Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

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, 2019 and December 31, 2018.

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

	December 31, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value	$	536,385	$	536,509	$	1,048,801	$	1,048,821
Residential loans, held-for-investment	7,178,465		7,178,465		6,205,941		6,205,941
Business purpose residential loans, held-for-sale	331,565		331,565		28,460		28,460
Business purpose residential loans, held-for-investment	3,175,178		3,175,178		112,798		112,798
Multifamily loans	4,408,524		4,408,524		2,144,598		2,144,598
Trading securities	860,540		860,540		1,118,612		1,118,612
Available-for-sale securities	239,334		239,334		333,882		333,882
Servicer advance investments (1)	169,204		169,204		300,468		300,468
MSRs (1)	42,224		42,224		60,281		60,281
Participation in loan warehouse facility (1)	—		—		39,703		39,703
Excess MSRs (1)	31,814		31,814		27,312		27,312
Shared home appreciation options (1)	45,085		45,085		—		—
Cash and cash equivalents	196,966		196,966		175,764		175,764
Restricted cash	93,867		93,867		29,313		29,313
Accrued interest receivable	71,058		71,058		47,105		47,105
Derivative assets	35,701		35,701		35,789		35,789
REO (2)	9,462		10,389		3,943		4,396
Margin receivable (2)	209,776		209,776		100,773		100,773
FHLBC stock (2)	43,393		43,393		43,393		43,393
Guarantee asset (2)	1,686		1,686		2,618		2,618
Pledged collateral (2)	32,945		32,945		42,433		42,433
Liabilities
Short-term debt facilities	$	2,176,591	$	2,176,591	$	1,937,920	$	1,937,920
Short-term debt - servicer advance financing	152,554		152,554		262,740		262,740
Accrued interest payable	60,655		60,655		42,528		42,528
Margin payable (3)	1,700		1,700		835		835
Guarantee obligation (3)	14,009		13,754		16,711		16,774
Contingent consideration (3)	28,484		28,484		—		—
Derivative liabilities	163,424		163,424		84,855		84,855
ABS issued at fair value	10,515,475		10,515,475		5,410,073		5,410,073
FHLBC long-term borrowings	1,999,999		1,999,999		1,999,999		1,999,999
Subordinate securities financing facility	183,520		184,666		—		—
Convertible notes, net	631,125		661,985		633,196		618,271
Trust preferred securities and subordinated notes, net	138,628		99,045		138,582		102,533

(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)

These liabilities are included in Accrued expenses and other liabilities on our consolidated balance sheets.

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, 2019 and December 31, 2018, 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, 2019	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	7,714,745	$	—	$	—	$	7,714,745
Business purpose residential loans	3,506,743		—		—		3,506,743
Multifamily loans	4,408,524		—		—		4,408,524
Trading securities	860,540		—		—		860,540
Available-for-sale securities	239,334		—		—		239,334
Servicer advance investments	169,204		—		—		169,204
MSRs	42,224		—		—		42,224
Excess MSRs	31,814		—		—		31,814
Shared home appreciation options	45,085		—		—		45,085
Derivative assets	35,701		6,531		19,020		10,150
Pledged collateral	32,945		32,945		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	1,686		—		—		1,686
Liabilities
Contingent consideration	$	28,484	$	—	$	—	$	28,484
Derivative liabilities	163,424		13,368		148,766		1,290
ABS issued	10,515,475		—		—		10,515,475

December 31, 2018	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	7,254,631	$	—	$	—	$	7,254,631
Business purpose residential loans	141,258		—		—		141,258
Multifamily loans	2,144,598		—		—		2,144,598
Trading securities	1,118,612		—		—		1,118,612
Available-for-sale securities	333,882		—		—		333,882
Servicer advance investments	300,468		—		—		300,468
MSRs	60,281		—		—		60,281
Excess MSRs	27,312		—		—		27,312
Derivative assets	35,789		4,665		28,211		2,913
Pledged collateral	42,433		42,433		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	2,618		—		—		2,618
Liabilities
Derivative liabilities	$	84,855	$	13,215	$	70,908	$	732
ABS issued	5,410,073		—		—		5,410,073

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, 2019 and December 31, 2018.

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

	Assets
	Residential Loans			Business Purpose Residential Loans			Multifamily Loans			Trading Securities			AFS Securities			Servicer Advance Investments			MSRs			Excess MSRs			Shared Home Appreciation Options
(In Thousands)
Beginning balance - December 31, 2018	$	7,254,631		$	141,258		$	2,144,598		$	1,118,612		$	333,882		$	300,468		$	60,281		$	27,312		$	—
Acquisitions	7,092,866			2,639,615			2,162,386			332,593			26,539			69,610			868			7,762			44,243
Originations	—			1,015,436			—			—			—			—			—			—			—
Sales	(5,141,886		)	(76,909		)	—			(597,122		)	(110,069		)	—			—			—			—
Principal paydowns	(1,609,220		)	(213,655		)	(28,543		)	(44,600		)	(39,704		)	(203,876		)	—			—			—
Gains (losses) in net income, net	119,132			7,423			130,083			56,008			24,580			3,002			(18,925		)	(3,260		)	842
Unrealized losses in OCI, net	—			—			—			—			4,106			—			—			—			—
Other settlements, net (1)	(778		)	(6,425		)	—			(4,951		)	—			—			—			—			—
Ending balance - December 31, 2019	$	7,714,745		$	3,506,743		$	4,408,524		$	860,540		$	239,334		$	169,204		$	42,224		$	31,814		$	45,085

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

	Assets						Liabilities
	Guarantee Asset			Derivatives (2)			Contingent Consideration		ABS Issued
(In Thousands)
Beginning balance - December 31, 2018	$	2,618		$	2,181		$	—	$	5,410,073
Acquisitions	—			—			25,267		6,098,462
Principal paydowns	—			—			—		(1,112,437		)
Gains (losses) in net income, net	(932		)	62,220			3,217		119,377
Other settlements, net (1)	—			(55,541		)	—		—
Ending balance - December 31, 2019	$	1,686		$	8,860		$	28,484	$	10,515,475

	Assets
(In Thousands)	Residential Loans			Business Purpose Residential Loans			Multifamily Loans			Trading Securities			AFS Securities			Servicer Advance Investments			MSRs			Excess MSRs		Guarantee Asset
Beginning balance - December 31, 2017	$	5,114,317		$	—		$	—		$	968,844		$	507,666		$	—		$	63,598		$	—	$	2,869
Acquisitions	8,338,724			167,777			2,099,916			653,739			7,739			395,813			328			25,489		—
Sales	(5,425,168		)	—			—			(438,304		)	(143,644		)	—			(1,077		)	—		—
Principal paydowns	(814,122		)	(27,382		)	(1,873		)	(40,050		)	(44,446		)	(94,644		)	—			—		—
Gains (losses) in net income, net	44,627			863			46,555			(8,436		)	41,051			(701		)	(2,568		)	1,823		(251		)
Unrealized gains in OCI, net	—			—			—			—			(34,484		)	—			—			—		—
Other settlements, net (1)	(3,747		)	—			—			(17,181		)	—			—			—			—		—
Ending balance - December 31, 2018	$	7,254,631		$	141,258		$	2,144,598		$	1,118,612		$	333,882		$	300,468		$	60,281		$	27,312	$	2,618

				Liabilities
(In Thousands)	Derivatives (2)			ABS  Issued
Beginning balance - December 31, 2017	$	1,714		$	1,164,585
Acquisitions	—			4,613,168
Principal paydowns	—			(459,173		)
Gains (losses) in net income, net	(1,214		)	91,493
Other settlements, net (1)	1,681			—
Ending balance - December 31, 2018	$	2,181		$	5,410,073

(1) Other settlements, net for residential and business purpose residential loans represents the transfer of loans to REO, and for derivatives, the settlement of forward sale commitments and the transfer of the fair value of loan purchase or interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental loans. Other settlements, net for trading securities relates to the consolidation of Freddie Mac K-Series securitization entities.

(2) 

For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments, forward sale commitments, and interest rate lock commitments, are presented on a net basis.

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, 2019, 2018, and 2017. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the years ended December 31, 2019, 2018, and 2017 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, 2019, 2018, and 2017 Included in Net Income

	Included in Net Income
	Years Ended December 31,
(In Thousands)	2019			2018			2017
Assets
Residential loans at Redwood	$	67,470		$	(17,757	)	$	523
Residential loans at consolidated Sequoia entities	(10,062		)	24,799			17,727
Residential loans at consolidated Freddie Mac SLST entities	63,583			21,295			—
Business purpose residential loans	14,603			445			—
Single-family rental loans at consolidated CAFL entities	(14,681		)	—			—
Multifamily loans at consolidated Freddie Mac K-Series entities	130,083			46,555			—
Trading securities	18,865			(12,256		)	28,612
Available-for-sale securities	—			(89		)	(1,011		)
Servicer advance investments	3,001			(702		)	—
MSRs	(11,957		)	1,942			1,277
Excess MSRs	(3,260		)	1,824			—
Shared home appreciation options	842			—			—
Loan purchase and interest rate lock commitments	10,190			2,913			3,243
Loan forward sale commitments	—			—			2,177
Other assets - Guarantee asset	(932		)	(251		)	(1,223		)
Liabilities
Loan purchase commitments	$	(1,290	)	$	(732	)	$	(3,706	)
Contingent consideration	(3,217		)	—			—
ABS issued	(130,421		)	(71,468		)	(29,187		)

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, 2019 and December 31, 2018. 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, 2019 and December 31, 2018.

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

									Gain (Loss) for Year Ended
December 31, 2019	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3		December 31, 2019
Assets
REO	$	4,051	$	—	$	—	$	4,051	$	(1,363	)
									Gain (Loss) for Year Ended
December 31, 2018	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3		December 31, 2018
Assets
REO	$	2,225	$	—	$	—	$	2,225	$	(131	)

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, 2019, 2018, and 2017.

Table 5.6 – Market Valuation Gains and Losses, Net

	Years Ended December 31,
(In Thousands)	2019			2018			2017
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	3,267		$	23,144		$	31,493
Residential loan purchase and forward sale commitments	60,260			(1,336		)	37,880
Single-family rental loans held-for-sale, at fair value	15,043			375			—
Single-family rental loan purchase and interest rate lock commitments	1,961			78			—
Residential bridge loans	4,518			—			—
Risk management derivatives, net	(15,723		)	34,739			(17,529		)
Total mortgage banking activities, net (1)	$	69,326		$	57,000		$	51,844
Investment Fair Value Changes, Net
Residential loans held-for-investment at Redwood	$	58,891		$	(29,573	)	$	(5,765	)
Single-family rental loans held-for-investment	272			—			—
Residential bridge loans held-for-investment	(2,139		)	(29		)	—
Trading securities	56,046			(8,055		)	39,526
Commercial loans held-for-sale	—			—			300
Servicer advance investments	3,001			(701		)	—
Excess MSRs	(3,260		)	1,823			—
Shared home appreciation options	842			—			—
REO	(1,045		)	—			—
Net investments in Legacy Sequoia entities (2)	(1,545		)	(1,016		)	(8,027		)
Net investments in Sequoia Choice entities (2)	6,947			443			(323		)
Net investments in Freddie Mac SLST entities (2)	27,206			1,271			—
Net investments in Freddie Mac K-Series entities (2)	21,430			931			—
Net investments in CAFL entities (2)	(3,636		)	—			—
Other investments	(341		)	(434		)	(1,484		)
Risk management derivatives, net	(127,169		)	9,740			(12,842		)
Impairments on AFS securities	—			(89		)	(1,011		)
Total investment fair value changes, net	$	35,500		$	(25,689	)	$	10,374
Other Income
MSRs	$	(18,856	)	$	(2,508	)	$	(10,166	)
Risk management derivatives, net	8,595			(4,734		)	(568		)
Gain on re-measurement of 5 Arches investment	2,441			—			—
Total other income (3)	$	(7,820	)	$	(7,242	)	$	(10,734	)
Total Market Valuation Gains, Net	$	97,006		$	24,069		$	51,484

(1) 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.

(2) Includes changes in fair value of the residential loans held-for-investment, REO and the ABS issued at the entities, which netted together represent the change in value of our investments at the consolidated VIEs.

(3)

Other income presented above does not include net MSR fee income or provisions for repurchases for MSRs, as these amounts do not represent market valuation adjustments.

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, 2019	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average
Assets
Residential loans, at fair value:
Jumbo fixed-rate loans	$	2,113,977	Prepayment rate (annual CPR)	20		-	20		%	20		%
			Whole loan spread to TBA price	$	0.53	-	$	1.63		$	1.62
			Whole loan spread to swap rate	95		-	375		bps	170		bps
Jumbo hybrid loans	326,336		Prepayment rate (annual CPR)	15		-	15		%	15		%
			Whole loan spread to swap rate	80		-	345		bps	134		bps
Jumbo loans committed to sell	207,864		Whole loan committed sales price	$	101.85	-	$	102.96		$	102.41
Loans held by Legacy Sequoia (1)	407,890		Liability price				N/A			N/A
Loans held by Sequoia Choice (1)	2,291,463		Liability price				N/A			N/A
Loans held by Freddie Mac SLST (1)	2,367,215		Liability price				N/A			N/A
Business purpose residential loans:
Single-family rental loans	569,185		Senior credit spread	100		-	105		bps	103		bps
			Subordinate credit spread	135		-	1,400		bps	299		bps
			Senior credit support	33		-	40		%	34		%
			IO discount rate	6		-	9		%	8		%
			Prepayment rate (annual CPR)	5		-	5		%	5		%
Single-family rental loans held by CAFL	2,192,552		Liability price				N/A			N/A
Residential bridge loans	745,006		Discount rate	6			10		%	7		%
Multifamily loans held by Freddie Mac K-Series (1)	4,408,524		Liability price				N/A			N/A
Trading and AFS securities	1,099,874		Discount rate	3		-	40		%	5		%
			Prepayment rate (annual CPR)	5		-	50		%	16		%
			Default rate	—		-	7		%	1		%
			Loss severity	—		-	30		%	5		%
Servicer advance investments	169,204		Discount rate	5		-	5		%	5		%
			Prepayment rate (annual CPR)	8		-	15		%	14		%
			Expected remaining life (2)	2		-	2		year	2		year
			Mortgage servicing income	8		-	13		bps	10		bps
MSRs	42,224		Discount rate	11		-	12		%	11		%
			Prepayment rate (annual CPR)	5		-	44		%	11		%
			Per loan annual cost to service	$	82	-	$	82		$	82
Excess MSRs	31,814		Discount rate	11		-	16		%	14		%
			Prepayment rate (annual CPR)	9		-	14		%	11		%
			Excess mortgage servicing amount	8		-	18		bps	13		bps

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)

December 31, 2019	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average
Assets (continued)
Shared home appreciation options	$	45,085	Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	10		-	30		%	23		%
			Home price appreciation	3		-	3		%	3		%
Guarantee asset	1,686		Discount rate	11		-	11		%	11		%
			Prepayment rate (annual CPR)	15		-	15		%	15		%
REO	4,051		Loss severity	17		-	55		%	26		%
Residential loan purchase commitments, net	8,419		MSR multiple	0.7		-	4.3		x	2.8		x
			Pull-through rate	8		-	100		%	75		%
			Whole loan spread to TBA price	$	0.53	-	$	1.63		$	1.62
			Whole loan spread to swap rate - fixed rate	115		-	375		bps	253		bps
			Prepayment rate (annual CPR)	15		-	20		%	20		%
			Whole loan spread to swap rate - hybrid	115		-	155		bps	131		bps
Single-family rental interest rate lock commitments	440		Senior credit spread	105		-	105		bps	105		bps
			Subordinate credit spread	140		-	1,400		bps	299		bps
			Senior credit support	33		-	33		%	33		%
			IO discount rate	6		-	7		%	7		%
			Prepayment rate (annual CPR)	5		-	5		%	5		%
			Pull-through rate	100		-	100		%	100		%
Liabilities
ABS issued (1)
At consolidated Sequoia entities	2,439,663		Discount rate	3		-	30		%	4		%
			Prepayment rate (annual CPR)	17		-	43		%	26		%
			Default rate	—		-	7		%	—		%
			Loss severity	—		-	65		%	1		%
At consolidated Freddie Mac SLST entities	1,918,322		Discount rate	3		-	13		%	3		%
			Prepayment rate (annual CPR)	6		-	6		%	6		%
			Default rate	17		-	18		%	17		%
			Loss severity	30		-	30		%	30		%
At consolidated Freddie Mac K-Series entities (4)	4,156,239		Discount rate	1		-	9		%	3		%
			Non-IO prepayment rate (annual CPR)	—		-	—		%	—		%
			IO prepayment rate (annual CPY/CPP)	—		-	100		%	94		%
At consolidated CAFL entities (4)	2,001,251		Discount rate	2		-	30		%	4		%
			Prepayment rate (annual CPR)	—		-	5		%	—		%
Contingent consideration	28,484		Discount rate	23		-	23		%	23		%
			Probability of outcomes (3)	100		-	100		%	100		%

Footnotes to Table 5.7

(1) The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At December 31, 2019, the fair value of securities we owned at the consolidated Sequoia, Freddie Mac SLST, Freddie Mac K-Series and CAFL entities was $264 million, $449 million, $252 million, and $191 million, respectively.

(2) 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).

(3) Represents the probability of a full payout of contingent purchase consideration.

(4)

As a market convention, certain securities are priced to a no-loss yield and therefore do not include default and loss severity assumptions.