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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2023

For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an asset or liability that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value.

In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.

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 March 31, 2023 and December 31, 2022.

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


	March 31, 2023				December 31, 2022
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale, at fair value	$	26,975	$	26,975	$	780,781	$	780,781
Residential loans, held-for-investment, at fair value	5,465,883		5,465,883		4,832,407		4,832,407
Business purpose loans, held-for-sale, at fair value	371,385		371,385		364,073		364,073
Business purpose loans, held-for-investment, at fair value	4,993,264		4,993,264		4,968,513		4,968,513
Consolidated Agency multifamily loans, at fair value	426,599		426,599		424,551		424,551
Real estate securities, at fair value	243,346		243,346		240,475		240,475
HEIs	416,783		416,783		403,462		403,462
Servicer advance investments (1)	260,378		260,378		269,259		269,259
MSRs (1)	24,831		24,831		25,421		25,421
Excess MSRs (1)	38,807		38,807		39,035		39,035
Other investments (1)	5,727		5,727		6,155		6,155
Cash and cash equivalents	404,449		404,449		258,894		258,894
Restricted cash	86,037		86,037		70,470		70,470
Derivative assets	11,497		11,497		20,830		20,830
REO (2)	13,095		3,378		6,455		4,185
Margin receivable (2)	17,079		17,079		13,802		13,802


Liabilities
Short-term debt (3)	$	1,472,968	$	1,472,968	$	1,853,664	$	1,853,664
Margin payable (4)	2,558		2,558		5,944		5,944
Guarantee obligations (4)	6,223		4,612		6,344		4,738
HEI securitization non-controlling interest	23,097		23,097		22,329		22,329
Derivative liabilities	10,736		10,736		16,855		16,855
ABS issued, net
at fair value	7,968,135		7,968,135		7,424,132		7,424,132
at amortized cost	478,984		452,263		562,620		524,768
Other long-term debt, net (5)	1,076,099		1,022,015		1,077,200		1,069,946
Convertible notes, net (5)	661,634		620,465		693,473		638,049
Trust preferred securities and subordinated notes, net (5)	138,779		87,885		138,767		83,700

(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)Short-term debt excludes short-term convertible notes, which are included below under "Convertible notes, net."

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

(5)These liabilities are primarily included in Long-term debt, net on our consolidated balance sheets. Convertible notes, net also includes convertible notes classified as Short-term debt. See Note 14 for more information on Short-term debt.

During the three months ended March 31, 2023 and 2022, we elected the fair value option for $2 million and $5 million of securities, respectively, $53 million and $2.12 billion (principal balance) of residential loans, respectively, and $442 million and $920 million (principal balance) of business purpose loans, respectively. Additionally, during the three months ended March 31, 2023 and 2022, we elected the fair value option for $17 million and $40 million of HEIs, respectively, and $0 and $6 million of Other investments, respectively. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, as well as for certain securities we purchase, including IO securities, fixed-rate securities rated investment grade or higher, and HEIs.

The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at March 31, 2023 and December 31, 2022, 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


March 31, 2023	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	5,492,828	$	—	$	—	$	5,492,828
Business purpose loans	5,364,649		—		—		5,364,649
Consolidated Agency multifamily loans	426,599		—		—		426,599
Real estate securities	243,346		—		—		243,346
HEIs	416,783		—		—		416,783
Servicer advance investments	260,378		—		—		260,378
MSRs	24,831		—		—		24,831
Excess MSRs	38,807		—		—		38,807
Other investments	5,727		—		—		5,727
Derivative assets	11,497		3,112		8,032		353



Liabilities
HEI securitization non-controlling interest	$	23,097	$	—	$	—	$	23,097
Derivative liabilities	10,736		10,730		—		6
ABS issued	7,968,135		—		—		7,968,135


December 31, 2022	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	5,613,157	$	—	$	—	$	5,613,157
Business purpose loans	5,332,586		—		—		5,332,586
Consolidated Agency multifamily loans	424,551		—		—		424,551
Real estate securities	240,475		—		—		240,475
HEIs	403,462		—		—		403,462
Servicer advance investments	269,259		—		—		269,259
MSRs	25,421		—		—		25,421
Excess MSRs	39,035		—		—		39,035
Other investments	6,155		—		—		6,155
Derivative assets	20,830		5,869		14,625		336



Liabilities
HEI securitization non-controlling interest	$	22,329	$	—	$	—	$	22,329
Derivative liabilities	16,855		16,841		—		14
ABS issued	7,424,132		—		—		7,424,132

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2023.

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


	Assets
	Residential Loans		Business Purpose Loans		Consolidated Agency Multifamily Loans		Trading Securities		AFS Securities		HEIs		Servicer Advance Investments		Excess MSRs		MSRs and Other Investments
(In Thousands)
Beginning balance - December 31, 2022	$	5,613,157	$	5,332,586	$	424,552	$	108,329	$	132,146	$	403,462	$	269,259	$	39,035	$	31,576
Acquisitions	51,816		—		—		1,700		—		16,559		—		—		—
Originations	—		438,390		—		—		—		—		—		—		—
Sales	(163,695)		(205,135)		—		(3,509)		(2,150)		—		—		—		(272)
Principal paydowns	(111,710)		(248,311)		(2,113)		(115)		(139)		(7,754)		(7,529)		—		(70)
Gains (losses) in net income, net	103,660		52,015		4,160		1,961		263		4,516		(1,352)		(228)		(676)
Unrealized losses in OCI, net	—		—		—		—		4,860		—		—		—		—
Other settlements, net (1)	(400)		(4,896)		—		—		—		—		—		—		—
Ending balance - March 31, 2023	$	5,492,828	$	5,364,649	$	426,599	$	108,366	$	134,980	$	416,783	$	260,378	$	38,807	$	30,558


	Liabilities
		Derivatives (2)		HEI Securitization Non-Controlling Interest		ABS Issued
(In Thousands)
Beginning balance - December 31, 2022		$	322	$	22,329	$	7,424,132
Acquisitions		—		—		594,327
Principal paydowns		—		—		(181,696)
Gains (losses) in net income, net		88		768		131,372
Other settlements, net (1)		(57)		—		—
Ending balance - March 31. 2023		$	353	$	23,097	$	7,968,135

(1) Other settlements, net: for residential and business purpose loans, represents the transfer of loans to REO; for derivatives, represents the transfer of the fair value of loan purchase and interest rate lock commitments at the time loans are acquired to the basis of residential and business purpose loans; and for MSRs and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.

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

The following table presents the portion of fair value 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 March 31, 2023 and 2022. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2023 and 2022 are not included in this presentation.

Table 5.4 – Portion of Net Fair Value Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at March 31, 2023 and 2022 Included in Net Income


	Included in Net Income
	Three Months Ended March 31,
(In Thousands)	2023		2022
Assets
Residential loans at Redwood	$	156	$	(35,397)
Business purpose loans	12,239		(14,647)
Net investments in consolidated Sequoia entities (1)	2,349		(4,981)
Net investments in consolidated Freddie Mac SLST entities (1)	8,759		2,940
Net investments in consolidated Freddie Mac K-Series entities (1)	363		264
Net investments in consolidated CAFL Term entities (1)	(8,810)		4,048
Net investment in consolidated HEI securitization entity (1)	1,194		9,628
Trading securities	1,793		(1,401)
Available-for-sale securities	(28)		—
HEIs at Redwood	3,433		1,185
Servicer advance investments	(1,352)		(3,081)
MSRs	(424)		3,526
Excess MSRs	(229)		(1,208)
Loan purchase and interest rate lock commitments	353		2,050
Other investments	(94)		—


Liabilities
Non-controlling interest in consolidated HEI entity	$	—	$	(6,218)
Loan purchase commitments	(6)		(14,442)

(1) Represents the portion of net fair value gains or losses included in our consolidated statements of income related to securitized loans, securitized HEIs, and the associated ABS issued at our consolidated securitization entities held at March 31, 2023 and 2022, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election, excluding REO.

The following table presents information on assets recorded at fair value on a non-recurring basis at March 31, 2023. 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 March 31, 2023.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2023


									Gain (Loss) for
March 31, 2023	Carrying Value		Fair Value Measurements Using						Three Months Ended
(In Thousands)			Level 1		Level 2		Level 3		March 31, 2023
Assets


REO	$	2,820	$	—	$	—	$	2,820	$	(183)

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three months ended March 31, 2023 and 2022.

Table 5.6 – Market Valuation Gains and Losses, Net


	Three Months Ended March 31,
(In Thousands)	2023		2022
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	6,994	$	(27,199)
Residential loan purchase commitments	(239)		(41,623)
BPL term loans held-for-sale, at fair value	12,666		(24,468)
BPL term loan interest rate lock commitments	—		(725)
BPL bridge loans	1,153		2,135
Trading securities (1)	—		2,786
Risk management derivatives, net	(8,467)		90,387
Total mortgage banking activities, net (2)	$	12,107	$	1,293
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood (called Sequoia loans)	$	183	$	(4,252)
Business Purpose loans held-for-investment	1,376		(2,143)
Trading securities	1,961		(4,242)
Servicer advance investments	(1,352)		(3,081)
Excess MSRs	(228)		(1,208)
Net investments in Legacy Sequoia entities (3)	(94)		(714)
Net investments in Sequoia entities (3)	2,442		(3,822)
Net investments in Freddie Mac SLST entities (3)	8,934		3,036
Net investment in Freddie Mac K-Series entity (3)	363		264
Net investments in CAFL Term entities (3)	(8,810)		4,048
Net investments in HEI securitization entities (3)	425		3,411
HEIs at Redwood	3,840		1,192
Other investments	(435)		123
Risk management derivatives, net	(8,704)		1,973
Credit losses on AFS securities, net	(28)		(705)
Total investment fair value changes, net	$	(127)	$	(6,120)
Other Income
MSRs	$	(590)	$	2,968
Other	(120)		—
Total other income (4)	$	(710)	$	2,968
Total Market Valuation Gains (Losses), Net	$	11,270	$	(1,859)

(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the market risks associated with our residential mortgage banking operations.

(2)Mortgage banking activities, net presented above does not include fee income from loan originations or acquisitions, provisions for repurchases, and other expenses 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)Includes changes in fair value of the residential loans held-for-investment, securitized HEIs, REO, and ABS issued at the entities, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election.

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

At March 31, 2023, our valuation policy and processes had not changed from those described in our Annual Report on Form 10-K for the year ended December 31, 2022.

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


March 31, 2023	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average(1)
Assets
Residential loans, at fair value:

Jumbo fixed-rate loans	$	26,975	Whole loan spread to swap rate	112		-	112		bps	112		bps
			Seasoned whole loan dollar price	$	91		$	91		$	91














Loans held by Legacy Sequoia (2)	170,000		Liability price				N/A			N/A

Loans held by Sequoia (2)	3,831,538		Liability price				N/A			N/A

Loans held by Freddie Mac SLST (2)	1,464,345		Liability price				N/A			N/A

Business purpose loans:
BPL term loans	354,166		Senior credit spread(3)	180		-	180		bps	180		bps
			Subordinate credit spread(3)	240		-	600		bps	337		bps
			Senior credit support(3)	36		-	36		%	36		%
			IO discount rate(3)	7		-	13		%	10		%
			Prepayment rate (annual CPR)(3)	3		-	3		%	3		%
			Whole loan spread to treasury rate	325		-	550		bps	441		bps

BPL term loans held by CAFL (2)	2,891,043		Liability price				N/A			N/A

BPL bridge loans	2,119,440		Whole loan discount rate	5		-	15		%	10		%
			Senior credit spread(3)	280		-	280		bps	280		bps
			Subordinate credit spread(3)	335		-	1,150		bps	654		bps
			Senior credit support(3)	43		-	43		%	43		%


Multifamily loans held by Freddie Mac K-Series (2)	426,599		Liability price				N/A			N/A



Trading and AFS securities	243,346		Discount rate	5		-	18		%	10		%
			Prepayment rate (annual CPR)	5		-	65		%	9		%
			Default rate	—		-	12		%	0.5		%
			Loss severity	—		-	50		%	25		%
			CRT dollar price	$	64	-	$	96		$	87

HEIs	287,466		Discount rate	10		-	10		%	10		%
			Prepayment rate (annual CPR)	1		-	23		%	16		%
			Home price appreciation (depreciation)	(7)		-	4		%	3		%

HEIs held by HEI securitization entity	129,317		Discount Rate				N/A			N/A


Servicer advance investments	260,378		Discount rate	2		-	4		%	3		%
			Prepayment rate (annual CPR)	14		-	30		%	14		%
			Expected remaining life (4)	5		-	6		yrs	5		yrs
			Mortgage servicing income	—		-	18		bps	3		bps

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


March 31, 2023	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average (1)
Assets (continued)









































































MSRs	$	24,831	Discount rate	11		-	53		%	11		%
			Prepayment rate (annual CPR)	4		-	27		%	8		%
			Per loan annual cost to service	$	93	-	$	93		$	93

Excess MSRs	38,807		Discount rate	13		-	19		%	18		%
			Prepayment rate (annual CPR)	10		-	100		%	17		%
			Excess mortgage servicing amount	8		-	19		bps	11		bps

Residential loan purchase commitments, net	359		Whole loan spread to swap rate	112		-	137		bps	125		bps

			Pull-through rate	36		-	100		%	69		%
			Committed sales price	$	99	-	$	103		$	101








Liabilities




ABS issued (2):
At consolidated Sequoia entities	3,739,429		Discount rate	4		-	18		%	6		%
			Prepayment rate (annual CPR)	5		-	59		%	8		%
			Default rate	—		-	13		%	1		%
			Loss severity	25		-	50		%	29		%

At consolidated CAFL Term entities	2,593,192		Discount rate	—		-	17		%	6		%
			Prepayment rate (annual CPR)	—		-	3		%	0.1		%
			Default rate	5		-	16		%	8		%
			Loss severity	30		-	40		%	31		%

At consolidated Freddie Mac SLST entities	1,143,522		Discount rate	5		-	16		%	5		%
			Prepayment rate (annual CPR)	6		-	7		%	6		%
			Default rate	13		-	14		%	14		%
			Loss severity	35		-	35		%	35		%

At consolidated Freddie Mac K-Series entities (4)	394,469		Discount rate	3		-	10		%	5		%





At consolidated HEI entities	97,523		Discount rate	10		-	14		%	10		%
			Prepayment rate (annual CPR)	20		-	20		%	20		%


			Home price appreciation (depreciation)	(7)		-	4		%	3		%

(1)The weighted average input values for all loan types are based on unpaid principal balance. The weighted average input values for all other assets and liabilities are based on relative fair value.

(2)The fair value of the loans and HEIs held by consolidated entities is based on the fair value of the ABS issued by these entities and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At March 31, 2023, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities was $261 million, $295 million, $323 million, $32 million, and $13 million, respectively.

(3)Values represent pricing inputs used in securitization pricing model. Credit spreads generally represent spreads to applicable swap rates.

(4)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).

Determination of Fair Value

We generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, a significant increase or decrease in any of these inputs in isolation — such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions — would likely result in a significantly lower or higher fair value measurement.

Included in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2022 is a more detailed description of our financial instruments measured at fair value and their significant inputs, as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy.

Certain of our Other investments (inclusive of strategic investments in early-stage companies) are Level 3 financial instruments that we account for under the fair value option. These investments generally take the form of equity or debt with conversion features and do not have readily determinable fair values. We initially record these investments at cost and adjust their fair value based on observable price changes, such as follow-on capital raises or secondary sales, and will also evaluate impacts to valuation from changing market conditions and underlying business performance. As of March 31, 2023, the carrying value of these investments was $6 million.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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