Note 7. Allowance for Loan Losses

Allowance for Loan Losses on Residential Loans

For residential real estate loans held-for-investment, we establish and maintain an allowance for loan losses. The allowance includes a component for loans collectively evaluated for impairment that includes pools of residential loans owned at Sequoia securitization entities, and a component for loans individually evaluated for impairment that includes modified residential loans from Sequoia entities that have been determined to be troubled debt restructurings.

Activity in the Allowance for Loan Losses on Residential Loans

The following table summarizes the activity in the allowance for loan losses for the three and six months ended June 30, 2011 and 2010.


	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2011			2010			2011			2010
Balance at beginning of period	$	62,922		$	61,169		$	62,432		$	54,220
Charge-offs, net		(2,197	)		(4,012	)		(4,515	)		(6,539	)
Provision for loan losses		1,581			4,321			4,389			13,797
Balance at End of Period	$	62,306		$	61,478		$	62,306		$	61,478

During the three months ended June 30, 2011 and 2010, there were $2 million and $4 million of charge-offs, respectively, in our residential loan portfolio that reduced our allowance for loan losses. These charge-offs arose from $7 million and $13 million of defaulted loan principal, respectively. During the six months ended June 30, 2011 and 2010, there were $5 million and $7 million of charge-offs, respectively, in our residential loan portfolio that reduced our allowance for loan losses. These charge-offs arose from $15 million and $21 million of defaulted loan principal, respectively. As of June 30, 2011 and December 31, 2010, we did not record any interest income on individually impaired loans.

Loans Collectively Evaluated for Impairment

We collectively evaluate most of our residential loans for impairment based on the characteristics of the loan pools underlying the securitization entities that own the loans. These characteristics, which include loan product types, credit characteristics, and origination years, are what management primarily uses to establish the allowance for residential loans. The collective analysis is further divided into two segments. The first segment reflects our estimate of losses on delinquent loans within each loan pool. These loss estimates are determined by applying the loss factors described in Note 3 to the delinquent loans, including our expectations of the timing of defaults and the loss severities we expect once defaults occur. The second segment relates to our estimate of losses incurred on nondelinquent loans within each loan pool. This estimate is based on losses we expect to realize over a 23 month loss confirmation period, which is based on our historical loss experience as well as consideration of the loss factors described in Note 3.

The following table summarizes the balances for loans collectively evaluated for impairment at June 30, 2011 and December 31, 2010.


(In Thousands)	June 30, 2011		December 31, 2010
Unpaid principal balance	$	3,870,056	$	3,801,921
Recorded investment		3,908,849		3,844,372
Related allowance		58,558		57,804

The following table shows the recorded investment in residential loans collectively evaluated for impairment at June 30, 2011 and December 31, 2010.


(In Thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		90+ Days Past Due		Current		Total Loans
June 30, 2011	$	54,843	$	20,826	$	131,991	$	3,701,189	$	3,908,849
December 31, 2010		65,708		21,674		133,695		3,623,295		3,844,372

Loans Individually Evaluated for Impairment

The following table summarizes the balances for loans individually evaluated for impairment at June 30, 2011 and December 31, 2010.


(In Thousands)	June 30, 2011		December 31, 2010
Unpaid principal balance	$	12,547	$	13,352
Recorded investment		11,854		13,300
Related allowance		3,748		4,628
Average recorded investment for the three months ended		12,199		13,014

The following table shows the recorded investment in residential loans individually evaluated for impairment at June 30, 2011 and December 31, 2010.


(In Thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		90+ Days Past Due		Current		Total Loans
June 30, 2011	$	1,031	$	709	$	804	$	9,310	$	11,854
December 31, 2010		2,604		—		1,046		9,650		13,300

Credit Characteristics of Residential Loans Held-for-Investment

As a percent of total recorded investment, 99% of residential loans held-for-investment on our balance sheet at June 30, 2011, were first lien, predominately prime quality loans, at the time of origination. The remaining 1% of loans at June 30, 2011 were second lien, home equity lines of credit. The weighted average original loan-to-value (LTV) for our residential loans held-for-investment outstanding at June 30, 2011, was 66%. The weighted average Fair Isaac Corporation (FICO) score for the borrowers of these loans (at origination) was 736.

Due to the uniform product and credit characteristics of our residential loans, we consider the year of origination to be a general indicator of credit performance. The following table displays the recorded investment and year of origination for residential loans recorded on our consolidated balance sheets at June 30, 2011 and December 31, 2010.


(In Thousands)	June 30, 2011		December 31, 2010
2003 & Earlier	$	1,851,493	$	1,939,618
2004		1,084,285		1,116,358
2005		131,794		136,481
2006		189,212		191,945
2007		68,687		75,136
2008		—		—
2009		169,817		189,355
2010		303,517		208,779
2011		121,898		—
Total Recorded Investment	$	3,920,703	$	3,857,672

Allowance for Loan Losses on Commercial Loans

For commercial real estate loans classified as held-for-investment, we establish and maintain an allowance for loan losses on an individual basis for those loans we have determined to be impaired as of the reporting date. At June 30, 2011 and December 31, 2010, there were no delinquent or impaired commercial loans.

Of the $71 million recorded investment in commercial loans held-for-investment at June 30, 2011, 57% were originated in 2011 and 43% were originated in 2010. Of the $31 million of recorded investment in commercial loans held-for-investment at December 31, 2010, 99% were originated in the fourth quarter of 2010 and 1% were originated in 2004.