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Principles of Consolidation (Tables)

9 Months Ended

Sep. 30, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

The following table presents a summary of the assets and liabilities of these VIEs.

Table 4.1 – Assets and Liabilities of Consolidated VIEs Accounted for as Collateralized Financing Entities


September 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	$	296,765	$	1,836,361	$	2,256,682	$	—	$	—	$	—	$	4,389,808
Business purpose residential loans, held-for-investment	—		—		—		—		2,969,692		—		2,969,692
Multifamily loans, held-for-investment	—		—		—		491,415		—		—		491,415

Other investments	—		—		—		—		—		278,487		278,487
Cash and cash equivalents	—		—		—		—		—		10,425		10,425
Restricted cash	146		—		—		—		—		20,649		20,795
Accrued interest receivable	402		7,292		6,928		1,342		12,071		2,609		30,644
Other assets	784		—		887		—		4,158		—		5,829
Total Assets	$	298,097	$	1,843,653	$	2,264,497	$	492,757	$	2,985,921	$	312,170	$	8,197,095
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	228,998	$	228,998
Accrued interest payable	180		5,652		5,009		1,182		9,337		137		21,497
Accrued expenses and other liabilities	—		47		—		—		—		18,129		18,176
Asset-backed securities issued	292,484		1,626,564		1,841,313		464,865		2,744,150		—		6,969,376
Total Liabilities	$	292,664	$	1,632,263	$	1,846,322	$	466,047	$	2,753,487	$	247,264	$	7,238,047

Number of VIEs	20		10		2		1		13		3		49


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

The following table presents income (loss) from these VIEs for the three and nine months ended September 30, 2020 and 2019.

Table 4.2 – Income (Loss) from Consolidated VIEs Accounted for as Collateralized Financing Entities


	Three Months Ended September 30, 2020
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,795	$	20,919	$	21,696	$	4,918	$	36,181	$	4,403	$	89,912
Interest expense	(1,058)		(17,828)		(15,473)		(4,426)		(27,499)		(1,587)		(67,871)
Net interest income	737		3,091		6,223		492		8,682		2,816		22,041
Non-interest income

Investment fair value changes, net	(81)		7,851		82,214		2,166		9,692		(422)		101,420


Total non-interest income, net	(81)		7,851		82,214		2,166		9,692		(422)		101,420
General and administrative expenses	—		—		—		—		—		(41)		(41)
Other expenses	—		—		—		—		—		(471)		(471)

Income from Consolidated VIEs	$	656	$	10,942	$	88,437	$	2,658	$	18,374	$	1,882	$	122,949


	Nine Months Ended September 30, 2020
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	7,675	$	68,566	$	64,869	$	49,960	$	99,169	$	13,026	$	303,265
Interest expense	(5,098)		(58,455)		(47,495)		(47,154)		(75,600)		(4,961)		(238,763)
Net interest income	2,577		10,111		17,374		2,806		23,569		8,065		64,502
Non-interest income

Investment fair value changes, net	(702)		(22,065)		(33,081)		(82,744)		(41,841)		(9,015)		(189,448)


Total non-interest income, net	(702)		(22,065)		(33,081)		(82,744)		(41,841)		(9,015)		(189,448)
General and administrative expenses	—		—		—		—		—		(784)		(784)
Other expenses	—		—		—		—		—		346		346

Income (Loss) from Consolidated VIEs	$	1,875	$	(11,954)	$	(15,707)	$	(79,938)	$	(18,272)	$	(1,388)	$	(125,384)


	Three Months Ended September 30, 2019
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	4,295	$	27,555	$	11,830	$	36,829	$	—	$	3,922	$	84,431
Interest expense	(3,452)		(23,576)		(8,709)		(35,328)		—		(2,891)		(73,956)
Net interest income	843		3,979		3,121		1,501		—		1,031		10,475
Non-interest income

Investment fair value changes, net	(407)		2,722		17,300		7,445		—		963		28,023


Total non-interest income, net	(407)		2,722		17,300		7,445		—		963		28,023
General and administrative expenses	—		—		—		—		—		(16)		(16)
Other expenses	—		—		—		—		—		(395)		(395)

Income from Consolidated VIEs	$	436	$	6,701	$	20,421	$	8,946	$	—	$	1,583	$	38,087


	Nine Months Ended September 30, 2019
	Legacy Sequoia		Sequoia Choice		Freddie Mac SLST		Freddie Mac K-Series		CAFL		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	13,924	$	80,045	$	35,221	$	94,134	$	—	$	10,847	$	234,171
Interest expense	(11,548)		(68,823)		(26,013)		(90,089)		—		(9,905)		(206,378)
Net interest income	2,376		11,222		9,208		4,045		—		942		27,793
Non-interest income

Investment fair value changes, net	(904)		8,866		31,702		13,810		—		3,462		56,936


Total non-interest income, net	(904)		8,866		31,702		13,810		—		3,462		56,936
General and administrative expenses	—		—		—		—		—		(87)		(87)
Other expenses	—		—		—		—		—		(864)		(864)

Income from Consolidated VIEs	$	1,472	$	20,088	$	40,910	$	17,855	$	—	$	3,453	$	83,778

Securitization Activity Related to Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents information related to securitization transactions that occurred during the three and nine months ended September 30, 2020 and 2019.

Table 4.3 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Principal balance of loans transferred	$	—	$	366,999	$	1,573,703	$	1,116,092
Trading securities retained, at fair value	—		1,228		43,362		4,736
AFS securities retained, at fair value	—		1,069		3,198		3,023

The following table summarizes the cash flows during the three and nine months ended September 30, 2020 and 2019 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

Table 4.4 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Proceeds from new transfers	$	—	$	376,126	$	1,610,761	$	1,138,778
MSR fees received	2,280		2,919		7,445		9,084
Funding of compensating interest, net	4		(76)		(293)		(213)
Cash flows received on retained securities	5,873		6,603		19,242		20,892

The following table presents the key weighted-average assumptions used to measure MSRs and securities retained at the date of securitization for securitizations completed during the three and nine months ended September 30, 2020 and 2019.

Table 4.5 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood


	Three Months Ended September 30, 2020		Three Months Ended September 30, 2019
At Date of Securitization	Senior IO Securities	Subordinate Securities	Senior IO Securities		Subordinate Securities
Prepayment rates	N/A	N/A	37	%	15	%
Discount rates	N/A	N/A	14	%	7	%
Credit loss assumptions	N/A	N/A	0.20	%	0.20	%


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
At Date of Securitization	Senior IO Securities		Subordinate Securities		Senior IO Securities		Subordinate Securities
Prepayment rates	41	%	13	%	25	%	15	%
Discount rates	16	%	6	%	14	%	7	%
Credit loss assumptions	0.21	%	0.22	%	0.20	%	0.20	%

Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents additional information at September 30, 2020 and December 31, 2019, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.6 – Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	September 30, 2020		December 31, 2019
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	19,878	$	88,425
Subordinate securities, classified as AFS	124,132		140,649
Mortgage servicing rights	14,240		40,254
Maximum loss exposure (1)	$	158,250	$	269,328
Assets transferred:
Principal balance of loans outstanding	$	8,571,916	$	10,299,442
Principal balance of loans 30+ days delinquent	200,910		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.

Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at September 30, 2020 and December 31, 2019.

Table 4.7 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood


September 30, 2020	MSRs			Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)
Fair value at September 30, 2020	$	14,240		$	16,226		$	127,783
Expected life (in years) (2)	3			3			10
Prepayment speed assumption (annual CPR) (2)	26		%	30		%	27		%
Decrease in fair value from:
10% adverse change	$	1,105		$	1,622		$	1,075
25% adverse change	2,678			3,675			3,735
Discount rate assumption (2)	12		%	17		%	6		%
Decrease in fair value from:
100 basis point increase	$	383		$	327		$	10,219
200 basis point increase	746			638			19,348
Credit loss assumption (2)	N/A			0.38		%	0.38		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	2,274
25% higher losses	N/A			—			5,500


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

(1)Senior securities included $16 million and $49 million of interest-only securities at September 30, 2020 and December 31, 2019, respectively.

(2)Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.

Schedule of Third-Party Sponsored VIE Summary

The following table presents a summary of our interests in third-party VIEs at September 30, 2020 and December 31, 2019, grouped by asset type.

Table 4.8 – Third-Party Sponsored VIE Summary


(In Thousands)	September 30, 2020		December 31, 2019
Mortgage-Backed Securities
Senior	$	11,865	$	127,094
Mezzanine	2,016		508,195
Subordinate	193,445		235,510
Total Mortgage-Backed Securities	207,326		870,799
Excess MSR	15,205		16,216
Total Investments in Third-Party Sponsored VIEs	$	222,531	$	887,015

- Definition

Tabular disclosure of the significant judgments and assumptions made in determining whether a variable interest (as defined) held by the entity requires the variable interest entity (VIE) (as defined) to be consolidated and (or) disclose information about its involvement with the VIE, individually or in aggregate (as applicable); the nature of restrictions, if any, on the consolidated VIE's assets and on the settlement of its liabilities reported by an entity in its statement of financial position, including the carrying amounts of such assets and liabilities; the nature of, and changes in, the risks associated with involvement in the VIE; how involvement with the VIE affects the entity's financial position, financial performance, and cash flows; the lack of recourse if creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the primary beneficiary (if applicable); the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, if any, that could require the entity to provide financial support to the VIE, including events or circumstances that could expose the entity to a loss; the methodology used by the entity for determining whether or not it is the primary beneficiary of the variable interest entity; the significant factors considered and judgments made in determining that the power to direct the activities of a VIE that most significantly impact the VIE's economic performance are shared (as defined); the carrying amounts and classification of assets and liabilities of the VIE included in the statement of financial position; the entity's maximum exposure to loss, if any, as a result of its involvement with the VIE, including how the maximum exposure is determined and significant sources of the entity's exposure to the VIE; a comparison of the carrying amounts of the assets and liabilities and the entity's maximum exposure to loss; information about any liquidity arrangements, guarantees, and (or) other commitments by third parties that may affect the fair value or risk of the entity's variable interest in the VIE; whether or not the entity has provided financial support or other support (explicitly or implicitly) to the VIE that it was not previously contractually required to provide or whether the entity intends to provide that support, including the type and amount of the support and the primary reasons for providing the support; and supplemental information the entity determines necessary to provide.

+ References + Details