GAAP requires us to consider whether securitizations we sponsor and other transfers of financial assets should be treated as sales or financings, as well as whether any VIEs that we hold variable interests in – for example, certain legal entities often used in securitization and other structured finance transactions – should be included in our consolidated financial statements. The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods.

At June 30, 2020, we consolidated Legacy Sequoia, Freddie Mac SLST, Freddie Mac K-Series and CAFL securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for the consolidated Sequoia and CAFL entities we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. At June 30, 2020, the estimated fair value of our investments in the consolidated Legacy Sequoia, Sequoia Choice, Freddie Mac SLST, Freddie Mac K-Series and CAFL entities was $6 million, $204 million, $336 million, $25 million, and $206 million, respectively.

During the first quarter of 2020, we sold subordinate securities issued by four of these Freddie Mac K-Series securitization trusts and determined that we should derecognize the associated assets and liabilities of each of these entities for financial reporting purposes. We deconsolidated $3.86 billion of multifamily loans and other assets and $3.72 billion of multifamily ABS issued and other liabilities, for which we realized market valuation losses of $72 million, which were recorded through Investment fair value changes, net on our consolidated statements of income (loss) for the three months ended March 31, 2020.

Beginning in 2018, we consolidated two Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At June 30, 2020, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 10 for a further description of these entities and the investments they hold and Note 12 for additional information on the minority partner’s interest. Additionally, beginning in 2018, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing. At June 30, 2020, the estimated fair value of our investment in the Servicing Investment entities was $68 million.


June 30, 2020	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	304,632	$	2,064,388	$	2,145,111	$	—	$	—	$	—	$	4,514,131
Business purpose residential loans, held-for-investment	—		—		—		—		2,615,038		—		2,615,038
Multifamily loans, held-for-investment	—		—		—		489,075		—		—		489,075

Other investments	—		—		—		—		—		290,805		290,805
Cash and cash equivalents	—		—		—		—		—		2,773		2,773
Restricted cash	145		9		—		—		—		30,416		30,570
Accrued interest receivable	529		8,236		6,627		1,342		11,087		6,725		34,546
Other assets	916		—		940		—		5,824		—		7,680
Total Assets	$	306,222	$	2,072,633	$	2,152,678	$	490,417	$	2,631,949	$	330,719	$	7,984,618
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	244,437	$	244,437
Accrued interest payable	230		6,474		5,149		1,182		8,458		134		21,627
Accrued expenses and other liabilities	—		9		—		—		—		18,062		18,071
Asset-backed securities issued	300,357		1,861,777		1,812,008		464,691		2,417,253		—		6,856,086
Total Liabilities	$	300,587	$	1,868,260	$	1,817,157	$	465,873	$	2,425,711	$	262,633	$	7,140,221

Number of VIEs	20		10		2		1		12		3		48


December 31, 2019	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	407,890	$	2,291,463	$	2,367,215	$	—	$	—	$	—	$	5,066,568
Business purpose residential loans, held-for-investment	—		—		—		—		2,192,552		—		2,192,552
Multifamily loans, held-for-investment	—		—		—		4,408,524		—		—		4,408,524

Other investments	—		—		—		—		—		184,802		184,802
Cash and cash equivalents	—		—		—		—		—		9,015		9,015
Restricted cash	143		27		—		—		—		21,766		21,936
Accrued interest receivable	655		9,824		7,313		13,539		9,572		4,869		45,772
Other assets	460		—		445		—		1,795		—		2,700
Total Assets	$	409,148	$	2,301,314	$	2,374,973	$	4,422,063	$	2,203,919	$	220,452	$	11,931,869
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	152,554	$	152,554
Accrued interest payable	395		7,732		5,374		12,887		7,485		187		34,060
Accrued expenses and other liabilities	—		27		—		—		—		14,956		14,983
Asset-backed securities issued	402,465		2,037,198		1,918,322		4,156,239		2,001,251		—		10,515,475
Total Liabilities	$	402,860	$	2,044,957	$	1,923,696	$	4,169,126	$	2,008,736	$	167,697	$	10,717,072

Number of VIEs	20		9		2		5		10		3		49


	Three Months Ended June 30, 2020
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	2,686	$	22,565	$	21,187	$	4,870	$	32,978	$	4,540	$	88,826
Interest expense	(1,518)		(19,117)		(15,845)		(4,378)		(24,446)		(1,797)		(67,101)
Net interest income	1,168		3,448		5,342		492		8,532		2,743		21,725
Non-interest income

Investment fair value changes, net	(230)		39,753		26,867		1,599		16,313		3,292		87,594


Total non-interest income, net	(230)		39,753		26,867		1,599		16,313		3,292		87,594
General and administrative expenses	—		—		—		—		—		(712)		(712)
Other expenses	—		—		—		—		—		(1,065)		(1,065)

Income from Consolidated VIEs	$	938	$	43,201	$	32,209	$	2,091	$	24,845	$	4,258	$	107,542


	Six Months Ended June 30, 2020
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	5,880	$	47,647	$	43,173	$	45,042	$	62,988	$	8,623	$	213,353
Interest expense	(4,040)		(40,627)		(32,022)		(42,728)		(48,101)		(3,374)		(170,892)
Net interest income	1,840		7,020		11,151		2,314		14,887		5,249		42,461
Non-interest income

Investment fair value changes, net	(621)		(29,916)		(115,295)		(84,910)		(51,533)		(8,593)		(290,868)


Total non-interest income, net	(621)		(29,916)		(115,295)		(84,910)		(51,533)		(8,593)		(290,868)
General and administrative expenses	—		—		—		—		—		(743)		(743)
Other expenses	—		—		—		—		—		817		817

Income (Loss) from Consolidated VIEs	$	1,219	$	(22,896)	$	(104,144)	$	(82,596)	$	(36,646)	$	(3,270)	$	(248,333)


	Three Months Ended June 30, 2019
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	4,776	$	26,828	$	11,597	$	35,917	$	—	$	3,579	$	82,697
Interest expense	(3,981)		(23,134)		(8,557)		(34,441)		—		(3,401)		(73,514)
Net interest income	795		3,694		3,040		1,476		—		178		9,183
Non-interest income

Investment fair value changes, net	(123)		2,879		8,037		3,246		—		1,069		15,108


Total non-interest income, net	(123)		2,879		8,037		3,246		—		1,069		15,108
General and administrative expenses	—		—		—		—		—		(41)		(41)
Other expenses	—		—		—		—		—		(242)		(242)

Income from Consolidated VIEs	$	672	$	6,573	$	11,077	$	4,722	$	—	$	964	$	24,008


	Six Months Ended June 30, 2019
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	9,629	$	52,490	$	23,391	$	57,305	$	—	$	6,926	$	149,741
Interest expense	(8,096)		(45,247)		(17,304)		(54,760)		—		(7,014)		(132,421)
Net interest income	1,533		7,243		6,087		2,545		—		(88)		17,320
Non-interest income

Investment fair value changes, net	(497)		6,144		14,402		6,365		—		2,499		28,913


Total non-interest income, net	(497)		6,144		14,402		6,365		—		2,499		28,913
General and administrative expenses	—		—		—		—		—		(70)		(70)
Other expenses	—		—		—		—		—		(468)		(468)

Income from Consolidated VIEs	$	1,036	$	13,387	$	20,489	$	8,910	$	—	$	1,873	$	45,695

We consolidate the assets and liabilities of certain Sequoia and CAFL securitization entities, as we did not meet the GAAP sale criteria at the time we transferred financial assets to these entities. Our involvement in consolidated Sequoia and CAFL entities continues in the following ways: (i) we continue to hold subordinate investments in each entity, and for certain entities, more senior investments; (ii) we maintain certain discretionary rights associated with our sponsorship of, or our subordinate investments in, each entity; and (iii) we continue to hold a right to call the assets of certain entities (once they have been paid down below a specified threshold) at a price equal to, or in excess of, the current outstanding principal amount of the entity’s asset-backed securities issued. These factors have resulted in our continuing to consolidate the assets and liabilities of these Sequoia and CAFL entities in accordance with GAAP.

We consolidate the assets and liabilities of certain Freddie Mac K-Series and SLST securitization trusts resulting from our investment in subordinate securities issued by these trusts, and in the case of certain CAFL securitizations, resulting from securities acquired through our acquisition of CoreVest. Additionally, we consolidate the assets and liabilities of Servicing Investment entities from our investment in servicer advance investments and excess MSRs. In each case, we maintain certain discretionary rights associated with the ownership of these investments that we determined reflected a controlling financial interest, as we have both the power to direct the activities that most significantly impact the economic performance of the VIEs and the right to receive benefits of and the obligation to absorb losses from the VIEs that could potentially be significant to the VIEs.

Since 2012, we have transferred residential loans to 51 Sequoia securitization entities sponsored by us that are still outstanding as of June 30, 2020, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.


	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2020		2019		2020		2019
Principal balance of loans transferred	$	—	$	400,836	$	1,573,703	$	749,093
Trading securities retained, at fair value	—		1,792		43,362		3,508
AFS securities retained, at fair value	—		1,069		3,198		1,954


	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2020		2019		2020		2019
Proceeds from new transfers	$	—	$	410,281	$	1,610,761	$	762,652
MSR fees received	2,475		3,105		5,165		6,165
Funding of compensating interest, net	(205)		(47)		(297)		(137)
Cash flows received on retained securities	6,788		6,743		13,369		14,289


	Three Months Ended June 30, 2020				Three Months Ended June 30, 2019
At Date of Securitization	Senior IO Securities	Subordinate Securities	Senior IO Securities		Subordinate Securities
Prepayment rates	N/A	N/A	16	%	15	%
Discount rates	N/A	N/A	14	%	7	%
Credit loss assumptions	N/A	N/A	0.20	%	0.20	%


	Six Months Ended June 30, 2020						Six Months Ended June 30, 2019
At Date of Securitization	Senior IO Securities		Subordinate Securities		Senior IO Securities		Subordinate Securities
Prepayment rates	41	%	13	%	16	%	15	%
Discount rates	16	%	6	%	14	%	7	%
Credit loss assumptions	0.21	%	0.22	%	0.20	%	0.20	%


(In Thousands)	June 30, 2020		December 31, 2019
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	25,038	$	88,425
Subordinate securities, classified as AFS	117,675		140,649
Mortgage servicing rights	18,727		40,254
Maximum loss exposure ⁽¹⁾	$	161,440	$	269,328
Assets transferred:
Principal balance of loans outstanding	$	9,918,493	$	10,299,442
Principal balance of loans 30+ days delinquent	291,191		41,809

(1)Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities and MSRs retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization.


June 30, 2020	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)
Fair value at June 30, 2020	$	18,727		$	21,524		$	121,189
Expected life (in years)⁽²⁾	4			3			12
Prepayment speed assumption (annual CPR)⁽²⁾	21		%	28		%	24		%
Decrease in fair value from:
10% adverse change	$	1,477		$	1,855		$	1,361
25% adverse change	3,435			4,489			4,246
Discount rate assumption⁽²⁾	12		%	14		%	6		%
Decrease in fair value from:
100 basis point increase	$	548		$	196		$	10,543
200 basis point increase	1,061			652			19,824
Credit loss assumption ⁽²⁾	N/A			0.22		%	0.22		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	1,888
25% higher losses	N/A			—			4,706


December 31, 2019	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)
Fair value at December 31, 2019	$	40,254		$	48,765		$	180,309
Expected life (in years)⁽²⁾	6			6			14
Prepayment speed assumption (annual CPR)⁽²⁾	11		%	14		%	16		%
Decrease in fair value from:
10% adverse change	$	1,643		$	1,908		$	205
25% adverse change	3,913			5,086			1,434
Discount rate assumption⁽²⁾	11		%	12		%	5		%
Decrease in fair value from:
100 basis point increase	$	1,447		$	1,079		$	18,127
200 basis point increase	2,795			2,482			33,630
Credit loss assumption ⁽²⁾	N/A			0.21		%	0.21		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	1,804
25% higher losses	N/A			—			4,520

Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at June 30, 2020 and December 31, 2019, grouped by asset type.


(In Thousands)	June 30, 2020		December 31, 2019
Mortgage-Backed Securities
Senior	$	11,336	$	127,094
Mezzanine	—		508,195
Subordinate	162,387		235,510
Total Mortgage-Backed Securities	173,723		870,799
Excess MSR	15,883		16,216
Total Investments in Third-Party Sponsored VIEs	$	189,606	$	887,015

We determined that we are not the primary beneficiary of these third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them.