Residential Loans

We acquire residential loans from third-party originators. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia entities at December 31, 2016 and December 31, 2015.

Table 6.1 – Classifications and Carrying Values of Residential Loans



December 31, 2016
(In Thousands)	Redwood		Sequoia		Total
Held-for-sale
At fair value - jumbo	$	834,193	$	—	$	834,193
At lower of cost or fair value - jumbo	1,206		—		1,206
Total held-for-sale	835,399		—		835,399
Held-for-investment
At fair value - jumbo	2,261,016		791,636		3,052,652
Total Residential Loans	$	3,096,415	$	791,636	$	3,888,051



December 31, 2015
(In Thousands)	Redwood		Sequoia		Total
Held-for-sale
At fair value - conforming	$	129,819	$	—	$	129,819
At fair value - jumbo	984,486		—		984,486
At lower of cost or fair value - jumbo	1,433		—		1,433
Total held-for-sale	1,115,738		—		1,115,738
Held-for-investment
At fair value - jumbo	1,791,195		1,021,870		2,813,065
Total Residential Loans	$	2,906,933	$	1,021,870	$	3,928,803

At December 31, 2016, we owned mortgage servicing rights associated with $2.32 billion (principal balance) of consolidated residential loans purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our consolidated balance sheets. We contract with licensed sub-servicers that perform servicing functions for these loans.

Residential Loans Held-for-Sale

At Fair Value

At December 31, 2016, we owned 1,114 loans held-for-sale at fair value with an aggregate unpaid principal balance of $0.83 billion and a fair value of $0.83 billion, compared to 1,763 loans with an aggregate unpaid principal balance of $1.09 billion and a fair value of $1.11 billion at December 31, 2015. At December 31, 2016, none of these loans were greater than 90 days delinquent or in foreclosure. At December 31, 2015, one of these loans with a fair value of $1 million was greater than 90 days delinquent and one of these loans with a fair value of $1 million was in foreclosure.

During the years ended December 31, 2016 and 2015, we purchased $4.85 billion and $10.21 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $4.04 billion and $9.04 billion (principal balance) of loans, respectively, for which we recorded net market valuation gains of $6 million and $4 million, respectively, through Mortgage banking activities, net on our consolidated statements of income. At December 31, 2016, loans held-for-sale with a market value of $534 million were pledged as collateral under short-term borrowing agreements.

At Lower of Cost or Fair Value

At December 31, 2016 and December 31, 2015, we held seven and nine residential loans, respectively, at the lower of cost or fair value with $2 million in outstanding principal balance for both periods and a carrying value of $1 million for both periods. At December 31, 2016, one of these loans with an unpaid principal balance of $0.3 million was greater than 90 days delinquent and none of these loans were in foreclosure. At December 31, 2015, one of these loans with an unpaid principal balance of $0.4 million was greater than 90 days delinquent and one of these loans with an unpaid principal balance of $0.1 million was in foreclosure.

Residential Loans Held-for-Investment at Fair Value

At Redwood

At December 31, 2016, we owned 3,068 held-for-investment loans at Redwood with an aggregate unpaid principal balance of $2.23 billion and a fair value of $2.26 billion, compared to 2,398 loans with an aggregate unpaid principal balance of $1.76 billion and a fair value of $1.79 billion at December 31, 2015. At December 31, 2016, one of these loans was greater than 90 days delinquent and none of these loans were in foreclosure. At December 31, 2015, none of these loans were greater than 90 days delinquent or in foreclosure.

During the years ended December 31, 2016 and 2015, we transferred loans with a fair value of $1.06 billion and $1.50 billion, respectively, from held-for-sale to held-for-investment. During the years ended December 31, 2016 and 2015, we transferred loans with a fair value of $56 million and $143 million, respectively, from held-for-investment to held-for-sale.

During the years ended December 31, 2016 and 2015, we recorded net market valuation losses of $23 million and $6 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income. At December 31, 2016, loans with a fair value of $2.25 billion were pledged as collateral under a borrowing agreement with the FHLBC.

The outstanding loans held-for-investment at Redwood at December 31, 2016 were prime-quality, first lien loans, of which 89% were originated between 2014 and 2016, 5% were originated in 2013, and 6% were originated in 2012 and prior years. The weighted average FICO score of borrowers backing these loans was 773 (at origination) and the weighted average loan-to-value ("LTV") ratio of these loans was 65% (at origination). At December 31, 2016, these loans were comprised of 99.5% fixed-rate loans with a weighted average coupon of 4.10%, and the remainder were hybrid or ARM loans with a weighted average coupon of 3.83%.

At Consolidated Sequoia Entities

At December 31, 2016, we owned 3,735 held-for-investment loans at consolidated Sequoia entities, with an aggregate unpaid principal balance of $887 million and a fair value of $792 million, as compared to 4,545 loans at December 31, 2015 with an aggregate unpaid balance of $1.12 billion and a fair value of $1.02 billion. At origination, the weighted average FICO score of borrowers backing these loans was 728, the weighted average LTV ratio of these loans was 66%, and the loans were nearly all first lien and prime-quality.

At December 31, 2016 and December 31, 2015, the unpaid principal balance of loans at consolidated Sequoia entities delinquent greater than 90 days was $19 million and $27 million, respectively, and the unpaid principal balance of loans in foreclosure was $11 million and $32 million, respectively. During the years ended December 31, 2016 and 2015, we recorded a net market valuation loss of $14 million and a net market valuation gain of $7 million, respectively, on these loans through Investment fair value changes, net on our consolidated statements of income.

Residential Loan Characteristics

The following table presents the geographic concentration of residential loans recorded on our consolidated balance sheets at December 31, 2016 and 2015.

Table 6.2 – Geographic Concentration of Residential Loans



	December 31, 2016						December 31, 2015
Geographic Concentration (by Principal)	Held-for-Sale		Held-for- Investment at Sequoia		Held-for- Investment at FVO		Held-for-Sale		Held-for- Investment at Sequoia		Held-for- Investment at FVO
California	40	%	18	%	42	%	41	%	18	%	39	%
Texas	9	%	6	%	10	%	9	%	6	%	11	%
Washington	8	%	2	%	4	%	6	%	2	%	3	%
Colorado	4	%	3	%	4	%	5	%	3	%	5	%
Florida	3	%	14	%	5	%	4	%	14	%	4	%
Virginia	2	%	3	%	3	%	3	%	3	%	4	%
Georgia	2	%	5	%	1	%	3	%	5	%	1	%
Massachusetts	2	%	2	%	4	%	2	%	2	%	4	%
New York	2	%	8	%	4	%	1	%	8	%	5	%
Other states (none greater than 5%)	28	%	39	%	23	%	26	%	39	%	24	%
Total	100	%	100	%	100	%	100	%	100	%	100	%

The following table displays the loan product type and accompanying loan characteristics of residential loans recorded on our consolidated balance sheets at December 31, 2016 and 2015.

Table 6.3 – Product Types and Characteristics of Residential Loans



December 31, 2016
(In Thousands)
Loan Balance					Number of Loans	Interest Rate⁽¹⁾				Maturity Date			Total Principal		30-89 Days DQ		90+ Days DQ
Held-for-Investment at Redwood⁽¹⁾:
Hybrid ARM loans
	$	251	to	$500	1	3.63	%	to	3.63%	2044-07	-	2044-07	264		—		—
	$	501	to	$750	4	2.88	%	to	4.65%	2040-09	-	2045-10	2,722		—		—
	$	751	to	$1,000	2	3.50	%	to	4.00%	2045-09	-	2045-10	1,726		—		—
			over	$1,000	4	3.00	%	to	4.20%	2040-10	-	2045-10	5,545		—		—
					11								10,257		—		—
Fixed loans
	$	—	to	$250	26	3.67	%	to	5.08%	2039-04	-	2045-10	4,643		—		237
	$	251	to	$500	633	2.80	%	to	5.13%	2028-02	-	2046-12	278,560		264		—
	$	501	to	$750	1,306	2.75	%	to	6.25%	2027-09	-	2046-12	807,714		2,803		—
	$	751	to	$1,000	690	2.75	%	to	5.63%	2027-07	-	2046-12	597,002		—		—
			over	$1,000	402	2.80	%	to	5.00%	2027-04	-	2047-01	535,621		1,232		—
					3,057								2,223,540		4,299		237
Total HFI at Redwood:					3,068								$	2,233,797	$	4,299	$	237
Held-for-Investment at Sequoia:
ARM loans:
	$	—	to	$250	2,623	0.63	%	to	5.60%	2019-02	-	2035-11	$	297,646	$	9,158	$	7,410
	$	251	to	$500	694	0.25	%	to	5.75%	2019-12	-	2036-05	241,253		9,177		10,059
	$	501	to	$750	203	0.88	%	to	3.89%	2024-05	-	2035-09	121,919		5,812		5,069
	$	751	to	$1,000	100	0.63	%	to	3.00%	2022-01	-	2035-07	86,988		2,750		3,322
			over	$1,000	78	0.25	%	to	3.75%	2027-03	-	2036-05	121,484		4,790		4,306
					3,698								869,290		31,687		30,166
Hybrid ARM loans:
	$	—	to	$250	4	3.00	%	to	3.00%	2033-09	-	2034-06	453		—		—
	$	251	to	$500	18	2.63	%	to	3.13%	2033-07	-	2034-12	6,516		—		—
	$	501	to	$750	13	2.75	%	to	3.13%	2033-07	-	2034-12	8,483		669		—
	$	751	to	$1,000	1	3.13	%	to	3.13%	2033-08	-	2033-08	751		—		—
			over	$1,000	1	3.00	%	to	3.00%	2033-09	-	2033-09	1,488		—		—
					37								17,691		669		—
Total HFI at Sequoia:					3,735								$	886,981	$	32,356	$	30,166
Held-for-Sale:
ARM loans
	$	61	to	$396	6	1.88	%	to	2.75%	2033-10	-	2032-11	$	882	$	—	$	300
Hybrid ARM loans
	$	2	to	$1,947	173	2.50	%	to	6.00%	2037-06	-	2047-01	144,174		—		—
Fixed loans
	$	404	to	$1,997	942	2.99	%	to	6.25%	2026-12	-	2047-01	688,329		—		—
Total Held-for-Sale					1,121								$	833,385	$	—	$	300



December 31, 2015
(In Thousands)
Loan Balance					Number of Loans	Interest Rate⁽¹⁾				Maturity Date			Total Principal		30-89 Days DQ		90+ Days DQ
Held-for-Investment at Redwood⁽¹⁾:
ARM loans:
	$	251	to	$500	2	3.63	%	to	3.75%	2044-07	-	2044-07	$	563	$	—	$	—
	$	501	to	$750	2	3.50	%	to	3.50%	2045-09	-	2045-10	1,671		—		—
	$	751	to	$1,000	1	3.63	%	to	3.63%	2044-08	-	2044-08	1,267		—		—
					5								3,501		—		—
Hybrid ARM loans
	$	251	to	$500	7	2.88	%	to	3.88%	2044-01	-	2044-09	2,963		—		—
	$	501	to	$750	28	2.63	%	to	4.90%	2040-09	-	2044-10	17,514		—		—
	$	751	to	$1,000	15	2.75	%	to	5.05%	2039-05	-	2044-11	12,994		—		—
			over	$1,000	6	2.88	%	to	5.20%	2039-04	-	2044-12	8,797		—		—
					56								42,268		—		—
Fixed loans
	$	—	to	$250	29	3.64	%	to	5.38%	2039-04	-	2045-10	5,295		242		—
	$	251	to	$500	484	3.13	%	to	5.13%	2029-07	-	2045-12	212,732		913		—
	$	501	to	$750	959	2.94	%	to	5.25%	2026-11	-	2045-12	595,863		3,213		—
	$	751	to	$1,000	552	2.90	%	to	5.00%	2024-01	-	2045-12	480,557		989		—
			over	$1,000	313	3.14	%	to	5.00%	2027-04	-	2045-12	418,774		—		—
					2,337								1,713,221		5,357		—
Total HFI at Redwood:					2,398								$	1,758,990	$	5,357	$	—
Held-for-Investment at Sequoia:
ARM loans:
	$	—	to	$250	3,133	0.38	%	to	5.16%	2013-02	-	2035-11	$	355,415	$	10,661	$	13,078
	$	251	to	$500	858	—	%	to	5.63%	2013-12	-	2036-05	296,425		9,620		15,345
	$	501	to	$750	269	0.63	%	to	4.66%	2014-05	-	2035-09	161,273		4,578		7,209
	$	751	to	$1,000	135	0.38	%	to	2.38%	2019-02	-	2035-07	118,983		3,586		8,473
			over	$1,000	109	—	%	to	2.63%	2022-01	-	2036-05	169,492		1,341		14,718
					4,504								1,101,588		29,786		58,823
Hybrid ARM loans:
	$	—	to	$250	3	2.75	%	to	2.88%	2033-09	-	2034-06	317		—		—
	$	251	to	$500	20	2.63	%	to	2.88%	2033-07	-	2034-12	7,523		—		—
	$	501	to	$750	15	2.63	%	to	2.88%	2033-08	-	2034-12	9,874		542		—
	$	751	to	$1,000	2	2.75	%	to	2.75%	2033-07	-	2033-08	1,547		—		—
			over	$1,000	1	2.75	%	to	2.75%	2033-09	-	2033-09	1,566		—		—
					41								20,827		542		—
Total HFI at Sequoia:					4,545								$	1,122,415	$	30,328	$	58,823
Held-for-Sale:
ARM loans
	$	64	to	$1,298	14	1.50	%	to	4.00%	2032-11	-	2045-12	$	5,258	$	—	$	415
Hybrid ARM loans
	$	164	to	$1,989	356	2.50	%	to	4.25%	2037-06	-	2046-01	276,457		2,249		—
Fixed loans
	$	30	to	$2,332	1,402	2.75	%	to	5.25%	2025-09	-	2046-01	809,803		2,097		1,437
Total Held-for-Sale					1,772								$	1,091,518	$	4,346	$	1,852


(1)	Rate is net of servicing fee for consolidated loans for which we do not own the MSR. For borrowers whose current rate is less than the applicable servicing fee, the rate shown in the table above is zero.

Allowance for Loan Losses on Residential Loans

Upon adoption of ASU 2014-13 on January 1, 2015, we began to record loans held-for-investment at consolidated Sequoia entities at fair value. See Note 3 for further discussion. Prior to the adoption of ASU 2014-13, we established and maintained an allowance for loan losses for residential loans held-for-investment. The allowance included a component for pools of residential loans owned at Sequoia securitization entities that we collectively evaluated for impairment, and a component for loans individually evaluated for impairment that included restructured residential loans at Sequoia entities were determined to be troubled debt restructurings.

Activity in the Allowance for Loan Losses on Residential Loans

The following table summarizes the activity in the allowance for loan losses for the years ended December 31, 2016, 2015, and 2014.

Table 6.4 – Allowance for Loan Losses



	Years Ended December 31,
(In Thousands)	2016		2015			2014
Balance at beginning of period	$	—	$	21,338		$	25,427
Charge-offs, net	—		—			(4,966		)
Provision for loan losses	—		—			877
Other adjustments ⁽¹⁾	—		(21,338		)	—
Balance at End of Period	$	—	$	—		$	21,338


(1)	Upon adoption of ASU 2014-13 on January 1, 2015, we began to record loans held-for-investment at consolidated Sequoia entities at fair value. See Note 3 for further discussion.