Home Equity Investments (HEI)

9 Months Ended

Sep. 30, 2023

Equity Method Investments and Joint Ventures [Abstract]

From time to time, we may purchase home equity investment contracts from third party originators under flow purchase agreements. Additionally, in the third quarter of 2023, we began to originate HEI. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by recording a security instrument (e.g., deed of trust) with respect to the property. Our investments in HEI expose us to both home price appreciation and depreciation of the associated property.

The following table presents our home equity investments at September 30, 2023 and December 31, 2022.

Table 10.1 – Home Equity Investments


(In Thousands)	September 30, 2023		December 31, 2022
HEI at Redwood	$	302,122	$	270,835
HEI held at consolidated HEI securitization entity	129,150		132,627
Total Home Equity Investments	$	431,272	$	403,462

We consolidate the HEI securitization entity in accordance with GAAP and have elected to account for it under the CFE election. As such, market valuation changes for the securitized HEI are based on the estimated fair value of the associated ABS issued by the entity, including the securities we own in the entity.

The following table details our HEI activity during the three and nine months ended September 30, 2023 and 2022.

Table 10.2 – Activity of HEI


	Three Months Ended September 30, 2023				Three Months Ended September 30, 2022
(In Thousands)	HEI at Redwood		Securitized HEI		HEI at Redwood		Securitized HEI
Fair value of HEI purchased and originated	$	113	$	—	$	79,050	$	—

Net market valuation gains (losses) recorded (1)	9,290		4,212		(4,774)		(724)


	Nine Months Ended September 30, 2023				Nine Months Ended September 30, 2022
(In Thousands)	HEI at Redwood		Securitized HEI		HEI at Redwood		Securitized HEI
Fair value of HEI purchased and originated	$	25,626	$	—	$	176,439	$	—

Net market valuation gains (losses) recorded (1)	21,598		8,418		(1,986)		8,587

(1)We account for HEI at Redwood under the fair value option and record net market valuation changes through Investment fair value changes, net on our Consolidated statements of income. We account for Securitized HEI under the CFE election and net market valuation gains (losses) for these investments are recorded through Investment fair value changes, net on our Consolidated statements of income. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2.

The following tables summarizes the characteristics of our HEI at September 30, 2023 and December 31, 2022.

Table 10.3 – HEI Characteristics


	September 30, 2023				December 31, 2022
(Dollars in Thousands)	HEI at Redwood		Securitized HEI		HEI at Redwood		Securitized HEI
Number of HEI contracts	2,644		929		2,599		1,007
Average initial amount of contract	$	103	$	95	$	101	$	94