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Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2023
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 September 30, 2023 and December 31, 2022.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
September 30, 2023December 31, 2022
Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
(In Thousands)
Assets
Residential loans, held-for-sale, at fair value$610,918 $610,918 $780,781 $780,781 
Residential loans, held-for-investment, at fair value5,236,391 5,236,391 4,832,407 4,832,407 
Business purpose loans, held-for-sale, at fair value102,777 102,777 364,073 364,073 
Business purpose loans, held-for-investment, at fair value5,146,553 5,146,553 4,968,513 4,968,513 
Consolidated Agency multifamily loans, at fair value420,554 420,554 424,551 424,551 
Real estate securities, at fair value129,445 129,445 240,475 240,475 
HEI431,272 431,272 403,462 403,462 
Servicer advance investments (1)
219,813 219,813 269,259 269,259 
MSRs (1)
26,033 26,033 25,421 25,421 
Excess MSRs (1)
38,427 38,427 39,035 39,035 
Other investments (1)
5,583 5,583 6,155 6,155 
Cash and cash equivalents203,622 203,622 258,894 258,894 
Restricted cash56,101 56,101 70,470 70,470 
Derivative assets37,686 37,686 20,830 20,830 
Margin receivable (2)
10,536 10,536 13,802 13,802 
Liabilities
Short-term debt (3)
$1,329,017 $1,327,134 $1,853,664 $1,853,664 
Margin payable (4)
25,210 25,210 5,944 5,944 
Guarantee obligations (4)
5,913 3,734 6,344 4,738 
HEI securitization non-controlling interest25,627 25,627 22,329 22,329 
Derivative liabilities8,781 8,781 16,855 16,855 
ABS issued, net
at fair value7,910,345 7,910,345 7,424,132 7,424,132 
at amortized cost481,705 454,973 562,620 524,768 
Other long-term debt, net (5)
1,320,733 1,315,014 1,077,200 1,069,946 
Convertible notes, net (5)
517,662 489,828 693,473 638,049 
Trust preferred securities and subordinated notes, net (5)
138,802 97,650 138,767 83,700 
(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)Short-term debt excludes short-term convertible notes, which are included below under "Convertible notes, net."
(4)These liabilities are included in Accrued expenses and other liabilities on our consolidated balance sheets.
(5)These liabilities are primarily included in Long-term debt, net on our consolidated balance sheets. Convertible notes, net also includes convertible notes classified as Short-term debt. See Note 14 for more information on Short-term debt.
During the three and nine months ended September 30, 2023, we elected the fair value option for zero and $8 million of securities, respectively, $858 million and $1.1 billion (principal balance) of residential loans, respectively, and $411 million and $1.26 billion (principal balance) of business purpose loans, respectively. Additionally, during the three and nine months ended September 30, 2023, we elected the fair value option for $0.1 million and $26 million of HEI, respectively. For the three and nine months ended September 30, 2023, we elected the fair value option for zero and $1 million, respectively, of Other investments. 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, HEI and certain equity investments.
The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at September 30, 2023 and December 31, 2022, 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
September 30, 2023Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$5,847,309 $— $— $5,847,309 
Business purpose loans5,249,330 — — 5,249,330 
Consolidated Agency multifamily loans420,554 — — 420,554 
Real estate securities129,445 — — 129,445 
HEI431,272 — — 431,272 
Servicer advance investments219,813 — — 219,813 
MSRs26,033 — — 26,033 
Excess MSRs38,427 — — 38,427 
Other investments5,583 — — 5,583 
Derivative assets37,686 18,800 13,819 5,067 
Liabilities
HEI securitization non-controlling interest$25,627 $— $— $25,627 
Derivative liabilities8,781 5,694 — 3,087 
ABS issued7,910,345 — — 7,910,345 
December 31, 2022Carrying
Value		Fair Value Measurements Using
(In Thousands)Level 1Level 2Level 3
Assets
Residential loans$5,613,157 $— $— $5,613,157 
Business purpose loans5,332,586 — — 5,332,586 
Consolidated Agency multifamily loans424,551 — — 424,551 
Real estate securities240,475 — — 240,475 
HEI403,462 — — 403,462 
Servicer advance investments269,259 — — 269,259 
MSRs25,421 — — 25,421 
Excess MSRs39,035 — — 39,035 
Other investments6,155 — — 6,155 
Derivative assets20,830 5,869 14,625 336 
Liabilities
HEI securitization non-controlling interest$22,329 $— $— $22,329 
Derivative liabilities16,855 16,841 — 14 
ABS issued7,424,132 — — 7,424,132 
The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2023.
Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets
Residential LoansBusiness Purpose
Loans		Consolidated Agency Multifamily LoansTrading SecuritiesAFS
Securities		HEIServicer Advance InvestmentsExcess MSRsMSRs and Other Investments
(In Thousands)
Beginning balance -
   December 31, 2022		$5,613,157 $5,332,586 $424,552 $108,329 $132,146 $403,462 $269,259 $39,035 $31,576 
Acquisitions1,050,444 — — 7,883 1,979 25,626 — — 500 
Originations— 1,255,680 — — — — — — — 
Sales(226,646)(471,336)— (82,270)(54,339)— — — (272)
Principal paydowns(363,128)(802,610)(6,198)(324)(632)(26,153)(55,828)— (114)
Gains (losses) in net income, net(224,162)(17,809)2,200 14,423 946 28,337 6,382 (608)426 
Unrealized losses in OCI, net— — — — 1,304 — — — — 
Other settlements, net (1)
(2,356)(47,181)— — — — — — (500)
Ending balance -
  September 30, 2023		$5,847,309 $5,249,330 $420,554 $48,041 $81,404 $431,272 $219,813 $38,427 $31,616 
Liabilities
Derivatives (2)
HEI Securitization Non-Controlling InterestABS
Issued
(In Thousands)
Beginning balance - December 31, 2022$322 $22,329 $7,424,132 
Acquisitions— — 1,240,120 
Principal paydowns— — (571,883)
Gains (losses) in net income, net10,086 3,298 (182,023)
Other settlements, net (1)
(8,428)— — 
Ending balance - September 30, 2023$1,980 $25,627 $7,910,346 
(1)     Other settlements, net: for residential and business purpose loans, represents the transfer of loans to REO; for derivatives, represents the transfer of the fair value of loan purchase and interest rate lock commitments at the time loans are acquired to the basis of residential and business purpose loans; and for MSRs and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.
(2)     For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments and interest rate lock commitments, are presented on a net basis.
The following table presents the portion of fair value gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at September 30, 2023 and 2022. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 2023 and 2022 are not included in this presentation.
Table 5.4 – Portion of Net Fair Value Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at September 30, 2023 and 2022 Included in Net Income
Included in Net Income (loss)
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Assets
Residential loans at Redwood$(3,963)$(28,762)$(4,404)$(42,952)
Business purpose loans at Redwood and CAFL Bridge(15,646)(10,967)(25,876)(39,019)
Net investments in consolidated Sequoia entities (1)
(4,471)(11,264)(1,952)(22,467)
Net investments in consolidated Freddie Mac SLST entities (1)
(32,397)(41,969)(40,398)(75,043)
Net investments in consolidated Freddie Mac K-Series entities (1)
390 316 1,138 390 
Net investments in consolidated CAFL Term entities (1)
(3,800)(6,585)(1,903)(24,365)
Net investment in consolidated HEI securitization entity (1)
2,700 (1,652)5,145 11,348 
Trading securities4,408 (12,668)5,795 (34,104)
Available-for-sale securities66 — (32)— 
HEI at Redwood8,705 (4,903)19,592 (2,272)
Servicer advance investments4,069 (3,905)6,383 (10,218)
MSRs160 1,653 1,425 9,118 
Excess MSRs(1,450)(351)(608)(3,779)
Loan purchase and interest rate lock commitments5,061 723 5,067 744 
Liabilities
Non-controlling interest in consolidated HEI entity$(1,732)$1,068 $(3,298)$(7,320)
Loan purchase commitments(3,087)(212)(3,087)(212)
(1)    Represents the portion of net fair value gains or losses included in our consolidated statements of income related to securitized loans, securitized HEI, and the associated ABS issued at our consolidated securitization entities held at September 30, 2023 and 2022, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election, excluding REO.
The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, 2023. 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 September 30, 2023.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 2023
Gain (Loss) for
September 30, 2023Carrying
Value		Fair Value Measurements UsingThree Months EndedNine Months Ended
(In Thousands)Level 1Level 2Level 3September 30, 2023September 30, 2023
Assets
Strategic investments$6,750 $— $— $6,750 $100 $(2,550)
REO423 — — 423 (65)(65)
The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and nine months ended September 30, 2023 and 2022.
Table 5.6 – Market Valuation Gains and Losses, Net
Three Months Ended September 30,Nine Months Ended September 30,
(In Thousands)2023202220232022
Mortgage Banking Activities, Net
Residential loans held-for-sale$(8,683)$(20,060)$(2,774)$(71,776)
Residential loan purchase commitments5,864 (2,716)8,045 (53,236)
BPL term loans held-for-sale1,600 (19,325)13,214 (83,827)
BPL term loan interest rate lock commitments— 19 — (666)
BPL bridge loans1,438 (9)4,808 2,242 
Trading securities (1)
(482)148 2,188 4,249 
Risk management derivatives, net15,591 48,363 11,802 164,137 
Total mortgage banking activities, net (2)
$15,328 $6,420 $37,283 $(38,877)
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood (called Sequoia loans)$— $(6,614)$183 $(18,876)
BPL term loans held-for-sale— — (14,430)— 
BPL bridge loans held-for-investment(16,899)2,482 (22,867)(9,220)
Trading securities5,738 (12,668)12,271 (34,268)
Servicer advance investments4,069 (3,905)6,382 (10,217)
Excess MSRs(1,450)(351)(608)(3,779)
Net investments in Legacy Sequoia entities (3)
(215)(328)(319)(1,378)
Net investments in Sequoia entities (3)
(4,256)(10,936)(886)(20,644)
Net investments in Freddie Mac SLST entities (3)
(32,388)(41,892)(40,017)(74,796)
Net investment in Freddie Mac K-Series entity (3)
390 316 1,138 390 
Net investments in CAFL Term entities (3)
(3,800)(6,585)(1,903)(24,365)
Net investments in HEI securitization entities (3)
968 (584)1,846 4,028 
HEI at Redwood9,290 (4,774)21,598 (1,986)
Other investments(414)1,445 (4,208)12,028 
Risk management derivatives, net7,471 27,241 6,446 33,609 
Credit losses on AFS securities, net66 (544)(33)(2,315)
Other— — (746)— 
Total investment fair value changes, net$(31,430)$(57,697)$(36,153)$(151,789)
Other Income
MSRs$(209)$1,236 $612 $8,031 
Other(7)(852)(467)(852)
Total other income (4)
$(216)$384 $145 $7,179 
Total Market Valuation Gains (Losses), Net$(16,318)$(50,893)$1,275 $(183,487)
Footnotes to Table 5.6
(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 loans held-for-investment, securitized HEI, REO, and 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 of MSRs, as these amounts do not represent market valuation adjustments.
At September 30, 2023, 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, 2022.
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
September 30, 2023Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average(1)
Assets
Residential loans, at fair value:
Jumbo loans$540,782 
Senior credit spread to TBA price(2)
$1.63 $2.63 $1.71 
Subordinate credit spread(2)
2751020bps438bps
Senior credit support(2)
7 7 %7 %
IO discount rate(2)
10 10 %10 %
Prepayment rate (annual CPR)(2)
15 15 %15 %
Jumbo loans committed to sell70,136 Whole loan committed sales price$98 -$101 $98 
Loans held by Legacy Sequoia (3)
150,152 Liability priceN/AN/A
Loans held by Sequoia (3)
3,774,090 Liability priceN/AN/A
Loans held by Freddie Mac SLST (3)
1,312,149 Liability priceN/AN/A
Business purpose loans:
BPL term loans72,149 
Senior credit spread(2)
185 -185 bps185 bps
Subordinate credit spread(2)
325 -818 bps468 bps
Senior credit support(2)
35 -35 %35 %
IO discount rate(2)
8 -9 %8 %
Prepayment rate (annual CPR)(2)
— -3 %3 %
Dollar price of non-performing loans$60 -$100 $61 
BPL term loans held by CAFL (3)
2,969,217 Liability priceN/AN/A
BPL bridge loans2,207,964 Whole loan discount rate6 -12 %9 %
Whole loan spread520 -520 bps520 bps
Dollar price of non-performing loans$48-$100 $91 
Multifamily loans held by Freddie Mac K-Series (3)
420,554 Liability priceN/AN/A
Trading and AFS securities129,445 Discount rate6 -18 %11 %
Prepayment rate (annual CPR)4 -65 %10 %
Default rate— -14 %0.1 %
Loss severity— -50 %22 %
HEI302,122 Discount rate10 -11 %10 %
Prepayment rate (annual CPR)1 -20 %15 %
Home price appreciation (depreciation)(1)-3 %3 %
HEI held by HEI securitization entity(3)
129,150 Liability priceN/AN/A
Servicer advance investments219,813 Discount rate3 -5 %4 %
Prepayment rate (annual CPR)11 -30 %14 %
Expected remaining life (4)
6-6yrs6yrs
Mortgage servicing income— -18 bps4 bps
Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)
September 30, 2023Fair
Value		Input Values
(Dollars in Thousands, except Input Values)Unobservable InputRange
Weighted
Average (1)
Assets (continued)
MSRs$26,033 Discount rate12 -73 %13 %
Prepayment rate (annual CPR)3 -21 %6 %
Per loan annual cost to service$93 -$93 $93 
Excess MSRs38,427 Discount rate13 -19 %18 %
Prepayment rate (annual CPR)10 -100 %17 %
Excess mortgage servicing amount8 -20 bps11 bps
Residential loan purchase commitments, net 1,980 
Senior credit spread to TBA price(2)
$1.63 $2.63 $1.71 
Subordinate credit spread(2)
275-1020bps438bps
Senior credit support(2)
7 -7 %7 %
IO discount rate(2)
10 -10 %10 %
Prepayment rate (annual CPR)(2)
15 -15 %15 %
Pull-through rate22 -100 %68 %
Committed sales price$102 -$103 $102 
Liabilities
ABS issued (3):
At consolidated Sequoia entities3,717,707 Discount rate4 -19 %8 %
Prepayment rate (annual CPR)3 -25 %8 %
Default rate— -16 %1 %
Loss severity25 -50 %31 %
At consolidated CAFL Term entities2,653,224 Discount rate6 -12 %7 %
Prepayment rate (annual CPR)— -3 %0.1 %
Default rate5 -14 %7 %
Loss severity30 -40 %30 %
At consolidated Freddie Mac SLST entities1,058,991 Discount rate6 -16 %7 %
Prepayment rate (annual CPR)6 -6 %6 %
Default rate12 -14 %13 %
Loss severity25 -25 %25 %
At consolidated Freddie Mac K-Series entities (3)
387,650 Discount rate3 -10 %6 %
At consolidated HEI entities92,773 Discount rate10 -16 %11 %
Prepayment rate (annual CPR)20 -20 %20 %
Home price appreciation (depreciation)(1)-3 %3 %
(1)The weighted average input values for all loan types are based on unpaid principal balance. The weighted average input values for all other assets and liabilities are based on relative fair value.
(2)Values represent pricing inputs used in securitization pricing model. Credit spreads represent spreads to applicable swap rates unless specified otherwise.
(3)The fair value of the loans and HEI held by consolidated entities is 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 September 30, 2023, 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 $206 million, $316 million, $256 million, $33 million, and $15 million, respectively.
(4)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).
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 in isolation — such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions — 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, 2022 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 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 September 30, 2023, the carrying value of these investments was $6 million.