Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2016

Carrying Values and Estimated Fair Values of Assets and Liabilities

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 December 31, 2016 and December 31, 2015.

Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities



	December 31, 2016				December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Residential loans, held-for-sale
At fair value	$	834,193	$	834,193	$	1,114,305	$	1,114,305
At lower of cost or fair value	1,206		1,365		1,433		1,635
Residential loans, held-for-investment
At fair value	3,052,652		3,052,652		2,813,065		2,813,065
Commercial loans, held-for-sale
At fair value	—		—		39,141		39,141
At lower of cost or fair value	2,700		2,700		—		—
Commercial loans, held-for-investment
At fair value	—		—		67,657		67,657
At amortized cost	—		—		295,849		300,824
Trading securities	445,687		445,687		404,011		404,011
Available-for-sale securities	572,752		572,752		829,245		829,245
MSRs	118,526		118,526		191,976		191,976
Cash and cash equivalents	212,844		212,844		220,229		220,229
Restricted cash	8,623		8,623		5,567		5,567
Accrued interest receivable	18,454		18,454		23,290		23,290
Derivative assets	36,595		36,595		16,393		16,393
REO ⁽¹⁾	5,533		5,560		4,896		5,282
Margin receivable⁽¹⁾	68,038		68,038		83,191		83,191
FHLBC stock ⁽¹⁾	43,393		43,393		34,437		34,437
Guarantee asset⁽¹⁾	4,092		4,092		5,697		5,697
Pledged collateral⁽¹⁾	42,875		42,875		53,600		53,600
Liabilities
Short-term debt	$	791,539	$	791,539	$	1,855,003	$	1,855,003
Accrued interest payable	9,608		9,608		8,936		8,936
Margin payable	12,783		12,783		6,415		6,415
Guarantee obligation	21,668		22,181		22,704		22,702
Derivative liabilities	66,329		66,329		62,794		62,794
ABS issued, net⁽²⁾
Fair value	773,462		773,462		996,820		996,820
Amortized cost	—		—		52,595		53,137
FHLBC long-term borrowings	1,999,999		1,999,999		1,343,023		1,343,023
Commercial secured borrowings	—		—		63,152		63,152
Convertible notes, net ⁽²⁾	482,195		493,365		483,119		461,053
Trust preferred securities and subordinated notes, net ⁽²⁾	138,489		96,255		138,443		83,700


(1)	These assets are included in Other assets on our consolidated balance sheets.


(2)	On January 1, 2016, we adopted ASU 2015-03 and began to present ABS issued, convertible notes, and trust preferred securities and subordinated notes, each net of deferred debt issuance costs. See Note 3 for further discussion.

Assets and Liabilities Measured at Fair Value on Recurring Basis

The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at December 31, 2016 and December 31, 2015, 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



December 31, 2016	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	3,886,845	$	—	$	—	$	3,886,845
Trading securities	445,687		—		—		445,687
Available-for-sale securities	572,752		—		—		572,752
Derivative assets	36,595		8,300		24,980		3,315
MSRs	118,526		—		—		118,526
Pledged collateral	42,875		42,875		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	4,092		—		—		4,092

Liabilities
Derivative liabilities	$	66,329	$	5,609	$	56,919	$	3,801
ABS issued	773,462		—		—		773,462



December 31, 2015	Carrying Value		Fair Value Measurements Using
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3
Assets
Residential loans	$	3,927,370	$	—	$	129,819	$	3,797,551
Commercial loans	106,798		—		—		106,798
Trading securities	404,011		—		—		404,011
Available-for-sale securities	829,245		—		—		829,245
Derivative assets	16,393		2,734		8,988		4,671
MSRs	191,976		—		—		191,976
Pledged collateral	53,600		53,600		—		—
FHLBC stock	34,437		—		34,437		—
Guarantee asset	5,697		—		—		5,697

Liabilities
Derivative liabilities	$	62,794	$	2,963	$	58,368	$	1,463
Commercial secured borrowings	63,152		—		—		63,152
ABS issued	996,820		—		—		996,820

Changes in Level 3 Assets and Liabilities Measured at Fair Value on Recurring Basis

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2016 and December 31, 2015.

Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis



	Assets																					Liabilities
	Residential Loans			Commercial Loans			Trading Securities			AFS Securities			MSRs			Guarantee Asset			Derivatives ⁽¹⁾			Commercial Secured Borrowings			ABS Issued
(In Thousands)	Residential Loans			Commercial Loans			Trading Securities			AFS Securities			MSRs			Guarantee Asset			Derivatives ⁽¹⁾			Commercial Secured Borrowings			ABS Issued
Beginning balance - December 31, 2015	$	3,797,551		$	106,798		$	404,011		$	829,245		$	191,976		$	5,697		$	3,208		$	63,152		$	996,820
Acquisitions	4,747,564			37,625			292,875			34,520			25,362			—			—			—			—
Sales	(3,813,538		)	(81,523		)	(244,219		)	(252,696		)	(62,440		)	—			—			—			—
Principal paydowns	(806,081		)	(476		)	(17,827		)	(62,229		)	—			—			—			(306		)	(208,215		)
Gains (losses) in net income, net	(33,893		)	2,791			10,847			48,399			(36,372		)	(1,605		)	30,193			2,369			(8,275		)
Unrealized losses in OCI, net	—			—			—			(24,487		)	—			—			—			—			—
Other settlements, net⁽²⁾	(4,758		)	(65,215		)	—			—			—			—			(33,887		)	(65,215		)	(6,868		)
Ending balance - December 31, 2016	$	3,886,845		$	—		$	445,687		$	572,752		$	118,526		$	4,092		$	(486	)	$	—		$	773,462



	Assets																					Liabilities
(In Thousands)	Residential Loans			Commercial Loans			Trading Securities			AFS Securities			MSRs			Guarantee Asset			Derivatives ⁽¹⁾			Commercial Secured Borrowings			ABS Issued
Beginning balance - December 31, 2014	$	1,677,984		$	237,496		$	111,606		$	1,267,624		$	139,293		$	7,201		$	1,119		$	66,707		$	—
Transfer to FVO ⁽³⁾	1,370,699			—			—			—			—			—			—			—			1,302,216
Acquisitions	5,231,532			617,519			399,990			33,370			95,281			—			—			—			—
Sales	(3,857,807		)	(754,636		)	(83,038		)	(366,373		)	(18,206		)	—			—			—			(1,362		)
Principal paydowns	(612,473		)	(780		)	(7,245		)	(131,387		)	—			—			—			(593		)	(312,800		)
Gains (losses) in net income, net	(6,071		)	7,199			(17,302		)	72,612			(24,392		)	(1,377		)	60,823			(3,011		)	8,366
Unrealized gains in OCI, net	—			—			—			(46,961		)	—			—			—			—			—
Other settlements, net ⁽²⁾	(6,313		)	—			—			360			—			(127		)	(58,734		)	49			400
Ending balance - December 31, 2015	$	3,797,551		$	106,798		$	404,011		$	829,245		$	191,976		$	5,697		$	3,208		$	63,152		$	996,820


(1)	For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments, are presented on a net basis.


(2)	Other settlements, net for derivatives represents the transfer of the fair value of loan purchase commitments at the time loans are acquired to the basis of residential loans. For commercial secured borrowings and commercial loans, the reduction in 2016 represents the derecognition of our commercial secured borrowings and related commercial A-note investments upon sale of the associated B-notes.


(3)	Upon adoption of ASU 2014-13 on January 1, 2015, loans held-for-investment in, and ABS issued by, consolidated financial entities are now recorded at fair value. See Note 3 for further discussion.

Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held and Included in Net Income

The following table presents the portion of 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 December 31, 2016, 2015, and 2014. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the years ended December 31, 2016, 2015, and 2014 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at December 31, 2016, 2015, and 2014 Included in Net Income



	Included in Net Income
	Years Ended December 31,
(In Thousands)	2016			2015			2014
Assets
Residential loans at Redwood	$	(17,370	)	$	(5,541	)	$	16,512
Residential loans at consolidated Sequoia entities	(14,391		)	7,422			—
Commercial loans	—			(2,620		)	3,357
Trading securities	7,184			(13,391		)	(25,216		)
Available-for-sale securities	(368		)	(246		)	(434		)
MSRs	42,964			(3,471		)	(15,239		)
Loan purchase commitments	—			4,252			1,119
Other assets - Guarantee asset	(1,605		)	(1,504		)	—

Liabilities
Loan purchase commitments	$	(486	)	$	—		$	—
Commercial secured borrowing	—			3,011			2,033
ABS issued	8,275			(8,366		)	—

Assets and Liabilities Measured at Fair Value on Non-Recurring Basis

The following table presents information on assets recorded at fair value on a non-recurring basis at December 31, 2016 and December 31, 2015. 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 December 31, 2016 and December 31, 2015.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis



									Gain (Loss) for Year Ended
December 31, 2016	Carrying Value		Fair Value Measurements Using						Gain (Loss) for Year Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		December 31, 2016
Assets
Residential loans, at lower of cost or fair value	$	867	$	—	$	—	$	867	$	(17	)
Commercial loans, at lower of cost or fair value	2,700		—		—		2,700		(300		)
REO	5,207		—		—		5,207		(1,831		)

									Gain (Loss) for Year Ended
December 31, 2015	Carrying Value		Fair Value Measurements Using						Gain (Loss) for Year Ended
(In Thousands)	Carrying Value		Level 1		Level 2		Level 3		December 31, 2015
Assets
Residential loans, at lower of cost or fair value	$	1,096	$	—	$	—	$	1,096	$	3
REO	2,395		—		—		2,395		(764		)
Liabilities
Guarantee obligation	4,414		—		—		4,414		—

Market Valuation Adjustments

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the years ended December 31, 2016, 2015, and 2014.

Table 5.6 – Market Valuation Gains and Losses, Net



	Years Ended December 31,
(In Thousands)	2016			2015			2014
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	5,786		$	3,712		$	51,312
Residential loan purchase and forward sale commitments	25,613			50,234			13,891
Commercial loans, at fair value ⁽¹⁾	433			10,265			20,788
Sequoia securities	1,455			(15,261		)	(23,839		)
Risk management derivatives, net	3,158			(42,468		)	(31,167		)
Total mortgage banking activities, net ⁽²⁾	$	36,445		$	6,482		$	30,985
Investment Fair Value Changes, Net
Residential loans held-for-investment at Redwood	(23,102		)	(6,337		)	(697		)
Trading securities	9,666			(2,019		)	(358		)
Valuation adjustments on commercial loans held-for-sale	(307		)	—			—
Net investments in consolidated Sequoia entities	(4,200		)	(1,192		)	(894		)
Risk sharing investments	(1,151		)	(1,886		)	104
Risk management derivatives, net	(9,112		)	(9,677		)	(7,792		)
Impairments on AFS securities	(368		)	(246		)	(565		)
Total investment fair value changes, net	$	(28,574	)	$	(21,357	)	$	(10,202	)
MSR Income (Loss), Net
MSRs	$	(36,372	)	$	(24,392	)	$	(21,081	)
Risk management derivatives, net	15,584			(12,708		)	—
Total MSR loss, net ⁽³⁾	$	(20,788	)	$	(37,100	)	$	(21,081	)
Total Market Valuation Gains (Losses), Net	$	(12,917	)	$	(51,975	)	$	(298	)


(1)	Commercial loans at fair value does not include commercial A-notes, which were sold in 2014, but did not qualify for sale treatment under GAAP. The market valuation gains and losses on the commercial A-notes and associated commercial secured borrowings net to zero in each period presented.


(2)	Mortgage banking activities, net presented above does not include fee income or provisions for repurchases 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)

MSR income (loss), net presented above does not include net fee income or provisions for repurchases that are components of MSR income (loss), net on our consolidated statements of income, as these amounts do not represent market valuation adjustments. In addition, we did not specifically identify derivatives used to hedge MSRs prior to the second quarter of 2015. See Note 2 for additional detail.

Quantitative Information about Significant Unobservable Inputs Used in Valuation of Level 3 Assets and Liabilities Measured at Fair Value

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



December 31, 2016	Fair Value			Input Values
(Dollars in Thousands, except Input Values)	Fair Value		Unobservable Input	Range						Weighted Average
Assets

Residential loans, at fair value:

Jumbo fixed rate loans	$	2,871,120	Whole loan spread to TBA price	$	3.05	-	$	4.06		$	3.94
			Whole loan spread to swap rate	275		-	305		bps	304		bps

Jumbo hybrid loans	50,974		Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate	135		-	275		bps	168		bps

Jumbo loans committed to sell	173,114		Whole loan committed sales price	$	99.98	-	$	102.06		$	100.61

Loans held by consolidated Sequoia entities ⁽¹⁾	791,636		Liability price				N/A			N/A

Residential loans, at lower of cost or fair value	867		Loss severity	15		-	30		%	20		%

Trading and AFS securities	1,018,439		Discount rate	4		-	12		%	7		%
			Prepayment rate (annual CPR)	1		-	57		%	20		%
			Default rate	0		-	35		%	2		%
			Loss severity	20		-	65		%	22		%
			Credit support	0		-	48		%	3		%

MSRs	118,526		Discount rate	10		-	11		%	10		%
			Prepayment rate (annual CPR)	5		-	11		%	9		%
			Per loan annual cost to service	$	72	-	$	82		$	77

Guarantee asset	4,092		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	10		-	10		%	10		%

REO	5,207		Loss severity	1		-	100		%	24		%

Liabilities

Loan purchase commitments, net ⁽²⁾	486		MSR multiple	0.9		-	5.4		x	3.6		x
			Pull-through rate	12		-	100		%	75		%
			Whole loan spread to TBA price	$	2.66	-	$	4.06		$	3.98
			Whole loan spread to swap rate - fixed rate	275		-	305		bps	305		bps
			Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate - hybrid	135		-	275		bps	163		bps

ABS issued ⁽¹⁾	773,462		Discount rate	4		-	8		%	5		%
			Prepayment rate (annual CPR)	1		-	20		%	15		%
			Default rate	1		-	12		%	7		%
			Loss severity	20		-	32		%	27		%
			Credit support	—		-	34		%	9		%


(1)	The fair value of the loans held by consolidated Sequoia entities was based on the fair value of the ABS issued by these entities, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.


(2)	For the purpose of this presentation, loan purchase commitment assets and liabilities are presented net.