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Real Estate Securities | 9 Months Ended
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Sep. 30, 2023
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, 2023 and December 31, 2022. Table 9.1 – Fair Values of Real Estate Securities by Type
(In Thousands) |  | September 30, 2023 |  | December 31, 2022
Trading |  | $ | 48,041 |  |  | $ | 108,329 |
Available-for-sale |  | 81,404 |  |  | 132,146 |
Total Real Estate Securities |  | $ | 129,445 |  |  | $ | 240,475 |
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, 2023 and December 31, 2022. Table 9.2 – Fair Value of Trading Securities by Position
(In Thousands) |  | September 30, 2023 |  | December 31, 2022
Senior |  |  |  |
Interest-only securities (1) |  | $ | 41,169 |  |  | $ | 28,867 |
Total Senior |  | 41,169 |  |  | 28,867 |
Subordinate |  |  |  |
RPL securities |  | — |  |  | 29,002 |
Multifamily securities |  | 5,239 |  |  | 5,027 |
Other third-party residential securities |  | 1,633 |  |  | 45,433 |
Total Subordinate |  | 6,872 |  |  | 79,462 |
Total Trading Securities |  | $ | 48,041 |  |  | $ | 108,329 |
(1)Includes $29 million and $26 million of Sequoia certificated mortgage servicing rights at September 30, 2023 and December 31, 2022, respectively. The following table presents the unpaid principal balance of trading securities by position and collateral type at September 30, 2023 and December 31, 2022. Table 9.3 – Unpaid Principal Balance of Trading Securities by Position
(In Thousands) |  | September 30, 2023 |  | December 31, 2022
Senior (1) |  | $ | — |  |  | $ | — |
Subordinate |  | 19,354 |  |  | 215,592 |
Total Trading Securities |  | $ | 19,354 |  |  | $ | 215,592 |
(1)Our senior trading securities are comprised of 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, 2023 and 2022. Table 9.4 – Trading Securities Activity
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2023 |  | 2022 |  | 2023 |  | 2022
Fair value of securities acquired |  | $ | — |  |  | $ | — |  |  | $ | 7,883 |  |  | $ | 5,006 |
Fair value of securities sold |  | 27,183 |  |  | 4,142 |  |  | 82,270 |  |  | 27,471 |
Net market valuation gains (losses) recorded (1) |  | 5,967 |  |  | (12,521) |  |  | 14,423 |  |  | (30,019) |
(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. AFS Securities The following table presents the fair value of our available-for-sale ("AFS") securities by position and collateral type at September 30, 2023 and December 31, 2022. Table 9.5 – Fair Value of Available-for-Sale Securities by Position
(In Thousands) |  | September 30, 2023 |  | December 31, 2022
Subordinate |  |  |  |
Sequoia securities |  | $ | 73,160 |  |  | $ | 74,367 |
Multifamily securities |  | 4,448 |  |  | 7,647 |
Other third-party residential securities |  | 3,796 |  |  | 50,132 |
Total Subordinate |  | 81,404 |  |  | 132,146 |
Total AFS Securities |  | $ | 81,404 |  |  | $ | 132,146 |
The following table provides the activity of available-for-sale securities during the three and nine months ended September 30, 2023 and 2022. Table 9.6 – Available-for-Sale Securities Activity
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2023 |  | 2022 |  | 2023 |  | 2022
Fair value of securities acquired |  | $ | — |  |  | $ | — |  |  | $ | 1,979 |  |  | $ | 10,000 |
Fair value of securities sold |  | 12,590 |  |  | — |  |  | 55,842 |  |  | — |
Principal balance of securities called |  | — |  |  | — |  |  | — |  |  | 14,486 |
Net unrealized gains (losses) on AFS securities (1) |  | (3,921) |  |  | (8,731) |  |  | 398 |  |  | (60,013) |
(1)Net unrealized gains (losses) on AFS securities are recorded on our consolidated balance sheets through Accumulated other comprehensive loss. 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, 2023, we had $4 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, 2023 and December 31, 2022. Table 9.7 – Carrying Value of AFS Securities
(In Thousands) |  |  |  |  |  |  |  | September 30, 2023 |  | December 31, 2022
Principal balance |  |  |  |  |  |  |  | $ | 149,991 |  |  | $ | 221,933 |
Credit reserve |  |  |  |  |  |  |  | (23,890) |  |  | (28,739) |
Unamortized discount, net |  |  |  |  |  |  |  | (46,603) |  |  | (61,650) |
Amortized cost |  |  |  |  |  |  |  | 79,498 |  |  | 131,544 |
Gross unrealized gains |  |  |  |  |  |  |  | 13,463 |  |  | 16,269 |
Gross unrealized losses |  |  |  |  |  |  |  | (8,984) |  |  | (13,127) |
CECL allowance |  |  |  |  |  |  |  | (2,573) |  |  | (2,540) |
Carrying Value |  |  |  |  |  |  |  | $ | 81,404 |  |  | $ | 132,146 |
The following table presents the changes for the three and nine months ended September 30, 2023, 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, 2023 |  | Nine Months Ended September 30, 2023
|  | Credit Reserve |  | Unamortized Discount, Net |  | Credit Reserve |  | Unamortized Discount, Net
(In Thousands) |  |  |  |
Beginning balance |  | $ | 25,615 |  |  | $ | 46,948 |  |  | $ | 28,739 |  |  | $ | 61,650 |
Amortization of net discount |  | — |  |  | (296) |  |  | — |  |  | (946) |
Realized credit recoveries (losses), net |  | 101 |  |  | — |  |  | 106 |  |  | — |
Acquisitions |  | — |  |  | — |  |  | 1,106 |  |  | 754 |
Sales, calls, other |  | (1,207) |  |  | (668) |  |  | (5,331) |  |  | (15,585) |
Transfers to (release of) credit reserves, net |  | (619) |  |  | 619 |  |  | (730) |  |  | 730 |
Ending Balance |  | $ | 23,890 |  |  | $ | 46,603 |  |  | $ | 23,890 |  |  | $ | 46,603 |
AFS Securities with Unrealized Losses The following table presents the total carrying value (fair value) and unrealized losses of residential AFS securities that were in a gross unrealized loss position at September 30, 2023 and December 31, 2022. Table 9.9 – AFS Securities in Gross Unrealized Loss Position by Holding Periods
|  | Less Than 12 Consecutive Months |  | 12 Consecutive Months or Longer
|  | Fair Value |  | Unrealized Losses |  |  |  | Fair Value |  | Unrealized Losses |  |
(In Thousands) |  |  |  |  |  |
September 30, 2023 |  | $ | 9,459 |  |  | $ | (585) |  |  |  |  | $ | 28,630 |  |  | $ | (8,399) |  |  |
December 31, 2022 |  | 72,679 |  |  | (12,940) |  |  |  |  | 1,414 |  |  | (186) |  |  |
At September 30, 2023, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 66 AFS securities, of which 29 were in an unrealized loss position and 23 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2022, our consolidated balance sheet included 79 AFS securities, of which 38 were in an unrealized loss position and one was 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 $9 million at September 30, 2023. 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, 2023, 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, 2023, our current expected credit loss ("CECL") allowance related to our AFS securities was $2.6 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, 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, 2023. Table 9.10 – Significant Credit Quality Indicators
September 30, 2023 |  |  |  | Subordinate Securities
Default rate |  |  |  | 0.8%
Loss severity |  |  |  | 20%
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, 2023. Table 9.11 – Rollforward of Allowance for Credit Losses
|  | Three Months Ended September 30, 2023 |  | Nine Months Ended September 30, 2023
(In Thousands) |  |
Beginning balance allowance for credit losses |  | $ | 2,639 |  |  | $ | 2,540 |
Additions to allowance for credit losses on securities for which credit losses were not previously recorded |  | 48 |  |  | 278 |
Additional increases (or decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period |  | 17 |  |  | 63 |
Reduction to allowance for securities sold during the period |  | (131) |  |  | (308) |
Ending balance of allowance for credit losses |  | $ | 2,573 |  |  | $ | 2,573 |
Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. 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, 2023 and 2022. Table 9.12 – Gross Realized Gains and Losses on AFS Securities
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2023 |  | 2022 |  | 2023 |  | 2022
Gross realized gains - sales |  | $ | 103 |  |  | $ | — |  |  | $ | 3,917 |  |  | $ | — |
Gross realized gains - calls |  | — |  |  | — |  |  | — |  |  | 1,914 |
Gross realized losses - sales |  | (77) |  |  | — |  |  | (2,415) |  |  | — |
Gross realized losses - calls |  | — |  |  | — |  |  | — |  |  | — |
Total Realized Gains on Sales and Calls of AFS Securities, net |  | $ | 26 |  |  | $ | — |  |  | $ | 1,502 |  |  | $ | 1,914 |

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