Principles of Consolidation (Tables)

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Assets and Liabilities of Consolidated VIEs

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

Table 4.1 – Assets and Liabilities of Consolidated VIEs



September 30, 2017	Legacy Sequoia		Sequoia Choice		Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia		Sequoia Choice		Total Consolidated VIEs
Residential loans, held-for-investment	$	673,134	$	317,303	$	990,437
Restricted cash	147		—		147
Accrued interest receivable	898		1,266		2,164
REO	3,020		—		3,020
Total Assets	$	677,199	$	318,569	$	995,768
Accrued interest payable	$	540	$	1,045	$	1,585
Asset-backed securities issued	657,960		286,328		944,288
Total Liabilities	$	658,500	$	287,373	$	945,873

Number of VIEs	20		1		21



December 31, 2016	Legacy Sequoia		Sequoia Choice		Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia		Sequoia Choice		Total Consolidated VIEs
Residential loans, held-for-investment	$	791,636	$	—	$	791,636
Restricted cash	148		—		148
Accrued interest receivable	1,000		—		1,000
REO	5,533		—		5,533
Total Assets	$	798,317	$	—	$	798,317
Accrued interest payable	$	518	$	—	$	518
Asset-backed securities issued	773,462		—		773,462
Total Liabilities	$	773,980	$	—	$	773,980

Number of VIEs	20		—		20

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, 2017 and 2016.

Table 4.2 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2017		2016		2017		2016
Principal balance of loans transferred	$	839,264	$	348,537	$	2,223,387	$	693,427
Trading securities retained, at fair value	24,617		—		55,607		—
AFS securities retained, at fair value	4,416		1,839		11,476		3,673
MSRs recognized	—		1,971		7,123		4,102

The following table summarizes the cash flows during the three and nine months ended September 30, 2017 and 2016 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

Table 4.3 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2017			2016			2017			2016
Proceeds from new transfers	$	839,642		$	356,497		$	2,213,151		$	708,539
MSR fees received	3,631			3,473			10,804			10,397
Funding of compensating interest, net	(35		)	(98		)	(114		)	(254		)
Cash flows received on retained securities	6,882			6,384			19,843			24,314

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, 2017 and 2016.

Table 4.4 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood



	Three Months Ended September 30, 2017					Three Months Ended September 30, 2016
At Date of Securitization	MSRs	Senior IO Securities		Subordinate Securities		MSRs		Subordinate Securities
Prepayment rates	N/A	11	%	10	%	24	%	15	%
Discount rates	N/A	14	%	5	%	11	%	7	%
Credit loss assumptions	N/A	0.25	%	0.25	%	N/A		0.25	%



	Nine Months Ended September 30, 2017						Nine Months Ended September 30, 2016
At Date of Securitization	MSRs		Senior IO Securities		Subordinate Securities		MSRs		Subordinate Securities
Prepayment rates	9	%	10	%	10	%	20	%	15	%
Discount rates	11	%	13	%	5	%	11	%	7	%
Credit loss assumptions	N/A		0.25	%	0.25	%	N/A		0.25	%

Unconsolidated Variable Interest Entity's Sponsored by Redwood

The following table presents additional information at September 30, 2017 and December 31, 2016, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.5 – Unconsolidated VIEs Sponsored by Redwood



(In Thousands)	September 30, 2017		December 31, 2016
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	94,491	$	41,909
Subordinate securities, classified as AFS	228,764		234,025
Mortgage servicing rights	60,377		58,800
Maximum loss exposure ⁽¹⁾	$	383,632	$	334,734
Assets transferred:
Principal balance of loans outstanding	$	8,329,635	$	6,870,398
Principal balance of loans 30+ days delinquent	12,651		21,427

(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, 2017 and December 31, 2016.

Table 4.6 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood



September 30, 2017	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at September 30, 2017	$	60,377		$	34,276		$	288,979
Expected life (in years)⁽²⁾	7			5			13
Prepayment speed assumption (annual CPR)⁽²⁾	9		%	10		%	11		%
Decrease in fair value from:
10% adverse change	$	1,694		$	1,575		$	667
25% adverse change	4,278			3,734			1,683
Discount rate assumption⁽²⁾	11		%	9		%	5		%
Decrease in fair value from:
100 basis point increase	$	2,311		$	1,281		$	25,377
200 basis point increase	4,453			2,472			47,107
Credit loss assumption ⁽²⁾	N/A			0.25		%	0.25		%
Decrease in fair value from:
10% higher losses	N/A			$	4		$	1,505
25% higher losses	N/A			9			3,764



December 31, 2016	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
(Dollars in Thousands)	MSRs			Senior Securities ⁽¹⁾			Subordinate Securities
Fair value at December 31, 2016	$	58,800		$	26,618		$	249,317
Expected life (in years)⁽²⁾	7			6			12
Prepayment speed assumption (annual CPR)⁽²⁾	11		%	8		%	12		%
Decrease in fair value from:
10% adverse change	$	2,226		$	1,075		$	997
25% adverse change	5,284			2,569			2,494
Discount rate assumption⁽²⁾	11		%	8		%	6		%
Decrease in fair value from:
100 basis point increase	$	2,088		$	1,105		$	19,574
200 basis point increase	4,032			2,128			36,574
Credit loss assumption ⁽²⁾	N/A			0.25		%	0.25		%
Decrease in fair value from:
10% higher losses	N/A			$	19		$	1,174
25% higher losses	N/A			49			2,933


(1)	Senior securities included $34 million and $27 million of interest only securities at September 30, 2017 and December 31, 2016, 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, 2017, grouped by security type.

Table 4.7 – Third-Party Sponsored VIE Summary



(Dollars in Thousands)	September 30, 2017
Mortgage-Backed Securities
Senior	$	181,723
Re-REMIC	39,033
Subordinate	812,260
Total Investments in Third-Party Sponsored VIEs	$	1,033,016

- 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.

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