316 |  |  | (3,286) |  |  | (584) |  |  | (61,237) |
Other income |  | — |  |  | — |  |  | 286 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 286 |
Total non-interest income, net |  | (328) |  |  | (10,936) |  |  | (4,241) |  |  | (41,892) |  |  | 316 |  |  | (3,286) |  |  | (584) |  |  | (60,951) |
General and administrative expenses |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (55) |  |  | — |  |  | (55) |
Other expenses |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (372) |  |  | — |  |  | (372) |
Income (loss) from Consolidated VIEs |  | $ | (339) |  |  | $ | (6,890) |  |  | $ | 12,394 |  |  | $ | (38,623) |  |  | $ | 701 |  |  | $ | 1,481 |  |  | $ | (584) |  |  | $ | (31,860) |
|  | Nine Months Ended September 30, 2022
|  | Legacy Sequoia |  | Sequoia |  | CAFL |  | Freddie Mac SLST |  | Freddie Mac K-Series |  | Servicing Investment |  | HEI |  | Total Consolidated VIEs
(Dollars in Thousands) |  |  |  |  |  |  |  |
Interest income |  | $ | 3,595 |  |  | $ | 95,608 |  |  | $ | 195,381 |  |  | $ | 49,851 |  |  | $ | 14,247 |  |  | $ | 23,287 |  |  | $ | — |  |  | $ | 381,969 |
Interest expense |  | (3,154) |  |  | (84,041) |  |  | (145,207) |  |  | (40,286) |  |  | (13,099) |  |  | (6,110) |  |  | — |  |  | (291,897) |
Net interest income |  | 441 |  |  | 11,567 |  |  | 50,174 |  |  | 9,565 |  |  | 1,148 |  |  | 17,177 |  |  | — |  |  | 90,072 |
Non-interest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment fair value changes, net |  | (1,378) |  |  | (20,644) |  |  | (23,972) |  |  | (74,796) |  |  | 390 |  |  | (11,259) |  |  | 4,028 |  |  | (127,631) |
Other income |  | — |  |  | — |  |  | 631 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 631 |
Total non-interest income, net |  | (1,378) |  |  | (20,644) |  |  | (23,341) |  |  | (74,796) |  |  | 390 |  |  | (11,259) |  |  | 4,028 |  |  | (127,000) |
General and administrative expenses |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (130) |  |  | — |  |  | (130) |
Other expenses |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (1,158) |  |  | — |  |  | (1,158) |
Income (loss) from Consolidated VIEs |  | $ | (937) |  |  | $ | (9,077) |  |  | $ | 26,833 |  |  | $ | (65,231) |  |  | $ | 1,538 |  |  | $ | 4,630 |  |  | $ | 4,028 |  |  | $ | (38,216) |
|  | Three Months Ended September 30, 2021
|  | Legacy Sequoia |  | Sequoia |  | CAFL |  | Freddie Mac SLST |  | Freddie Mac K-Series |  | Servicing Investment |  | HEI |  | Total Consolidated VIEs
(Dollars in Thousands) |  |  |  |  |  |  |  |
Interest income |  | $ | 1,042 |  |  | $ | 18,867 |  |  | $ | 48,937 |  |  | $ | 18,707 |  |  | $ | 4,846 |  |  | $ | 3,905 |  |  | $ | — |  |  | $ | 96,304 |
Interest expense |  | (641) |  |  | (15,368) |  |  | (37,489) |  |  | (15,774) |  |  | (4,460) |  |  | (1,018) |  |  | — |  |  | (74,750) |
Net interest income |  | 401 |  |  | 3,499 |  |  | 11,448 |  |  | 2,933 |  |  | 386 |  |  | 2,887 |  |  | — |  |  | 21,554 |
Non-interest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment fair value changes, net |  | (247) |  |  | 3,314 |  |  | 2,943 |  |  | 13,849 |  |  | 554 |  |  | (2,080) |  |  | 47 |  |  | 18,380 |
Other income |  | — |  |  | — |  |  | 10 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 10 |
Total non-interest income, net |  | (247) |  |  | 3,314 |  |  | 2,953 |  |  | 13,849 |  |  | 554 |  |  | (2,080) |  |  | 47 |  |  | 18,390 |
General and administrative expenses |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (60) |  |  | — |  |  | (60) |
Other expenses |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (149) |  |  | — |  |  | (149) |
Income (loss) from Consolidated VIEs |  | $ | 154 |  |  | $ | 6,813 |  |  | $ | 14,401 |  |  | $ | 16,782 |  |  | $ | 940 |  |  | $ | 598 |  |  | $ | 47 |  |  | $ | 39,735 |
|  | Nine Months Ended September 30, 2021
|  | Legacy Sequoia |  | Sequoia |  | CAFL |  | Freddie Mac SLST |  | Freddie Mac K-Series |  | Servicing Investment |  | HEI |  | Total Consolidated VIEs
(Dollars in Thousands) |  |  |  |  |  |  |  |
Interest income |  | $ | 3,559 |  |  | $ | 48,842 |  |  | $ | 152,659 |  |  | $ | 58,372 |  |  | $ | 14,492 |  |  | $ | 12,168 |  |  | $ | — |  |  | $ | 290,092 |
Interest expense |  | (2,271) |  |  | (38,848) |  |  | (118,543) |  |  | (49,756) |  |  | (13,294) |  |  | (3,414) |  |  | — |  |  | (226,126) |
Net interest income |  | 1,288 |  |  | 9,994 |  |  | 34,116 |  |  | 8,616 |  |  | 1,198 |  |  | 8,754 |  |  | — |  |  | 63,966 |
Non-interest income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment fair value changes, net |  | (1,162) |  |  | 13,118 |  |  | 6,354 |  |  | 54,282 |  |  | 11,330 |  |  | (5,646) |  |  | 47 |  |  | 78,323 |
Other income |  | — |  |  | — |  |  | 10 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 10 |
Total non-interest income, net |  | (1,162) |  |  | 13,118 |  |  | 6,364 |  |  | 54,282 |  |  | 11,330 |  |  | (5,646) |  |  | 47 |  |  | 78,333 |
General and administrative expenses |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (150) |  |  | — |  |  | (150) |
Other expenses |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (591) |  |  | — |  |  | (591) |
Income (loss) from Consolidated VIEs |  | $ | 126 |  |  | $ | 23,112 |  |  | $ | 40,480 |  |  | $ | 62,898 |  |  | $ | 12,528 |  |  | $ | 2,367 |  |  | $ | 47 |  |  | $ | 141,558 |
We consolidate the assets and liabilities of certain Sequoia, CAFL and HEI securitization entities, as we did not meet the GAAP sale criteria at the time we transferred financial assets to these entities. Our involvement in consolidated Sequoia, CAFL and HEI securitization entities continues in the following ways: (i) we continue to hold subordinate investments in each entity, and for certain entities, more senior investments; (ii) we maintain certain discretionary rights associated with our sponsorship of, or our subordinate investments in, each entity, including rights to direct loss mitigation activities; and (iii) we continue to hold a right to call the assets of certain entities (once they have been paid down below a specified threshold) at a price equal to, or in excess of, the current outstanding principal amount of the entity’s asset-backed securities issued. These factors have resulted in our continuing to consolidate the assets and liabilities of these Sequoia, CAFL and HEI securitization entities in accordance with GAAP. We consolidate the assets and liabilities of certain Freddie Mac K-Series and SLST securitization trusts resulting from our investment in subordinate securities issued by these trusts, and in the case of certain CAFL securitizations, resulting from securities acquired through our acquisition of CoreVest. Additionally, we consolidate the assets and liabilities of Servicing Investment entities from our investment in servicer advance investments and excess MSRs. In each case, we maintain certain discretionary rights associated with the ownership of these investments that we determined reflected a controlling financial interest, as we have both the power to direct the activities that most significantly impact the economic performance of the VIEs and the right to receive benefits of and the obligation to absorb losses from the VIEs that could potentially be significant to the VIEs. Analysis of Unconsolidated VIEs with Continuing Involvement Since 2012, we have transferred residential loans to 46 Sequoia securitization entities sponsored by us that are still outstanding as of September 30, 2022, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained. During the three months ended September 30, 2022, we did not call any of our unconsolidated Sequoia entities. During the nine months ended September 30, 2022, we called three of our unconsolidated Sequoia entities, and purchased $102 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $0.3 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). At September 30, 2022, we held $158 million of loans for sale at fair value that were acquired following the calls. The following table presents information related to securitization transactions that occurred during the three and nine months ended September 30, 2022 and 2021. Table 4.3 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2022 |  | 2021 |  | 2022 |  | 2021
Principal balance of loans transferred |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,231,803 |
Trading securities retained, at fair value |  | — |  |  | — |  |  | — |  |  | 7,774 |
AFS securities retained, at fair value |  | — |  |  | — |  |  | — |  |  | 1,600 |
The following table summarizes the cash flows during the three and nine months ended September 30, 2022 and 2021 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012. Table 4.4 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2022 |  | 2021 |  | 2022 |  | 2021
Proceeds from new transfers |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,266,063 |
MSR fees received |  | 737 |  |  | 1,095 |  |  | 2,365 |  |  | 4,038 |
Funding of compensating interest, net |  | (11) |  |  | 54 |  |  | (41) |  |  | (116) |
Cash flows received on retained securities |  | 3,096 |  |  | 16,724 |  |  | 20,380 |  |  | 42,117 |
The following table presents the key weighted-average assumptions used to value securities retained at the date of securitization for securitizations completed during the three and nine months ended September 30, 2022 and 2021. Table 4.5 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood
|  |  |  | Three Months Ended September 30, 2022 |  |  |  | Three Months Ended September 30, 2021
At Date of Securitization |  |  |  | Senior IO Securities |  | Subordinate Securities |  |  |  | Senior IO Securities |  | Subordinate Securities
Prepayment rates |  |  |  | N/A |  | N/A |  |  |  | N/A |  | N/A
Discount rates |  |  |  | N/A |  | N/A |  |  |  | N/A |  | N/A
Credit loss assumptions |  |  |  | N/A |  | N/A |  |  |  | N/A |  | N/A
|  |  |  | Nine Months Ended September 30, 2022 |  |  |  | Nine Months Ended September 30, 2021
At Date of Securitization |  |  |  | Senior IO Securities |  | Subordinate Securities |  |  |  | Senior IO Securities |  | Subordinate Securities
Prepayment rates |  |  |  | N/A |  | N/A |  |  |  | 11 |  |  | 11 %
Discount rates |  |  |  | N/A |  | N/A |  |  |  | 15 % |  | 6 %
Credit loss assumptions |  |  |  | N/A |  | N/A |  |  |  | 0.23 % |  | 0.23 %
The following table presents additional information at September 30, 2022 and December 31, 2021, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012. Table 4.6 – Unconsolidated VIEs Sponsored by Redwood
(In Thousands) |  | September 30, 2022 |  | December 31, 2021
On-balance sheet assets, at fair value: |  |  |  |
Interest-only, senior and subordinate securities, classified as trading |  | $ | 28,511 |  |  | $ | 18,214 |
Subordinate securities, classified as AFS |  | 78,065 |  |  | 127,542 |
Mortgage servicing rights |  | 11,915 |  |  | 6,450 |
Maximum loss exposure (1) |  | $ | 118,491 |  |  | $ | 152,206 |
Assets transferred: |  |  |  |
Principal balance of loans outstanding |  | $ | 4,146,817 |  |  | $ | 4,959,234 |
Principal balance of loans 30+ days delinquent |  | 21,803 |  |  | 30,594 |
(1)Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities and MSRs retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization. The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at September 30, 2022 and December 31, 2021. Table 4.7 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood
September 30, 2022 |  | MSRs |  | Senior Securities (1) |  | Subordinate Securities
(Dollars in Thousands) |  |  |
Fair value at September 30, 2022 |  | $ | 11,915 |  |  | $ | 28,511 |  |  | $ | 78,065 |
Expected life (in years) (2) |  | 7 |  | 7 |  | 16
Prepayment speed assumption (annual CPR) (2) |  | 8 | % |  | 11 | % |  | 8 | %
Decrease in fair value from: |  |  |  |  |  |
10% adverse change |  | $ | 334 |  |  | $ | 942 |  |  | $ | 570 |
25% adverse change |  | 810 |  |  | 2,291 |  |  | 1,132 |
Discount rate assumption (2) |  | 11 | % |  | 12 | % |  | 8 | %
Decrease in fair value from: |  |  |  |  |  |
100 basis point increase |  | $ | 441 |  |  | $ | 1,001 |  |  | $ | 7,714 |
200 basis point increase |  | 852 |  |  | 1,889 |  |  | 14,345 |
Credit loss assumption (2) |  | N/A |  | 0.04 | % |  | 0.04 | %
Decrease in fair value from: |  |  |  |  |  |
10% higher losses |  | N/A |  | N/A |  | $ | 190 |
25% higher losses |  | N/A |  | N/A |  | 254 |
December 31, 2021 |  | MSRs |  | Senior Securities (1) |  | Subordinate Securities
(Dollars in Thousands) |  |  |
Fair value at December 31, 2021 |  | $ | 6,450 |  |  | $ | 18,214 |  |  | $ | 127,542 |
Expected life (in years) (2) |  | 3 |  | 4 |  | 5
Prepayment speed assumption (annual CPR) (2) |  | 29 | % |  | 23 | % |  | 32 %
Decrease in fair value from: |  |  |  |  |  |
10% adverse change |  | $ | 447 |  |  | $ | 1,130 |  |  | $ | 531 |
25% adverse change |  | 1,020 |  |  | 2,596 |  |  | 1,440 |
Discount rate assumption (2) |  | 12 % |  | 16 | % |  | 5 | %
Decrease in fair value from: |  |  |  |  |  |
100 basis point increase |  | $ | 152 |  |  | $ | 426 |  |  | $ | 4,801 |
200 basis point increase |  | 297 |  |  | 829 |  |  | 9,139 |
Credit loss assumption (2) |  | N/A |  | 0.35 | % |  | 0.35 | %
Decrease in fair value from: |  |  |  |  |  |
10% higher losses |  | N/A |  | N/A |  | $ | 1,528 |
25% higher losses |  | N/A |  | N/A |  | 3,819 |
(1)Senior securities included $29 million and $18 million of interest-only securities at September 30, 2022 and December 31, 2021, respectively. (2)Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages. Analysis of Unconsolidated Third-Party VIEs Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at September 30, 2022 and December 31, 2021, grouped by asset type. Table 4.8 – Third-Party Sponsored VIE Summary
(In Thousands) |  | September 30, 2022 |  | December 31, 2021
Mortgage-Backed Securities |  |  |  |
Senior |  | $ | 348 |  |  | $ | 3,572 |
Subordinate |  | 152,288 |  |  | 228,083 |
Total Mortgage-Backed Securities |  | 152,636 |  |  | 231,655 |
Excess MSR |  | 7,662 |  |  | 10,400 |
Total Investments in Third-Party Sponsored VIEs |  | $ | 160,298 |  |  | $ | 242,055 |
We determined that we are not the primary beneficiary of these third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them. Our assessments of whether we are required to consolidate a VIE may change in subsequent reporting periods based upon changing facts and circumstances pertaining to each VIE. Any related accounting changes could result in a material impact to our financial statements.

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- Definition The entire disclosure for a variable interest entity (VIE), including but not limited to, judgments and assumptions in determining whether to consolidate and in identifying the primary beneficiary, gain (loss) recognized on the initial consolidation of the VIE, terms of arrangements, amounts and classification of the VIE's assets and liabilities, and the entity's maximum exposure to loss. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -URI https://asc.fasb.org/topic&trid=2197479 + Details
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