Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2024

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Fair Value of Financial Instruments

We estimate fair values for financial assets or liabilities based on available inputs observed in the marketplace as well as unobservable inputs. We primarily use two pricing valuation techniques: market comparable pricing and discounted cash flow analysis. Market comparable pricing is used to determine the fair value of certain instruments by incorporating known inputs and performance metrics, such as observed prepayment rates, delinquencies, severities, credit support, recent transaction prices, pending transactions, or prices of other similar instruments. Discounted cash flow analysis techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of an instrument and then discounting those cash flows at a rate of return that results in an estimate of fair value. After considering all available indications of the appropriate rate of return that market participants would require, we consider the reasonableness of the range indicated by the results to determine an estimate that is most representative of fair value. We also consider counterparty credit quality and risk as part of our fair value assessments.

We maintain policies that specify the methodologies we use to value different types of financial instruments. Significant changes to the valuation methodologies are reviewed by members of the Pricing Committee, which is comprised of several members of senior management, to confirm the changes are appropriate and reasonable. Valuations based on information from external sources are generally performed on an instrument-by-instrument basis with the resulting amounts analyzed individually against internal calculations as well as in the aggregate by product type classification. Our Pricing Committee then independently reviews all fair value estimates to ensure they are reasonable.

For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. 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 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 describes the valuation methodologies used for the financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy. 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 the determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table.

Residential Consumer loans, Residential Investor loans, Multifamily loans and HEI at consolidated securitization entities

We have elected to account for most of our consolidated securitization entities as CFEs in accordance with GAAP. A CFE is a variable interest entity that holds financial assets and issues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets or fair value of the financial liabilities. Pursuant to this guidance, we use the fair value of the ABS issued by the CFEs (which we determined to be more observable) to determine the fair value of the loans or HEI held at these entities, whereby the net assets we consolidate in our financial statements related to these entities represent the fair value of our retained interests in the CFEs. 

Residential Consumer Loans

Fair values for residential consumer loans are determined using models that incorporate various pricing inputs, including information derived from whole loan sales and securitizations that have occurred in the market. Certain significant inputs in these models are considered unobservable and are therefore Level 3 in nature. Significant pricing inputs obtained from market whole loan transaction activity include indicative spreads to indexed TBA prices and indexed swap rates. Significant pricing inputs obtained from market securitization activity include indicative spreads to indexed TBA prices and swap rates for senior and subordinate MBS, IO MBS discount rates, senior credit support levels, and assumed future prepayment rates.

Residential Investor Loans

Fair values for residential investor loans are determined using models that incorporate various pricing inputs, including information derived from whole loan sales and securitizations that have occurred in the market. Certain significant inputs in these models are considered unobservable and are therefore Level 3 in nature. Significant pricing inputs obtained from market securitization activity include indicative spreads to indexed treasury rates for senior and subordinate MBS, IO MBS discount rates, senior credit support levels, and assumed future prepayment rates. Significant pricing inputs obtained from market whole loan transaction activity include indicative credit spreads to indexed treasury prices and swap rates or absolute yields. These assets would generally decrease in value based upon an increase in the credit spread or absolute yield, prepayment speed, or credit support assumptions. Prices for most of our residential investor bridge loans are determined using discounted cash flow modeling, which incorporates a primary significant unobservable input of market discount rates (incorporating indicative credit spreads where applicable). Cash flows for performing loans are generally based on contractual loan terms. Delinquent loans are generally valued at a dollar price that is informed by various market data inputs, including the fair value of the collateral securing the loan.

Real estate securities

Real estate securities include residential consumer, multifamily, and other mortgage-backed securities that are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis for these assets are predominantly Level 3 in nature, due to the lack of readily available market quotes and related inputs. For real estate securities, we utilize both market comparable pricing and discounted cash flow analysis valuation techniques. Relevant market indicators that are factored into the analysis include bid/ask spreads, the amount and timing of credit losses, interest rates, and collateral prepayment rates. Securities priced using discounted cash flow models use significant unobservable inputs such as a discount rate, prepayment rate, default rate and loss severity.

Derivative assets and liabilities

Our derivative instruments include swaps, swaptions, TBAs, interest rate futures, loan purchase and interest rate lock commitments, and forward sale commitments. Fair values of derivative instruments are determined using quoted prices from active markets, when available, or from valuation models and are supported by valuations provided by dealers active in derivative markets. Fair values of TBAs and interest rate futures are generally obtained using quoted prices from active markets. Our derivative valuation models for swaps and swaptions require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates, and correlations of certain inputs. Model inputs can generally be verified and model selection does not involve significant management judgment. LPC, and IRLC fair values for residential consumer jumbo and residential investor term loans are estimated based on the fair values of the underlying loans (as described in "Residential consumer loans" and "Residential investor loans" above). In addition, fair values for LPCs and IRLCs are estimated based on the probability that the mortgage loan will be purchased or originated (the "Pull-through rate").

Servicer advance investments

Fair values for servicer advance investments are determined through internal pricing models that estimate future cash flows and utilize certain significant inputs that are considered unobservable and are therefore Level 3 in nature. Our estimations of cash flows include the combined cash flows of all of the components that comprise the servicer advance investments: existing advances, the requirement to purchase future advances, the recovery of advances, and the right to a portion of the associated mortgage servicing fee ("mortgage servicing income"). The valuation technique is based on discounted cash flows. Significant inputs used in the valuations include prepayment rate (of the loans underlying the investments), mortgage servicing income, the weighted-average expected remaining life of servicer advances ("expected remaining life"), and discount rate.

HEI

Fair values for home equity investment contracts are determined through internal pricing models that estimate future cash flows and utilize certain significant unobservable inputs such as forecasted home price appreciation, prepayment rates and discount rates, and are therefore Level 3 in nature. The valuation technique is based on discounted cash flows.

MSRs

MSRs include the rights to service jumbo residential mortgage loans. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. Changes in the fair value of MSRs occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputs and assumptions. Fair values are based on applying the inputs to generate the net present value of estimated future MSR income. These discounted cash flow models utilize certain significant unobservable inputs including market discount rates, assumed future prepayment rates of serviced loans, and the market cost of servicing.

Excess MSRs

Fair values for excess MSRs are determined through internal pricing models that estimate future cash flows and utilize certain significant inputs that are considered unobservable and are therefore Level 3 in nature. The valuation technique is based on discounted cash flows. Significant unobservable inputs used in the valuations include prepayment rate (of the loans underlying the investments), the amount of excess servicing income expected to be received ("excess mortgage servicing income"), and discount rate.

Strategic Investments

Strategic investments are Level 3 financial instruments that we account for under the fair value option. These investments are in early-stage start-up companies and 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.

ABS issued

ABS issued includes asset-backed securities issued through the Legacy Sequoia, Sequoia, CAFL and HEI securitization entities, as well as securities issued by certain third-party Freddie Mac K-Series and SLST securitization entities that we consolidate. These instruments are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. For ABS issued, we utilize both market comparable pricing and discounted cash flow analysis valuation techniques. Relevant market indicators factored into the analysis include bid/ask spreads, the amount and timing of collateral credit losses, interest rates, and collateral prepayment rates. Fair values incorporate market indicators as well as other significant unobservable inputs to generate discounted cash flows. These cash flow models use significant unobservable inputs such as discount rate, prepayment rate, default rate, and loss severity.

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, 2024 and 2023, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

Table 6.1 – Assets and Liabilities Measured at Fair Value on a Recurring Basis

December 31, 2024	Fair Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential consumer loans	$	11,077,823	$	—	$	—	$	11,077,823
Residential investor loans	4,587,090		—		—		4,587,090
Consolidated Agency multifamily loans	424,597		—		—		424,597
Real estate securities:
Trading	193,749		—		—		193,749
Available-for-sale	211,474		—		—		211,474
HEI	589,785		—		—		589,785
Other investments:
Servicer advance investments	233,820		—		—		233,820
Excess MSRs	32,274		—		—		32,274
MSRs	31,589		—		—		31,589
Strategic investments	3,460		—		—		3,460
Derivative assets	46,003		16,446		23,738		5,819
Total Assets	$	17,431,664	$	16,446	$	23,738	$	17,391,480
Liabilities
ABS issued	$	12,879,530	$	—	$	—	$	12,879,530
Derivative liabilities	23,660		23,164		—		496
Non-controlling interest	99,510		—		—		99,510
Total Liabilities	$	13,002,700	$	23,164	$	—	$	12,979,536

December 31, 2023	Fair Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential consumer loans	$	7,050,637	$	—	$	—	$	7,050,637
Residential investor loans	5,220,297		—		—		5,220,297
Consolidated agency multifamily loans	425,285		—		—		425,285
Real estate securities:
Trading	40,424		—		—		40,424
Available-for-sale	87,373		—		—		87,373
HEI	550,436		—		—		550,436
Other investments:
Servicer advance investments	225,345		—		—		225,345
MSRs	24,877		—		—		24,877
Excess MSRs	37,367		—		—		37,367
Strategic investments	3,193		—		—		3,193
Derivative assets	14,212		952		1,742		11,518
Total Assets	$	13,679,446	$	952	$	1,742	$	13,676,752
Liabilities
ABS issued	$	9,151,263	$	—	$	—	$	9,151,263
Derivative liabilities	33,828		30,414		—		3,414
Non-controlling interest	59,752		—		—		59,752
Total Liabilities	$	9,244,843	$	30,414	$	—	$	9,214,429

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, 2024.

Table 6.2 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

	Assets
	Residential Consumer Loans		Residential Investor Loans		Consolidated Agency Multifamily Loans		Real Estate Trading Securities		Real Estate AFS Securities		HEI		Servicer Advance Investments		Excess MSRs		MSRs/Strategic Investments/Other
(In Thousands)
Beginning balance - December 31, 2023	$	7,050,637	$	5,220,297	$	425,285	$	40,424	$	87,373	$	550,436	$	225,345	$	37,367	$	28,070
Acquisitions	7,120,201		19,746		—		117,502		117,280		—		—		—		2,061
Originations	—		1,681,723		—		—		—		2,043		—		—		—
Sales	(1,667,513)		(1,236,441)		—		(2,833)		—		—		—		—		—
Principal paydowns	(1,458,762)		(1,412,926)		(8,638)		(673)		(7,835)		(49,553)		(357)		—		(141)
Consolidation of securitized CAFL bridge loans	—		298,553		—		—		—		—		—		—		—
Gains (losses) in net income (loss), net	36,147		37,035		7,950		39,329		2,360		86,687		8,832		(5,093)		5,159
Unrealized gains in OCI, net	—		—		—		—		12,296		—		—		—		—
Other settlements, net (1)	(2,887)		(20,897)		—		—		—		172		—		—		(100)
Ending balance - December 31, 2024	$	11,077,823	$	4,587,090	$	424,597	$	193,749	$	211,474	$	589,785	$	233,820	$	32,274	$	35,049
Change in unrealized gains or (losses) for the period included in earnings for assets held at the end of the reporting period (2)	$	(58,330)	$	1,697	$	7,682	$	39,014	$	12,345	$	75,525	$	8,832	$	(5,093)	$	6,693

	Assets		Liabilities
	Derivatives (3)		ABS Issued		Non-controlling interests
(In Thousands)
Beginning balance - December 31, 2023	$	8,104	$	9,151,263	$	59,752
Acquisitions (4)	—		5,596,807		11,882
Sales	—		(1,544)		—
Principal paydowns	—		(1,878,771)		(315)
Gains (losses) in net income (loss), net	9,231		11,775		27,738
Other settlements, net (1)	(12,012)		—		453
Ending balance - December 31, 2024	$	5,323	$	12,879,530	$	99,510
Change in unrealized gains or (losses) for the period included in earnings for liabilities held at the end of the reporting period (2)	$	5,323	$	288,862	$	(27,738)

Footnotes to table 6.2

(1)Other settlements, net: for residential consumer and residential investor loans, represents the transfer of loans to REO; for HEI, represents the profit share fee we pay our third party originators for our purchased HEI portfolio; 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 consumer and investor loans; and for mortgage servicing rights ("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)All changes in unrealized gains or (losses) are included in earnings with the exception of Real Estate AFS Securities, which are included in comprehensive income.

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

(4)Includes $285 million of ABS and $12 million of non-controlling interests associated with the consolidation of securitized CAFL bridge loans.

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 for the years ended December 31, 2024.

Table 6.3 – Fair Value Methodology for Level 3 Financial Instruments

December 31, 2024	Fair Value (1)			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average (2)
Assets
Residential consumer loans (4)	$	11,077,823	Senior Credit Spread to TBA price (3)	$	0.63	-	$	1.25		$	0.68
			Senior credit spread to Swap rate (3)	150		-	170		bps	151		bps
			Subordinate credit spread to Swap rate	185		-	600		bps	274		bps
			Senior credit support (3)	7		-	10		%	7		%
			IO discount rate (3)	28		-	28		%	28		%
			Liability price (4)	$	34	-	$	103		$	94
Residential investor loans:
Residential investor term loans (4)	2,643,706		Whole loan spread (3)	243		-	243		bps	243		bps
			Liability price (4)	$	91	-	$	102		$	94
Residential investor bridge loans (4)	1,943,384		Whole loan discount rate	9		-	12		%	10		%
			Whole loan spread	445		-	445		bps	445		bps
			Liability Price (4)	$	100	-	$	138		$	122
			Dollar price of non-performing loans	$	29	-	$	100		$	79
Consolidated agency multifamily loans(6)	424,597		Liability price (4)	$	99	-	$	99		$	99
Trading and AFS securities	405,223		Discount rate	6		-	40		%	12		%
			Prepayment rate (Annual CPR)	—		-	27		%	8		%
			Default rate	—		-	10		%	0.1		%
			Loss severity	25		-	50		%	24		%
HEI	589,785		Discount rate	10		-	10		%	10		%
			Prepayment rate (Annual CPR)	1		-	20		%	14		%
			Home price appreciation (depreciation)	4		-	4		%	4		%
			Liability price (4)	$	138	-	$	191		$	157
Servicer advance investments	233,820		Prepayment rate (Annual CPR)	12		-	30		%	14		%
			Expected remaining life (5)	5		-	5		yrs	5		yrs
			Mortgage servicing amount	1		-	58		bps	9		bps
Excess MSRs & MSRs	63,863		Discount rate	9		-	46		%	14		%
			Prepayment rate (Annual CPR)	2		-	48		%	11		%
Residential loan purchase commitments, net	5,272		Senior credit spread to TBA price (3)	$	0.63	-	$	1.25		$	0.68
			Senior credit spread to Swap rate (3)	150		-	170		bps	151		bps

			Subordinate credit spread to Swap rate	185		-	600		bps	274		bps
			Senior credit support (3)	7		-	10		%	7		%
			IO discount rate (3)	28		-	28		%	28		%
			Pull-through rate	12		-	100		%	73		%
Strategic investments	3,460		Transaction price	$	200	-	$	1,000		$	494
Other assets (8)	547
Total Assets	$	17,391,480
December 31, 2024	Fair Value (1)			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average (2)
Liabilities
ABS issued (4)	$	12,879,530	Discount rate	4		-	45		%	7		%
			Prepayment rate (annual CPR)	—		-	100		%	3		%
			Default rate	—		-	24		%	5		%
			Loss severity	—		-	50		%	20		%
Non-controlling interests (7)	99,510		Discount rate	13		-	20		%	16		%
Other liabilities (8)	496
Total Liabilities	$	12,979,536

(1)The predominant valuation technique used to determine our Level 3 fair value assets and liabilities is based on the discounted cash flow model.

(2)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.

(3)Values represent pricing inputs used in a securitization pricing model. Credit spreads represent spreads to applicable swap rates unless specified otherwise.

(4)The fair value of the loans and HEI 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 December 31, 2024, the fair value of securities we owned at the consolidated Sequoia, CAFL Term, Freddie Mac SLST, and Freddie Mac K-Series was $419 million, $326 million, $242 million and $35 million, respectively. At December 31, 2024, the fair value of our securities in the two CAFL Bridge loan securitizations accounted for under the CFE election and our HEI securitization entities was $21 million and $47 million, respectively.

(5)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).

(6)Consolidated agency multifamily loans represent securitized financial assets and liabilities of the Company's CFEs.

(7)Of the total $123 million payable to non-controlling interests, $100 million is measured at fair value on a recurring basis.

(8)Represents less than 1% of the individual and aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis.

Assets and Liabilities Not Measured at Fair Value

The following table summarizes the fair values of assets and liabilities that are not measured at fair value at December 31, 2024 and December 31, 2023.

Table 6.4 – Carrying Values and Fair Values of Assets and Liabilities

		December 31, 2024				December 31, 2023
	Level in Fair Value Hierarchy	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(In Thousands)
Assets
Cash and cash equivalents	1	$	245,165	$	245,165	$	293,104	$	293,104
Restricted cash	1	67,762		67,762		75,684		75,684
Liabilities
Debt obligation facilities and other financing	2	$	2,818,292	$	2,819,393	$	2,596,582	$	2,591,931
ABS issued, net	3	390,674		392,344		660,617		637,816
Convertible notes, net	2	365,739		365,455		503,728		488,341
Trust preferred securities and subordinated notes, net	3	138,860		93,465		138,813		92,070
Senior Notes	1	139,989		146,716		—		—
Guarantee obligations (1)	3	2,806		3,204		5,781		3,772

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

During the year ended December 31, 2024, we elected the fair value option for $118 million of securities, $7.04 billion (principal balance) of residential consumer loans, and $1.72 billion (principal balance) of residential investor loans. Additionally, during the year ended December 31, 2024, we elected the fair value option for $2 million of HEI. For the year ended December 31, 2024, we elected the fair value option for $2 million, of MSRs/Strategic Investments/Other investments.     

Nonrecurring Fair Values

We measure the fair value of certain assets and liabilities on a nonrecurring basis when events or changes in circumstances indicate that the carrying value may be impaired. Adjustments to fair value generally result from the write-down of asset values due to impairment. REO in Other Assets and Liabilities are classified as Level 3 in the fair value hierarchy based upon fair value determinations using appraisals, broker price opinions, comparable properties or other indications of value.

Refer to Note 14 for further information on our REO.