XML 28 R14.htm IDEA: XBRL DOCUMENT

Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2020

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 September 30, 2020 and December 31, 2019.

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


	September 30, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value	$	105,091	$	105,091	$	536,385	$	536,509
Residential loans, held-for-investment	4,389,808		4,389,808		7,178,465		7,178,465
Business purpose residential loans, held-for-sale	285,549		285,549		331,565		331,565
Business purpose residential loans, held-for-investment	3,670,552		3,670,552		3,175,178		3,175,178
Multifamily loans	491,415		491,415		4,408,524		4,408,524
Real estate securities	351,335		351,335		1,099,874		1,099,874

Servicer advance investments (1)	258,621		258,621		169,204		169,204
MSRs (1)	14,878		14,878		42,224		42,224

Excess MSRs (1)	35,070		35,070		31,814		31,814
Shared home appreciation options (1)	41,758		41,758		45,085		45,085
Cash and cash equivalents	450,684		450,684		196,966		196,966
Restricted cash	73,594		73,594		93,867		93,867

Derivative assets	14,709		14,709		35,701		35,701
REO (2)	8,535		9,654		9,462		10,389
Margin receivable (2)	3,809		3,809		209,776		209,776
FHLBC stock (2)	5,000		5,000		43,393		43,393
Guarantee asset (2)	579		579		1,686		1,686

Pledged collateral (2)	8,172		8,172		32,945		32,945
Liabilities
Short-term debt	$	482,761	$	482,761	$	2,329,145	$	2,329,145


Margin payable (3)	—		—		1,700		1,700
Guarantee obligation (3)	11,264		10,185		14,009		13,754
Contingent consideration (3)	—		—		28,484		28,484
Derivative liabilities	1,612		1,612		163,424		163,424
ABS issued, net
Fair value	6,969,376		6,969,376		10,515,475		10,515,475
Amortized cost	203,022		207,812		—		—
FHLBC long-term borrowings	1,000		1,000		1,999,999		1,999,999
Other long-term debt, net	886,054		885,172		183,520		184,666
Convertible notes, net	510,472		476,071		631,125		661,985
Trust preferred securities and subordinated notes, net	138,663		73,238		138,628		99,045

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

During the three and nine months ended September 30, 2020, we elected the fair value option for $18 million and $96 million of securities, respectively, $172 million and $2.86 billion of residential loans (principal balance), respectively, $260 million and $956 million of business purpose residential loans (principal balance), respectively, zero and $179 million of servicer advance investments, respectively, zero and $11 million of excess MSRs, respectively, and zero and $4 million of shared home appreciation options, respectively. We anticipate electing the fair value option for all future purchases of residential and business purpose residential loans that we intend to sell to third parties or transfer to securitizations, as well as for certain securities we purchase, including IO securities and fixed-rate securities rated investment grade or higher.

The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at September 30, 2020 and December 31, 2019, 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


September 30, 2020	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	4,494,899	$	—	$	—	$	4,494,899
Business purpose residential loans	3,956,101		—		—		3,956,101
Multifamily loans	491,415		—		—		491,415
Real estate securities	351,335		—		—		351,335

Servicer advance investments	258,621		—		—		258,621
MSRs	14,878		—		—		14,878
Excess MSRs	35,070		—		—		35,070
Shared home appreciation options	41,758		—		—		41,758
Derivative assets	14,709		464		3,472		10,773
Pledged collateral	8,172		8,172		—		—
FHLBC stock	5,000		—		5,000		—
Guarantee asset	579		—		—		579

Liabilities

Derivative liabilities	$	1,612	$	263	$	15	$	1,334

ABS issued	6,969,376		—		—		6,969,376


December 31, 2019	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	7,714,745	$	—	$	—	$	7,714,745
Business purpose residential loans	3,506,743		—		—		3,506,743
Multifamily loans	4,408,524		—		—		4,408,524
Real estate securities	1,099,874		—		—		1,099,874

Servicer advance investments	169,204		—		—		169,204
MSRs	42,224		—		—		42,224
Excess MSRs	31,814		—		—		31,814
Shared home appreciation options	45,085		—		—		45,085
Derivative assets	35,701		6,531		19,020		10,150
Pledged collateral	32,945		32,945		—		—
FHLBC stock	43,393		—		43,393		—
Guarantee asset	1,686		—		—		1,686

Liabilities
Contingent consideration	$	28,484	$	—	$	—	$	28,484
Derivative liabilities	163,424		13,368		148,766		1,290

ABS issued	10,515,475		—		—		10,515,475

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2020.

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


	Assets
	Residential Loans		Business Purpose Residential Loans		Multifamily Loans		Trading Securities		AFS Securities		Servicer Advance Investments		MSRs		Excess MSRs		Shared Home Appreciation Options
(In Thousands)
Beginning balance - December 31, 2019	$	7,714,745	$	3,506,743	$	4,408,524	$	860,540	$	239,334	$	169,204	$	42,224	$	31,814	$	45,085

Acquisitions	2,927,697		—		—		96,318		56,664		179,419		—		10,906		3,517
Originations	—		982,315		—		—		—		—		—		—		—
Sales	(4,783,682)		(53,434)		—		(579,466)		(55,193)		—		—		—		—
Principal paydowns	(1,210,117)		(489,243)		(5,830)		(8,502)		(10,345)		(83,124)		—		—		(2,558)
Deconsolidations	—		—		(3,849,779)		—		—		—		—		—		—
Gains (losses) in net income (loss), net	(152,145)		16,246		(61,500)		(224,728)		(23,287)		(6,878)		(27,346)		(7,650)		(4,286)

Other settlements, net (1)	(1,599)		(6,526)		—		—		—		—		—		—		—
Ending balance - September 30, 2020	$	4,494,899	$	3,956,101	$	491,415	$	144,162	$	207,173	$	258,621	$	14,878	$	35,070	$	41,758

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


	Assets	Liabilities
			Guarantee Asset		Derivatives (2)		Contingent Consideration		ABS Issued
(In Thousands)
Beginning balance - December 31, 2019			$	1,686	$	8,860	$	28,484	$	10,515,475

Acquisitions			—		—		—		1,137,656

Principal paydowns			—		—		(13,353)		(1,035,359)
Deconsolidations			—		—		—		(3,706,789)
Gains (losses) in net income (loss), net			(1,107)		34,620		(446)		58,393

Other settlements, net (1)			—		(34,041)		(14,685)		—
Ending balance - September 30, 2020			$	579	$	9,439	$	—	$	6,969,376

(1) Other settlements, net for residential and business purpose residential loans represents the transfer of loans to REO, and for derivatives, the settlement of forward sale commitments and the transfer of the fair value of loan purchase or interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental loans. Other settlements, net for contingent consideration reflects the reclassification from a contingent liability to a deferred liability during the period due to an amendment in the underlying agreement. See Note 16 for further discussion.

(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 gains or losses included in our consolidated statements of income (loss) that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at September 30, 2020 and 2019. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 2020 and 2019 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at September 30, 2020 and 2019 Included in Net Income


	Included in Net Income
	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Assets
Residential loans at Redwood	$	(107)	$	17,771	$	(865)	$	82,408
Business purpose residential loans	21,155		584		17,901		4,069
Net investments in consolidated Sequoia entities (1)	7,700		1,860		(22,802)		7,051
Net investments in consolidated Freddie Mac SLST entities (1)	82,209		17,300		(33,087)		31,702
Net investments in consolidated Freddie Mac K-Series entities (1)	2,165		7,445		(11,014)		13,810
Net investments in consolidated CAFL entities (1)	9,673		—		(41,048)		—
Trading securities	(3,549)		11,206		(80,358)		33,196

Servicer advance investments	25		1,585		(6,172)		3,025
MSRs	(2,376)		(5,892)		(16,798)		(16,971)
Excess MSRs	(1,127)		(1,634)		(7,650)		(2,137)
Shared home appreciation options	2,384		29		(4,286)		29
Loan purchase and interest rate lock commitments	10,791		4,678		10,773		4,757

Other assets - Guarantee asset	(191)		(216)		(1,107)		(834)

Liabilities
Loan purchase commitments	$	420	$	(1,668)	$	(1,334)	$	(1,669)

(1) Represents the portion of net gains or losses included in our consolidated statements of income (loss) related to loans and the associated ABS issued at our consolidated securitization entities held at September 30, 2020 and 2019, which netted together represent the change in value of our investments at the consolidated VIEs.

The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, 2020. 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 September 30, 2020.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 2020


									Gain (Loss) for
September 30, 2020	Carrying Value		Fair Value Measurements Using						Three Months Ended		Nine Months Ended
(In Thousands)			Level 1		Level 2		Level 3		September 30, 2020		September 30, 2020
Assets


REO	$	3,523	$	—	$	—	$	3,523	$	(805)	$	(840)

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 and nine months ended September 30, 2020 and 2019.

Table 5.6 – Market Valuation Gains and Losses, Net


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	(478)	$	(6,623)	$	(15,972)	$	289
Residential loan purchase and forward sale commitments	13,067		12,943		35,123		41,142
Single-family rental loans held-for-sale, at fair value	43,191		1,283		55,868		4,200
Single-family rental loan purchase and interest rate lock commitments	—		564		341		1,273
Residential bridge loans	938		1,010		(4,256)		2,108
Risk management derivatives, net	(99)		(2,972)		(52,931)		(15,387)
Total mortgage banking activities, net (1)	$	56,619	$	6,205	$	18,173	$	33,625
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood	$	218	$	7,667	$	(93,314)	$	71,323
Single-family rental loans held-for-investment	—		22		(20,806)		22
Residential bridge loans held-for-investment	6,812		(742)		(10,016)		(1,363)
Trading securities	(3,600)		15,275		(224,679)		55,577
Servicer advance investments	26		1,585		(6,172)		3,025
Excess MSRs	(1,127)		(1,635)		(7,650)		(2,137)


Net investments in Legacy Sequoia entities (2)	(81)		(407)		(702)		(904)
Net investments in Sequoia Choice entities (2)	7,851		2,722		(22,065)		8,866
Net investments in Freddie Mac SLST entities (2)	82,214		17,300		(33,081)		31,702
Net investments in Freddie Mac K-Series entities (2)	2,166		7,445		(82,744)		13,810
Net investments in CAFL entities (2)	9,673		—		(41,048)		—
Other investments	2,451		(355)		(9,111)		(632)
Risk management derivatives, net	—		(37,433)		(59,142)		(144,548)

Credit recoveries (losses) on AFS securities	444		—		(1,027)		—
Total investment fair value changes, net	$	107,047	$	11,444	$	(611,557)	$	34,741
Other Income
MSRs	$	(4,783)	$	(7,489)	$	(27,346)	$	(21,243)
Risk management derivatives, net	—		4,389		13,966		13,157
Gain on re-measurement of 5 Arches investment	—		—		—		2,440
Total other income (3)	$	(4,783)	$	(3,100)	$	(13,380)	$	(5,646)
Total Market Valuation Gains (Losses), Net	$	158,883	$	14,549	$	(606,764)	$	62,720

(1)Mortgage banking activities, net presented above does not include fee income from loan originations or acquisitions, provisions for repurchases expense, and other expenses that are components of Mortgage banking activities, net presented on our consolidated statements of income (loss), as these amounts do not represent market valuation changes.

(2)Includes changes in fair value of the residential loans held-for-investment, REO and the ABS issued at the entities, which netted together represent the change in value of our investments at the consolidated VIEs.

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

At September 30, 2020, 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, 2019. 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


September 30, 2020	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	$	6,312	Prepayment rate (annual CPR)	20		-	20		%	20		%

			Whole loan spread to swap rate	350		-	350		bps	350		bps





Jumbo loans committed to sell	98,779		Whole loan committed sales price	$	101.61	-	$	103.40		$	103.23






Loans held by Legacy Sequoia (2)	296,765		Liability price				N/A			N/A

Loans held by Sequoia Choice (2)	1,836,361		Liability price				N/A			N/A

Loans held by Freddie Mac SLST (2)	2,256,682		Liability price				N/A			N/A

Business purpose residential loans:
Single-family rental loans	285,549		Senior credit spread	130		-	130		bps	130		bps
			Subordinate credit spread	200		-	1,600		bps	551		bps
			Senior credit support	30		-	32		%	31		%
			IO discount rate	8		-	9		%	9		%
			Prepayment rate (annual CPR)	—		-	3		%	3		%
			Non-securitizable loan dollar price	$	101	-	$	101		$	101

Single-family rental loans held by CAFL	2,969,692		Liability price				N/A			N/A

Residential bridge loans	700,860		Discount rate	6		-	12		%	8		%
			Non-performing loan dollar price	$	3	-	$	100		$	89

Multifamily loans held by Freddie Mac K-Series (2)	491,415		Liability price				N/A			N/A



Trading and AFS securities	351,335		Discount rate	3		-	34		%	9		%
			Prepayment rate (annual CPR)	7		-	65		%	24		%
			Default rate	—		-	26		%	1		%
			Loss severity	—		-	50		%	19		%
			CRT dollar price	$	49	-	$	103		$	84

Servicer advance investments	258,621		Discount rate	3		-	4		%	4		%
			Prepayment rate (annual CPR)	8		-	14		%	13		%
			Expected remaining life (3)	1		-	2		years	2		years
			Mortgage servicing income	6		-	16		bps	8		bps

MSRs	14,878		Discount rate	12		-	12		%	12		%
			Prepayment rate (annual CPR)	8		-	97		%	26		%
			Per loan annual cost to service	$	95	-	$	95		$	95

Excess MSRs	35,070		Discount rate	15		-	21		%	18		%
			Prepayment rate (annual CPR)	10		-	13		%	11		%
			Excess mortgage servicing income	9		-	17		bps	12		bps

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


September 30, 2020	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average (1)
Assets (continued)
















































Shared home appreciation options	$	41,758	Discount rate	16		-	16		%	16		%
			Prepayment rate (annual CPR)	8		-	26		%	19		%
			Home price appreciation	2		-	3		%	3		%

Guarantee asset	579		Discount rate	12		-	12		%	12		%
			Prepayment rate (annual CPR)	42		-	42		%	42		%

REO	3,523		Loss severity	3		-	63		%	23		%

Residential loan purchase commitments, net	10,282		Committed sales price	$	100.89	-	$	103.40		$	102.59
			Pull-through rate	13		-	100		%	58		%
			Whole loan spread to TBA price	$	2.00	-	$	2.00		$	2.00
			Whole loan spread to swap rate - fixed rate	350		-	350		bps	350		bps
			Prepayment rate (annual CPR)	15		-	15		%	15		%
			MSR multiple	0.8		-	4.1		x	3.4		x








Liabilities
ABS issued (2):
At consolidated Sequoia entities	1,919,048		Discount rate	2		-	30		%	3		%
			Prepayment rate (annual CPR)	5		-	53		%	27		%
			Default rate	—		-	40		%	2		%
			Loss severity	—		-	50		%	31		%

At consolidated Freddie Mac SLST entities	1,841,313		Dollar price	$	1	-	$	108		$	99





At consolidated Freddie Mac K-Series entities (4)	464,865		Discount rate	1		-	18		%	2		%





At consolidated CAFL entities (4)	2,744,150		Discount rate	0.2		-	40		%	3		%
			Prepayment rate (annual CPR)	—		-	3		%	—		%
			Default rate	—		-	18		%	11		%
			Loss severity	30		-	30		%	30		%

(1)The weighted average input values for all loan types are based on the 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 held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities. At September 30, 2020, the fair value of securities we owned at the consolidated Sequoia, Freddie Mac SLST, Freddie Mac K-Series, and CAFL entities was $215 million, $416 million, $27 million, and $229 million, respectively.

(3)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).

(4)As a market convention, certain securities are priced to a no-loss yield and therefore do not include default and loss severity assumptions.

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 input 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 - such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions - in isolation 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, 2019 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.

- 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.

+ References + Details