0000930236rwt:BusinessPurposeBridgeLoansMember2020-12-31
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: September 30, 20172021
OR
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o
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from _______________ to _______________.
Commission File Number 1-13759
REDWOOD TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Maryland | | 68-0329422 |
(State or Other Jurisdiction of
Incorporation or Organization) | | (I.R.S. Employer
Identification No.) |
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One Belvedere Place, | Suite 300
Mill Valley, California | | 94941 |
Mill Valley, | California | | 94941 |
(Address of Principal Executive Offices) | | (Zip Code) |
(415) 389-7373
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x ☒No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x☒ | | Accelerated filer | o☐ |
Non-accelerated filer | o☐ | (Do not check if a smaller reporting company) | Smaller reporting company | o☐ |
| | | Emerging growth company | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock, par value $0.01 per share | RWT | New York Stock Exchange |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Common Stock, $0.01 par value per share | | 77,114,790 114,674,962 | | shares outstanding as of November 3, 20171, 2021 |
REDWOOD TRUST, INC.
20172021 FORM 10-Q REPORT
TABLE OF CONTENTS
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| FINANCIAL INFORMATION | | |
Item 1. | | | |
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Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
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| OTHER INFORMATION | | |
Item 1. | | | |
Item 1A. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
Item 5. | | | |
Item 6. | | | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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(In Thousands, except Share Data) (Unaudited) | | September 30, 2017 | | December 31, 2016 |
ASSETS (1) | | | | |
Residential loans, held-for-sale, at fair value | | $ | 925,681 |
| | $ | 835,399 |
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Residential loans, held-for-investment, at fair value | | 3,259,239 |
| | 3,052,652 |
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Real estate securities, at fair value | | 1,356,272 |
| | 1,018,439 |
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Mortgage servicing rights, at fair value | | 62,928 |
| | 118,526 |
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Cash and cash equivalents | | 257,611 |
| | 212,844 |
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Total earning assets | | 5,861,731 |
| | 5,237,860 |
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Restricted cash | | 26,258 |
| | 8,623 |
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Accrued interest receivable | | 21,256 |
| | 18,454 |
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Derivative assets | | 11,948 |
| | 36,595 |
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Other assets | | 209,506 |
| | 181,945 |
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Total Assets | | $ | 6,130,699 |
| | $ | 5,483,477 |
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| | | | |
LIABILITIES AND EQUITY (1) | | | | |
Liabilities | | | | |
Short-term debt (2) | | $ | 1,238,196 |
| | $ | 791,539 |
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Accrued interest payable | | 18,836 |
| | 9,608 |
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Derivative liabilities | | 65,238 |
| | 66,329 |
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Accrued expenses and other liabilities | | 81,062 |
| | 72,428 |
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Asset-backed securities issued, at fair value | | 944,288 |
| | 773,462 |
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Long-term debt, net | | 2,574,439 |
| | 2,620,683 |
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Total liabilities | | 4,922,059 |
| | 4,334,049 |
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Equity | | | | |
Common stock, par value $0.01 per share, 180,000,000 shares authorized; 77,122,687 and 76,834,663 issued and outstanding | | 771 |
| | 768 |
|
Additional paid-in capital | | 1,681,968 |
| | 1,676,486 |
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Accumulated other comprehensive income | | 82,316 |
| | 71,853 |
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Cumulative earnings | | 1,259,408 |
| | 1,149,935 |
|
Cumulative distributions to stockholders | | (1,815,823 | ) | | (1,749,614 | ) |
Total equity | | 1,208,640 |
| | 1,149,428 |
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Total Liabilities and Equity | | $ | 6,130,699 |
| | $ | 5,483,477 |
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—————— | |
(1) | Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At September 30, 2017 and December 31, 2016, assets of consolidated VIEs totaled $995,768 and $798,317, respectively. At September 30, 2017 and December 31, 2016, liabilities of consolidated VIEs totaled $945,873 and $773,980, respectively. See Note 4 for further discussion.
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(2) | Includes $250 million of convertible notes, which were reclassified from Long-term debt, net to Short-term debt as the maturity of the notes was less than one year as of April 2017. See Note 11 for further discussion.
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The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEBALANCE SHEETS
| | | | | | | | | | | | | | |
(In Thousands, except Share Data) (Unaudited) | | September 30, 2021 | | December 31, 2020 |
ASSETS (1) | | | | |
Residential loans, held-for-sale, at fair value | | $ | 1,495,079 | | | $ | 176,641 | |
Residential loans, held-for-investment, at fair value | | 4,721,389 | | | 4,072,410 | |
Business purpose loans, held-for-sale, at fair value | | 466,346 | | | 245,394 | |
Business purpose loans, held-for-investment, at fair value | | 4,227,209 | | | 3,890,959 | |
Multifamily loans, held-for-investment, at fair value | | 482,791 | | | 492,221 | |
Real estate securities, at fair value | | 353,286 | | | 344,125 | |
Other investments | | 422,366 | | | 348,175 | |
Cash and cash equivalents | | 556,989 | | | 461,260 | |
Restricted cash | | 88,717 | | | 83,190 | |
Intangible assets | | 45,246 | | | 56,865 | |
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Derivative assets | | 51,103 | | | 53,238 | |
Other assets | | 162,193 | | | 130,588 | |
Total Assets | | $ | 13,072,714 | | | $ | 10,355,066 | |
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LIABILITIES AND EQUITY (1) | | | | |
Liabilities | | | | |
Short-term debt, net | | $ | 1,750,941 | | | $ | 522,609 | |
| | | | |
Derivative liabilities | | 10,972 | | | 16,072 | |
Accrued expenses and other liabilities | | 251,576 | | | 179,340 | |
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Asset-backed securities issued (includes $7,756,101 and $6,900,362 at fair value), net | | 8,183,825 | | | 7,100,661 | |
Long-term debt, net | | 1,499,577 | | | 1,425,485 | |
Total liabilities | | 11,696,891 | | | 9,244,167 | |
Commitments and Contingencies (see Note 16) | | 0 | | 0 |
Equity | | | | |
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 114,661,762 and 112,090,006 issued and outstanding | | 1,147 | | | 1,121 | |
Additional paid-in capital | | 2,312,272 | | | 2,264,874 | |
Accumulated other comprehensive income (loss) | | 1,923 | | | (4,221) | |
Cumulative earnings | | 1,272,845 | | | 997,277 | |
Cumulative distributions to stockholders | | (2,212,364) | | | (2,148,152) | |
Total equity | | 1,375,823 | | | 1,110,899 | |
Total Liabilities and Equity | | $ | 13,072,714 | | | $ | 10,355,066 | |
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(In Thousands, except Share Data) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited) | | 2017 | | 2016 | | 2017 | | 2016 |
Interest Income | | | | | | | | |
Residential loans | | $ | 38,541 |
| | $ | 35,595 |
| | $ | 109,538 |
| | $ | 102,149 |
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Commercial loans | | — |
| | 6,453 |
| | 345 |
| | 28,834 |
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Real estate securities | | 23,425 |
| | 18,600 |
| | 65,068 |
| | 58,112 |
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Other interest income | | 771 |
| | 258 |
| | 1,638 |
| | 926 |
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Total interest income | | 62,737 |
| | 60,906 |
| | 176,589 |
| | 190,021 |
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Interest Expense | | | | | | | | |
Short-term debt | | (10,182 | ) | | (5,405 | ) | | (23,985 | ) | | (17,439 | ) |
Asset-backed securities issued | | (3,956 | ) | | (3,193 | ) | | (11,191 | ) | | (11,457 | ) |
Long-term debt | | (13,305 | ) | | (12,999 | ) | | (37,532 | ) | | (39,095 | ) |
Total interest expense | | (27,443 | ) | | (21,597 | ) | | (72,708 | ) | | (67,991 | ) |
Net Interest Income | | 35,294 |
| | 39,309 |
| | 103,881 |
| | 122,030 |
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Reversal of provision for loan losses | | — |
| | 859 |
| | — |
| | 7,102 |
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Net Interest Income after Provision | | 35,294 |
| | 40,168 |
| | 103,881 |
| | 129,132 |
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Non-interest Income | | | | | | | | |
Mortgage banking activities, net | | 21,200 |
| | 9,766 |
| | 50,850 |
| | 24,712 |
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Mortgage servicing rights income, net | | 1,615 |
| | 3,770 |
| | 6,106 |
| | 12,834 |
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Investment fair value changes, net | | 324 |
| | 11,918 |
| | 9,990 |
| | (18,686 | ) |
Other income | | 1,197 |
| | 1,643 |
| | 3,367 |
| | 4,157 |
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Realized gains, net | | 1,734 |
| | 6,615 |
| | 8,809 |
| | 26,037 |
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Total non-interest income, net | | 26,070 |
| | 33,712 |
| | 79,122 |
| | 49,054 |
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Operating expenses | | (19,922 | ) | | (20,355 | ) | | (56,789 | ) | | (70,962 | ) |
Net Income before Provision for Income Taxes | | 41,442 |
| | 53,525 |
| | 126,214 |
| | 107,224 |
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Provision for income taxes | | (5,262 | ) | | (972 | ) | | (16,741 | ) | | (1,327 | ) |
Net Income | | $ | 36,180 |
| | $ | 52,553 |
| | $ | 109,473 |
| | $ | 105,897 |
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Basic earnings per common share | | $ | 0.46 |
| | $ | 0.67 |
| | $ | 1.39 |
| | $ | 1.34 |
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Diluted earnings per common share | | $ | 0.41 |
| | $ | 0.58 |
| | $ | 1.26 |
| | $ | 1.23 |
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Regular dividends declared per common share | | $ | 0.28 |
| | $ | 0.28 |
| | $ | 0.84 |
| | $ | 0.84 |
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Basic weighted average shares outstanding | | 76,850,830 |
| | 76,680,183 |
| | 76,803,324 |
| | 76,827,026 |
|
Diluted weighted average shares outstanding | | 102,703,108 |
| | 97,831,617 |
| | 99,397,866 |
| | 97,991,678 |
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(1)Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At September 30, 2021 and December 31, 2020, assets of consolidated VIEs totaled $9,358,317 and $8,141,069, respectively. At September 30, 2021 and December 31, 2020, liabilities of consolidated VIEs totaled $8,391,761 and $7,348,713, respectively. See Note 4 for further discussion.
The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands, except Share Data) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited) | | 2021 | | 2020 | | 2021 | | 2020 |
Interest Income | | | | | | | | |
Residential loans | | $ | 53,993 | | | $ | 44,921 | | | $ | 146,081 | | | $ | 179,331 | |
Business purpose loans | | 67,129 | | | 55,637 | | | 201,640 | | | 161,710 | |
Multifamily loans | | 4,846 | | | 4,918 | | | 14,492 | | | 49,960 | |
Real estate securities | | 14,242 | | | 10,135 | | | 33,184 | | | 38,471 | |
Other interest income | | 5,512 | | | 6,371 | | | 17,325 | | | 20,537 | |
Total interest income | | 145,722 | | | 121,982 | | | 412,722 | | | 450,009 | |
Interest Expense | | | | | | | | |
Short-term debt | | (11,826) | | | (5,145) | | | (30,794) | | | (45,119) | |
Asset-backed securities issued | | (73,732) | | | (66,514) | | | (222,712) | | | (232,316) | |
Long-term debt | | (18,196) | | | (28,752) | | | (60,865) | | | (72,313) | |
Total interest expense | | (103,754) | | | (100,411) | | | (314,371) | | | (349,748) | |
Net Interest Income | | 41,968 | | | 21,571 | | | 98,351 | | | 100,261 | |
Non-interest Income (Loss) | | | | | | | | |
Mortgage banking activities, net | | 63,163 | | | 59,395 | | | 200,189 | | | 24,511 | |
Investment fair value changes, net | | 26,077 | | | 107,047 | | | 120,644 | | | (611,557) | |
Other income, net | | 2,388 | | | (114) | | | 8,357 | | | 3,979 | |
Realized gains, net | | 6,703 | | | 602 | | | 17,803 | | | 30,419 | |
Total non-interest income (loss), net | | 98,331 | | | 166,930 | | | 346,993 | | | (552,648) | |
General and administrative expenses | | (47,692) | | | (27,630) | | | (131,837) | | | (84,832) | |
Loan acquisition costs | | (4,621) | | | (2,158) | | | (11,928) | | | (7,716) | |
Other expenses | | (4,023) | | | (7,788) | | | (12,104) | | | (104,286) | |
Net Income (Loss) before (Provision for) Benefit from Income Taxes | | 83,963 | | | 150,925 | | | 289,475 | | | (649,221) | |
Benefit from (provision for) income taxes | | 4,323 | | | (9,113) | | | (13,907) | | | 13,079 | |
Net Income (Loss) | | $ | 88,286 | | | $ | 141,812 | | | $ | 275,568 | | | $ | (636,142) | |
| | | | | | | | |
Basic earnings (loss) per common share | | $ | 0.75 | | | $ | 1.21 | | | $ | 2.36 | | | $ | (5.60) | |
Diluted earnings (loss) per common share | | $ | 0.65 | | | $ | 1.02 | | | $ | 2.03 | | | $ | (5.60) | |
Basic weighted average shares outstanding | | 112,995,847 | | | 113,403,102 | | | 112,754,691 | | | 113,952,308 | |
Diluted weighted average shares outstanding | | 141,855,471 | | | 141,969,977 | | | 141,575,385 | | | 113,952,308 | |
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(In Thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited) | | 2017 | | 2016 | | 2017 | | 2016 |
Net Income | | $ | 36,180 |
| | $ | 52,553 |
| | $ | 109,473 |
| | $ | 105,897 |
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Other comprehensive income (loss): | | | | | | | | |
Net unrealized gain on available-for-sale securities (1) | | 13,158 |
| | 9,038 |
| | 17,899 |
| | 5,195 |
|
Reclassification of unrealized gain on available-for-sale securities to net income | | (853 | ) | | (1,319 | ) | | (7,103 | ) | | (19,983 | ) |
Net unrealized gain (loss) on interest rate agreements | | 321 |
| | 647 |
| | (375 | ) | | (22,545 | ) |
Reclassification of unrealized loss on interest rate agreements to net income | | 14 |
| | 18 |
| | 42 |
| | 55 |
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Total other comprehensive income (loss) | | 12,640 |
| | 8,384 |
| | 10,463 |
| | (37,278 | ) |
Total Comprehensive Income | | $ | 48,820 |
| | $ | 60,937 |
| | $ | 119,936 |
| | $ | 68,619 |
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——————
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(1) | Amounts are presented net of tax benefit (provision) of zero and $(0.1) million for the three and nine months ended September 30, 2017, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2016, respectively.
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The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYCOMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited) | | 2021 | | 2020 | | 2021 | | 2020 |
Net Income (Loss) | | $ | 88,286 | | | $ | 141,812 | | | $ | 275,568 | | | $ | (636,142) | |
Other comprehensive income (loss): | | | | | | | | |
Net unrealized (loss) gain on available-for-sale securities | | (2,658) | | | 8,236 | | | 19,552 | | | (19,890) | |
Reclassification of unrealized (gain) loss on available-for-sale securities to net income | | (6,200) | | | (445) | | | (16,495) | | | (11,525) | |
Net unrealized loss on interest rate agreements | | — | | | — | | | — | | | (32,806) | |
Reclassification of unrealized loss on interest rate agreements to net income | | 1,041 | | | 1,040 | | | 3,087 | | | 2,148 | |
Total other comprehensive (loss) income | | (7,817) | | | 8,831 | | | 6,144 | | | (62,073) | |
Total Comprehensive Income (Loss) | | $ | 80,469 | | | $ | 150,643 | | | $ | 281,712 | | | $ | (698,215) | |
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(In Thousands, except Share Data) | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Cumulative Earnings | | Cumulative Distributions to Stockholders | | Total |
(Unaudited) | | Shares | | Amount | | | | | |
December 31, 2016 | | 76,834,663 |
| | $ | 768 |
| | $ | 1,676,486 |
| | $ | 71,853 |
| | $ | 1,149,935 |
| | $ | (1,749,614 | ) | | $ | 1,149,428 |
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Net income | | — |
| | — |
| | — |
| | — |
| | 109,473 |
| | — |
| | 109,473 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | 10,463 |
| | — |
| | — |
| | 10,463 |
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Employee stock purchase and incentive plans | | 288,024 |
| | 3 |
| | (2,315 | ) | | — |
| | — |
| | — |
| | (2,312 | ) |
Non-cash equity award compensation | | — |
| | — |
| | 7,797 |
| | — |
| | — |
| | — |
| | 7,797 |
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Common dividends declared | | — |
| | — |
| | — |
| | — |
| | — |
| | (66,209 | ) | | (66,209 | ) |
September 30, 2017 | | 77,122,687 |
| | $ | 771 |
| | $ | 1,681,968 |
| | $ | 82,316 |
| | $ | 1,259,408 |
| | $ | (1,815,823 | ) | | $ | 1,208,640 |
|
For the Nine Months Ended September 30, 2016
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(In Thousands, except Share Data) | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Cumulative Earnings | | Cumulative Distributions to Stockholders | | Total |
(Unaudited) | | Shares | | Amount | | | | | |
December 31, 2015 | | 78,162,765 |
| | $ | 782 |
| | $ | 1,695,956 |
| | $ | 91,993 |
| | $ | 1,018,683 |
| | $ | (1,661,149 | ) | | $ | 1,146,265 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | 105,897 |
| | — |
| | 105,897 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | (37,278 | ) | | — |
| | — |
| | (37,278 | ) |
Employee stock purchase and incentive plans | | 437,441 |
| | 4 |
| | (4,183 | ) | | — |
| | — |
| | — |
| | (4,179 | ) |
Non-cash equity award compensation | | — |
| | — |
| | 10,595 |
| | — |
| | — |
| | — |
| | 10,595 |
|
Share repurchases | | (1,917,873 | ) | | (19 | ) | | (24,745 | ) | | — |
| | — |
| | — |
| | (24,764 | ) |
Common dividends declared | | — |
| | — |
| | — |
| | — |
| | — |
| | (66,406 | ) | | (66,406 | ) |
September 30, 2016 | | 76,682,333 |
| | $ | 767 |
| | $ | 1,677,623 |
| | $ | 54,715 |
| | $ | 1,124,580 |
| | $ | (1,727,555 | ) | | $ | 1,130,130 |
|
The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands, except Share Data) | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Cumulative Earnings | | Cumulative Distributions to Stockholders | | Total |
(Unaudited) | | Shares | | Amount | | | | | |
June 30, 2021 | | 113,052,780 | | | $ | 1,131 | | | $ | 2,287,412 | | | $ | 9,740 | | | $ | 1,184,559 | | | $ | (2,187,700) | | | $ | 1,295,142 | |
Net income | | — | | | — | | | — | | | — | | | 88,286 | | | — | | | 88,286 | |
Other comprehensive loss | | — | | | — | | | — | | | (7,817) | | | — | | | — | | | (7,817) | |
Issuance of common stock | | 1,585,709 | | | 16 | | | 19,810 | | | — | | | — | | | — | | | 19,826 | |
| | | | | | | | | | | | | | |
Employee stock purchase and incentive plans | | 23,273 | | | — | | | 153 | | | — | | | — | | | — | | | 153 | |
Non-cash equity award compensation | | — | | | — | | | 4,897 | | | — | | | — | | | — | | | 4,897 | |
| | | | | | | | | | | | | | |
Common dividends declared ($0.21 per share) | | — | | | — | | | — | | | — | | | — | | | (24,664) | | | (24,664) | |
September 30, 2021 | | 114,661,762 | | | $ | 1,147 | | | $ | 2,312,272 | | | $ | 1,923 | | | $ | 1,272,845 | | | $ | (2,212,364) | | | $ | 1,375,823 | |
For the Nine Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands, except Share Data) | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Cumulative Earnings | | Cumulative Distributions to Stockholders | | Total |
(Unaudited) | | Shares | | Amount | | | | | |
December 31, 2020 | | 112,090,006 | | | $ | 1,121 | | | $ | 2,264,874 | | | $ | (4,221) | | | $ | 997,277 | | | $ | (2,148,152) | | | $ | 1,110,899 | |
Net income | | — | | | — | | | — | | | — | | | 275,568 | | | — | | | 275,568 | |
Other comprehensive income | | — | | | — | | | — | | | 6,144 | | | — | | | — | | | 6,144 | |
Issuance of common stock | | 2,391,777 | | | 24 | | | 33,176 | | | — | | | — | | | — | | | 33,200 | |
| | | | | | | | | | | | | | |
Employee stock purchase and incentive plans | | 179,979 | | | 2 | | | (536) | | | — | | | — | | | — | | | (534) | |
Non-cash equity award compensation | | — | | | — | | | 14,758 | | | — | | | — | | | — | | | 14,758 | |
| | | | | | | | | | | | | | |
Common dividends declared ($0.55 per share) | | — | | | — | | | — | | | — | | | — | | | (64,212) | | | (64,212) | |
September 30, 2021 | | 114,661,762 | | | $ | 1,147 | | | $ | 2,312,272 | | | $ | 1,923 | | | $ | 1,272,845 | | | $ | (2,212,364) | | | $ | 1,375,823 | |
For the Three Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands, except Share Data) | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Cumulative Earnings | | Cumulative Distributions to Stockholders | | Total |
(Unaudited) | | Shares | | Amount | | | | | |
June 30, 2020 | | 114,940,197 | | | $ | 1,149 | | | $ | 2,279,625 | | | $ | (29,391) | | | $ | 801,170 | | | $ | (2,115,977) | | | $ | 936,576 | |
Net income | | — | | | — | | | — | | | — | | | 141,812 | | | — | | | 141,812 | |
Other comprehensive income | | — | | | — | | | — | | | 8,831 | | | — | | | — | | | 8,831 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Employee stock purchase and incentive plans | | 11,460 | | | — | | | 9 | | | — | | | — | | | — | | | 9 | |
Non-cash equity award compensation | | — | | | — | | | 3,906 | | | — | | | — | | | — | | | 3,906 | |
Share repurchases | | (3,047,335) | | | (30) | | | (21,629) | | | — | | | — | | | — | | | (21,659) | |
Common dividends declared ($0.14 per share) | | — | | | — | | | — | | | — | | | — | | | (16,011) | | | (16,011) | |
September 30, 2020 | | 111,904,322 | | | $ | 1,119 | | | $ | 2,261,911 | | | $ | (20,560) | | | $ | 942,982 | | | $ | (2,131,988) | | | $ | 1,053,464 | |
|
| | | | | | | | |
(In Thousands) (Unaudited) | | Nine Months Ended September 30, |
| 2017 | | 2016 |
Cash Flows From Operating Activities: | | | | |
Net income | | $ | 109,473 |
| | $ | 105,897 |
|
Adjustments to reconcile net income to net cash used in operating activities: | | | | |
Amortization of premiums, discounts, and securities issuance costs, net | | (14,246 | ) | | (20,251 | ) |
Depreciation and amortization of non-financial assets | | 909 |
| | 849 |
|
Purchases of held-for-sale loans | | (3,760,110 | ) | | (3,817,445 | ) |
Proceeds from sales of held-for-sale loans | | 3,079,877 |
| | 2,930,641 |
|
Principal payments on held-for-sale loans | | 38,500 |
| | 55,694 |
|
Net settlements of derivatives | | (10,570 | ) | | (13,914 | ) |
Provision for loan losses | | — |
| | (7,102 | ) |
Non-cash equity award compensation expense | | 7,797 |
| | 10,595 |
|
Market valuation adjustments | | (50,352 | ) | | 9,238 |
|
Realized gains, net | | (8,809 | ) | | (26,037 | ) |
Net change in: | | | | |
Accrued interest receivable and other assets | | (19,868 | ) | | 7,983 |
|
Accrued interest payable and accrued expenses and other liabilities | | (1,677 | ) | | 7,728 |
|
Net cash used in operating activities | | (629,076 | ) | | (756,124 | ) |
Cash Flows From Investing Activities: | | | | |
Purchases of loans held-for-investment | | — |
| | — |
|
Proceeds from sales of loans held-for-investment | | — |
| | 219,639 |
|
Principal payments on loans held-for-investment | | 370,595 |
| | 574,037 |
|
Purchases of real estate securities | | (396,721 | ) | | (212,364 | ) |
Proceeds from sales of real estate securities | | 142,931 |
| | 482,716 |
|
Principal payments on real estate securities | | 55,544 |
| | 60,978 |
|
Purchase of mortgage servicing rights | | (574 | ) | | (15,286 | ) |
Proceeds from sales of mortgage servicing rights | | 51,279 |
| | 35,717 |
|
Net change in restricted cash | | (17,635 | ) | | 3,523 |
|
Net cash provided by investing activities | | 205,419 |
| | 1,148,960 |
|
Cash Flows From Financing Activities: | | | | |
Proceeds from borrowings on short-term debt | | 3,126,949 |
| | 3,156,642 |
|
Repayments on short-term debt | | (2,968,050 | ) | | (3,894,240 | ) |
Proceeds from issuance of asset-backed securities | | 286,898 |
| | — |
|
Repayments on asset-backed securities issued | | (146,357 | ) | | (208,801 | ) |
Proceeds from issuance of long-term debt | | 245,000 |
| | 771,287 |
|
Deferred long-term debt issuance costs | | (7,380 | ) | | — |
|
Repayments on long-term debt | | — |
| | (118,146 | ) |
Net settlements of derivatives | | (115 | ) | | (119 | ) |
Net proceeds from issuance of common stock | | 224 |
| | 220 |
|
Net payments on repurchase of common stock | | — |
| | (27,731 | ) |
Taxes paid on equity award distributions | | (2,536 | ) | | (4,399 | ) |
Dividends paid | | (66,209 | ) | | (66,406 | ) |
Net cash provided by (used in) financing activities | | 468,424 |
| | (391,693 | ) |
Net increase in cash and cash equivalents | | 44,767 |
| | 1,143 |
|
Cash and cash equivalents at beginning of period | | 212,844 |
| | 220,229 |
|
Cash and cash equivalents at end of period | | $ | 257,611 |
| | $ | 221,372 |
|
Supplemental Cash Flow Information: | | | | |
Cash paid during the period for: | | | | |
Interest | | $ | 67,339 |
| | $ | 62,053 |
|
Taxes | | 1,476 |
| | 826 |
|
Supplemental Noncash Information: | | | | |
Real estate securities retained from loan securitizations | | $ | 67,083 |
| | $ | 3,673 |
|
Retention of mortgage servicing rights from loan securitizations and sales | | 7,387 |
| | 7,679 |
|
Transfers from loans held-for-sale to loans held-for-investment | | 643,876 |
| | 877,744 |
|
Transfers from loans held-for-investment to loans held-for-sale | | 98,853 |
| | 359,005 |
|
Transfers from residential loans to real estate owned | | 3,177 |
| | 8,479 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands, except Share Data) | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Cumulative Earnings | | Cumulative Distributions to Stockholders | | Total |
(Unaudited) | | Shares | | Amount | | | | | |
December 31, 2019 | | 114,353,036 | | | $ | 1,144 | | | $ | 2,269,617 | | | $ | 41,513 | | | $ | 1,579,124 | | | $ | (2,064,167) | | | $ | 1,827,231 | |
Net loss | | — | | | — | | | — | | | — | | | (636,142) | | | — | | | (636,142) | |
Other comprehensive loss | | — | | | — | | | — | | | (62,073) | | | — | | | — | | | (62,073) | |
Issuance of common stock | | 350,088 | | | 3 | | | 5,544 | | | — | | | — | | | — | | | 5,547 | |
| | | | | | | | | | | | | | |
Employee stock purchase and incentive plans | | 248,533 | | | 2 | | | (2,767) | | | — | | | — | | | — | | | (2,765) | |
Non-cash equity award compensation | | — | | | — | | | 11,146 | | | — | | | — | | | — | | | 11,146 | |
Share repurchases | | (3,047,335) | | | (30) | | | (21,629) | | | — | | | — | | | — | | | (21,659) | |
Common dividends declared ($0.585 per share) | | — | | | — | | | — | | | — | | | — | | | (67,821) | | | (67,821) | |
September 30, 2020 | | 111,904,322 | | | $ | 1,119 | | | $ | 2,261,911 | | | $ | (20,560) | | | $ | 942,982 | | | $ | (2,131,988) | | | $ | 1,053,464 | |
The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | |
(In Thousands) (Unaudited) | | Nine Months Ended September 30, |
| 2021 | | 2020 |
Cash Flows From Operating Activities: | | | | |
Net income (loss) | | $ | 275,568 | | | $ | (636,142) | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | |
Amortization of premiums, discounts, and securities issuance costs, net | | 300 | | | 6,213 | |
Depreciation and amortization of non-financial assets | | 12,674 | | | 13,166 | |
Originations of held-for-sale loans | | (960,419) | | | (654,820) | |
Purchases of held-for-sale loans | | (9,902,028) | | | (2,893,246) | |
Proceeds from sales of held-for-sale loans | | 6,948,264 | | | 3,224,526 | |
Principal payments on held-for-sale loans | | 49,619 | | | 53,677 | |
Net settlements of derivatives | | 27,412 | | | (187,130) | |
| | | | |
Non-cash equity award compensation expense | | 14,758 | | | 11,146 | |
Goodwill impairment expense | | — | | | 88,675 | |
Market valuation adjustments | | (292,056) | | | 606,764 | |
Realized gains, net | | (17,803) | | | (30,419) | |
Net change in: | | | | |
Accrued interest receivable and other assets | | (9,680) | | | 304,147 | |
Accrued interest payable and accrued expenses and other liabilities | | 73,120 | | | (82,489) | |
Net cash used in operating activities | | (3,780,271) | | | (175,932) | |
Cash Flows From Investing Activities: | | | | |
Originations of loan investments | | (557,327) | | | (327,494) | |
Purchases of loan investments | | (35,713) | | | — | |
Proceeds from sales of loan investments | | 9,484 | | | 1,574,160 | |
Principal payments on loan investments | | 1,950,151 | | | 1,652,418 | |
Purchases of real estate securities | | (29,342) | | | (106,422) | |
| | | | |
| | | | |
Sales of securities held in consolidated securitization trusts | | 8,197 | | | 142,990 | |
Proceeds from sales of real estate securities | | 37,500 | | | 634,709 | |
Principal payments on real estate securities | | 46,904 | | | 19,446 | |
Purchases of servicer advance investments | | — | | | (179,419) | |
Principal repayments from servicer advance investments | | 58,248 | | | 83,124 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Purchases of home equity investment contracts | | (109,174) | | | (986) | |
Other investing activities, net | | (15,915) | | | 22,019 | |
Net cash provided by investing activities | | 1,363,013 | | | 3,514,545 | |
Cash Flows From Financing Activities: | | | | |
Proceeds from borrowings on short-term debt | | 9,847,178 | | | 3,981,572 | |
Repayments on short-term debt | | (8,443,664) | | | (5,828,972) | |
Proceeds from issuance of asset-backed securities | | 2,822,785 | | | 1,343,845 | |
Repayments on asset-backed securities issued | | (1,549,766) | | | (1,037,546) | |
| | | | |
Proceeds from borrowings on long-term debt | | 948,674 | | | 1,251,850 | |
| | | | |
Repayments on long-term debt | | (1,055,475) | | | (2,640,007) | |
Net settlements of derivatives | | — | | | (84,336) | |
Net proceeds from issuance of common stock | | 20,248 | | | 5,791 | |
Net payments on repurchase of common stock | | — | | | (21,659) | |
Taxes paid on equity award distributions | | (957) | | | (3,009) | |
Dividends paid | | (64,212) | | | (67,821) | |
Other financing activities, net | | (6,297) | | | (4,876) | |
Net cash provided by (used in) financing activities | | 2,518,514 | | | (3,105,168) | |
Net increase in cash, cash equivalents and restricted cash | | 101,256 | | | 233,445 | |
Cash, cash equivalents and restricted cash at beginning of period (1) | | 544,450�� | | | 290,833 | |
Cash, cash equivalents and restricted cash at end of period (1) | | $ | 645,706 | | | $ | 524,278 | |
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REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
| | | | | | | | | | | | | | |
(In Thousands) (Unaudited) | | Nine Months Ended September 30, |
| 2021 | | 2020 |
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Supplemental Cash Flow Information: | | | | |
Cash paid during the period for: | | | | |
Interest | | $ | 298,507 | | | $ | 364,875 | |
Taxes | | 28,092 | | | 218 | |
Supplemental Noncash Information: | | | | |
Real estate securities retained from loan securitizations | | $ | 9,375 | | | $ | 46,560 | |
Retention of mortgage servicing rights from loan securitizations and sales | | 7,065 | | | — | |
| | | | |
| | | | |
Deconsolidation of multifamily loans held in securitization trusts | | — | | | (3,849,779) | |
Deconsolidation of multifamily ABS | | — | | | (3,706,789) | |
Transfers from loans held-for-sale to loans held-for-investment | | 3,005,041 | | | 770,754 | |
Transfers from loans held-for-investment to loans held-for-sale | | 44,922 | | | — | |
Transfers from residential loans to real estate owned | | 21,655 | | | 12,547 | |
Transfers from long-term debt to short-term debt | | 93,150 | | | — | |
Right-of-use asset obtained in exchange for operating lease liability | | 1,135 | | | 5,362 | |
Reduction in operating lease liability due to lease modification | | — | | | 1,466 | |
Issuance of common stock for 5 Arches acquisition | | 13,375 | | | 3,375 | |
(1) Cash, cash equivalents, and restricted cash at September 30, 2021 includes cash and cash equivalents of $557 million and restricted cash of $89 million, and at December 31, 2020 includes cash and cash equivalents of $461 million and restricted cash of $83 million.
The accompanying notes are an integral part of these consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 1. Organization
Redwood Trust, Inc., together with its subsidiaries, focusesis a specialty finance company focused on investingseveral distinct areas of housing credit. Our operating platforms occupy a unique position in mortgages and other real estate-related assets and engaging in mortgage banking activities.the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not served by government programs. We seekdeliver customized housing credit investments to invest in real estate-related assets that have the potential to generate attractive cash flow returns over time and to generate incomea diverse mix of investors, through our mortgage banking activities.best-in-class securitization platforms; whole-loan distribution activities; and our publicly-traded shares. Our consolidated investment portfolio has evolved to incorporate a diverse mix of residential, business purpose and multifamily investments. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in two3 segments: Investment PortfolioResidential Lending, Business Purpose Lending, and Residential Mortgage Banking. Redwood was incorporated inThird-Party Investments.
Our primary sources of income are net interest income from our investments and non-interest income from our mortgage banking activities. Net interest income primarily consists of the Stateinterest income we earn on investments less the interest expense we incur on borrowed funds and other liabilities. Income from mortgage banking activities is generated through the origination and acquisition of Maryland on April 11, 1994,loans, and commenced operations on August 19, 1994. References hereintheir subsequent sale, securitization, or transfer to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires.our investment portfolios.
Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable year ended December 31, 1994. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are generally not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our operating subsidiaries” or “our taxable REIT subsidiaries” or “TRS.”
We sponsor our Sequoia securitization program, which we use forRedwood was incorporated in the securitizationState of residential mortgage loans.Maryland on April 11, 1994, and commenced operations on August 19, 1994. References herein to Sequoia with respect to any time or period generally refer collectively to all“Redwood,” the then“company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated Sequoia securitization entities forsubsidiaries, unless the periods presented. We have also engaged in securitization transactions in order to obtain financing for certain of our securities and commercial loans.context otherwise requires.
Note 2. Basis of Presentation
The consolidated financial statements presented herein are at September 30, 20172021 and December 31, 2016,2020, and for the three and nine months ended September 30, 20172021 and 2016.2020. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — have been condensed or omitted in these interim financial statements according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 2016.2020. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the companyCompany at September 30, 20172021 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 20172021 should not be construed as indicative of the results to be expected for the full year.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 2. Basis of Presentation - (continued)
Principles of Consolidation
In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities issued prior to 2012 where we maintain an ongoing involvement ("Legacy Sequoia"), as well as an entitycertain entities formed during and after 2012 in connection with the securitization of Redwood Select prime loans and Redwood Choice expanded-prime loans ("Sequoia"), entities formed in connection with the securitization of Redwood Choice expanded-primeCoreVest single-family rental and bridge loans during("CAFL"), and beginning in the third quarter of 20172021, an entity ("Sequoia Choice"Point HEI") formed in connection with the securitization of home equity investment contracts ("HEIs"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations in which we have invested. Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have purchased or retained, although for certain entities we are exposed to certain financial risks associated with our role as a sponsor or co-sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.
For financial reporting purposes, the underlying loans owned at the consolidated Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment at fair value, the underlying loans at the consolidated Freddie Mac K-Series entity are shown under Multifamily loans held-for-investment at fair value, the underlying single-family rental and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment at fair value, and the underlying HEIs at the consolidated Point HEI entity are shown under Other investments at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income (loss), we recorded interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as fair value changes, other income and expenses associated with these entities' activities. See Note 1214 for further discussion on ABS issued.
We also consolidate 2 partnerships ("Servicing Investment" entities) through which we have invested in servicing-related assets. We maintain an 80% ownership interest in each entity and have determined that we are the primary beneficiary of these partnerships.
See Note 4 for further discussion on principles of consolidation.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 2. Basis of Presentation - (continued)
Use of Estimates
The preparation of financial statements requires us to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material.
Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information regarding the acquisitions of 5 Arches, LLC ("5 Arches") and CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), including purchase price allocations.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 2. Basis of Presentation - (continued)
In connection with the acquisitions of 5 Arches and CoreVest in 2019, we identified and recorded finite-lived intangible assets totaling $25 million and $57 million, respectively. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at September 30, 2021.
Table 2.1 – Intangible Assets – Activity
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Intangible Assets at Acquisition | | Accumulated Amortization at September 30, 2021 | | Carrying Value at September 30, 2021 | | Weighted Average Amortization Period (in years) |
(Dollars in Thousands) | | | | |
Borrower network | | $ | 45,300 | | | $ | (12,672) | | | $ | 32,628 | | | 7 |
Broker network | | 18,100 | | | (9,352) | | | 8,748 | | | 5 |
Non-compete agreements | | 9,500 | | | (6,806) | | | 2,694 | | | 3 |
Tradenames | | 4,000 | | | (2,861) | | | 1,139 | | | 3 |
Developed technology | | 1,800 | | | (1,763) | | | 37 | | | 2 |
Loan administration fees on existing loan assets | | 2,600 | | | (2,600) | | | — | | | 1 |
Total | | $ | 81,300 | | | $ | (36,054) | | | $ | 45,246 | | | 6 |
All of our intangible assets are amortized on a straight-line basis. For both of the nine months ended September 30, 2021 and 2020, we recorded intangible asset amortization expense of $12 million. Estimated future amortization expense is summarized in the table below.
Table 2.2 – Intangible Asset Amortization Expense by Year
| | | | | | | | | | | | |
| | | | | | |
(In Thousands) | | | | | | September 30, 2021 |
2021 (3 months) | | | | | | $ | 3,685 | |
2022 | | | | | | 12,800 | |
2023 | | | | | | 10,091 | |
2024 | | | | | | 7,073 | |
2025 and thereafter | | | | | | 11,597 | |
Total Future Intangible Asset Amortization | | | | | | $ | 45,246 | |
On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at September 30, 2021.
A liability resulting from the contingent consideration arrangement with 5 Arches was initially recorded in 2019 at its acquisition-date fair value as part of total consideration for the acquisition of 5 Arches. During the first quarter of 2021, we distributed 806,068 shares of Redwood common stock and paid $1 million in cash in full settlement of the remaining deferred consideration associated with this acquisition.
Note 3. Summary of Significant Accounting Policies
Significant Accounting Policies
Included in Note 3 to the Consolidated Financial Statements of our 2016 Annual Report on Form 10-K for the year ended December 31, 2020 is a summary of our significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the company’scompany's consolidated financial conditionposition and results of operations for the three and nine months ended September 30, 2017.2021.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 3. Summary of Significant Accounting Policies - (continued)
Other Investments
Strategic Investments
We have made and may make additional strategic investments in companies through our RWT Horizons venture investment strategy or at a corporate level. These investments can take the form of equity or debt and often have conversion features. Depending on the terms of the investments, we may account for these investments under the fair value option or as non-marketable equity securities under the equity method of accounting or the measurement alternative (to the extent they do not have a “readily determinable fair value,” or are not traded in a verifiable public market or are restricted for sale in the public market by a restricted stock legend or otherwise).
Investments accounted for under the fair value option are carried at fair value with periodic changes in value recorded through Investment fair value changes on our consolidated statements of income (loss). For non-marketable securities, we utilize the equity method of accounting when we are able to exert significant influence over but do not control the activities of the investee. Under the equity method of accounting, we generally elect to record our share of earnings or losses from equity method investments on a one-quarter lag and we assess our investments for impairment whenever events or changes in circumstances indicate that the carrying amount of our investment might not be recoverable. Income from equity method investments is recorded in Other income, net on our consolidated statements of income (loss). Under the measurement alternative, the carrying value of our investment is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Adjustments are determined primarily based on a market approach as of the transaction date and are recorded as a component of Other income, net on our consolidated statements of income (loss).
Recent Accounting Pronouncements
Newly Adopted Accounting Standards Updates ("ASUs")
In January 2017,August 2021, the FASB issued ASU 2017-03, "Accounting Changes2021-06, "Presentation of Financial Statements (Topic 205), Financial Services—Depository and Error CorrectionsLending (Topic 250)942), and Investments - Equity MethodFinancial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Joint Ventures (Topic 323)Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update)." This new guidance requires that companies evaluate ASUs that have not been adoptedaligns certain SEC paragraphs in the codification with new SEC rules issued in May 2020 related to determinechanges to the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. This new guidance was effective immediately.disclosure requirements for acquired and disposed businesses. We adopted this guidance as required,upon issuance in the firstthird quarter of 2017,2021, which did not have a material impact on our consolidated financial statements.
In March 2016,October 2020, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.2020-10, "Codification Improvements." This new guidance provides simplificationsupdates various codification topics by clarifying or improving disclosure requirements. This new guidance is effective for fiscal years ending after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-09, "Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762." This new guidance aligns certain SEC paragraphs in the codification with new SEC rules issued in March 2020 related to changes to the disclosure requirements for registered debt securities. This new guidance became effective January 4, 2021. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs." This new guidance clarifies that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. This new guidance is effective for fiscal years ending after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 3. Summary of Significant Accounting Policies - (continued)
In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." This new guidance clarifies the interaction of the accounting for share-based payment transactions, including related income tax accounting, classification of awards,equity securities, equity method investments, and classification on the statement of cash flows. In addition, this guidance permits the withholding of employee taxes related to the distribution of equity awards up to the maximum individual employee statutory tax rates.certain forward contracts and purchased options. This new guidance is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted. In2020. We adopted this guidance, as required, in the secondfirst quarter of 2016, we2021, which did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance. This new guidance is effective for fiscal years beginning after December 15, 2020. We adopted this new guidance. Upon adoption, we elected to account for forfeitures on employee equity awardsguidance, as they occur, rather than estimating expected forfeitures. The adoptionrequired, in the first quarter of this guidance2021, which did not have a material impact on our consolidated financial statements.
Other Recent Accounting Pronouncements
In August 2017,2020, the FASB issued ASU 2017-12, "Derivatives2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.- Contracts in Entity's Own Equity (Subtopic 815-40)." This new guidance amends previous guidancesimplifies the accounting for convertible debt by reducing the number of accounting models to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.separately present certain conversion features in equity. This new guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We plan to adopt this new guidance by the required date and we are currently evaluating the impact that this update will have on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception." This new guidance changes the classification analysis of certain equity-linked financial instruments (or embedded conversion options) with down round features. This new guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 3. Summary of Significant Accounting Policies - (continued)
In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20)." This new guidance shortens the amortization period for certain callable debt securities purchased at a premium by requiring the premium to be amortized to the earliest call date. This new guidance is effective for fiscal years beginning after December 15, 2018.31, 2021. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
In November 2016,March 2020, the FASB issued ASU 2016-18, "Statement2020-04, "Reference Rate Reform (Topic 848): Facilitation of Cash Flows (Topic 230): Restricted Cash.the Effects of Reference Rate Reform on Financial Reporting." This new guidance amends previousprovides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." This new guidance on howclarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to classify and present changes in restricted cash onderivatives that are affected by the statement of cash flows.discounting transition. This new guidance is effective for fiscal years beginning afterall entities as of March 12, 2020 through December 15, 2017. Early adoption is permitted. We plan to adopt this new guidance by the required date and we will modify the presentation of our cash flow statement as required.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This new guidance allows an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. It also eliminates the exceptions for an intra-entity transfer of assets other than inventory. This new guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This new guidance provides guidance on how to present and classify certain cash receipts and cash payments in the statement of cash flows. This new guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses." This new guidance provides a new impairment model that is based on expected losses rather than incurred losses to determine the allowance for credit losses. This new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning December 15, 2018. Currently, a significant portion of our financial instruments are measured at fair value, for which we do not maintain any allowances for loan losses in accordance with fair value accounting. As such, based on our initial evaluation of this new guidance, we do not believe the provisions in this guidance will have a material impact to how we account for these instruments. Separately, we account for our available-for-sale securities under the other-than-temporary impairment ("OTTI") model for debt securities. This new guidance changes the accounting for available-for-sale securities, including AFS securities purchased with credit deterioration.31, 2022. We are currently evaluating the impact thatthe adoption of this update willstandard would have on our consolidated financial statements in regard to our available-for-sale securities. We plan to adopt this new guidance by the required date.
In February 2016, the FASB issued ASU 2016-02, "Leases." This new guidance requires lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. This new guidance retains a dual lease accounting model, which requires leases to be classified as either operating or capital leases for lessees, for purposes of income statement recognition. This new guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. As discussed in Note 14, our only material leases are those related to our leased office space, for which future payments under these leases total $18 million atstatements. Through September 30, 2017. Upon adoption of this standard in2021, we have not elected to apply the first quarter of 2019, we will record a right-of-use assetoptional expedients and lease liability equalexceptions to the present value of these future lease payments discounted at our incremental borrowing rate. Based on our initial evaluation of this new guidance, and taking into consideration our current in-place leases, we do not expect that its adoption will have a material impact on our consolidated financial statements. We will continue evaluating this new standard and caution that any changes in our business or additional leases we may enter into could change our initial assessment.
In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This new guidance amends accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. This new guidance also amends certain disclosure requirements associated with the fair value of financial instruments and it is effective for fiscal years beginning after December 15, 2017. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 3. Summary of Significant Accounting Policies - (continued)
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The update modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. In July 2015, the FASB approved a one year deferral of the effective date. Accordingly, the update is effective for us in the first quarter of 2018 with retrospective application to prior periods presented or as a cumulative effect adjustment in the period of adoption. Early adoption is permitted in the first quarter of 2017. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." This new guidance provides additional implementation guidance on how an entity should identify the unit of accounting for the principal versus agent evaluations. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," and in December 2016, the FASB issued ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." These new ASUs provide more specific guidance on certain aspects of Topic 606. In September 2017, the FASB issued ASU 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update). This new ASU allows certain public business entities to use the nonpublic business entity effective dates for adoption of the new revenue standard. Based on our initial evaluation of these new accounting standards, we do not expect that their adoption will have a material impact on our consolidated financial statements, as financial instruments are explicitly scoped out of the standards and nearly all of our income is generated from financial instruments. We will continue evaluating these new standards and caution that any changes in our businessexisting contracts, hedging relationships, or additional amendments to these standards could change our initial assessment.other transactions.
Balance Sheet Netting
Certain of our derivatives and short-term debt are subject to master netting arrangements or similar agreements. Under GAAP, in certain circumstances we may elect to present certain financial assets, liabilities and related collateral subject to master netting arrangements in a net position on our consolidated balance sheets. However, we do not report any of these financial assets or liabilities on a net basis, and instead present them on a gross basis on our consolidated balance sheets.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 3. Summary of Significant Accounting Policies - (continued)
The table below presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at September 30, 20172021 and December 31, 2016.2020.
Table 3.1 – Offsetting of Financial Assets, Liabilities, and Collateral
| | | | | | | | | | | | | | | | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in Consolidated Balance Sheet | | Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet | | Gross Amounts Not Offset in Consolidated Balance Sheet (1) | | Net Amount |
| | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in Consolidated Balance Sheet | | Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet | | Gross Amounts Not Offset in Consolidated Balance Sheet (1) | | Net Amount | |
September 30, 2017 (In Thousands) | | Financial Instruments | | Cash Collateral (Received) Pledged | | |
September 30, 2021 (In Thousands) | | September 30, 2021 (In Thousands) | | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in Consolidated Balance Sheet | | Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet | | Financial Instruments | | Cash Collateral (Received) Pledged | | Net Amount |
Assets (2) | | | | | | | | | | | | | Assets (2) | | | | | |
Interest rate agreements | | $ | 3,942 |
| | $ | — |
| | $ | 3,942 |
| | $ | (3,644 | ) | | $ | (298 | ) | | $ | — |
| Interest rate agreements | | $ | 33,628 | | | $ | — | | | $ | 33,628 | | | $ | (74) | | | $ | (32,408) | | | $ | 1,146 | |
| TBAs | | 2,875 |
| | — |
| | 2,875 |
| | (2,806 | ) | | — |
| | 69 |
| TBAs | | 8,213 | | | — | | | 8,213 | | | (4,278) | | | (3,117) | | | 818 | |
Futures | | 135 |
| | — |
| | 135 |
| | — |
| | — |
| | 135 |
| |
| Total Assets | | $ | 6,952 |
| | $ | — |
| | $ | 6,952 |
| | $ | (6,450 | ) | | $ | (298 | ) | | $ | 204 |
| Total Assets | | $ | 41,841 | | | $ | — | | | $ | 41,841 | | | $ | (4,352) | | | $ | (35,525) | | | $ | 1,964 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities (2) | | | | | | | | | | | | | Liabilities (2) | |
Interest rate agreements | | $ | (57,994 | ) | | $ | — |
| | $ | (57,994 | ) | | $ | 3,644 |
| | $ | 54,350 |
| | $ | — |
| Interest rate agreements | | $ | (74) | | | $ | — | | | $ | (74) | | | $ | 74 | | | $ | — | | | $ | — | |
TBAs | | (3,946 | ) | | — |
| | (3,946 | ) | | 2,807 |
| | 976 |
| | (163 | ) | TBAs | | (7,599) | | | — | | | (7,599) | | | 4,278 | | | 3,321 | | | — | |
Futures | | (423 | ) | | — |
| | (423 | ) | | — |
| | 423 |
| | — |
| Futures | | (749) | | | — | | | (749) | | | — | | | 749 | | | — | |
Loan warehouse debt | | (438,243 | ) | | — |
| | (438,243 | ) | | 438,243 |
| | — |
| | — |
| Loan warehouse debt | | (1,335,464) | | | — | | | (1,335,464) | | | 1,335,464 | | | — | | | — | |
Security repurchase agreements | | (549,811 | ) | | — |
| | (549,811 | ) | | 549,811 |
| | — |
| | — |
| Security repurchase agreements | | (79,766) | | | — | | | (79,766) | | | 79,766 | | | — | | | — | |
Total Liabilities | | $ | (1,050,417 | ) | | $ | — |
| | $ | (1,050,417 | ) | | $ | 994,505 |
| | $ | 55,749 |
| | $ | (163 | ) | Total Liabilities | | $ | (1,423,652) | | | $ | — | | | $ | (1,423,652) | | | $ | 1,419,582 | | | $ | 4,070 | | | $ | — | |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 3. Summary of Significant Accounting Policies - (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in Consolidated Balance Sheet | | Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet | | Gross Amounts Not Offset in Consolidated Balance Sheet (1) | | Net Amount |
December 31, 2020 (In Thousands) | | | | | Financial Instruments | | Cash Collateral (Received) Pledged | |
Assets (2) | | | | | | | | | | | | |
Interest rate agreements | | $ | 19,951 | | | $ | — | | | $ | 19,951 | | | $ | — | | | $ | (7,769) | | | $ | 12,182 | |
| | | | | | | | | | | | |
TBAs | | 18,260 | | | — | | | 18,260 | | | (13,423) | | | (4,658) | | | 179 | |
| | | | | | | | | | | | |
Total Assets | | $ | 38,211 | | | $ | — | | | $ | 38,211 | | | $ | (13,423) | | | $ | (12,427) | | | $ | 12,361 | |
| | | | | | | | | | | | |
Liabilities (2) | | | | | | | | | | | | |
| | | | | | | | | | | | |
TBAs | | $ | (15,495) | | | $ | — | | | $ | (15,495) | | | $ | 13,423 | | | $ | 1,061 | | | $ | (1,011) | |
| | | | | | | | | | | | |
Loan warehouse debt | | (137,269) | | | — | | | (137,269) | | | 137,269 | | | — | | | — | |
Security repurchase agreements | | (77,775) | | | — | | | (77,775) | | | 77,775 | | | — | | | — | |
Total Liabilities | | $ | (230,539) | | | $ | — | | | $ | (230,539) | | | $ | 228,467 | | | $ | 1,061 | | | $ | (1,011) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in Consolidated Balance Sheet | | Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet | | Gross Amounts Not Offset in Consolidated Balance Sheet (1) | | Net Amount |
December 31, 2016 (In Thousands) | | | | | Financial Instruments | | Cash Collateral (Received) Pledged | |
Assets (2) | | | | | | | | | | | | |
Interest rate agreements | | $ | 24,980 |
| | $ | — |
| | $ | 24,980 |
| | $ | (7,736 | ) | | $ | (4,784 | ) | | $ | 12,460 |
|
TBAs | | 8,300 |
| | — |
| | 8,300 |
| | (3,936 | ) | | (4,364 | ) | | — |
|
Total Assets | | $ | 33,280 |
| | $ | — |
| | $ | 33,280 |
| | $ | (11,672 | ) | | $ | (9,148 | ) | | $ | 12,460 |
|
| | | | | | | | | | | | |
Liabilities (2) | | | | | | | | | | | | |
Interest rate agreements | | $ | (56,919 | ) | | $ | — |
| | $ | (56,919 | ) | | $ | 7,736 |
| | $ | 49,183 |
| | $ | — |
|
TBAs | | (4,681 | ) | | — |
| | (4,681 | ) | | 3,936 |
| | — |
| | (745 | ) |
Futures | | (928 | ) | | — |
| | (928 | ) | | — |
| | 928 |
| | — |
|
Loan warehouse debt | | (485,544 | ) | | — |
| | (485,544 | ) | | 485,544 |
| | — |
| | — |
|
Security repurchase agreements | | (305,995 | ) | | — |
| | (305,995 | ) | | 305,995 |
| | — |
| | — |
|
Total Liabilities | | $ | (854,067 | ) | | $ | — |
| | $ | (854,067 | ) | | $ | 803,211 |
| | $ | 50,111 |
| | $ | (745 | ) |
(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column ("Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet") by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty (which may, in certain circumstances, be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively. | |
(1) | Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty (which may, in certain circumstances, be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively. |
| |
(2) | Interest rate agreements, TBAs, credit default index swaps, and futures are components of derivatives instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by residential mortgage loans, and security repurchase agreements are components of Short-term debt on our consolidated balance sheets. |
(2)Interest rate agreements and TBAs are components of derivatives instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by certain residential and business purpose loans, and security repurchase agreements are components of Short-term debt and Long-term debt on our consolidated balance sheets.
For each category of financial instrument set forth in the table above, the assets and liabilities resulting from individual transactions within that category between us and a counterparty are subject to a master netting arrangement or similar agreement with that counterparty that provides for individual transactions to be aggregated and treated as a single transaction. For certain categories of these instruments, some of our transactions are cleared and settled through one or more clearinghouses that are substituted as our counterparty. References herein to master netting arrangements or similar agreements include the arrangements and agreements governing the clearing and settlement of these transactions through the clearinghouses. In the event of the termination and close-out of any of those transactions, the corresponding master netting agreement or similar agreement provides for settlement on a net basis. Any such settlement would include the proceeds of the liquidation of any corresponding collateral, subject to certain limitations on termination, settlement, and liquidation of collateral that may apply in the event of the bankruptcy or insolvency of a party. Such limitations should not inhibit the eventual practical realization of the principal benefits of those transactions or the corresponding master netting arrangement or similar agreement and any corresponding collateral.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 4. Principles of Consolidation
GAAP requires us to consider whether securitizations we sponsor and other transfers of financial assets should be treated as sales or financings, as well as whether any VIEs that we hold variable interests in – for example, certain legal entities often used in securitization and other structured finance transactions – should be included in our consolidated financial statements. The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 4. Principles of Consolidation - (continued)
Analysis of Consolidated VIEs
At September 30, 2017,2021, we consolidated certain Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, Freddie Mac K-Series, and Point HEI securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. In addition, we consolidated the Sequoia Choice securitization entity beginning in the third quarter of 2017. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for certain securitizations, we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.
We also consolidate 2 Servicing Investment entities formed to invest in servicing-related assets that we determined were VIEs and for which we determined we were the primary beneficiary. At September 30, 2017,2021, we held an 80% ownership interest in, and were responsible for the estimatedmanagement of, each entity. See Note 10 for a further description of these entities and the investments they hold and Note 12 for additional information on the minority partner’s non-controlling interest. Additionally, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing.
During the third quarter of 2021, we consolidated a Point securitization entity formed to invest in Point HEIs that we determined was a VIE and for which we determined we were the primary beneficiary. At September 30, 2021, we owned a portion of the subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 12 for additional information on non-controlling interests in the entity. We consolidate the Point securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 4. Principles of Consolidation - (continued)
For certain of our consolidated VIEs, we have elected to account for the assets and liabilities of these entities as collateralized financing entities ("CFE"). 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 our investmentsthe financial assets or fair value of the financial liabilities. The net equity in an entity effectively represents the fair value of the beneficial interests we own in the consolidated Legacy Sequoia entities and the Sequoia Choice entity was $19 million and $31 million, respectively.entity. The following table presents a summary of the assets and liabilities of these VIEs.
Table 4.1 – Assets and Liabilities of Consolidated VIEs Accounted for as Collateralized Financing Entities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021 | | Legacy Sequoia | | Sequoia | | CAFL SFR | | Freddie Mac SLST | | Freddie Mac K-Series | | Servicing Investment | | Point HEI | | Total Consolidated CFE VIEs |
(Dollars in Thousands) | | | | | | | | |
Residential loans, held-for-investment | | $ | 242,234 | | | $ | 2,479,750 | | | $ | — | | | $ | 1,999,405 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,721,389 | |
Business purpose loans, held-for-investment | | — | | | — | | | 3,402,410 | | | — | | | — | | | — | | | — | | | 3,402,410 | |
Multifamily loans, held-for-investment | | — | | | — | | | — | | | — | | | 482,791 | | | — | | | — | | | 482,791 | |
| | | | | | | | | | | | | | | | |
Other investments | | — | | | — | | | — | | | — | | | — | | | 187,880 | | | 167,442 | | | 355,322 | |
Cash and cash equivalents | | — | | | — | | | — | | | — | | | — | | | 12,977 | | | — | | | 12,977 | |
Restricted cash | | 148 | | | — | | | — | | | — | | | — | | | 19,872 | | | 5,033 | | | 25,053 | |
Accrued interest receivable | | 232 | | | 7,869 | | | 13,451 | | | 6,068 | | | 1,321 | | | 1,068 | | | — | | | 30,009 | |
Other assets | | 275 | | | — | | | 13,172 | | | 1,958 | | | — | | | 6,283 | | | 50 | | | 21,738 | |
Total Assets | | $ | 242,889 | | | $ | 2,487,619 | | | $ | 3,429,033 | | | $ | 2,007,431 | | | $ | 484,112 | | | $ | 228,080 | | | $ | 172,525 | | | $ | 9,051,689 | |
Short-term debt | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 151,910 | | | $ | — | | | $ | 151,910 | |
Accrued interest payable | | 108 | | | 5,918 | | | 10,691 | | | 4,279 | | | 1,195 | | | 97 | | | — | | | 22,288 | |
Accrued expenses and other liabilities | | — | | | — | | | 224 | | | — | | | — | | | 15,835 | | | 16,740 | | | 32,799 | |
Asset-backed securities issued | | 239,447 | | | 2,243,299 | | | 3,126,405 | | | 1,550,111 | | | 451,402 | | | — | | | 145,437 | | | 7,756,101 | |
Total Liabilities | | $ | 239,555 | | | $ | 2,249,217 | | | $ | 3,137,320 | | | $ | 1,554,390 | | | $ | 452,597 | | | $ | 167,842 | | | $ | 162,177 | | | $ | 7,963,098 | |
| | | | | | | | | | | | | | | | |
Fair value of our investments | | $ | 3,062 | | | $ | 236,451 | | | $ | 287,813 | | | $ | 451,252 | | | $ | 31,389 | | | $ | 60,238 | | | $ | 10,348 | | | $ | 1,080,553 | |
Number of VIEs | | 20 | | | 13 | | | 15 | | | 3 | | | 1 | | | 3 | | | 1 | | | 56 | |
|
| | | | | | | | | | | | |
September 30, 2017 | | Legacy Sequoia | | Sequoia Choice | | Total Consolidated VIEs |
(Dollars in Thousands) | | | |
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) | | | |
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 |
|
17
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 4. Principles of Consolidation - (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | Legacy Sequoia | | Sequoia | | CAFL SFR | | Freddie Mac SLST | | Freddie Mac K-Series | | Servicing Investment | | Point HEI | | Total Consolidated CFE VIEs |
(Dollars in Thousands) | | | | | | | | |
Residential loans, held-for-investment | | $ | 285,935 | | | $ | 1,565,322 | | | $ | — | | | $ | 2,221,153 | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,072,410 | |
Business purpose loans, held-for-investment | | — | | | — | | | 3,249,194 | | | — | | | — | | | — | | | — | | | 3,249,194 | |
Multifamily loans, held-for-investment | | — | | | — | | | — | | | — | | | 492,221 | | | — | | | — | | | 492,221 | |
| | | | | | | | | | | | | | | | |
Other investments | | — | | | — | | | — | | | — | | | — | | | 251,773 | | | — | | | 251,773 | |
Cash and cash equivalents | | — | | | — | | | — | | | — | | | — | | | 11,579 | | | — | | | 11,579 | |
Restricted cash | | 148 | | | — | | | — | | | — | | | — | | | 23,220 | | | — | | | 23,368 | |
Accrued interest receivable | | 305 | | | 6,802 | | | 13,055 | | | 6,754 | | | 1,337 | | | 2,334 | | | — | | | 30,587 | |
Other assets | | 638 | | | — | | | 2,930 | | | 646 | | | — | | | 5,723 | | | — | | | 9,937 | |
Total Assets | | $ | 287,026 | | | $ | 1,572,124 | | | $ | 3,265,179 | | | $ | 2,228,553 | | | $ | 493,558 | | | $ | 294,629 | | | $ | — | | | $ | 8,141,069 | |
Short-term debt | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 208,375 | | | $ | — | | | $ | 208,375 | |
Accrued interest payable | | 141 | | | 4,697 | | | 10,278 | | | 4,846 | | | 1,177 | | | 135 | | | — | | | 21,274 | |
Accrued expenses and other liabilities | | — | | | 50 | | | — | | | — | | | — | | | 18,353 | | | — | | | 18,403 | |
Asset-backed securities issued | | 282,326 | | | 1,347,357 | | | 3,013,093 | | | 1,793,620 | | | 463,966 | | | — | | | — | | | 6,900,362 | |
Total Liabilities | | $ | 282,467 | | | $ | 1,352,104 | | | $ | 3,023,371 | | | $ | 1,798,466 | | | $ | 465,143 | | | $ | 226,863 | | | $ | — | | | $ | 7,148,414 | |
| | | | | | | | | | | | | | | | |
Fair value of our investments | | $ | 4,559 | | | $ | 220,020 | | | $ | 241,808 | | | $ | 430,087 | | | $ | 28,415 | | | $ | 67,766 | | | $ | — | | | $ | 992,655 | |
Number of VIEs | | 20 | | | 10 | | | 14 | | | 2 | | | 1 | | | 3 | | | — | | | 50 | |
The following table presents income (loss) from these VIEs for the three and nine months ended September 30, 2021 and 2020.
Table 4.2 – Income (Loss) from Consolidated VIEs Accounted for as Collateralized Financing Entities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
| | Legacy Sequoia | | Sequoia | | CAFL SFR | | Freddie Mac SLST | | Freddie Mac K-Series | | Servicing Investment | | Point HEI | | Total Consolidated CFE VIEs |
(Dollars in Thousands) | | | | | | | | |
Interest income | | $ | 1,042 | | | $ | 18,867 | | | $ | 48,723 | | | $ | 18,707 | | | $ | 4,846 | | | $ | 3,905 | | | $ | — | | | $ | 96,090 | |
Interest expense | | (641) | | | (15,368) | | | (37,415) | | | (13,303) | | | (4,460) | | | (1,018) | | | — | | | (72,205) | |
Net interest income | | 401 | | | 3,499 | | | 11,308 | | | 5,404 | | | 386 | | | 2,887 | | | — | | | 23,885 | |
Non-interest income | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Investment fair value changes, net | | (247) | | | 3,314 | | | 2,943 | | | 13,849 | | | 554 | | | (2,080) | | | 47 | | | 18,380 | |
Other income | | — | | | — | | | 10 | | | — | | | — | | | — | | | — | | | 10 | |
| | | | | | | | | | | | | | | | |
Total non-interest income, net | | (247) | | | 3,314 | | | 2,953 | | | 13,849 | | | 554 | | | (2,080) | | | 47 | | | 18,390 | |
General and administrative expenses | | — | | | — | | | — | | | — | | | — | | | (60) | | | — | | | (60) | |
Other expenses | | — | | | — | | | — | | | — | | | — | | | (149) | | | — | | | (149) | |
| | | | | | | | | | | | | | | | |
Income from Consolidated VIEs | | $ | 154 | | | $ | 6,813 | | | $ | 14,261 | | | $ | 19,253 | | | $ | 940 | | | $ | 598 | | | $ | 47 | | | $ | 42,066 | |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 4. Principles of Consolidation - (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
| | Legacy Sequoia | | Sequoia | | CAFL SFR | | Freddie Mac SLST | | Freddie Mac K-Series | | Servicing Investment | | Point HEI | | Total Consolidated CFE VIEs |
(Dollars in Thousands) | | | | | | | | |
Interest income | | $ | 3,559 | | | $ | 48,842 | | | $ | 152,445 | | | $ | 58,372 | | | $ | 14,492 | | | $ | 12,168 | | | $ | — | | | $ | 289,878 | |
Interest expense | | (2,271) | | | (38,848) | | | (118,469) | | | (41,698) | | | (13,294) | | | (3,414) | | | — | | | (217,994) | |
Net interest income | | 1,288 | | | 9,994 | | | 33,976 | | | 16,674 | | | 1,198 | | | 8,754 | | | — | | | 71,884 | |
Non-interest income | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Investment fair value changes, net | | (1,162) | | | 13,118 | | | 6,354 | | | 54,282 | | | 11,330 | | | (5,646) | | | 47 | | | 78,323 | |
Other income | | — | | | — | | | 10 | | | — | | | — | | | — | | | — | | | 10 | |
| | | | | | | | | | | | | | | | |
Total non-interest income, net | | (1,162) | | | 13,118 | | | 6,364 | | | 54,282 | | | 11,330 | | | (5,646) | | | 47 | | | 78,333 | |
General and administrative expenses | | — | | | — | | | — | | | — | | | — | | | (150) | | | — | | | (150) | |
Other expenses | | — | | | — | | | — | | | — | | | — | | | (591) | | | — | | | (591) | |
| | | | | | | | | | | | | | | | |
Income from Consolidated VIEs | | $ | 126 | | | $ | 23,112 | | | $ | 40,340 | | | $ | 70,956 | | | $ | 12,528 | | | $ | 2,367 | | | $ | 47 | | | $ | 149,476 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 |
| | Legacy Sequoia | | Sequoia | | CAFL SFR | | Freddie Mac SLST | | Freddie Mac K-Series | | Servicing Investment | | Point HEI | | Total Consolidated CFE VIEs |
(Dollars in Thousands) | | | | | | | | |
Interest income | | $ | 1,795 | | | $ | 20,919 | | | $ | 36,181 | | | $ | 21,696 | | | $ | 4,918 | | | $ | 4,403 | | | $ | — | | | $ | 89,912 | |
Interest expense | | (1,059) | | | (17,828) | | | (26,383) | | | (15,473) | | | (4,426) | | | (1,587) | | | — | | | (66,756) | |
Net interest income | | 736 | | | 3,091 | | | 9,798 | | | 6,223 | | | 492 | | | 2,816 | | | — | | | 23,156 | |
Non-interest income | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Investment fair value changes, net | | (81) | | | 7,851 | | | 9,692 | | | 82,214 | | | 2,166 | | | (422) | | | — | | | 101,420 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total non-interest income, net | | (81) | | | 7,851 | | | 9,692 | | | 82,214 | | | 2,166 | | | (422) | | | — | | | 101,420 | |
General and administrative expenses | | — | | | — | | | — | | | — | | | — | | | (41) | | | — | | | (41) | |
Other expenses | | — | | | — | | | — | | | — | | | — | | | (471) | | | — | | | (471) | |
| | | | | | | | | | | | | | | | |
Income from Consolidated VIEs | | $ | 655 | | | $ | 10,942 | | | $ | 19,490 | | | $ | 88,437 | | | $ | 2,658 | | | $ | 1,882 | | | $ | — | | | $ | 124,064 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | Legacy Sequoia | | Sequoia | | CAFL SFR | | Freddie Mac SLST | | Freddie Mac K-Series | | Servicing Investment | | Point HEI | | Total Consolidated CFE VIEs |
(Dollars in Thousands) | | | | | | | | |
Interest income | | $ | 7,674 | | | $ | 68,566 | | | $ | 99,169 | | | $ | 64,869 | | | $ | 49,960 | | | $ | 13,026 | | | $ | — | | | $ | 303,264 | |
Interest expense | | (5,099) | | | (58,455) | | | (72,768) | | | (47,495) | | | (47,154) | | | (4,961) | | | — | | | (235,932) | |
Net interest income | | 2,575 | | | 10,111 | | | 26,401 | | | 17,374 | | | 2,806 | | | 8,065 | | | — | | | 67,332 | |
Non-interest income | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Investment fair value changes, net | | (702) | | | (22,065) | | | (41,841) | | | (33,081) | | | (82,744) | | | (9,015) | | | — | | | (189,448) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total non-interest income, net | | (702) | | | (22,065) | | | (41,841) | | | (33,081) | | | (82,744) | | | (9,015) | | | — | | | (189,448) | |
General and administrative expenses | | — | | | — | | | — | | | — | | | — | | | (784) | | | — | | | (784) | |
Other expenses | | — | | | — | | | — | | | — | | | — | | | 346 | | | — | | | 346 | |
| | | | | | | | | | | | | | | | |
Income (Loss) from Consolidated VIEs | | $ | 1,873 | | | $ | (11,954) | | | $ | (15,440) | | | $ | (15,707) | | | $ | (79,938) | | | $ | (1,388) | | | $ | — | | | $ | (122,554) | |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 4. Principles of Consolidation - (continued)
In addition to our consolidated VIEs for which we made the CFE election, we consolidate additional VIEs for which we did not make the CFE election, and elected to account for the ABS issued by these entities at amortized cost. These include our CAFL Bridge securitization, Freddie Mac SLST re-securitization, and Servicing Investment entities.
We consolidate the assets and liabilities of certain Sequoia, CAFL and Point HEI securitization entities, as we did not meet the GAAP sale criteria at the time we transferred financial assets to these entities. Our involvement in consolidated Sequoia, CAFL and Point HEI entities continues in the following ways: (i) we continue to hold subordinate investments in each entity, and for certain entities, more senior investments; (ii) we maintain certain discretionary rights associated with our sponsorship of, or our subordinate investments in, each entity including rights to direct loss mitigation activities; and (iii) we continue to hold a right to call the assets of certain entities (once they have been paid down below a specified threshold) at a price equal to, or in excess of, the current outstanding principal amount of the entity’s asset-backed securities issued. These factors have resulted in our continuing to consolidate the assets and liabilities of these Sequoia, CAFL and Point HEI entities in accordance with GAAP.
We consolidate the assets and liabilities of certain Freddie Mac K-Series and SLST securitization trusts resulting from our investment in subordinate securities issued by these trusts, and in the case of certain CAFL securitizations, resulting from securities acquired through our acquisition of CoreVest. Additionally, we consolidate the assets and liabilities of Servicing Investment entities from our investment in servicer advance investments and excess MSRs. In each case, we maintain certain discretionary rights associated with the ownership of these investments that we determined reflected a controlling financial interest, as we have both the power to direct the activities that most significantly impact the economic performance of the VIEs and the right to receive benefits of and the obligation to absorb losses from the VIEs that could potentially be significant to the VIEs.
During the three months ended September 30, 2021, we did not call any of our consolidated CAFL entities. During the nine months ended September 30, 2021, we called 1 of our consolidated CAFL entities and repaid the associated ABS issued. In association with this call, we transferred $45 million (unpaid principal balance) of loans from held-for-investment to held-for-sale.
During 2020, we re-securitized subordinate securities we owned in our consolidated Freddie Mac SLST securitization trusts, through the transfer of these financial assets to a re-securitization trust that we sponsored. We retain a subordinate investment in the re-securitization trust and maintain certain discretionary rights associated with the ownership of this investment that we determined reflected a controlling financial interest in the entity, as we have both the power to direct the activities that most significantly impact the performance of the VIE and the right to receive benefits of and the obligation to absorb losses from the VIE that could potentially be significant to the VIE.
Analysis of Unconsolidated VIEs with Continuing Involvement
Since 2012, we have transferred residential loans to 3550 Sequoia securitization entities sponsored by us that are still outstanding as of September 30, 2021, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continuecontinued to hold the servicing rights following the transfer, we recorded MSRsmortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining residential MSRsservicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.
During the three months ended September 30, 2021, we called 2 of our unconsolidated Sequoia entities, and purchased $66 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $6 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). During the nine months ended September 30, 2021, we called 6 of our unconsolidated Sequoia entities, and purchased $167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $15 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). At September 30, 2021, we held $151 million of loans for sale at fair value that were acquired following the calls.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 4. Principles of Consolidation - (continued)
The following table presents information related to securitization transactions that occurred during the three and nine months ended September 30, 20172021 and 2016.2020.
Table 4.24.3 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 | (In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Principal balance of loans transferred | | $ | 839,264 |
| | $ | 348,537 |
| | $ | 2,223,387 |
| | $ | 693,427 |
| Principal balance of loans transferred | | $ | — | | | $ | — | | | $ | 1,231,803 | | | $ | 1,573,703 | |
Trading securities retained, at fair value | | 24,617 |
| | — |
| | 55,607 |
| | — |
| Trading securities retained, at fair value | | — | | | — | | | 7,774 | | | 43,362 | |
AFS securities retained, at fair value | | 4,416 |
| | 1,839 |
| | 11,476 |
| | 3,673 |
| AFS securities retained, at fair value | | — | | | — | | | 1,600 | | | 3,198 | |
MSRs recognized | | — |
| | 1,971 |
| | 7,123 |
| | 4,102 |
| |
|
The following table summarizes the cash flows during the three and nine months ended September 30, 20172021 and 20162020 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.
Table 4.34.4 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 | (In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Proceeds from new transfers | | $ | 839,642 |
| | $ | 356,497 |
| | $ | 2,213,151 |
| | $ | 708,539 |
| Proceeds from new transfers | | $ | — | | | $ | — | | | $ | 1,266,063 | | | $ | 1,610,761 | |
MSR fees received | | 3,631 |
| | 3,473 |
| | 10,804 |
| | 10,397 |
| MSR fees received | | 1,095 | | | 2,280 | | | 4,038 | | | 7,445 | |
Funding of compensating interest, net | | (35 | ) | | (98 | ) | | (114 | ) | | (254 | ) | Funding of compensating interest, net | | 54 | | | 4 | | | (116) | | | (293) | |
Cash flows received on retained securities | | 6,882 |
| | 6,384 |
| | 19,843 |
| | 24,314 |
| Cash flows received on retained securities | | 16,724 | | | 5,873 | | | 42,117 | | | 19,242 | |
The following table presents the key weighted-average assumptions used to measure MSRs andvalue securities retained at the date of securitization for securitizations completed during the three and nine months ended September 30, 20172021 and 2016.2020.
Table 4.44.5 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, 2021 | | | | Three Months Ended September 30, 2020 |
At Date of Securitization | | | | Senior IO Securities | | Subordinate Securities | | | | Senior IO Securities | | Subordinate Securities |
Prepayment rates | | | | N/A | | N/A | | | | N/A | | N/A |
Discount rates | | | | N/A | | N/A | | | | N/A | | N/A |
Credit loss assumptions | | | | N/A | | N/A | | | | N/A | | N/A |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Nine Months Ended September 30, 2021 | | | | Nine Months Ended September 30, 2020 |
At Date of Securitization | | | | Senior IO Securities | | Subordinate Securities | | | | Senior IO Securities | | Subordinate Securities |
Prepayment rates | | | | 11 | % | | 11 % | | | | 41 | % | | 13 | % |
Discount rates | | | | 15 % | | 6 % | | | | 16 | % | | 6 | % |
Credit loss assumptions | | | | 0.23 % | | 0.23 % | | | | 0.21 | % | | 0.22 | % |
|
| | | | | | | | | | | | | | |
| | 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 | % |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 4. Principles of Consolidation - (continued)
|
| | | | | | | | | | | | | | | |
| | 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 | % |
The following table presents additional information at September 30, 20172021 and December 31, 2016,2020, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.
Table 4.54.6 – Unconsolidated VIEs Sponsored by Redwood
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
On-balance sheet assets, at fair value: | | | | |
Interest-only, senior and subordinate securities, classified as trading | | $ | 18,380 | | | $ | 20,982 | |
Subordinate securities, classified as AFS | | 128,874 | | | 136,475 | |
Mortgage servicing rights | | 6,068 | | | 8,413 | |
Maximum loss exposure (1) | | $ | 153,322 | | | $ | 165,870 | |
Assets transferred: | | | | |
Principal balance of loans outstanding | | $ | 5,542,244 | | | $ | 7,728,432 | |
Principal balance of loans 30+ days delinquent | | 32,422 | | | 138,029 | |
|
| | | | | | | | |
(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. | |
(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. |
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, 20172021 and December 31, 2016.2020.
Table 4.64.7 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood
| | September 30, 2017 | | MSRs | | Senior Securities (1) | | Subordinate Securities | |
September 30, 2021 | | September 30, 2021 | | MSRs | | Senior Securities (1) | | Subordinate Securities |
(Dollars in Thousands) | | MSRs | | Senior Securities (1) | | Subordinate Securities | (Dollars in Thousands) | |
Fair value at September 30, 2017 | | |
Fair value at September 30, 2021 | | Fair value at September 30, 2021 | | $ | 6,068 | | | $ | 18,380 | | | $ | 128,874 | |
Expected life (in years) (2) | | 7 |
| | 5 |
| | 13 |
| Expected life (in years) (2) | | 2 | | 4 | | 8 |
Prepayment speed assumption (annual CPR) (2) | | 9 | % | | 10 | % | | 11 | % | Prepayment speed assumption (annual CPR) (2) | | 36 % | | 25 | % | | 32 % |
Decrease in fair value from: | | | | | | | Decrease in fair value from: | |
10% adverse change | | $ | 1,694 |
| | $ | 1,575 |
| | $ | 667 |
| 10% adverse change | | $ | 502 | | | $ | 1,173 | | | $ | 57 | |
25% adverse change | | 4,278 |
| | 3,734 |
| | 1,683 |
| 25% adverse change | | 1,173 | | | 2,789 | | | 141 | |
Discount rate assumption (2) | | 11 | % | | 9 | % | | 5 | % | Discount rate assumption (2) | | 12 % | | 18 | % | | 3.8 % |
Decrease in fair value from: | | | | | | | Decrease in fair value from: | |
100 basis point increase | | $ | 2,311 |
| | $ | 1,281 |
| | $ | 25,377 |
| 100 basis point increase | | $ | 134 | | | $ | 417 | | | $ | 9,353 | |
200 basis point increase | | 4,453 |
| | 2,472 |
| | 47,107 |
| 200 basis point increase | | 261 | | | 812 | | | 17,829 | |
Credit loss assumption (2) | | N/A |
| | 0.25 | % | | 0.25 | % | Credit loss assumption (2) | | N/A | | 0.34 | % | | 0.34 | % |
Decrease in fair value from: | | | | | | | Decrease in fair value from: | |
10% higher losses | | N/A |
| | $ | 4 |
| | $ | 1,505 |
| 10% higher losses | | N/A | | $ | — | | | $ | 2,190 | |
25% higher losses | | N/A |
| | 9 |
| | 3,764 |
| 25% higher losses | | N/A | | — | | | 5,473 | |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 4. Principles of Consolidation - (continued)
| | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | MSRs | | Senior Securities (1) | | Subordinate Securities |
(Dollars in Thousands) | | | |
Fair value at December 31, 2020 | | $ | 8,413 | | | $ | 17,333 | | | $ | 140,124 | |
Expected life (in years) (2) | | 2 | | 3 | | 8 |
Prepayment speed assumption (annual CPR) (2) | | 37 | % | | 31 | % | | 33 | % |
Decrease in fair value from: | | | | | | |
10% adverse change | | $ | 906 | | | $ | 1,557 | | | $ | 452 | |
25% adverse change | | 2,058 | | | 3,754 | | | 2,298 | |
Discount rate assumption (2) | | 12 | % | | 21 | % | | 5 | % |
Decrease in fair value from: | | | | | | |
100 basis point increase | | $ | 196 | | | $ | 337 | | | $ | 9,769 | |
200 basis point increase | | 380 | | | 659 | | | 18,650 | |
Credit loss assumption (2) | | N/A | | 0.41 | % | | 0.41 | % |
Decrease in fair value from: | | | | | | |
10% higher losses | | N/A | | $ | — | | | $ | 2,409 | |
25% higher losses | | N/A | | — | | | 5,915 | |
|
| | | | | | | | | | | | |
December 31, 2016 | | MSRs | | Senior Securities (1) | | Subordinate Securities |
(Dollars in Thousands) | | | |
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 $18 million and $17 million of interest-only securities at September 30, 2021 and December 31, 2020, respectively.
(2)Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.
| |
(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. |
Analysis of Unconsolidated Third-Party VIEs
Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at September 30, 2017,2021 and December 31, 2020, grouped by securityasset type.
Table 4.74.8 – Third-Party Sponsored VIE Summary
| | (Dollars in Thousands) | | September 30, 2017 | |
(In Thousands) | | (In Thousands) | | September 30, 2021 | | December 31, 2020 |
Mortgage-Backed Securities | | | Mortgage-Backed Securities | | | | |
Senior | | $ | 181,723 |
| Senior | | $ | 4,114 | | | $ | 11,131 | |
Re-REMIC | | 39,033 |
| |
Mezzanine | | Mezzanine | | — | | | 2,014 | |
Subordinate | | 812,260 |
| Subordinate | | 201,918 | | | 173,523 | |
Total Mortgage-Backed Securities | | Total Mortgage-Backed Securities | | 206,032 | | | 186,668 | |
Excess MSR | | Excess MSR | | 11,368 | | | 14,133 | |
Total Investments in Third-Party Sponsored VIEs | | $ | 1,033,016 |
| Total Investments in Third-Party Sponsored VIEs | | $ | 217,400 | | | $ | 200,801 | |
We determined that we are not the primary beneficiary of anythese third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them.
Our assessments of whether we are required to consolidate a VIE may change in subsequent reporting periods based upon changing facts and circumstances pertaining to each VIE. Any related accounting changes could result in a material impact to our financial statements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 5. Fair Value of Financial Instruments
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.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
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, 20172021 and December 31, 2016.2020.
Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
(In Thousands) | | | | |
Assets | | | | | | | | |
Residential loans, held-for-sale at fair value | | $ | 1,495,044 | | | $ | 1,495,044 | | | $ | 176,604 | | | $ | 176,604 | |
Residential loans, held-for-investment | | 4,721,389 | | | 4,721,389 | | | 4,072,410 | | | 4,072,410 | |
Business purpose loans, held-for-sale | | 466,346 | | | 466,346 | | | 245,394 | | | 245,394 | |
Business purpose loans, held-for-investment | | 4,227,209 | | | 4,227,209 | | | 3,890,959 | | | 3,890,959 | |
Multifamily loans | | 482,791 | | | 482,791 | | | 492,221 | | | 492,221 | |
Real estate securities | | 353,286 | | | 353,286 | | | 344,125 | | | 344,125 | |
Servicer advance investments (1) | | 170,062 | | | 170,062 | | | 231,489 | | | 231,489 | |
MSRs (1) | | 12,389 | | | 12,389 | | | 8,815 | | | 8,815 | |
Excess MSRs (1) | | 29,185 | | | 29,185 | | | 34,418 | | | 34,418 | |
HEIs (1) | | 167,856 | | | 167,856 | | | 42,440 | | | 42,440 | |
Other investments (2) | | 17,574 | | | 17,574 | | | 18,847 | | | 18,847 | |
Cash and cash equivalents | | 556,989 | | | 556,989 | | | 461,260 | | | 461,260 | |
Restricted cash | | 88,717 | | | 88,717 | | | 83,190 | | | 83,190 | |
Derivative assets | | 51,103 | | | 51,103 | | | 53,238 | | | 53,238 | |
REO (3) | | 18,863 | | | 21,657 | | | 8,413 | | | 9,229 | |
Margin receivable (3) | | 16,503 | | | 16,503 | | | 4,758 | | | 4,758 | |
FHLBC stock (3) | | 10 | | | 10 | | | 5,000 | | | 5,000 | |
Pledged collateral (3) | | — | | | — | | | 1,177 | | | 1,177 | |
Liabilities | | | | | | | | |
Short-term debt | | $ | 1,750,941 | | | $ | 1,750,941 | | | $ | 522,609 | | | $ | 522,609 | |
Margin payable (4) | | 48,298 | | | 48,298 | | | — | | | — | |
Guarantee obligation (4) | | 7,902 | | | 5,263 | | | 10,039 | | | 7,843 | |
| | | | | | | | |
Point HEI non-controlling interest | | 16,722 | | | 16,722 | | | — | | | — | |
Derivative liabilities | | 10,972 | | | 10,972 | | | 16,072 | | | 16,072 | |
ABS issued, net | | | | | | | | |
Fair value | | 7,756,101 | | | 7,756,101 | | | 6,900,362 | | | 6,900,362 | |
Amortized cost | | 427,724 | | | 428,059 | | | 200,299 | | | 204,892 | |
| | | | | | | | |
Other long-term debt, net (5) | | 847,889 | | | 848,929 | | | 774,726 | | | 783,570 | |
Convertible notes, net (5) | | 512,979 | | | 539,067 | | | 511,085 | | | 499,865 | |
Trust preferred securities and subordinated notes, net (5) | | 138,709 | | | 94,163 | | | 138,674 | | | 80,910 | |
(1)These investments are included in Other investments on our consolidated balance sheets.
(2)Comprised of financial instruments included in Other investments on our consolidated balance sheets.
(3)These assets are included in Other assets on our consolidated balance sheets.
(4)These liabilities are included in Accrued expenses and other liabilities on our consolidated balance sheets.
(5)These liabilities are included in Long-term debt, net on our consolidated balance sheets.
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
(In Thousands) | | | | |
Assets | | | | | | | | |
Residential loans, held-for-sale | | | | | | | | |
At fair value | | $ | 924,594 |
| | $ | 924,594 |
| | $ | 834,193 |
| | $ | 834,193 |
|
At lower of cost or fair value | | 1,087 |
| | 1,227 |
| | 1,206 |
| | 1,365 |
|
Residential loans, held-for-investment | | | | | | | | |
At fair value | | 3,259,239 |
| | 3,259,239 |
| | 3,052,652 |
| | 3,052,652 |
|
Trading securities | | 820,134 |
| | 820,134 |
| | 445,687 |
| | 445,687 |
|
Available-for-sale securities | | 536,138 |
| | 536,138 |
| | 572,752 |
| | 572,752 |
|
MSRs | | 62,928 |
| | 62,928 |
| | 118,526 |
| | 118,526 |
|
Cash and cash equivalents | | 257,611 |
| | 257,611 |
| | 212,844 |
| | 212,844 |
|
Restricted cash | | 26,258 |
| | 26,258 |
| | 8,623 |
| | 8,623 |
|
Accrued interest receivable | | 21,256 |
| | 21,256 |
| | 18,454 |
| | 18,454 |
|
Derivative assets | | 11,948 |
| | 11,948 |
| | 36,595 |
| | 36,595 |
|
REO (1) | | 3,020 |
| | 3,441 |
| | 5,533 |
| | 5,560 |
|
Margin receivable (1) | | 93,679 |
| | 93,679 |
| | 68,038 |
| | 68,038 |
|
FHLBC stock (1) | | 43,393 |
| | 43,393 |
| | 43,393 |
| | 43,393 |
|
Guarantee asset (1) | | 3,049 |
| | 3,049 |
| | 4,092 |
| | 4,092 |
|
Commercial loans (1) | | — |
| | — |
| | 2,700 |
| | 2,700 |
|
Pledged collateral (1) | | 42,933 |
| | 42,933 |
| | 42,875 |
| | 42,875 |
|
Liabilities | | | | | | | | |
Short-term debt facilities | | $ | 988,054 |
| | $ | 988,054 |
| | $ | 791,539 |
| | $ | 791,539 |
|
Accrued interest payable | | 18,836 |
| | 18,836 |
| | 9,608 |
| | 9,608 |
|
Margin payable | | 841 |
| | 841 |
| | 12,783 |
| | 12,783 |
|
Guarantee obligation | | 20,101 |
| | 19,682 |
| | 21,668 |
| | 22,181 |
|
Derivative liabilities | | 65,238 |
| | 65,238 |
| | 66,329 |
| | 66,329 |
|
ABS issued at fair value, net | | 944,288 |
| | 944,288 |
| | 773,462 |
| | 773,462 |
|
FHLBC long-term borrowings | | 1,999,999 |
| | 1,999,999 |
| | 1,999,999 |
| | 1,999,999 |
|
Convertible notes, net | | 686,058 |
| | 705,703 |
| | 482,195 |
| | 493,365 |
|
Trust preferred securities and subordinated notes, net | | 138,524 |
| | 101,138 |
| | 138,489 |
| | 96,255 |
|
| |
(1) | These assets are included in Other assets on our consolidated balance sheets. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
During the three and nine months ended September 30, 2017,2021, we elected the fair value option for $16$11 million and $32$37 million of residential senior securities, $167 million and $412 million of subordinate securities, $1.43respectively, $3.17 billion and $3.72$9.75 billion of residential loans (principal balance), and $0.3respectively, $637 million and $8$1.55 billion of business purpose loans (principal balance), respectively, $5 million and $9 million of MSRs, respectively, and $11 million and $15 million of other financial instruments, respectively. Additionally, during the three months ended September 30, 2021, we elected the fair value option for $122 million of HEIs. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we mayintend to sell to third parties or transfer to securitizations, for business purpose bridge loans, HEIs, MSRs purchased or retained from sales of residential loans, and 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, 20172021 and December 31, 2016,2020, 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, 2017 | | Carrying Value | | Fair Value Measurements Using | |
September 30, 2021 | | September 30, 2021 | | Carrying Value | | Fair Value Measurements Using |
(In Thousands) | | Carrying Value | | Level 1 | | Level 2 | | Level 3 | (In Thousands) | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | Assets | | | | | | | | |
Residential loans | | $ | 4,183,833 |
| | $ | — |
| | $ | — |
| | $ | 4,183,833 |
| Residential loans | | $ | 6,216,433 | | | $ | — | | | $ | — | | | $ | 6,216,433 | |
Trading securities | | 820,134 |
| | — |
| | — |
| | 820,134 |
| |
Available-for-sale securities | | 536,138 |
| | — |
| | — |
| | 536,138 |
| |
Business purpose loans | | Business purpose loans | | 4,693,555 | | | — | | | — | | | 4,693,555 | |
Multifamily loans | | Multifamily loans | | 482,791 | | | — | | | — | | | 482,791 | |
Real estate securities | | Real estate securities | | 353,286 | | | — | | | — | | | 353,286 | |
Servicer advance investments | | Servicer advance investments | | 170,062 | | | — | | | — | | | 170,062 | |
MSRs | | MSRs | | 12,389 | | | — | | | — | | | 12,389 | |
Excess MSRs | | Excess MSRs | | 29,185 | | | — | | | — | | | 29,185 | |
HEIs | | HEIs | | 167,856 | | | — | | | — | | | 167,856 | |
Other investments | | Other investments | | 17,574 | | | — | | | — | | | 17,574 | |
Derivative assets | | 11,948 |
| | 3,010 |
| | 3,942 |
| | 4,996 |
| Derivative assets | | 51,103 | | | 8,213 | | | 33,628 | | | 9,262 | |
MSRs | | 62,928 |
| | — |
| | — |
| | 62,928 |
| |
Pledged collateral | | 42,933 |
| | 42,933 |
| | — |
| | — |
| |
FHLBC stock | | 43,393 |
| | — |
| | 43,393 |
| | — |
| |
Guarantee asset | | 3,049 |
| | — |
| | — |
| | 3,049 |
| |
| | | | | | | | | | |
Liabilities | |
|
| | | | | | | Liabilities | |
Non-controlling interest in consolidated Point HEI entity | | Non-controlling interest in consolidated Point HEI entity | | $ | 16,722 | | | $ | — | | | $ | — | | | $ | 16,722 | |
Derivative liabilities | | $ | 65,238 |
| | $ | 4,369 |
| | $ | 57,994 |
| | $ | 2,875 |
| Derivative liabilities | | 10,972 | | | 8,348 | | | 74 | | | 2,550 | |
ABS issued | | 944,288 |
| | — |
| | — |
| | 944,288 |
| ABS issued | | 7,756,101 | | | — | | | — | | | 7,756,101 | |
|
| | | | | | | | | | | | | | | | |
December 31, 2016 | | Carrying Value | | Fair Value Measurements Using |
(In Thousands) | | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Residential loans | | $ | 3,886,845 |
| | $ | — |
| | $ | — |
| | $ | 3,886,845 |
|
Trading securities | | 445,687 |
| | — |
| | — |
| | 445,687 |
|
Available-for-sale securities | | 572,752 |
| | — |
| | — |
| | 572,752 |
|
Derivative assets | | 36,595 |
| | 8,300 |
| | 24,980 |
| | 3,315 |
|
MSRs | | 118,526 |
| | — |
| | — |
| | 118,526 |
|
Pledged collateral | | 42,875 |
| | 42,875 |
| | — |
| | — |
|
FHLBC stock | | 43,393 |
| | — |
| | 43,393 |
| | — |
|
Guarantee asset | | 4,092 |
| | — |
| | — |
| | 4,092 |
|
| | | | | | | | |
Liabilities | | | | | | | | |
Derivative liabilities | | $ | 66,329 |
| | $ | 5,609 |
| | $ | 56,919 |
| | $ | 3,801 |
|
ABS issued | | 773,462 |
| | — |
| | — |
| | 773,462 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | Carrying Value | | Fair Value Measurements Using |
(In Thousands) | | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Residential loans | | $ | 4,249,014 | | | $ | — | | | $ | — | | | $ | 4,249,014 | |
Business purpose loans | | 4,136,353 | | | — | | | — | | | 4,136,353 | |
Multifamily loans | | 492,221 | | | — | | | — | | | 492,221 | |
Real estate securities | | 344,125 | | | — | | | — | | | 344,125 | |
Servicer advance investments | | 231,489 | | | — | | | — | | | 231,489 | |
MSRs | | 8,815 | | | — | | | — | | | 8,815 | |
Excess MSRs | | 34,418 | | | — | | | — | | | 34,418 | |
HEIs | | 42,440 | | | — | | | — | | | 42,440 | |
Other investments | | 18,847 | | | — | | | — | | | 18,847 | |
Derivative assets | | 53,238 | | | 18,260 | | | 19,951 | | | 15,027 | |
Pledged collateral | | 1,177 | | | 1,177 | | | — | | | — | |
FHLBC stock | | 5,000 | | | — | | | 5,000 | | | — | |
| | | | | | | | |
Liabilities | | | | | | | | |
Derivative liabilities | | $ | 16,072 | | | $ | 15,495 | | | $ | — | | | $ | 577 | |
ABS issued | | 6,900,362 | | | — | | | — | | | 6,900,362 | |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
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, 2017.2021.
Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis | | | | Assets | | | | Liabilities | | Assets |
| | Residential Loans | | Trading Securities | | AFS Securities | | MSRs | | Guarantee Asset | | Derivatives(1) | | ABS Issued | | Residential Loans | | Business Purpose Loans | | Multifamily Loans | | Trading Securities | | AFS Securities | | Servicer Advance Investments | | Excess MSRs | | HEIs | | Other |
(In Thousands) | | (In Thousands) | |
Beginning balance - December 31, 2016 | | $ | 3,886,845 |
| | $ | 445,687 |
| | $ | 572,752 |
| | $ | 118,526 |
| | $ | 4,092 |
| | $ | (486 | ) | | $ | 773,462 |
| |
Beginning balance - December 31, 2020 | | Beginning balance - December 31, 2020 | | $ | 4,249,014 | | | $ | 4,136,353 | | | $ | 492,221 | | | $ | 125,667 | | | $ | 218,458 | | | $ | 231,489 | | | $ | 34,418 | | | $ | 42,440 | | | $ | 27,662 | |
| Acquisitions | | 3,791,471 |
| | 444,073 |
| | 31,654 |
| | 7,957 |
| | — |
| | — |
| | 286,898 |
| Acquisitions | | 9,926,335 | | | 38,176 | | | — | | | 37,117 | | | 1,600 | | | — | | | — | | | 122,373 | | | 14,615 | |
Originations | | Originations | | — | | | 1,515,262 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Sales | | (3,147,707 | ) | | (87,092 | ) | | (60,801 | ) | | (52,966 | ) | | — |
| | — |
| | — |
| Sales | | (6,958,669) | | | (9,484) | | | — | | | (32,704) | | | (4,785) | | | — | | | — | | | — | | | — | |
Principal paydowns | | (405,888 | ) | | (13,219 | ) | | (42,325 | ) | | — |
| | — |
| | — |
| | (146,358 | ) | Principal paydowns | | (1,051,390) | | | (942,096) | | | (5,685) | | | (1,783) | | | (45,120) | | | (58,248) | | | — | | | (10,220) | | | (9,224) | |
Gains (losses) in net income, net | | 62,290 |
| | 30,685 |
| | 24,011 |
| | (10,589 | ) | | (1,043 | ) | | 33,686 |
| | 30,286 |
| |
| Gains (losses) in net income (loss), net | | Gains (losses) in net income (loss), net | | 53,549 | | | (25,658) | | | (3,745) | | | 24,713 | | | 26,998 | | | (3,179) | | | (5,233) | | | 13,263 | | | (2,974) | |
Unrealized losses in OCI, net | | — |
| | — |
| | 10,847 |
| | — |
| | — |
| | — |
| | — |
| Unrealized losses in OCI, net | | — | | | — | | | — | | | — | | | 3,125 | | | — | | | — | | | — | | | — | |
Other settlements, net (2) | | (3,178 | ) | | — |
| | — |
| | — |
| | — |
| | (31,079 | ) | | — |
| |
Ending Balance - September 30, 2017 | | $ | 4,183,833 |
| | $ | 820,134 |
| | $ | 536,138 |
| | $ | 62,928 |
| | $ | 3,049 |
| | $ | 2,121 |
| | $ | 944,288 |
| |
Other settlements, net (1) | | Other settlements, net (1) | | (2,406) | | | (18,998) | | | — | | | — | | | — | | | — | | | — | | | — | | | (116) | |
Ending balance - September 30, 2021 | | Ending balance - September 30, 2021 | | $ | 6,216,433 | | | $ | 4,693,555 | | | $ | 482,791 | | | $ | 153,010 | | | $ | 200,276 | | | $ | 170,062 | | | $ | 29,185 | | | $ | 167,856 | | | $ | 29,963 | |
| |
(1) | For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments, are presented on a net basis. |
| |
(2) | Other settlements, net for derivatives represents the transfer of the fair value of loan purchase commitments at the time loans are acquired to the basis of residential loans. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Liabilities |
| | | | | | | | | | | | | | Derivatives (2) | | Point HEI Non-Controlling Interest | | ABS Issued |
(In Thousands) | | | | | | | | | |
Beginning balance - December 31, 2020 | | | | | | | | | | | | | | $ | 14,450 | | | $ | — | | | $ | 6,900,362 | |
| | | | | | | | | | | | | | | | | | |
Acquisitions | | | | | | | | | | | | | | — | | | 16,639 | | | 2,552,785 | |
| | | | | | | | | | | | | | | | | | |
Principal paydowns | | | | | | | | | | | | | | — | | | — | | | (1,500,357) | |
| | | | | | | | | | | | | | | | | | |
Gains (losses) in net income (loss), net | | | | | | | | | | | | | | 17,806 | | | 83 | | | (196,689) | |
| | | | | | | | | | | | | | | | | | |
Other settlements, net (1) | | | | | | | | | | | | | | (25,544) | | | — | | | — | |
Ending balance - September 30, 2021 | | | | | | | | | | | | | | $ | 6,712 | | | $ | 16,722 | | | $ | 7,756,101 | |
(1) Other settlements, net for residential and business purpose 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.
(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.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
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, 20172021 and 2016.2020. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 20172021 and 20162020 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, 20172021 and 20162020 Included in Net Income
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Included in Net Income |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Assets | | | | | | | | |
Residential loans at Redwood | | $ | 6,553 | | | $ | (107) | | | $ | 9,371 | | | $ | (865) | |
Business purpose loans | | 18,810 | | | 21,155 | | | 19,829 | | | 17,901 | |
Net investments in consolidated Sequoia entities (1) | | 2,885 | | | 7,700 | | | 11,779 | | | (22,802) | |
Net investments in consolidated Freddie Mac SLST entities (1) | | 13,781 | | | 82,209 | | | 54,006 | | | (33,087) | |
Net investments in consolidated Freddie Mac K-Series entity (1) | | 555 | | | 2,165 | | | 11,330 | | | (11,014) | |
Net investments in consolidated CAFL SFR entities (1) | | 2,943 | | | 9,673 | | | 5,500 | | | (41,048) | |
Net investment in consolidated Point HEI entity (1) | | 47 | | | — | | | 129 | | | — | |
Trading securities | | 1,547 | | | (3,549) | | | 3,824 | | | (80,358) | |
| | | | | | | | |
Servicer advance investments | | (2,079) | | | 25 | | | (3,179) | | | (6,172) | |
MSRs | | (235) | | | (2,376) | | | (49) | | | (16,798) | |
Excess MSRs | | (803) | | | (1,127) | | | (5,233) | | | (7,650) | |
HEIs at Redwood | | (41) | | | 2,384 | | | 21 | | | (4,286) | |
Loan purchase and interest rate lock commitments | | 9,021 | | | 10,791 | | | 9,261 | | | 10,773 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Liabilities | | | | | | | | |
Non-controlling interest in consolidated Point HEI entity | | $ | (83) | | | $ | — | | | $ | (83) | | | $ | — | |
Loan purchase commitments | | (2,570) | | | 420 | | | (2,550) | | | (1,334) | |
| | | | | | | | |
(1) Represents the portion of net gains or losses included in our consolidated statements of income (loss) related to loans, securitized HEIs, and the associated ABS issued at our consolidated securitization entities held at September 30, 2021 and 2020, which netted together represent the change in value of our investments at the consolidated VIEs, excluding REO.
|
| | | | | | | | | | | | | | | | |
| | Included in Net Income |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Assets | | | | | | | | |
Residential loans at Redwood | | $ | 14,359 |
| | $ | 3,818 |
| | $ | 24,227 |
| | $ | 32,202 |
|
Residential loans at consolidated Sequoia entities | | 3,497 |
| | 9,200 |
| | 22,949 |
| | (18,864 | ) |
Trading securities | | (36 | ) | | 8,646 |
| | 24,452 |
| | 978 |
|
Available-for-sale securities | | (3 | ) | | — |
| | (248 | ) | | (305 | ) |
MSRs | | 317 |
| | 6,549 |
| | (1,005 | ) | | (36,738 | ) |
Loan purchase commitments | | 2,117 |
| | 5,381 |
| | 2,121 |
| | 5,896 |
|
Other assets - Guarantee asset | | (239 | ) | | 307 |
| | (1,043 | ) | | (2,070 | ) |
| | | | | | | | |
Liabilities | | | | | | | | |
ABS issued | | $ | (7,771 | ) | | $ | 10,522 |
| | $ | (30,286 | ) | | $ | (14,419 | ) |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, 2017.2021. 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 sheetsheets at September 30, 2017.2021.
Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 20172021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Gain (Loss) for |
September 30, 2021 | | Carrying Value | | Fair Value Measurements Using | | Three Months Ended | | Nine Months Ended |
(In Thousands) | | | Level 1 | | Level 2 | | Level 3 | | September 30, 2021 | | September 30, 2021 |
Assets | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
REO | | $ | 622 | | | $ | — | | | $ | — | | | $ | 622 | | | $ | (1) | | | $ | (4) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Gain (Loss) for |
September 30, 2017 | | Carrying Value | | Fair Value Measurements Using | | Three Months Ended | | Nine Months Ended |
(In Thousands) | | | Level 1 | | Level 2 | | Level 3 | | September 30, 2017 | | September 30, 2017 |
Assets | | | | | | | | | | | | |
Residential loans, at lower of cost or fair value | | $ | 866 |
| | $ | — |
| | $ | — |
| | $ | 866 |
| | $ | 18 |
| | $ | 21 |
|
REO | | 1,725 |
| | — |
| | — |
| | 1,725 |
| | — |
| | (81 | ) |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
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, 20172021 and 2016.
Table 5.6 – Market Valuation Gains and Losses, Net2020.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Mortgage Banking Activities, Net | | | | | | | | |
Residential loans held-for-sale, at fair value | | $ | 14,859 |
| | $ | 650 |
| | $ | 29,175 |
| | $ | 11,948 |
|
Residential loan purchase commitments | | 13,276 |
| | 12,021 |
| | 33,947 |
| | 35,508 |
|
Commercial loans, at fair value | | — |
| | — |
| | — |
| | 433 |
|
Sequoia securities | | — |
| | — |
| | — |
| | 1,455 |
|
Risk management derivatives, net | | (7,077 | ) | | (3,287 | ) | | (13,787 | ) | | (25,281 | ) |
Total mortgage banking activities, net (1) | | $ | 21,058 |
| | $ | 9,384 |
| | $ | 49,335 |
| | $ | 24,063 |
|
Investment Fair Value Changes, Net | | | | | | | | |
Residential loans held-for-investment, at Redwood | | $ | 2,881 |
| | $ | (655 | ) | | $ | 8,902 |
| | $ | 22,161 |
|
Trading securities | | 607 |
| | 8,898 |
| | 30,676 |
| | 3,728 |
|
Valuation adjustments on commercial loans held-for-sale | | — |
| | (307 | ) | | 300 |
| | (307 | ) |
Net investments in Legacy Sequoia entities (2) | | (1,045 | ) | | (255 | ) | | (3,842 | ) | | (2,086 | ) |
Net investment in Sequoia Choice entity (2) | | (256 | ) | | — |
| | (256 | ) | | — |
|
Risk sharing investments | | (267 | ) | | 15 |
| | (985 | ) | | (689 | ) |
Risk management derivatives, net | | (1,592 | ) | | 4,222 |
| | (24,557 | ) | | (41,188 | ) |
Impairments on AFS securities | | (4 | ) | | — |
| | (248 | ) | | (305 | ) |
Total investment fair value changes, net | | $ | 324 |
| | $ | 11,918 |
| | $ | 9,990 |
| | $ | (18,686 | ) |
MSR Income (Loss), Net | | | | | | | | |
MSRs | | $ | (1,351 | ) | | $ | 1,380 |
| | $ | (10,842 | ) | | $ | (70,489 | ) |
Risk management derivatives, net | | (422 | ) | | (6,336 | ) | | 1,869 |
| | 55,874 |
|
Total MSR loss, net (3) | | $ | (1,773 | ) | | $ | (4,956 | ) | | $ | (8,973 | ) | | $ | (14,615 | ) |
Total Market Valuation Gains (Losses), Net | | $ | 19,609 |
| | $ | 16,346 |
| | $ | 50,352 |
| | $ | (9,238 | ) |
| |
(1) | Mortgage banking activities, net presented above does not include fee income or provisions for repurchases that are components of Mortgage banking activities, net presented on our consolidated statements of income, as these amounts do not represent market valuation changes. |
| |
(2) | Includes changes in fair value of the residential loans held-for-sale, REO and the ABS issued at the entities, which netted together represent the change in value of our retained investments at the consolidated VIEs. |
| |
(3) | MSR income (loss), net presented above does not include net fee income or provisions for repurchases that are components of MSR income, net on our consolidated statements of income, as these amounts do not represent market valuation adjustments. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
Table 5.6 – Market Valuation Gains and Losses, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Mortgage Banking Activities, Net | | | | | | | | |
Residential loans held-for-sale, at fair value | | $ | 9,045 | | | $ | (478) | | | $ | 57,145 | | | $ | (15,972) | |
Residential loan purchase commitments | | 18,817 | | | 13,067 | | | 18,351 | | | 35,123 | |
Single-family rental loans held-for-sale, at fair value | | 19,205 | | | 43,191 | | | 54,675 | | | 55,868 | |
Single-family rental loan interest rate lock commitments | | (744) | | | — | | | — | | | 341 | |
Bridge loans | | 3,433 | | | 938 | | | 6,702 | | | (4,256) | |
Trading securities (1) | | 32 | | | — | | | (342) | | | — | |
Risk management derivatives, net | | 3,539 | | | (99) | | | 38,117 | | | (52,931) | |
Total mortgage banking activities, net (2) | | $ | 53,327 | | | $ | 56,619 | | | $ | 174,648 | | | $ | 18,173 | |
Investment Fair Value Changes, Net | | | | | | | | |
Residential loans at Redwood | | $ | 816 | | | $ | 218 | | | $ | 2,423 | | | $ | (93,314) | |
Single-family rental loans held-for-investment | | — | | | — | | | — | | | (20,806) | |
Bridge loans held-for-investment | | 900 | | | 6,812 | | | 4,142 | | | (10,016) | |
Trading securities | | 1,546 | | | (3,600) | | | 25,067 | | | (224,679) | |
Servicer advance investments | | (2,079) | | | 26 | | | (3,179) | | | (6,172) | |
Excess MSRs | | (803) | | | (1,127) | | | (5,233) | | | (7,650) | |
Net investments in Legacy Sequoia entities (3) | | (247) | | | (81) | | | (1,162) | | | (702) | |
Net investments in Sequoia entities (3) | | 3,314 | | | 7,851 | | | 13,118 | | | (22,065) | |
Net investments in Freddie Mac SLST entities (3) | | 13,849 | | | 82,214 | | | 54,282 | | | (33,081) | |
Net investment in Freddie Mac K-Series entity (3) | | 554 | | | 2,166 | | | 11,330 | | | (82,744) | |
Net investments in CAFL entities (3) | | 2,943 | | | 9,673 | | | 6,354 | | | (41,048) | |
Net investment in Point HEI entity (3) | | 47 | | | — | | | 47 | | | — | |
HEIs at Redwood | | 5,622 | | | 2,384 | | | 13,017 | | | (4,286) | |
Other investments | | (385) | | | 67 | | | 50 | | | (4,825) | |
Risk management derivatives, net | | — | | | — | | | — | | | (59,142) | |
Credit recoveries (losses) on AFS securities | | — | | | 444 | | | 388 | | | (1,027) | |
Total investment fair value changes, net | | $ | 26,077 | | | $ | 107,047 | | | $ | 120,644 | | | $ | (611,557) | |
Other Income | | | | | | | | |
MSRs | | $ | (989) | | | $ | (4,783) | | | $ | (3,236) | | | $ | (27,346) | |
Risk management derivatives, net | | — | | | — | | | — | | | 13,966 | |
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Total other income (4) | | $ | (989) | | | $ | (4,783) | | | $ | (3,236) | | | $ | (13,380) | |
Total Market Valuation Gains (Losses), Net | | $ | 78,415 | | | $ | 158,883 | | | $ | 292,056 | | | $ | (606,764) | |
(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the mark-to-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 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.
(3)Includes changes in fair value of the residential loans held-for-investment, securitized Point HEIs, REO and the ABS issued at the entities, which netted together represent the change in value of our investments at the consolidated VIEs.
(4)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.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
At September 30, 2017,2021, 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, 2016.2020. 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
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September 30, 2021 | | Fair Value | | | | Input Values |
(Dollars in Thousands, except Input Values) | | | Unobservable Input | | Range | | | Weighted Average(1) |
Assets | | | | | | | | | | | | |
Residential loans, at fair value: | | | | | | | | | | | | |
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Jumbo fixed-rate loans | | $ | 624,477 | | | Prepayment rate (annual CPR) | | 20 | | - | 20 | | % | | 20 | | % |
| | | | Whole loan spread to TBA price | | $ | 3.00 | | - | $ | 3.00 | | | | $ | 3.00 | | |
| | | | Whole loan spread to swap rate | | 202 | | - | 202 | | bps | | 202 | | bps |
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Jumbo loans committed to sell | | 870,568 | | | Whole loan committed sales price | | $ | 101.90 | | - | $ | 103.32 | | | | $ | 102.46 | | |
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Loans held by Legacy Sequoia (2) | | 242,234 | | | Liability price | | | | N/A | | | N/A | |
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Loans held by Sequoia (2) | | 2,479,750 | | | Liability price | | | | N/A | | | N/A | |
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Loans held by Freddie Mac SLST (2) | | 1,999,405 | | | Liability price | | | | N/A | | | N/A | |
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Business purpose loans: | | | | | | | | | | | | |
Single-family rental loans | | 466,346 | | | Senior credit spread | | 65 | | - | 65 | | bps | | 65 | | bps |
| | | | Subordinate credit spread | | 110 | | - | 1,523 | | bps | | 401 | | bps |
| | | | Senior credit support | | 35 | | - | 35 | | % | | 35 | | % |
| | | | IO discount rate | | 9 | | - | 9 | | % | | 9 | | % |
| | | | Prepayment rate (annual CPR) | | 3 | | - | 3 | | % | | 3 | | % |
| | | | Non-securitizable loan dollar price | | $ | 76 | | - | $ | 111 | | | | $ | 101 | | |
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Single-family rental loans held by CAFL (2) | | 3,402,410 | | | Liability price | | | | N/A | | | N/A | |
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Bridge loans | | 824,799 | | | Discount rate | | 4 | | - | 15 | | % | | 6 | | % |
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Multifamily loans held by Freddie Mac K-Series (2) | | 482,791 | | | Liability price | | | | N/A | | | N/A | |
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Trading and AFS securities | | 353,286 | | | Discount rate | | 2 | | - | 38 | | % | | 7 | | % |
| | | | Prepayment rate (annual CPR) | | 8 | | - | 58 | | % | | 27 | | % |
| | | | Default rate | | — | | - | 25 | | % | | 4 | | % |
| | | | Loss severity | | — | | - | 50 | | % | | 24 | | % |
| | | | CRT dollar price | | $ | 96 | | - | $ | 116 | | | | $ | 104 | | |
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Servicer advance investments | | 170,062 | | | Discount rate | | 2 | | - | 3 | | % | | 2 | | % |
| | | | Prepayment rate (annual CPR) | | 20 | | - | 30 | | % | | 21 | | % |
| | | | Expected remaining life (3) | | 5 | - | 5 | years | | 5 | years |
| | | | Mortgage servicing income | | 2 | | - | 11 | | bps | | 9 | | bps |
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MSRs | | 12,389 | | | Discount rate | | 12 | | - | 15 | | % | | 13 | | % |
| | | | Prepayment rate (annual CPR) | | 6 | | - | 80 | | % | | 28 | | % |
| | | | Per loan annual cost to service | | $ | 95 | | - | $ | 95 | | | | $ | 95 | | |
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Excess MSRs | | 29,185 | | | Discount rate | | 13 | | - | 16 | | % | | 15 | | % |
| | | | Prepayment rate (annual CPR) | | 21 | | - | 30 | | % | | 25 | | % |
| | | | Excess mortgage servicing income | | 8 | | - | 17 | | bps | | 11 | | bps |
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September 30, 2017 | | Fair Value | | | | Input Values |
(Dollars in Thousands, except Input Values) | | | Unobservable Input | | Range | | | Weighted Average |
Assets | | | | | | | | | | | | |
Residential loans, at fair value: | | | | | | | | | | | | |
Jumbo fixed-rate loans | | $ | 2,450,845 |
| | Whole loan spread to TBA price | | $ | 2.13 |
| - | $ | 3.15 |
| | | $ | 3.13 |
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| | | | Whole loan spread to swap rate | | 180 |
| - | 270 |
| bps | | 265 |
| bps |
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Jumbo hybrid loans | | 168,138 |
| | Prepayment rate (annual CPR) | | 15 |
| - | 15 |
| % | | 15 |
| % |
| | | | Whole loan spread to swap rate | | 100 |
| - | 190 |
| bps | | 163 |
| bps |
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Jumbo loans committed to sell | | 574,413 |
| | Whole loan committed sales price | | $ | 102.42 |
| - | $ | 103.08 |
| | | $ | 102.89 |
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Loans held by Legacy Sequoia (1) | | 673,134 |
| | Liability price | | | | N/A |
| | | N/A |
| |
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Loans held by Sequoia Choice (1) | | 317,303 |
| | Liability price | | | | N/A |
| | | N/A |
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Residential loans, at lower of cost or fair value | | 866 |
| | Loss severity | | 13 |
| - | 30 |
| % | | 18 |
| % |
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Trading and AFS securities | | 1,356,272 |
| | Discount rate | | 2 |
| - | 25 |
| % | | 5 |
| % |
| | | | Prepayment rate (annual CPR) | | — |
| - | 50 |
| % | | 10 |
| % |
| | | | Default rate | | — |
| - | 32 |
| % | | 3 |
| % |
| | | | Loss severity | | — |
| - | 40 |
| % | | 22 |
| % |
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MSRs | | 62,928 |
| | Discount rate | | 10 |
| - | 35 |
| % | | 11 |
| % |
| | | | Prepayment rate (annual CPR) | | 5 |
| - | 31 |
| % | | 9 |
| % |
| | | | Per loan annual cost to service | | $ | 82 |
| - | $ | 84 |
| | | $ | 82 |
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Guarantee asset | | 3,049 |
| | Discount rate | | 11 |
| - | 11 |
| % | | 11 |
| % |
| | | | Prepayment rate (annual CPR) | | 14 |
| - | 14 |
| % | | 14 |
| % |
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REO | | 1,725 |
| | Loss severity | | 4 |
| - | 39 |
| % | | 18 |
| % |
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Loan purchase commitments, net (2) | | 2,121 |
| | MSR multiple | | 1.9 |
| - | 5.1 |
| x | | 3.8 |
| x |
| | | | Pull-through rate | | 13 |
| - | 100 |
| % | | 72 |
| % |
| | | | Whole loan spread to TBA price | | $ | 2.13 |
| - | $ | 3.10 |
| | | $ | 3.07 |
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| | | | Whole loan spread to swap rate - fixed rate | | 180 |
| - | 270 |
| bps | | 268 |
| bps |
| | | | Prepayment rate (annual CPR) | | 15 |
| - | 15 |
| % | | 15 |
| % |
| | | | Whole loan spread to swap rate - hybrid | | 100 |
| - | 190 |
| bps | | 133 |
| bps |
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Liabilities | | | | | | | | | | | | |
ABS issued: (1) | | 944,288 |
| | Discount rate | | 3 |
| - | 15 |
| % | | 4 |
| % |
| | | | Prepayment rate (annual CPR) | | 11 |
| - | 20 |
| % | | 18 |
| % |
| | | | Default rate | | — |
| - | 12 |
| % | | 5 |
| % |
| | | | Loss severity | | 20 |
| - | 32 |
| % | | 26 |
| % |
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(1) | The fair value of the loans held by consolidated Sequoia entities was based on the fair value of the ABS issued by these entities, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities. |
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(2) | For the purpose of this presentation, loan purchase commitment assets and liabilities are presented net. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments (continued)
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September 30, 2021 | | Fair Value | | | | Input Values |
(Dollars in Thousands, except Input Values) | | | Unobservable Input | | Range | | | Weighted Average (1) |
Assets (continued) | | | | | | | | | | | | |
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HEIs at Redwood | | $ | 414 | | | Dollar Price | | $ | 92 | | - | $ | 124 | | | | $ | 105 | | |
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HEIs held by Point HEI entity | | 167,442 | | | Liability price | | | | N/A | | | N/A | |
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REO | | 622 | | | Loss severity | | 11 | | - | 40 | | % | | 22 | | % |
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Residential loan purchase commitments, net | | 6,712 | | | Committed sales price | | $ | 102.11 | | - | $ | 102.77 | | | | $ | 102.54 | | |
| | | | Pull-through rate | | 4 | | - | 100 | | % | | 71 | | % |
| | | | Whole loan spread to TBA price | | $ | 3.00 | | - | $ | 3.00 | | | | $ | 3.00 | | |
| | | | Whole loan spread to swap rate | | 185 | | - | 202 | | bps | | 201 | | bps |
| | | | Prepayment rate (annual CPR) | | 20 | | - | 20 | | % | | 20 | | % |
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Liabilities | | | | | | | | | | | | |
ABS issued (2): | | | | | | | | | | | | |
At consolidated Sequoia entities | | 2,482,746 | | | Discount rate | | 1 | | - | 18 | | % | | 3 | | % |
| | | | Prepayment rate (annual CPR) | | 7 | | - | 55 | | % | | 33 | | % |
| | | | Default rate | | — | | - | 36 | | % | | 2 | | % |
| | | | Loss severity | | 25 | | - | 50 | | % | | 32 | | % |
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At consolidated CAFL SFR entities (4) | | 3,126,405 | | | Discount rate | | 1 | | - | 13 | | % | | 3 | | % |
| | | | Prepayment rate (annual CPR) | | 3 | | - | 3 | | % | | 3 | | % |
| | | | Default rate | | 2 | | - | 18 | | % | | 9 | | % |
| | | | Loss severity | | 30 | | - | 30 | | % | | 30 | | % |
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At consolidated Freddie Mac SLST entities | | 1,550,111 | | | Discount rate | | 2 | | - | 7 | | % | | 3 | | % |
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| | | | Prepayment rate (annual CPR) | | 6 | | - | 8 | | % | | 6 | | % |
| | | | Default rate | | 9 | | - | 10 | | % | | 9 | | % |
| | | | Loss severity | | 35 | | - | 35 | | % | | 35 | | % |
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At consolidated Freddie Mac K-Series entities (4) | | 451,402 | | | Discount rate | | 1 | | - | 8 | | % | | 2 | | % |
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At consolidated Point HEI entity (4) | | 145,437 | | | Discount rate | | 3 | | - | 15 | | % | | 4 | | % |
| | | | Prepayment rate (annual CPR) | | 20 | | - | 20 | | % | | 20 | | % |
| | | | Default rate | | 6 | | - | 6 | | % | | 6 | | % |
| | | | Loss severity | | 25 | | - | 25 | | % | | 25 | | % |
| | | | Home price appreciation | | 3 | | - | 4 | | % | | 3 | | % |
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(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 and HEIs held by consolidated entities was 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 September 30, 2021, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and Point HEI entities was $240 million, $288 million, $451 million, $31 million, and $10 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.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
Determination of Fair Value
A description of the instruments measured at fair value as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy is listed herein. 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 –- 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.
Residential loans at Redwood
Estimated fair values for residential loans are determined using models that incorporate various observable inputs, including pricing information from whole loan sales and securitizations. Certain significant inputsIncluded in these models are considered unobservable and are therefore Level 3 in nature. Pricing inputs obtained from market whole loan transaction activity include indicative spreads Note 5 to indexed to be announced ("TBA") prices and indexed swap rates for fixed-rate loans and indexed swap rates for hybrid loans (Level 3). Pricing inputs obtained from market securitization activity include indicative spreads to indexed TBA prices for senior residential mortgage-backed securities ("RMBS") and indexed swap rates for subordinate RMBS, and credit support levels (Level 3). Other unobservable inputs also include assumed future prepayment rates. Observable inputs include benchmark interest rates, swap rates, and TBA prices. At September 30, 2017,the Consolidated Financial Statements of our jumbo fixed-rate loans that were not committed to sell were priced using whole loan sale inputs. These assets would generally decrease in value based upon an increase in the credit spread, prepayment speed, or credit support assumptions.
Residential loans at Consolidated Sequoia entities
We have elected to accountAnnual Report on Form 10-K for the consolidated Sequoia securitization entities as collateralized financing entities ("CFEs") in accordance with GAAP. A CFEyear ended December 31, 2020 is a variable interest entity that holdsmore detailed description of our 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 allow companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of theinstruments measured at 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 Sequoia CFEs (which we determined to be more observable) to determine the fair value of the loans held at these entities, whereby the net assets we consolidate in our financial statements related to these entities represent the estimated fair value of our retained interests in the Sequoia CFEs.
Real estate securities
Real estate securities include residential, commercial, and other asset-backed securities that are generally illiquid in nature and trade infrequently. Significanttheir significant inputs, in the valuation analysis 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. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3). These cash flow models use significant unobservable inputs such as a discount rate, prepayment rate, default rate, loss severity and credit support. The estimated fair value of our securities would generally decrease based upon an increase in default rates, serious delinquencies, or a decrease in prepayment rates or credit support.
As part of our securities valuation process, we request and consider indications of value from third-party securities dealers. For purposes of pricing our securities at September 30, 2017, we received dealer price indications on 73% of our securities, representing 81% of our carrying value. In the aggregate, our internal valuations of the securities for which we received dealer price indications were within 1% of the aggregate average dealer valuations. Once we receive the price indications from dealers, they are compared to other relevant market inputs, such as actual or comparable trades, and the results of our discounted cash flow analysis. In circumstances where relevant market inputs cannot be obtained, increased reliance on discounted cash flow analysis and management judgment are required to estimate fair value.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
Derivative assets and liabilities
Our derivative instruments include swaps, swaptions, TBAs, financial futures, and loan purchase commitments ("LPCs"). 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 financial futures are generally obtained using quoted prices from active markets (Level 1). 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 (Level 2).
LPC fair values for jumbo loans are estimated based on the estimated fair values of the underlying loans (as described in "Residential loans" above) as well as the probability that the mortgage loan will be purchased (the "Pull-through rate") (Level 3).
For other derivatives, valuations are based on various factors such as liquidity, bid/ask spreads, and credit considerations for which we rely on available market inputs. In the absencegeneral classification of such inputs, management’s best estimate is used (Level 3).
MSRs
MSRs includeinstruments pursuant to the rights to service jumboLevel 1, Level 2, and conforming residential mortgage loans. Significant inputs in the valuation analysis are predominantly Level 3 duevaluation hierarchy.
In addition to the natureLevel 3 financial instruments included in Table 5.7 above, certain of theseour Other investments (comprised of strategic investments in early-stage start-up companies) are Level 3 financial instruments and the lack of readily available market quotes. Changes inthat we account for under the fair value option. These investments generally take the form of MSRs occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputsequity or debt with conversion features and assumptions. Estimateddo not have readily determinable fair values arevalues. We generally value these assets based on applyingour original investment price until there is an observable price change in an orderly transaction for the inputs to generate the net present value of estimated future MSR income (Level 3). 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. An increase in these unobservable inputs would generally reduce the estimated fair valueidentical or similar investment of the MSRs.same issuer.
As part of our MSR valuation process, we received a valuation estimate from a third-party valuations firm. In the aggregate, our internal valuation of the MSRs were within 2% of the third-party valuation.
FHLBC Stock
Our Federal Home Loan Bank ("FHLB") member subsidiary is required to purchase Federal Home Loan Bank of Chicago ("FHLBC") stock under a borrowing agreement between our FHLB-member subsidiary and the FHLBC. Under this agreement, the stock is redeemable at face value, which represents the carrying value and fair value of the stock (Level 2).
Guarantee Asset
The guarantee asset represents the estimated fair value of cash flows we are contractually entitled to receive related to a risk sharing arrangement with Fannie Mae. Significant inputs in the valuation analysis are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset.
Pledged Collateral
Pledged collateral consists of cash and U.S. Treasury securities held by a custodian in association with certain agreements we have entered into. Treasury securities are carried at their fair value, which is determined using quoted prices in active markets (Level 1).
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. Fair values equal carrying values (Level 1).
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
Restricted cash
Restricted cash primarily includes interest-earning cash balances related to risk sharing transactions with the Agencies, cash held in association with borrowings from the FHLBC, and cash held at consolidated Sequoia entities for the purpose of distribution to investors and reinvestment. Due to the short-term nature of the restrictions, fair values approximate carrying values (Level 1).
Accrued interest receivable and payable
Accrued interest receivable and payable includes interest due on our assets and payable on our liabilities. Due to the short-term nature of when these interest payments will be received or paid, fair values approximate carrying values (Level 1).
REO
REO includes properties owned in satisfaction of foreclosed loans. Fair values are determined using available market quotes, appraisals, broker price opinions, comparable properties, or other indications of value (Level 3).
Margin receivable
Margin receivable reflects cash collateral we have posted with our various derivative and debt counterparties as required to satisfy margin requirements. Fair values approximate carrying values (Level 2).
Guarantee Obligations
In association with our risk sharing transactions with the Agencies, we have made certain guarantees. These obligations are initially recorded at fair value and subsequently carried at amortized cost. Fair values of guarantee obligations are determined using internal models that incorporate certain significant inputs that are considered unobservable and are therefore Level 3 in nature. Pricing inputs include assumed future prepayment rates, credit losses, and market discount rates. A decrease in future prepayment rates or discount rates, or an increase in credit losses, would generally cause the fair value of the guarantee obligations to decrease (become a larger liability).
Short-term debt
Short-term debt includes our credit facilities that mature within one year. As these borrowings are secured and subject to margin calls and as the rates on these borrowings reset frequently to market rates, we believe that carrying values approximate fair values (Level 2). Additionally, at September 30, 2017, short-term debt included unsecured convertible senior notes with a maturity of less than one year. The fair value of the convertible notes is determined using quoted prices in generally active markets (Level 2).
ABS issued
ABS issued includes asset-backed securities issued through the Legacy Sequoia and Sequoia Choice securitization entities. 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. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3). A decrease in credit losses or discount rate, or an increase in prepayment rates, would generally cause the fair value of the ABS issued to decrease (become a larger liability).
FHLBC Borrowings
FHLBC borrowings include amounts borrowed from the FHLBC that are secured, generally by residential mortgage loans. As these borrowings are secured and subject to margin calls and as the rates on these borrowings reset frequently to market rates, we believe that carrying values approximate fair values (Level 2).
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 5. Fair Value of Financial Instruments - (continued)
Convertible notes
Convertible notes include unsecured convertible and exchangeable senior notes. Fair values are determined using quoted prices in generally active markets (Level 2).
Trust preferred securities and subordinated notes
Estimated fair values of trust preferred securities and subordinated notes are determined using discounted cash flow analysis valuation techniques. 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. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3).
Note 6. Residential Loans
We acquire jumbo residential loans from third-party originators.originators and may sell or securitize these loans or hold them for investment. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia and Freddie Mac SLST entities at September 30, 20172021 and December 31, 2016.2020.
Table 6.1 – Classifications and Carrying Values of Residential Loans
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021 | | | | Legacy | | | | Freddie Mac | | |
(In Thousands) | | Redwood | | Sequoia | | Sequoia | | SLST | | Total |
Held-for-sale at fair value | | $ | 1,495,079 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,495,079 | |
Held-for-investment at fair value | | — | | | 242,234 | | | 2,479,750 | | | 1,999,405 | | | 4,721,389 | |
Total Residential Loans | | $ | 1,495,079 | | | $ | 242,234 | | | $ | 2,479,750 | | | $ | 1,999,405 | | | $ | 6,216,468 | |
|
| | | | | | | | | | | | | | | | |
September 30, 2017 | | | | Legacy | | Sequoia | | |
(In Thousands) | | Redwood | | Sequoia | | Choice | | Total |
Held-for-sale | | | | | | | | |
At fair value | | $ | 924,594 |
| | $ | — |
| | $ | — |
| | $ | 924,594 |
|
At lower of cost or fair value | | 1,087 |
| | — |
| | — |
| | 1,087 |
|
Total held-for-sale | | 925,681 |
| | — |
|
| — |
| | 925,681 |
|
Held-for-investment at fair value | | 2,268,802 |
| | 673,134 |
| | 317,303 |
| | 3,259,239 |
|
Total Residential Loans | | $ | 3,194,483 |
| | $ | 673,134 |
|
| $ | 317,303 |
| | $ | 4,184,920 |
|
|
| | | | | | | | | | | | | | | | |
December 31, 2016 | | | | Legacy | | Sequoia | | |
(In Thousands) | | Redwood | | Sequoia | | Choice | | Total |
Held-for-sale | | | | | | | | |
At fair value | | $ | 834,193 |
| | $ | — |
| | $ | — |
| | $ | 834,193 |
|
At lower of cost or fair value | | 1,206 |
| | — |
| | — |
| | 1,206 |
|
Total held-for-sale | | 835,399 |
| | — |
| | — |
| | 835,399 |
|
Held-for-investment at fair value | | 2,261,016 |
| | 791,636 |
| | — |
| | 3,052,652 |
|
Total Residential Loans | | $ | 3,096,415 |
| | $ | 791,636 |
| | $ | — |
| | $ | 3,888,051 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | | | Legacy | | | | Freddie Mac | | |
(In Thousands) | | Redwood | | Sequoia | | Sequoia | | SLST | | Total |
Held-for-sale at fair value | | $ | 176,641 | | | $ | — | | | $ | — | | | $ | — | | | $ | 176,641 | |
Held-for-investment at fair value | | — | | | 285,935 | | | 1,565,322 | | | 2,221,153 | | | 4,072,410 | |
Total Residential Loans | | $ | 176,641 | | | $ | 285,935 | | | $ | 1,565,322 | | | $ | 2,221,153 | | | $ | 4,249,051 | |
At September 30, 2017,2021, we owned mortgage servicing rights associated with $2.41$1.40 billion (principal balance) of consolidated residential loans owned at Redwood that were purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our consolidated balance sheets. We contract with licensed sub-servicers that perform servicing functions for these loans.
Residential Loans Held-for-Sale
At Fair Value
At September 30, 2017, we owned 1,233 loans held-for-sale at fair value with an aggregate unpaid principal balance of $0.90 billion and a fair value of $0.92 billion, compared to 1,114 loans with an aggregate unpaid principal balance of $0.83 billion and a fair value of $0.83 billion at December 31, 2016. At September 30, 2017 and December 31, 2016, none of these loans were greater than 90 days delinquent or in foreclosure.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 6. Residential Loans - (continued)
Residential Loans Held-for-Sale
DuringAt Fair Value
The following table summarizes the characteristics of residential loans held-for-sale at September 30, 2021 and December 31, 2020.
Table 6.2 – Characteristics of Residential Loans Held-for-Sale
| | | | | | | | | | | | | | |
(Dollars in Thousands) | | September 30, 2021 | | December 31, 2020 |
Number of loans | | 1,958 | | | 198 | |
Unpaid principal balance | | $ | 1,464,767 | | | $ | 172,748 | |
Fair value of loans | | $ | 1,495,079 | | | $ | 176,641 | |
Market value of loans pledged as collateral under short-term borrowing agreements | | $ | 1,478,424 | | | $ | 156,355 | |
| | | | |
Delinquency information | | | | |
Number of loans with 90+ day delinquencies | | 4 | | | 1 | |
Unpaid principal balance of loans with 90+ day delinquencies | | $ | 3,159 | | | $ | 1,882 | |
Fair value of loans with 90+ day delinquencies | | $ | 2,490 | | | $ | 1,223 | |
Number of loans in foreclosure | | — | | | — | |
| | | | |
| | | | |
The following table provides the activity of residential loans held-for-sale during the three and nine months ended September 30, 2017, we purchased $1.43 billion2021 and $3.72 billion (principal balance)2020.
Table 6.3 – Activity of loans, respectively, for which we elected the fair value option, and we sold $1.05 billion and $3.08 billion (principal balance) of loans, respectively, for which we recorded netResidential Loans Held-for-Sale
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Principal balance of loans acquired | | $ | 3,167,186 | | | $ | 172,162 | | | $ | 9,747,867 | | | $ | 2,859,813 | |
Principal balance of loans sold | | 2,360,862 | | | 87,868 | | | 6,787,490 | | | 4,750,615 | |
Principal balance of loans transferred to HFI | | 448,878 | | | — | | | 1,623,000 | | | 274,048 | |
Net market valuation gains (losses) recorded (1) | | 9,861 | | | (478) | | | 59,568 | | | (15,972) | |
(1)Net market valuation gains of $15 million and $29 million, respectively,(losses) on residential loans held-for-sale are recorded primarily through Mortgage banking activities, net on our consolidated statements of income. At income (loss).
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017, loans held-for-sale with a market value of $493 million were pledged as collateral under short-term borrowing agreements.2021
During the three and nine months ended September 30, 2016, we purchased $1.22 billion and $3.73 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $0.76 billion and $2.80 billion (principal balance) of loans, respectively, for which we recorded net market valuation gains of $1 million and $12 million, respectively, through Mortgage banking activities, net on our consolidated statements of income.(Unaudited)
At Lower of Cost or Fair Value
At September 30, 2017 and December 31, 2016, we held six and seven residential loans, respectively, at the lower of cost or fair value with $1 million and $2 million in outstanding principal balance, respectively, and a carrying value of $1 million for both periods. At both September 30, 2017 and December 31, 2016, one of these loans with an unpaid principal balance of $0.3 million was greater than 90 days delinquent and none of these loans were in foreclosure.Note 6. Residential Loans - (continued)
Residential Loans Held-for-Investment at Fair Value
At Redwood
AtWe invest in residential subordinate securities issued by Legacy Sequoia, Sequoia, and Freddie Mac SLST securitization trusts and consolidate the underlying residential loans owned by these entities for financial reporting purposes in accordance with GAAP. The following tables summarize the characteristics of the residential loans owned at consolidated Sequoia and Freddie Mac SLST entities at September 30, 2017, we owned 3,081 held-for-investment loans at Redwood with an aggregate unpaid principal balance of $2.23 billion2021 and a fair value of $2.27 billion, compared to 3,068 loans with an aggregate unpaid principal balance of $2.23 billion and a fair value of $2.26 billion at December 31, 2016. At September 30, 2017, none2020.
Table 6.4 – Characteristics of theseResidential Loans Held-for-Investment
| | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021 | | | | Legacy | | | | Freddie Mac |
(Dollars in Thousands) | | | | Sequoia | | Sequoia | | SLST |
Number of loans | | | | 1,653 | | | 3,022 | | | 12,444 | |
Unpaid principal balance | | | | $ | 278,815 | | | $ | 2,447,402 | | | $ | 2,022,724 | |
Fair value of loans | | | | $ | 242,234 | | | $ | 2,479,750 | | | $ | 1,999,405 | |
| | | | | | | | |
Delinquency information | | | | | | | | |
Number of loans with 90+ day delinquencies (1) | | | | 40 | | | 30 | | | 1,168 | |
Unpaid principal balance of loans with 90+ day delinquencies | | | | $ | 14,038 | | | $ | 24,438 | | | $ | 209,913 | |
Fair value of loans with 90+ day delinquencies (2) | | | | N/A | | N/A | | N/A |
Number of loans in foreclosure | | | | 18 | | | 4 | | | 305 | |
Unpaid principal balance of loans in foreclosure | | | | $ | 4,416 | | | $ | 2,863 | | | $ | 52,319 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | | | Legacy | | | | Freddie Mac |
(Dollars in Thousands) | | | | Sequoia | | Sequoia | | SLST |
Number of loans | | | | 1,908 | | | 2,177 | | | 13,605 | |
Unpaid principal balance | | | | $ | 333,474 | | | $ | 1,550,454 | | | $ | 2,247,771 | |
Fair value of loans | | | | $ | 285,935 | | | $ | 1,565,322 | | | $ | 2,221,153 | |
| | | | | | | | |
Delinquency information | | | | | | | | |
Number of loans with 90+ day delinquencies (1) | | | | 52 | | | 94 | | | 2,110 | |
Unpaid principal balance of loans with 90+ day delinquencies | | | | $ | 17,285 | | | $ | 74,742 | | | $ | 389,245 | |
Fair value of loans with 90+ day delinquencies (2) | | | | N/A | | N/A | | N/A |
Number of loans in foreclosure | | | | 21 | | | 3 | | | 245 | |
Unpaid principal balance of loans in foreclosure | | | | $ | 4,939 | | | $ | 2,251 | | | $ | 38,610 | |
| | | | | | | | |
(1)For loans wereheld at consolidated entities, the number of loans greater than 90 days delinquent orincludes loans in foreclosure. At December 31, 2016, one of these loans with an unpaid principal balance of $0.2 million was greater than 90 days delinquent and none of these loans were in foreclosure.
During the three and nine months ended September 30, 2017, we transferred loans with a(2)The fair value of $78 million and $326 million, respectively, from held-for-sale to held-for-investment. During both the three and nine months ended September 30, 2017, we transferred loans with aheld by consolidated entities was based on the fair value of $98 million from held-for-investment to held-for-sale. During the three and nine months ended September 30, 2017,ABS issued by these entities, including securities we recorded net market valuation gains of $3 million and $9 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income. At September 30, 2017, loansown, which we determined were more readily observable, in accordance with a fair value of $2.26 billion were pledged as collateral under a borrowing agreement with the FHLBC.
During the three and nine months ended September 30, 2016, we transferred loans with a fair value of $152 million and $878 million, respectively, from held-for-sale to held-for-investment. During the three and nine months ended September 30, 2016, we transferred loans with a fair value of zero and $56 million, respectively, from held-for-investment to held-for-sale. During the three and nine months ended September 30, 2016, we recorded a net market valuation loss of $1 million and a net market valuation gain of $22 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income.
At September 30, 2017, the outstanding loans held-for-investment at Redwood were prime-quality, first lien loans, of which 95% were originated between 2013 and 2017, and 5% were originated in 2012 and prior years. The weighted average FICO score of borrowers backing these loans was 772 (at origination) and the weighted average loan-to-value ("LTV") ratio of these loans was 65% (at origination). At September 30, 2017, these loans were comprised of 94% fixed-rate loans with a weighted average coupon of 4.08%, and the remainder were hybrid or ARM loans with a weighted average coupon of 4.00%.
At Consolidated Legacy Sequoia Entities
At September 30, 2017, we owned 3,308 held-for-investment loans at consolidated Legacy Sequoia entities, with an aggregate unpaid balance of $738 million and a fair value of $673 million, as compared to 3,735 loans at December 31, 2016, with an aggregate unpaid principal balance of $887 million and a fair value of $792 million. At origination, the weighted average FICO score of borrowers backing these loans was 728, the weighted average LTV ratio of these loans was 66%, and the loans were nearly all first lien and prime-quality.accounting guidance for collateralized financing entities.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 6. Residential Loans - (continued)
At September 30, 2017 and December 31, 2016,The following table provides the unpaid principal balanceactivity of residential loans held-for-investment at consolidated Legacy Sequoia entities delinquent greater than 90 days was $14 million and $19 million, respectively, and the unpaid principal balance of loans in foreclosure was $12 million and $11 million, respectively. DuringRedwood during the three and nine months ended September 30, 2017, we recorded2021 and 2020.
Table 6.5 – Activity of Residential Loans Held-for-Investment at Redwood
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
| | | | | | | | |
Fair value of loans transferred from HFS to HFI | | $ | — | | | $ | — | | | $ | — | | | $ | 13,258 | |
Fair value of loans transferred from HFI to HFS | | — | | | — | | | — | | | 1,870,986 | |
Net market valuation gains (losses) recorded (1) | | — | | | 218 | | | — | | | (93,314) | |
(1)Subsequent to the transfer of these loans to our investment portfolio, net market valuation gains of $4 million and $24 million, respectively,(losses) on theseresidential loans held-for-investment at Redwood are recorded through Investment fair value changes, net on our consolidated statements of income. Duringincome (loss).
The following table provides the activity of residential loans held-for-investment at consolidated entities during the three and nine months ended September 30, 2016,2021 and 2020.
Table 6.6 – Activity of Residential Loans Held-for-Investment at Consolidated Entities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2020 |
| | Legacy | | | | Freddie Mac | | Legacy | | | | Freddie Mac |
(In Thousands) | | Sequoia | | Sequoia | | SLST | | Sequoia | | Sequoia | | SLST |
Fair value of loans transferred from HFS to HFI (1) | | N/A | | $ | 464,189 | | | N/A | | N/A | | $ | — | | | N/A |
Net market valuation gains (losses) recorded (2) | | (2,580) | | | (11,663) | | | (13,836) | | | 21,938 | | | (5,175) | | | 159,687 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2020 |
| | Legacy | | | | Freddie Mac | | Legacy | | | | Freddie Mac |
(In Thousands) | | Sequoia | | Sequoia | | SLST | | Sequoia | | Sequoia | | SLST |
Fair value of loans transferred from HFS to HFI (1) | | N/A | | $ | 1,669,683 | | | N/A | | N/A | | $ | 270,506 | | | N/A |
Net market valuation gains (losses) recorded (2) | | 9,896 | | | (27,076) | | | 5,177 | | | (38,996) | | | (21,727) | | | 15,254 | |
(1)Represents the transfer of loans from held-for-sale to held-for-investment associated with Sequoia securitizations.
(2)For loans held at our consolidated Legacy Sequoia, Sequoia, and Freddie Mac SLST entities, market value changes are based on the estimated fair value of the associated ABS issued, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 7. Business Purpose Loans
We originate and invest in business purpose loans, including single-family rental ("SFR") loans and bridge loans. The following table summarizes the classifications and carrying values of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, 2021 and December 31, 2020.
Table 7.1 – Classifications and Carrying Values of Business Purpose Loans
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021 | | Single-Family Rental | | Bridge | | |
(In Thousands) | | Redwood | | CAFL | | Redwood | | CAFL | | Total |
Held-for-sale at fair value | | $ | 466,346 | | | — | | | $ | — | | | $ | — | | | $ | 466,346 | |
Held-for-investment at fair value | | — | | | 3,402,410 | | | 548,445 | | | 276,354 | | | 4,227,209 | |
Total Business Purpose Loans | | $ | 466,346 | | | $ | 3,402,410 | | | $ | 548,445 | | | $ | 276,354 | | | $ | 4,693,555 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | Single-Family Rental | | Bridge | | |
(In Thousands) | | Redwood | | CAFL | | Redwood | | CAFL | | Total |
Held-for-sale at fair value | | $ | 245,394 | | | $ | — | | | $ | — | | | $ | — | | | $ | 245,394 | |
Held-for-investment at fair value | | — | | | 3,249,194 | | | 641,765 | | | — | | | 3,890,959 | |
Total Business Purpose Loans | | $ | 245,394 | | | $ | 3,249,194 | | | $ | 641,765 | | | $ | — | | | $ | 4,136,353 | |
Single-Family Rental Loans
Nearly all of the outstanding single-family rental loans at September 30, 2021 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years, with less than 1% with original maturities of 30 years.
Bridge Loans
The outstanding bridge loans held-for-investment at September 30, 2021 were first-lien, interest-only loans with original maturities of six to 24 months and were comprised of 69% one-month LIBOR-indexed adjustable-rate loans and 31% fixed-rate loans.
At September 30, 2021, we recordedhad a $426 million commitment to fund bridge loans. See Note 16 for additional information on this commitment.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 7. Business Purpose Loans - (continued)
The following table provides the activity of business purpose loans at Redwood during the three and nine months ended September 30, 2021 and 2020.
Table 7.2 – Activity of Business Purpose Loans at Redwood
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2020 |
(In Thousands) | | SFR at Redwood | | Bridge at Redwood | | SFR at Redwood | | Bridge at Redwood |
Principal balance of loans originated | | $ | 392,620 | | | $ | 208,938 | | | $ | 195,744 | | | $ | 65,517 | |
Principal balance of loans acquired | | 2,463 | | | 35,713 | | | — | | | — | |
Principal balance of loans sold to third parties | | — | | | 253 | | | 7,695 | | | 1,567 | |
Fair value of loans transferred from HFS to HFI (1) | | 332,670 | | | 276,354 | | | 326,405 | | | N/A |
Fair value of loans transferred from HFI to HFS (2) | | — | | | N/A | | — | | | N/A |
Mortgage banking activities income (loss) recorded (3) | | 19,205 | | | 3,691 | | | 43,191 | | | 29 | |
Investment fair value changes recorded (4) | | — | | | 900 | | | — | | | 6,812 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2020 |
(In Thousands) | | SFR at Redwood | | Bridge at Redwood | | SFR at Redwood | | Bridge at Redwood |
Principal balance of loans originated | | $ | 957,935 | | | $ | 557,327 | | | $ | 631,749 | | | $ | 351,353 | |
Principal balance of loans acquired | | 2,463 | | | 35,713 | | | — | | | — | |
Principal balance of loans sold to third parties | | — | | | 9,484 | | | 33,843 | | | 23,860 | |
Fair value of loans transferred from HFS to HFI (1) | | 799,375 | | | 276,354 | | | 925,437 | | | N/A |
Fair value of loans transferred from HFI to HFS (2) | | 44,922 | | | N/A | | — | | | N/A |
Mortgage banking activities income (loss) recorded (3) | | 54,675 | | | 5,212 | | | 54,731 | | | (3,412) | |
Investment fair value changes recorded (4) | | — | | | 4,142 | | | (20,806) | | | (10,016) | |
(1)Represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL securitizations.
(2)Represents the transfer of single-family rental loans from held-for-investment to held-for-sale associated with the call of a consolidated CAFL securitization during the second quarter of 2021.
(3)Represents net market valuation gainchanges from the time a loan is originated to when it is sold or transferred to our investment portfolio. Additionally, for the three and nine months ended September 30, 2021, we recorded loan origination fee income of $9 million and a$22 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss). For the three and nine months ended September 30, 2020, we recorded loan origination fee income of $3 million and $13 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).
(4)Represents net market valuation losschanges for loans classified as held-for-investment.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 7. Business Purpose Loans - (continued)
Business Purpose Loans Held-for-Investment at CAFL
We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying single-family rental loans and bridge loans owned by these entities. During the nine months ended September 30, 2021, we transferred 3 CAFL loans with a fair value of $19$12 million respectively,to REO, which is included in Other assets on our consolidated balance sheets.
The following table provides the activity of business purpose loans held-for-investment at CAFL during the three and nine months ended September 30, 2021 and 2020.
Table 7.3 – Activity of Business Purpose Loans Held-for-Investment at CAFL
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2020 |
(In Thousands) | | SFR at CAFL | | Bridge at CAFL | | SFR at CAFL | | Bridge at CAFL |
Net market valuation gains (losses) recorded (1) | | $ | (34,803) | | | $ | — | | | $ | 88,271 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2020 |
(In Thousands) | | SFR at CAFL | | Bridge at CAFL | | SFR at CAFL | | Bridge at CAFL |
Net market valuation gains (losses) recorded (1) | | $ | (96,934) | | | $ | — | | | $ | (14,319) | | | $ | — | |
(1)For loans held at our consolidated CAFL entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2.
REO
See Note 12 for detail on BPL loans transferred to REO during 2021.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 7. Business Purpose Loans - (continued)
Business Purpose Loan Characteristics
The following tables summarize the characteristics of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, 2021 and December 31, 2020.
Table 7.4 – Characteristics of Business Purpose Loans
| | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021 | | SFR at Redwood | | SFR at CAFL | | Bridge at Redwood | | Bridge at CAFL |
(Dollars in Thousands) | | | | |
Number of loans | | 123 | | | 1,157 | | | 1,092 | | | 1,589 | |
Unpaid principal balance | | $ | 451,295 | | | $ | 3,207,118 | | | $ | 550,711 | | | $ | 272,243 | |
Fair value of loans | | $ | 466,346 | | | $ | 3,402,411 | | | $ | 548,445 | | | $ | 276,354 | |
Weighted average coupon | | 4.57 | % | | 5.27 | % | | 7.48 | % | | 7.19 | % |
Weighted average remaining loan term (years) | | 7 | | 6 | | 1 | | 1 |
Market value of loans pledged as collateral under short-term debt facilities | | $ | 127,930 | | | N/A | | $ | 126,725 | | | N/A |
Market value of loans pledged as collateral under long-term debt facilities | | $ | 298,014 | | | N/A | | $ | 373,597 | | | N/A |
| | | | | | | | |
Delinquency information | | | | | | | | |
Number of loans with 90+ day delinquencies (1) | | 7 | | | 15 | | | 35 | | | — | |
Unpaid principal balance of loans with 90+ day delinquencies | | $ | 5,067 | | | $ | 39,423 | | | $ | 30,132 | | | $ | — | |
Fair value of loans with 90+ day delinquencies (2) | | $ | 2,664 | | | N/A | | $ | 26,525 | | | $ | — | |
Number of loans in foreclosure | | 6 | | | 10 | | | 34 | | | — | |
Unpaid principal balance of loans in foreclosure | | $ | 4,978 | | | $ | 22,004 | | | $ | 26,177 | | | $ | — | |
Fair value of loans in foreclosure (2) | | $ | 2,619 | | | N/A | | $ | 22,570 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | SFR at Redwood | | SFR at CAFL | | Bridge at Redwood | | Bridge at CAFL |
(Dollars in Thousands) | | | | |
Number of loans | | 65 | | | 1,094 | | | 1,725 | | | — | |
Unpaid principal balance | | $ | 234,475 | | | $ | 3,017,137 | | | $ | 649,532 | | | $ | — | |
Fair value of loans | | $ | 245,394 | | | $ | 3,249,194 | | | $ | 641,765 | | | $ | — | |
Weighted average coupon | | 4.84 | % | | 5.44 | % | | 8.09 | % | | — | % |
Weighted average remaining loan term (years) | | 8 | | 5 | | 1 | | — | |
Market value of loans pledged as collateral under short-term debt facilities | | $ | 34,098 | | | N/A | | $ | 92,931 | | | N/A |
Market value of loans pledged as collateral under long-term debt facilities | | $ | 154,774 | | | N/A | | $ | 544,151 | | | N/A |
| | | | | | | | |
Delinquency information | | | | | | | | |
Number of loans with 90+ day delinquencies (1) | | 10 | | | 22 | | | 31 | | | — | |
Unpaid principal balance of loans with 90+ day delinquencies | | $ | 7,127 | | | $ | 61,440 | | | $ | 39,415 | | | $ | — | |
Fair value of loans with 90+ day delinquencies (2) | | $ | 6,143 | | | N/A | | $ | 33,605 | | | $ | — | |
Number of loans in foreclosure | | — | | | 10 | | | 25 | | | — | |
Unpaid principal balance of loans in foreclosure | | $ | — | | | $ | 24,745 | | | $ | 38,552 | | | $ | — | |
Fair value of loans in foreclosure (2) | | $ | — | | | N/A | | $ | 33,066 | | | $ | — | |
(1)The number of loans greater than 90 days delinquent includes loans in foreclosure.
(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.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 8. Multifamily Loans
We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of the multifamily loans consolidated at Redwood at September 30, 2021 and December 31, 2020.
Table 8.1 – Characteristics of Multifamily Loans
| | | | | | | | | | | | | | |
(Dollars in Thousands) | | September 30, 2021 | | December 31, 2020 |
Number of loans | | 28 | | | 28 | |
Unpaid principal balance | | $ | 457,123 | | | $ | 462,808 | |
Fair value of loans | | $ | 482,791 | | | $ | 492,221 | |
Weighted average coupon | | 4.25 | % | | 4.25 | % |
Weighted average remaining loan term (years) | | 4 | | 5 |
| | | | |
Delinquency information | | | | |
Number of loans with 90+ day delinquencies | | — | | | — | |
| | | | |
| | | | |
Number of loans in foreclosure | | — | | | — | |
| | | | |
| | | | |
The outstanding multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at September 30, 2021 were first-lien, fixed-rate loans that were originated in 2015. The following table provides the activity of multifamily loans held-for-investment during the three and nine months ended September 30, 2021 and 2020.
Table 8.2 – Activity of Multifamily Loans Held-for-Investment
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Net market valuation gains (losses) recorded (1) | | $ | (487) | | | $ | 2,340 | | | $ | (3,745) | | | $ | (61,500) | |
(1)Net market valuation gains (losses) on multifamily loans held-for-investment are recorded through Investment fair value changes, net on our consolidated statements of income. Pursuant to the collateralized financingincome (loss). For loans held at our consolidated Freddie Mac K-Series entity, guidelines, the market valuationvalue changes of these loans isare based on the estimated fair value of the associated ABS issued.issued, including securities we own, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our retained economic investment in the Legacy Sequoiathese securitization entities is presented in Note 5.Table 4.2.
At Consolidated Sequoia Choice Entity
At September 30, 2017, we owned 409 held-for-investment loans at the consolidated Sequoia Choice entity, with an aggregate unpaid balance of $308 million and a fair value of $317 million. There were no loans held at the Sequoia Choice entity at December 31, 2016. At origination, the weighted average FICO score of borrowers backing these loans was 744, the weighted average LTV ratio of these loans was 75%, and the loans were all first lien and prime-quality. At September 30, 2017, none of these loans were greater than 90 days delinquent or in foreclosure.
During both the three and nine months ended September 30, 2017, we transferred loans with a fair value of $318 million from held-for-sale to held-for-investment, associated with this transaction. During both the three and nine months ended September 30, 2017, we recorded a net market valuation loss of $1 million on these loans through Investment fair value changes, net on our consolidated statements of income. Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans is based on the estimated fair value of the ABS issued associated with this transaction. The net impact to our income statement associated with our retained economic investment in the Sequoia Choice securitization entity is presented in Note 5.
Note 7.9. Real Estate Securities
We invest in real estate securities.securities that we create and retain from our Sequoia securitizations or acquire from third parties. The following table presents the fair values of our real estate securities by type at September 30, 20172021 and December 31, 2016.2020.
Table 7.19.1 – Fair Values of Real Estate Securities by Type
| | (In Thousands) | | September 30, 2017 | | December 31, 2016 | (In Thousands) | | September 30, 2021 | | December 31, 2020 |
Trading | | $ | 820,134 |
| | $ | 445,687 |
| Trading | | $ | 153,010 | | | $ | 125,667 | |
Available-for-sale | | 536,138 |
| | 572,752 |
| Available-for-sale | | 200,276 | | | 218,458 | |
Total Real Estate Securities | | $ | 1,356,272 |
| | $ | 1,018,439 |
| Total Real Estate Securities | | $ | 353,286 | | | $ | 344,125 | |
Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. Re-REMIC securities, as presented herein, were created through the resecuritization of certain senior security interests to provide additional credit support to those interests. These re-REMICMezzanine securities are thereforeinterests that are generally subordinate to the remaining senior security interests, but seniorsecurities in their rights to anyreceive cash flows, and have subordinate tranches of the securitization from which they were created.securities below them that are first to absorb losses. Subordinate securities are all interests below senior and re-REMIC interests. We further separatemezzanine. Exclusive of our subordinatere-performing loan securities, into mezzanine and subordinate, where mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later. Nearlynearly all of our residential securities are supported by collateral that was designated as prime asat the time of issuance.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 7.9. Real Estate Securities - (continued)
Trading Securities
The following table presents the fair value of trading securities by position and collateral type at September 30, 2017 and December 31, 2016.
Table 7.2 – Trading Securities by Position and Collateral Type
|
| | | | | | | | |
(In Thousands) | | September 30, 2017 | | December 31, 2016 |
Senior Securities | | $ | 62,767 |
| | $ | 37,067 |
|
Subordinate Securities | | | | |
Mezzanine | | 458,299 |
| | 256,226 |
|
Subordinate | | 299,068 |
| | 152,394 |
|
Total Subordinate Securities | | 757,367 |
| | 408,620 |
|
Total Trading Securities | | $ | 820,134 |
| | $ | 445,687 |
|
We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and commercial/multifamily securities. Atmortgage-backed securities, and our residential securities also include securities backed by re-performing loans ("RPL"). The following table presents the fair value of trading securities by position and collateral type at September 30, 2017, trading securities with a carrying value of $435 million were pledged as collateral under short-term borrowing agreements. See Note 11 for additional information on short-term debt.
At September 30, 20172021 and December 31, 2016, our2020.
Table 9.2 – Fair Value of Trading Securities by Position
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Senior | | | | |
Interest-only securities (1) | | $ | 22,494 | | | $ | 28,464 | |
| | | | |
| | | | |
Total Senior | | 22,494 | | | 28,464 | |
Mezzanine | | | | |
Sequoia securities | | — | | | 3,649 | |
| | | | |
| | | | |
Total Mezzanine | | — | | | 3,649 | |
Subordinate | | | | |
RPL securities | | 64,845 | | | 47,448 | |
Multifamily securities | | 11,298 | | | 5,592 | |
Other third-party residential securities | | 54,373 | | | 40,514 | |
Total Subordinate | | 130,516 | | | 93,554 | |
Total Trading Securities | | $ | 153,010 | | | $ | 125,667 | |
(1)Includes $15 million and $13 million of Sequoia certificated mortgage servicing rights at September 30, 2021 and December 31, 2020, respectively.
The following table presents the unpaid principal balance of trading securities by position and collateral type at September 30, 2021 and December 31, 2020.
Table 9.3 – Unpaid Principal Balance of Trading Securities by Position
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Senior (1) | | $ | — | | | $ | — | |
Mezzanine | | — | | | 3,577 | |
Subordinate | | 216,771 | | | 242,278 | |
Total Trading Securities | | $ | 216,771 | | | $ | 245,855 | |
(1)Our senior trading securities were comprised ofinclude interest-only securities, for which there is no principal balance, and our subordinatebalance.
The following table provides the activity of trading securities had an unpaid principal balance of $767 million and $434 million, respectively.
At September 30, 2017 and December 31, 2016, subordinate trading securities included $287 million and $152 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities, $60 million and $15 million, respectively, of Sequoia securities, $167 million and $149 million, respectively, of other third-party residential securities, and $243 million and $92 million, respectively, of third-party commercial/multifamily securities.
Duringduring the three and nine months ended September 30, 2017, we acquired $171 million2021 and $432 million (principal balance), respectively, of senior and subordinate securities for which we elected the fair value option and classified as trading, and sold $25 million and $85 million, respectively, of such securities. During the three and nine months ended September 30, 2016, we acquired $65 million and $198 million (principal balance), respectively, of senior and subordinate securities for which we elected the fair value option and classified as trading, and sold $2 million and $238 million, respectively, of such securities.2020.
During the three and nine months ended September 30, 2017, we recorded netTable 9.4 – Trading Securities Activity
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Principal balance of securities acquired | | $ | 10,750 | | | $ | 11,000 | | | $ | 28,380 | | | $ | 77,721 | |
Principal balance of securities sold | | 750 | | | 15,903 | | | 53,561 | | | 720,517 | |
Net market valuation gains (losses) recorded (1) | | 1,578 | | | (3,600) | | | 24,725 | | | (224,679) | |
(1)Net market valuation gains of $1 million and $31 million, respectively,(losses) on trading securities included inare recorded through Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income. During the three and nine months ended September 30, 2016, we recorded net market valuation gains of $9 million and $5 million, respectively, on trading securities, included in Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income.income (loss).
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 7.9. Real Estate Securities - (continued)
AFS Securities
The following table presents the fair value of our available-for-sale securities by position and collateral type at September 30, 20172021 and December 31, 2016.2020.
Table 7.39.5 – Fair Value of Available-for-Sale Securities by Position and Collateral Type
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
| | | | |
| | | | |
| | | | |
Mezzanine | | | | |
| | | | |
| | | | |
Other third-party residential securities | | $ | — | | | $ | 2,014 | |
Total Mezzanine | | — | | | 2,014 | |
Subordinate | | | | |
Sequoia securities | | 128,874 | | | 136,475 | |
Multifamily securities | | 31,320 | | | 43,663 | |
Other third-party residential securities | | 40,082 | | | 36,306 | |
Total Subordinate | | 200,276 | | | 216,444 | |
Total AFS Securities | | $ | 200,276 | | | $ | 218,458 | |
|
| | | | | | | | |
(In Thousands) | | September 30, 2017 | | December 31, 2016 |
Senior Securities | | $ | 153,232 |
| | $ | 136,546 |
|
Re-REMIC Securities | | 39,033 |
| | 85,479 |
|
Subordinate Securities | | | | |
Mezzanine | | 119,687 |
| | 163,715 |
|
Subordinate | | 224,186 |
| | 187,012 |
|
Total Subordinate Securities | | 343,873 |
| | 350,727 |
|
Total AFS Securities | | $ | 536,138 |
| | $ | 572,752 |
|
At September 30, 2017 and December 31, 2016, allThe following table provides the activity of our available-for-sale securities were comprised of residential mortgage-backed securities. At September 30, 2017, AFS securities with a carrying value of $229 million were pledged as collateral under short-term borrowing agreements. See Note 11 for additional information on short-term debt.
Duringduring the three and nine months ended September 30, 2017, we purchased $4 million2021 and $32 million of AFS securities, respectively, and sold $23 million and $61 million of AFS securities, respectively, which resulted in net realized gains of $2 million and $9 million, respectively. During the three and nine months ended September 30, 2016, we purchased $11 million and $29 million of AFS securities, respectively, and sold $26 million and $241 million of AFS securities, respectively, which resulted in net realized gains of $2 million and $20 million, respectively. In addition, during the nine months ended September 30, 2017, we exchanged our interests in three Re-REMICs, which together had a fair value of $47 million, for the senior securities underlying the Re-REMICs, and reclassified our interests from Re-REMIC to Senior.2020.
Table 9.6 – Available-for-Sale Securities Activity
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Fair value of securities acquired | | $ | — | | | $ | 25,483 | | | $ | 1,600 | | | $ | 56,664 | |
Fair value of securities sold | | — | | | — | | | 4,785 | | | 55,193 | |
| | | | | | | | |
We often purchase AFS securities at a discount to their outstanding principal balances. To the extent we purchase an AFS security that has a likelihood of incurring a loss, we do not amortize into income the portion of the purchase discount that we do not expect to collect due to the inherent credit risk of the security. We may also expense a portion of our investment in the security to the extent we believe that principal losses will exceed the purchase discount. We designate any amount of unpaid principal balance that we do not expect to receive and thus do not expect to earn or recover as a credit reserve on the security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method.
At September 30, 2017, there were $0.12021, we had $28 million of AFS securities with contractual maturities less than five years, $0.4$4 million with contractual maturities greater than five years but less than 10ten years, and the remainder of our AFS securities had contractual maturities greater than 10ten years.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 7.9. Real Estate Securities - (continued)
The following table presents the components of carrying value (which equals fair value) of AFS securities at September 30, 20172021 and December 31, 2016.2020.
Table 7.49.7 – Carrying Value of AFS Securities
| | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021 | | | | | | |
(In Thousands) | | | | Mezzanine | | Subordinate | | Total |
Principal balance | | | | $ | — | | | $ | 238,459 | | | $ | 238,459 | |
Credit reserve | | | | — | | | (29,448) | | | (29,448) | |
Unamortized discount, net | | | | — | | | (88,108) | | | (88,108) | |
Amortized cost | | | | — | | | 120,903 | | | 120,903 | |
Gross unrealized gains | | | | — | | | 79,406 | | | 79,406 | |
Gross unrealized losses | | | | — | | | (33) | | | (33) | |
CECL allowance | | | | — | | | — | | | — | |
Carrying Value | | | | $ | — | | | $ | 200,276 | | | $ | 200,276 | |
|
| | | | | | | | | | | | | | | | |
September 30, 2017 | | | | | | | | |
(In Thousands) | | Senior | | Re-REMIC | | Subordinate | | Total |
Principal balance | | $ | 156,936 |
| | $ | 44,896 |
| | $ | 442,219 |
| | $ | 644,051 |
|
Credit reserve | | (3,024 | ) | | (5,810 | ) | | (38,041 | ) | | (46,875 | ) |
Unamortized discount, net | | (36,575 | ) | | (10,412 | ) | | (142,405 | ) | | (189,392 | ) |
Amortized cost | | 117,337 |
|
| 28,674 |
| | 261,773 |
| | 407,784 |
|
Gross unrealized gains | | 37,155 |
| | 10,359 |
| | 83,185 |
| | 130,699 |
|
Gross unrealized losses | | (1,260 | ) | | — |
| | (1,085 | ) | | (2,345 | ) |
Carrying Value | | $ | 153,232 |
|
| $ | 39,033 |
| | $ | 343,873 |
| | $ | 536,138 |
|
| | December 31, 2016 | | | | | | | | | |
December 31, 2020 | | December 31, 2020 | | | | |
(In Thousands) | | Senior | | Re-REMIC | | Subordinate | | Total | (In Thousands) | | | Mezzanine | | Subordinate | | Total |
Principal balance | | $ | 148,862 |
| | $ | 95,608 |
| | $ | 456,359 |
| | $ | 700,829 |
| Principal balance | | | $ | 2,000 | | | $ | 281,284 | | | $ | 283,284 | |
Credit reserve | | (4,814 | ) | | (6,857 | ) | | (35,802 | ) | | (47,473 | ) | Credit reserve | | | — | | | (44,967) | | | (44,967) | |
Unamortized discount, net | | (41,877 | ) | | (19,613 | ) | | (136,622 | ) | | (198,112 | ) | Unamortized discount, net | | | — | | | (95,718) | | | (95,718) | |
Amortized cost | | 102,171 |
|
| 69,138 |
| | 283,935 |
| | 455,244 |
| Amortized cost | | | 2,000 | | | 140,599 | | | 142,599 | |
Gross unrealized gains | | 36,304 |
| | 16,341 |
| | 68,032 |
| | 120,677 |
| Gross unrealized gains | | | 14 | | | 77,280 | | | 77,294 | |
Gross unrealized losses | | (1,929 | ) | | — |
| | (1,240 | ) | | (3,169 | ) | Gross unrealized losses | | | — | | | (1,047) | | | (1,047) | |
CECL allowance | | CECL allowance | | | — | | | (388) | | | (388) | |
Carrying Value | | $ | 136,546 |
|
| $ | 85,479 |
| | $ | 350,727 |
| | $ | 572,752 |
| Carrying Value | | | $ | 2,014 | | | $ | 216,444 | | | $ | 218,458 | |
The following table presents the changes for the three and nine months ended September 30, 2017,2021, in unamortized discount and designated credit reserves on residential AFS securities.
Table 7.59.8 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
| | Credit Reserve | | Unamortized Discount, Net | | Credit Reserve | | Unamortized Discount, Net |
(In Thousands) | | | | |
Beginning balance | | $ | 40,349 | | | $ | 90,216 | | | $ | 44,967 | | | $ | 95,718 | |
Amortization of net discount | | — | | | (6,437) | | | — | | | (9,620) | |
Realized credit losses | | (184) | | | — | | | (433) | | | — | |
Acquisitions | | — | | | — | | | 2,825 | | | 1,208 | |
Sales, calls, other | | (320) | | | (6,068) | | | (1,312) | | | (15,797) | |
| | | | | | | | |
Transfers to (release of) credit reserves, net | | (10,397) | | | 10,397 | | | (16,599) | | | 16,599 | |
Ending Balance | | $ | 29,448 | | | $ | 88,108 | | | $ | 29,448 | | | $ | 88,108 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| | Credit Reserve | | Unamortized Discount, Net | | Credit Reserve | | Unamortized Discount, Net |
(In Thousands) | | | | |
Beginning balance | | $ | 47,588 |
| | $ | 192,063 |
| | $ | 47,473 |
| | $ | 198,112 |
|
Amortization of net discount | | — |
| | (4,631 | ) | | — |
| | (14,697 | ) |
Realized credit losses | | (795 | ) | | — |
| | (3,232 | ) | | — |
|
Acquisitions | | 1,665 |
| | 2,732 |
| | 8,256 |
| | 11,375 |
|
Sales, calls, other | | (144 | ) | | (2,214 | ) | | (3,405 | ) | | (7,863 | ) |
Impairments | | 3 |
| | — |
| | 248 |
| | — |
|
Transfers to (release of) credit reserves, net | | (1,442 | ) | | 1,442 |
| | (2,465 | ) | | 2,465 |
|
Ending Balance | | $ | 46,875 |
| | $ | 189,392 |
| | $ | 46,875 |
| | $ | 189,392 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 7.9. Real Estate Securities - (continued)
AFS Securities with Unrealized Losses
The following table presents the components comprising the total carrying value of residential AFS securities that were in a gross unrealized loss position at September 30, 20172021 and December 31, 2016.2020.
Table 7.69.9 – Components of Fair Value of Residential AFS Securities by Holding Periods
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Consecutive Months | | 12 Consecutive Months or Longer |
| | Amortized Cost | | Unrealized Losses | | Fair Value | | Amortized Cost | | Unrealized Losses | | Fair Value |
(In Thousands) | | | | | | |
September 30, 2017 | | $ | 10,164 |
| | $ | (694 | ) | | $ | 9,470 |
| | $ | 31,001 |
| | $ | (1,651 | ) | | $ | 29,350 |
|
December 31, 2016 | | 15,772 |
| | (330 | ) | | 15,442 |
| | 60,035 |
| | (2,839 | ) | | 57,196 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Consecutive Months | | 12 Consecutive Months or Longer |
| | Amortized Cost | | Unrealized Losses | | Fair Value | | Amortized Cost | | Unrealized Losses | | Fair Value |
(In Thousands) | | | | | | |
September 30, 2021 | | $ | — | | | $ | — | | | $ | — | | | $ | 1,600 | | | $ | (33) | | | $ | 1,567 | |
December 31, 2020 | | 9,129 | | | (1,047) | | | 7,920 | | | — | | | — | | | — | |
At September 30, 2017,2021, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 17384 AFS securities, of which 14 were in an unrealized loss position and six were1 was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2016,2020, our consolidated balance sheet included 18696 AFS securities, of which 195 were in an unrealized loss position and 10zero were in a continuous unrealized loss position for 12 consecutive months or longer.
Evaluating AFS Securities for Other-than-Temporary ImpairmentsCredit Losses
Gross unrealized losses on our AFS securities were $2 million$33 thousand at September 30, 2017.2021. We evaluate all securities in an unrealized loss position to determine if the impairment is temporary or other-than-temporarycredit-related (resulting in an OTTI)allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At September 30, 2017,2021, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses that are other-than-temporary based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.
For the nine months endedAt September 30, 2017, other-than-temporary impairments2021, our current expected credit loss ("CECL") allowance related to our AFS securities were $0.6 million, of which $0.2 million were recognized through our consolidated statements of income and $0.4 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet.was zero. AFS securities for which OTTIan allowance is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the OTTI assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of thesecurity credit loss component of OTTI.losses.
The table below summarizes the weighted average of the significant valuation assumptionscredit quality indicators we used for the credit loss allowance on our AFS securities in unrealized loss positions at September 30, 2017.2021.
Table 7.79.10 – Significant Valuation AssumptionsCredit Quality Indicators
| | | | | | | | | | |
September 30, 2021 | | | | Subordinate Securities |
| | | | |
Default rate | | | | N/A |
Loss severity | | | | N/A |
|
| | | | |
September 30, 2017 | | Range for Securities |
Prepayment rates | | 8% | - | 15% |
Projected losses | | 0.25% | - | 8% |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 7.9. Real Estate Securities - (continued)
The following table details the activity related to the allowance for credit loss component of OTTI (i.e., OTTI recognized through earnings)losses for AFS securities held atfor the three and nine months ended September 30, 2017 and 2016, for which a portion of an OTTI was recognized in other comprehensive income.2021.
Table 7.89.11 – ActivityRollforward of theAllowance for Credit Component of Other-than-Temporary ImpairmentsLosses
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | 25,802 |
| | $ | 28,198 |
| | $ | 28,261 |
| | $ | 28,277 |
|
Additions | | | | | | | | |
Initial credit impairments | | — |
| | — |
| | 178 |
| | 291 |
|
Subsequent credit impairments | | — |
| | — |
| | 47 |
| | — |
|
Reductions | | | | | | | | |
Securities sold, or expected to sell | | — |
| | — |
| | (2,282 | ) | | (261 | ) |
Securities with no outstanding principal at period end | | (42 | ) | | — |
| | (444 | ) | | (109 | ) |
Balance at End of Period | | $ | 25,760 |
| | $ | 28,198 |
| | $ | 25,760 |
| | $ | 28,198 |
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
(In Thousands) | | |
Beginning balance allowance for credit losses | | $ | — | | | $ | 388 | |
| | | | |
Additions to allowance for credit losses on securities for which credit losses were not previously recorded | | — | | | — | |
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period | | — | | | (388) | |
Allowance on purchased financial assets with credit deterioration | | — | | | — | |
Reduction to allowance for securities sold during the period | | — | | | — | |
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell | | — | | | — | |
Write-offs charged against allowance | | — | | | — | |
Recoveries of amounts previously written off | | — | | | — | |
Ending balance of allowance for credit losses | | $ | — | | | $ | — | |
Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income.income (loss). The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 7.99.12 – Gross Realized Gains and Losses on AFS Securities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Gross realized gains - sales | | $ | — | | | $ | — | | | $ | 1,507 | | | $ | 8,779 | |
Gross realized gains - calls | | 6,389 | | | — | | | 15,484 | | | — | |
Gross realized losses - sales | | — | | | — | | | — | | | (4,144) | |
| | | | | | | | |
Total Realized Gains on Sales and Calls of AFS Securities, net | | $ | 6,389 | | | $ | — | | | $ | 16,991 | | | $ | 4,635 | |
During the three months ended September 30, 2021, we called 2 of our unconsolidated Sequoia entities, and purchased $66 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $6 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). During the nine months ended September 30, 2021, we called 6 of our unconsolidated Sequoia entities, and purchased $167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $15 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss).
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Gross realized gains - sales | | $ | 1,734 |
| | $ | 1,990 |
| | $ | 9,381 |
| | $ | 22,395 |
|
Gross realized gains - calls | | — |
| | — |
| | 677 |
| | 1,210 |
|
Gross realized losses - sales | | — |
| | — |
| | — |
| | (2,293 | ) |
Gross realized losses - calls | | — |
| | — |
| | (497 | ) | | — |
|
Total Realized Gains on Sales and Calls of AFS Securities, net | | $ | 1,734 |
| | $ | 1,990 |
| | $ | 9,561 |
| | $ | 21,312 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 8. 10. Other Investments
Other investments at September 30, 2021 and December 31, 2020 are summarized in the following table.
Table 10.1 – Components of Other Investments
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Servicer advance investments | | $ | 170,062 | | | $ | 231,489 | |
HEIs | | 167,856 | | | 42,440 | |
Strategic investments | | 31,108 | | | 4,449 | |
Excess MSRs | | 29,185 | | | 34,418 | |
Mortgage servicing rights | | 12,389 | | | 8,815 | |
| | | | |
Other | | 11,766 | | | 26,564 | |
Total Other Investments | | $ | 422,366 | | | $ | 348,175 | |
Servicer advance investments
We and a third-party co-investor, through 2 partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to a portfolio of legacy residential mortgage-backed securitizations serviced by the co-investor (Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information regarding the transactions). At September 30, 2021, we had funded $94 million of total capital to the SA Buyers (see Note 16 for additional detail).
At September 30, 2021, our servicer advance investments had a carrying value of $170 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of $7.53 billion. The outstanding servicer advance receivables associated with this investment were $159 million at September 30, 2021, which were financed with short-term non-recourse securitization debt (see Note 13 for additional detail on this debt). The servicer advance receivables were comprised of the following types of advances at September 30, 2021 and December 31, 2020.
Table 10.2 – Components of Servicer Advance Receivables
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Principal and interest advances | | $ | 77,116 | | | $ | 110,923 | |
Escrow advances (taxes and insurance advances) | | 62,117 | | | 79,279 | |
Corporate advances | | 20,175 | | | 27,454 | |
Total Servicer Advance Receivables | | $ | 159,408 | | | $ | 217,656 | |
We account for our servicer advance investments at fair value and during the three and nine months ended September 30, 2021, we recorded $2 million and $7 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $2 million and $3 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded $3 million and $8 million of interest income, respectively, through Other interest income, and recorded a net market valuation gain of less than $0.1 million and a net market valuation loss of $6 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss).
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 10. Other Investments - (continued)
HEIs
In 2019, we entered into a flow purchase agreement to acquire home equity investment contracts from Point Digital. At September 30, 2021, we had acquired $47 million of HEIs under this flow purchase agreement. We account for these investments under the fair value option and during the three and nine months ended September 30, 2021, we recorded net market valuation gains of $6 million and $13 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded a net market valuation gain of $2 million and a net market valuation loss of $4 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss).
During the three months ended September 30, 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased $122 million of additional HEIs from other contributors to the securitization, then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS (See Note 4 for further discussion on the Point securitization entity and Note 14 for further discussion on ABS issued). We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity. The other contributors to the securitization own subordinate certificates in the entity that were valued at $17 million at September 30, 2021 and are carried on our balance sheet as non-controlling interests within the Accrued expenses and other liabilities line item of our consolidated balance sheets.
We consolidate the Point HEI securitization entity in accordance with GAAP and have elected to account for it under the CFE election. During the three months ended September 30, 2021, we recorded net market valuation gains of less than $0.1 million related to our net investment in the Point HEI entity through Investment fair value changes, net on our consolidated statements of income (loss).
During three months ended September 30, 2021, we amended our flow purchase agreement with Point Digital and committed to purchase additional HEIs. See Note 16 for additional detail on this commitment.
Strategic Investments
Strategic investments represent investments we have made in companies through our RWT Horizons venture investment strategy or at a corporate level. At September 30, 2021, we had made 11 investments in companies through RWT Horizons and two corporate investments, including our investment in Churchill Finance. See Note 3 for additional detail on how we account for our strategic investments.
Excess MSRs
In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and nine months ended September 30, 2021, we recognized $3 million and $9 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1 million and $5 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recognized $3 million and $9 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1 million and $8 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss).
Mortgage Servicing Rights
We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The following table presentsmajority of our investments in MSRs were made through the fair valueretention of MSRsservicing rights associated with the residential jumbo mortgage loans that we acquired and the aggregate principal amounts of associated loans as of September 30, 2017 and December 31, 2016.
Table 8.1 – Fair Value of MSRs and Aggregate Principal Amounts of Associated Loans
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(In Thousands) | | MSR Fair Value | | Associated Principal | | MSR Fair Value | | Associated Principal |
Mortgage Servicing Rights | | | | | | | | |
Conforming Loans | | $ | 1,125 |
| | $ | 107,298 |
| | $ | 58,523 |
| | $ | 4,989,720 |
|
Jumbo Loans | | 61,803 |
| | 5,639,708 |
| | 60,003 |
| | 5,467,169 |
|
Total Mortgage Servicing Rights | | $ | 62,928 |
| | $ | 5,747,006 |
| | $ | 118,526 |
| | $ | 10,456,889 |
|
The following table presents activity for MSRs forsubsequently sold to third parties. During the three and nine months ended September 30, 20172021, we retained $5 million and 2016.$9 million of MSRs, respectively, from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.
Table 8.2 – Activity for MSRs
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | 63,770 |
| | $ | 110,046 |
| | $ | 118,526 |
| | $ | 191,976 |
|
Additions | | 256 |
| | 3,443 |
| | 7,957 |
| | 22,941 |
|
Sales | | — |
| | (8,860 | ) | | (52,966 | ) | | (38,419 | ) |
Changes in fair value due to: | | | | | | | | |
Changes in assumptions (1) | | 563 |
| | 7,085 |
| | (3,450 | ) | | (52,723 | ) |
Other changes (2) | | (1,661 | ) | | (5,705 | ) | | (7,139 | ) | | (17,766 | ) |
Balance at End of Period | | $ | 62,928 |
| | $ | 106,009 |
| | $ | 62,928 |
| | $ | 106,009 |
|
| |
(1) | Primarily reflects changes in prepayment assumptions due to changes in market interest rates. |
| |
(2) | Represents changes due to receipt of expected cash flows. |
During the three months ended September 30, 2017, we did not sell any MSRs. During the nine months ended September 30, 2017, we sold conforming MSRs with a fair value of $53 million.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 8. Mortgage Servicing Rights10. Other Investments - (continued)
We make investments inAt September 30, 2021 and December 31, 2020, our MSRs through the retentionhad a fair value of servicing rights$12 million and $9 million, respectively, and were associated with the residential mortgage loans that we acquirewith an aggregate principal balance of $2.29 billion and subsequently transfer to third parties or through the direct acquisition of MSRs sold by third parties. We hold our MSR investments at our taxable REIT subsidiary. The following table details the retention and purchase of MSRs during$2.59 billion, respectively. During the three and nine months ended September 30, 2017.
Table 8.3 – MSR Additions
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
(In Thousands) | | MSR Fair Value | | Associated Principal | | MSR Fair Value | | Associated Principal |
Jumbo MSR additions: | | | | | | | | |
From securitization | | $ | — |
| | $ | — |
| | $ | 7,123 |
| | $ | 654,605 |
|
From loan sales | | — |
| | — |
| | 263 |
| | 31,658 |
|
Total jumbo MSR additions | | — |
| | — |
| | 7,386 |
| | 686,263 |
|
Conforming MSR additions: | | | | | | | | |
From purchases | | 256 |
| | 41,263 |
| | 571 |
| | 95,595 |
|
Total MSR Additions | | $ | 256 |
| | $ | 41,263 |
| | $ | 7,957 |
| | $ | 781,858 |
|
The following table presents the components2021, including net market valuation gains and losses on our MSRs and related risk management derivatives, we recorded net income of $0.3 million and $1 million, respectively, through Other income on our MSRconsolidated statements of income for(loss). During the three and nine months ended September 30, 20172020, we recorded net losses of $2 million and 2016.$6 million, respectively, through Other income on our consolidated statements of income (loss).
Table 8.4 – Components of MSR Income, net
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Servicing income | | $ | 3,872 |
| | $ | 9,943 |
| | $ | 17,290 |
| | $ | 32,199 |
|
Cost of sub-servicer | | (476 | ) | | (1,217 | ) | | (2,515 | ) | | (4,958 | ) |
Net servicing fee income | | 3,396 |
| | 8,726 |
| | 14,775 |
| | 27,241 |
|
Market valuation changes of MSRs | | (1,351 | ) | | 1,380 |
| | (10,842 | ) | | (70,489 | ) |
Market valuation changes of associated derivatives | | (422 | ) | | (6,336 | ) | | 1,869 |
| | 55,874 |
|
MSR provision for repurchases | | (8 | ) | | — |
| | 304 |
| | 208 |
|
MSR Income, Net | | $ | 1,615 |
| | $ | 3,770 |
| | $ | 6,106 |
| | $ | 12,834 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 9.11. Derivative Financial Instruments
The following table presents the fair value and notional amount of our derivative financial instruments at September 30, 20172021 and December 31, 2016.2020.
Table 9.111.1 – Fair Value and Notional Amount of Derivative Financial Instruments
| | | | September 30, 2017 | | December 31, 2016 | | September 30, 2021 | | December 31, 2020 |
| | Fair Value | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount |
(In Thousands) | | (In Thousands) | |
| Assets - Risk Management Derivatives | | | | | | | | | Assets - Risk Management Derivatives | | | | | | | | |
Interest rate swaps | | $ | 3,645 |
| | $ | 509,000 |
| | $ | 19,859 |
| | $ | 1,009,000 |
| Interest rate swaps | | $ | 3,213 | | | $ | 293,200 | | | $ | 224 | | | $ | 42,000 | |
TBAs | | 2,875 |
| | 985,000 |
| | 8,300 |
| | 850,000 |
| TBAs | | 8,213 | | | 2,205,000 | | | 18,260 | | | 3,520,000 | |
Futures | | 135 |
| | 7,500 |
| | — |
| | — |
| |
| Swaptions | | 297 |
| | 300,000 |
| | 5,121 |
| | 345,000 |
| Swaptions | | 30,415 | | | 1,335,000 | | | 19,727 | | | 1,585,000 | |
| Assets - Other Derivatives | | | | | | | | | Assets - Other Derivatives | |
Loan purchase commitments | | 4,996 |
| | 802,550 |
| | 3,315 |
| | 352,981 |
| |
Loan purchase and interest rate lock commitments | | Loan purchase and interest rate lock commitments | | 9,262 | | | 1,687,314 | | | 15,027 | | | 2,617,254 | |
| Total Assets | | $ | 11,948 |
| | $ | 2,604,050 |
| | $ | 36,595 |
| | $ | 2,556,981 |
| Total Assets | | $ | 51,103 | | | $ | 5,520,514 | | | $ | 53,238 | | | $ | 7,764,254 | |
| | | | | | | | | | | | | | | | |
Liabilities - Cash Flow Hedges | | | | | | | | | |
Interest rate swaps | | $ | (45,093 | ) | | $ | 139,500 |
| | $ | (44,822 | ) | | $ | 139,500 |
| |
| Liabilities - Risk Management Derivatives | | | | | | | | | Liabilities - Risk Management Derivatives | |
Interest rate swaps | | (12,901 | ) | | 1,838,500 |
| | (12,097 | ) | | 1,101,500 |
| Interest rate swaps | | $ | (74) | | | $ | 40,500 | | | $ | — | | | $ | — | |
TBAs | | (3,946 | ) | | 950,000 |
| | (4,681 | ) | | 510,000 |
| TBAs | | (7,599) | | | 2,190,000 | | | (15,495) | | | 3,105,000 | |
Futures | | (423 | ) | | 29,000 |
| | (928 | ) | | 87,500 |
| |
Interest rate futures | | Interest rate futures | | (749) | | | 133,200 | | | — | | | — | |
Liabilities - Other Derivatives | | | | | | | | | Liabilities - Other Derivatives | |
Loan purchase commitments | | (2,875 | ) | | 683,709 |
| | (3,801 | ) | | 584,862 |
| Loan purchase commitments | | (2,550) | | | 1,084,579 | | | (577) | | | 477,153 | |
| Total Liabilities | | $ | (65,238 | ) | | $ | 3,640,709 |
| | $ | (66,329 | ) | | $ | 2,423,362 |
| Total Liabilities | | $ | (10,972) | | | $ | 3,448,279 | | | $ | (16,072) | | | $ | 3,582,153 | |
Total Derivative Financial Instruments, Net | | $ | (53,290 | ) | | $ | 6,244,759 |
| | $ | (29,734 | ) | | $ | 4,980,343 |
| Total Derivative Financial Instruments, Net | | $ | 40,131 | | | $ | 8,968,793 | | | $ | 37,166 | | | $ | 11,346,407 | |
Risk Management Derivatives
To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At September 30, 2017,2021, we were party to swaps and swaptions with an aggregate notional amount of $2.65$1.67 billion, TBA agreements sold with an aggregate notional amount of $1.94$4.40 billion, and financialinterest rate futures contracts with an aggregate notional amount of $37$133 million. At December 31, 2016,2020, we were party to swaps and swaptions with an aggregate notional amount of $2.46$1.63 billion and TBA agreements sold with an aggregate notional amount of $1.36 billion, and financial futures contracts with an aggregate notional amount of $88 million.$6.63 billion.
During the three and nine months ended September 30, 2017,2021, risk management derivatives had net market valuation lossesgains of $9$4 million and $36$38 million, respectively. During the three and nine months ended September 30, 2016,2020, risk management derivatives had net market valuation losses of $5 million0 and $11$98 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net, and MSROther income net on our consolidated statements of income.income (loss).
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 9.11. Derivative Financial Instruments - (continued)
Loan Purchase and Interest Rate Lock Commitments
LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. Net market valuation gains on LPCs were $13 million and $34 million forFor both the three and nine months ended September 30, 2017, respectively,2021, LPCs and were $12 million and $36 million for the three and nine months ended September 30, 2016, respectively. TheIRLCs had net market valuation gains and lossesof $18 million that were recorded in Mortgage banking activities, net on our consolidated statements of income.income (loss). For the three and nine months ended September 30, 2020, LPCs and IRLCs had net market valuation gains of $13 million and $35 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss).
Derivatives Designated as Cash Flow Hedges
To manage the variability in interest expense related to portionsa portion of our long-term debt and certain adjustable-rate securitization entity liabilities that areis included in our consolidated balance sheets for financial reporting purposes, we designated certain interest rate swaps as cash flow hedges with an aggregate notional balancehedges.
During the first quarter of $140 million.
For the three2020, we terminated and nine months ended September 30, 2017, changes in the valuessettled all of our outstanding derivatives that had been designated as cash flow hedges were positive $0.3 million and negative $0.4 million, respectively, and were recorded in Accumulated other comprehensive income,for our long-term debt, with a componentpayment of equity. For the three and nine months ended September 30, 2016, changes in the values of designated cash flow hedges were positive $1 million and negative $23 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity.$84 million. For interest rate agreements currently or previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $44$77 million and $81 million at both September 30, 20172021 and December 31, 2016.2020, respectively. We are amortizing this loss into interest expense over the remaining term of the debt they were originally hedging. As of September 30, 2021, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.
For both the three and nine months ended September 30, 2021, we did not have any derivatives designated as cash flow hedges. For the three and nine months ended September 30, 2020, changes in the values of designated cash flow hedges were zero and negative $33 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity.
The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 9.211.2 – Impact on Interest Expense of Interest Rate Agreements Accounted for as Cash Flow Hedges
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 | (In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Net interest expense on cash flows hedges | | $ | (1,119 | ) | | $ | (1,314 | ) | | $ | (3,516 | ) | | $ | (4,049 | ) | Net interest expense on cash flows hedges | | $ | — | | | $ | — | | | $ | — | | | $ | (860) | |
| Realized net losses reclassified from other comprehensive income | | (14 | ) | | (18 | ) | | (42 | ) | | (55 | ) | Realized net losses reclassified from other comprehensive income | | (1,041) | | | (1,040) | | | (3,086) | | | (2,148) | |
Total Interest Expense | | $ | (1,133 | ) | | $ | (1,332 | ) | | $ | (3,558 | ) | | $ | (4,104 | ) | Total Interest Expense | | $ | (1,041) | | | $ | (1,040) | | | $ | (3,086) | | | $ | (3,008) | |
Derivative Counterparty Credit Risk
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2016,2020, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At September 30, 2017,2021, we assessed this risk as remote and did not record aan associated specific valuation adjustment.
At September 30, 2017,2021, we had outstanding derivative agreements with three counterparties (other than clearinghouses) and were in compliance with our derivative counterparty ISDA agreements governing our open derivative positions.agreements.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 10.12. Other Assets and Liabilities
Other assets at September 30, 20172021 and December 31, 2016,2020 are summarized in the following table.
Table 10.112.1 – Components of Other Assets
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Accrued interest receivable | | $ | 41,997 | | | $ | 39,445 | |
Investment receivable | | 32,420 | | | 43,176 | |
Deferred tax asset | | 20,153 | | | 871 | |
REO | | 18,863 | | | 8,413 | |
Margin receivable | | 16,503 | | | 4,758 | |
Operating lease right-of-use assets | | 13,659 | | | 15,012 | |
Fixed assets and leasehold improvements (1) | | 9,344 | | | 4,203 | |
| | | | |
| | | | |
| | | | |
Pledged collateral | | — | | | 1,177 | |
| | | | |
| | | | |
Other | | 9,254 | | | 13,533 | |
Total Other Assets | | $ | 162,193 | | | $ | 130,588 | |
|
| | | | | | | | |
(In Thousands) | | September 30, 2017 | | December 31, 2016 |
Margin receivable | | $ | 93,679 |
| | $ | 68,038 |
|
FHLBC stock | | 43,393 |
| | 43,393 |
|
Pledged collateral | | 42,933 |
| | 42,875 |
|
MSR holdback receivable | | 9,754 |
| | 1,862 |
|
Investment receivable | | 6,095 |
| | 1,068 |
|
Guarantee asset | | 3,049 |
| | 4,092 |
|
REO | | 3,020 |
| | 5,533 |
|
Fixed assets and leasehold improvements (1) | | 2,852 |
| | 2,750 |
|
Other | | 4,731 |
| | 12,334 |
|
Total Other Assets | | $ | 209,506 |
| | $ | 181,945 |
|
(1)Fixed assets and leasehold improvements had a basis of $17 million and accumulated depreciation of $7 million at September 30, 2021. | |
(1) | Fixed assets and leasehold improvements had a basis of $6 million and accumulated depreciation of $3 million at September 30, 2017. |
Accrued expenses and other liabilities at September 30, 20172021 and December 31, 20162020 are summarized in the following table.
Table 10.212.2 – Components of Accrued Expenses and Other Liabilities
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Accrued compensation | | $ | 64,354 | | | $ | 24,393 | |
Margin payable | | 48,298 | | | 14,728 | |
Accrued interest payable | | 34,545 | | | 34,858 | |
Payable to non-controlling interests (1) | | 31,781 | | | 16,941 | |
Operating lease liabilities | | 15,771 | | | 16,687 | |
| | | | |
| | | | |
| | | | |
Accrued income taxes payable | | 11,336 | | | 5,614 | |
Residential loan and MSR repurchase reserve | | 9,003 | | | 8,631 | |
Guarantee obligations | | 7,902 | | | 10,039 | |
| | | | |
Accrued operating expenses | | 4,068 | | | 5,509 | |
Bridge loan holdbacks | | 3,784 | | | 5,708 | |
| | | | |
| | | | |
| | | | |
Deferred consideration | | — | | | 14,579 | |
Other | | 20,734 | | | 21,653 | |
Total Accrued Expenses and Other Liabilities | | $ | 251,576 | | | $ | 179,340 | |
|
| | | | | | | | |
(In Thousands) | | September 30, 2017 | | December 31, 2016 |
Guarantee obligations | | $ | 20,101 |
| | $ | 21,668 |
|
Accrued compensation | | 18,978 |
| | 18,830 |
|
Accrued taxes payable | | 15,835 |
| | 525 |
|
Unsettled trades | | 12,005 |
| | 24 |
|
Residential loan and MSR repurchase reserve | | 4,755 |
| | 5,432 |
|
Legal reserve | | 2,000 |
| | 2,000 |
|
Current accounts payable | | 1,920 |
| | 1,151 |
|
Accrued operating expenses | | 1,097 |
| | 4,493 |
|
Deferred tax liability | | 898 |
| | 898 |
|
Margin payable | | 841 |
| | 12,783 |
|
Other | | 2,632 |
| | 4,624 |
|
Total Other Liabilities | | $ | 81,062 |
| | $ | 72,428 |
|
(1)Includes $11 million and $17 million of payables to non-controlling interest holders in our consolidated Servicing Investment and Point HEI entities, respectively, as September 30, 2021. Includes $17 million payable to a non-controlling interest holder in our consolidated Servicing Investment entities at December 31, 2020.Margin Receivable and PayableDeferred Consideration
Margin receivable and payable resulted from margin calls between us and our counterparties under derivatives, master repurchase agreements, and warehouse facilities, whereby we or the counterparty posted collateral.
FHLB Stock
In accordance with our FHLB-member subsidiary's borrowing agreement with the FHLBC, our subsidiary is required to purchase and hold stockThe deferred consideration presented in the FHLBC. See Note 13 for additional detail.table above is related to our acquisition of 5 Arches in 2019. During the first quarter of 2021, we distributed 806,068 shares of Redwood common stock and paid $1 million in cash in full settlement of the remaining deferred consideration associated with this acquisition.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 10.12. Other Assets and Liabilities - (continued)
Guarantee Asset, Pledged Collateral, and Guarantee Obligations
The pledged collateral, guarantee asset, and guarantee obligations presented in the tables above are related to our risk sharing arrangements with Fannie Mae and Freddie Mac. In accordance with these arrangements, we are required to pledge collateral to secure our guarantee obligations. See Note 14 for additional information on our risk sharing arrangements.
Investment Receivable and Unsettled Trades
In accordance with our policy to record purchases and sales of securities on the trade date, if the trade and settlement of a purchase or sale crosses over a quarterly reporting period, we will record an investment receivable for sales and an unsettled trades liability for purchases.
MSR Holdback Receivable
MSR holdback receivable represents amounts owed to us from third parties related to the sale of MSRs.
REO
The following table summarizes the activity and carrying valuevalues of REO assets held at September 30, 2017 was $3 million, which includes the net effect of $3 million related to transfers into REORedwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities during the nine months ended September 30, 2017, offset by $92021.
Table 12.3 – REO Activity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
(In Thousands) | | Bridge(1) | | Legacy Sequoia | | Freddie Mac SLST | | CAFL SFR | | Total |
Balance at beginning of period | | $ | 4,600 | | | $ | 638 | | | $ | 646 | | | $ | 2,529 | | | $ | 8,413 | |
Transfers to REO | | 7,074 | | | 65 | | | 2,591 | | | 11,924 | | | 21,654 | |
Liquidations (2) | | (7,387) | | | (607) | | | (1,555) | | | (1,990) | | | (11,539) | |
Changes in fair value, net | | 536 | | | 178 | | | 276 | | | (655) | | | 335 | |
Balance at End of Period | | $ | 4,823 | | | $ | 274 | | | $ | 1,958 | | | $ | 11,808 | | | $ | 18,863 | |
(1)Includes activity of bridge loans at Redwood and at consolidated CAFL bridge entity.
(2)For the nine months ended September 30, 2021, REO liquidations resulted in $0.3 million of REO liquidations, and $3 million of unrealized gains resulting from market valuation adjustments. At September 30, 2017 and December 31, 2016, thererealized losses, which were 12 and 23 REO properties, respectively, recorded in Investment fair value changes, net on our consolidated balance sheets, allstatements of which were ownedincome (loss).
The following table provides the detail of REO assets at Redwood and at consolidated Legacy Sequoia, entities.
Accrued Taxes Payable
Accrued taxes payableFreddie Mac SLST, and CAFL SFR entities at September 30, 2017 represents the interim period current2021 and deferred tax provisions, less any estimated tax payments made during the interim period. Annually, we record separate current and deferred tax provisions and at December 31, 2016,2020.
Table 12.4 – REO Assets
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Number of REO assets | | Bridge | | Legacy Sequoia | | Freddie Mac SLST | | CAFL SFR | | Total |
At September 30, 2021 | | 5 | | | 2 | | | 20 | | | 2 | | | 29 | |
At December 31, 2020 | | 3 | | | 3 | | | 9 | | | 2 | | | 17 | |
Refer to our Annual Report on Form 10-K for the accrued taxes payable represents income taxes currently payable to federal and state tax authorities.
Legal and Repurchase Reserves
See Note 14year ended December 31, 2020 for additional information on the legaldescriptions of our other assets and residential repurchase reserves.liabilities.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 11.13. Short-Term Debt
We enter into repurchase agreements bank("repo"), loan warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At September 30, 2017,2021, we had outstanding agreements with several counterparties and we were in compliance with all of the related covenants. For additional information about these financial covenants and our short-term debt, see Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.
The table below summarizes our short-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at September 30, 20172021 and December 31, 2016.2020.
Table 11.113.1 – Short-Term Debt | | | | September 30, 2017 | | September 30, 2021 |
(Dollars in Thousands) | | Number of Facilities | | Outstanding Balance | | Limit | | Weighted Average Interest Rate | | Maturity | | Weighted Average Days Until Maturity | (Dollars in Thousands) | | Number of Facilities | | Outstanding Balance | | Limit | | Weighted Average Interest Rate (1) | | Maturity | | Weighted Average Days Until Maturity |
Facilities | | | | | | | | | | Facilities | | | | | | | | | | | | |
Residential loan warehouse | | 4 |
| | $ | 438,243 |
| | $ | 1,325,000 |
| | 2.80 | % | | 12/2017-8/2018 | | 150 | Residential loan warehouse | | 7 | | | $ | 1,335,464 | | | $ | 2,700,000 | | | 1.89 | % | | 11/2021-8/2022 | | 156 |
| Business purpose loan warehouse | | Business purpose loan warehouse | | 2 | | | 183,800 | | | 350,000 | | | 3.39 | % | | 3/2022-7/2022 | | 201 |
Real estate securities repo | | 8 |
| | 549,811 |
| | — |
| | 2.46 | % | | 10/2017-12/2017 | | 28 | Real estate securities repo | | 3 | | | 79,766 | | | — | | | 1.23 | % | | 10/2021-12/2021 | | 34 |
| Total Short-Term Debt Facilities | | 12 |
| | 988,054 |
| | | | | | Total Short-Term Debt Facilities | | 12 | | | 1,599,030 | | |
Convertible notes, net | | N/A |
| | 250,142 |
| | — |
| | 4.63 | % | | 4/2018 | | 197 | |
Servicer advance financing | | Servicer advance financing | | 1 | | | 151,911 | | | 260,000 | | | 1.89 | % | | 11/2021 | | 61 |
| Total Short-Term Debt | |
| | $ | 1,238,196 |
| | | | | | Total Short-Term Debt | | $ | 1,750,941 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
(Dollars in Thousands) | | Number of Facilities | | Outstanding Balance | | Limit | | Weighted Average Interest Rate (1) | | Maturity | | Weighted Average Days Until Maturity |
Facilities | | | | | | | | | | | | |
Residential loan warehouse | | 4 | | | $ | 137,269 | | | $ | 1,300,000 | | | 2.45 | % | | 1/2021-11/2021 | | 268 |
| | | | | | | | | | | | |
Business purpose loan warehouse | | 2 | | | 99,190 | | | 500,000 | | | 3.37 | % | | 5/2022-6/2022 | | 521 |
Real estate securities repo | | 3 | | | 77,775 | | | — | | | 2.24 | % | | 1/2021-3/2021 | | 36 |
Total Short-Term Debt Facilities | | 9 | | | 314,234 | | | | | | | | | |
Servicer advance financing | | 1 | | | 208,375 | | | 335,000 | | | 1.95 | % | | 11/2021 | | 334 |
| | | | | | | | | | | | |
Total Short-Term Debt | | | | $ | 522,609 | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in Thousands) | | Number of Facilities | | Outstanding Balance | | Limit | | Weighted Average Interest Rate | | Maturity | | Weighted Average Days Until Maturity |
Facilities | | | | | | | | | | | | |
Residential loan warehouse | | 4 |
| | $ | 485,544 |
| | $ | 1,325,000 |
| | 2.40 | % | | 1/2017-12/2017 | | 206 |
Real estate securities repo | | 7 |
| | 305,995 |
| | — |
| | 1.91 | % | | 1/2017-3/2017 | | 24 |
Total Short-Term Debt | | 11 |
| | $ | 791,539 |
| | | | | | | | |
(1)Borrowings under our facilities are generally uncommitted and charged interest based on a specified margin over the one-month LIBOR interest rate. At September 30, 2017, all of these borrowings were under uncommitted facilities and were due within 364 days (or less) of the borrowing date.1- or 3-month LIBOR.
During the three months ended June 30, 2017, $288 million principal amount of 4.625% convertible senior notes and $2 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt, as the maturity of the notes was less than one year as of April 2017. Additionally, during the three months ended June 30, 2017, we repurchased $37 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the accrued interest payable balance on this debt was $5 million. See Note 13 for additional information on our convertible notes.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 11.13. Short-Term Debt - (continued)
The fairfollowing table below presents the value of held-for-sale residential loans, securities, and real estate securitiesother assets pledged as collateral under our short-term debt facilities was $493 million and $663 million, respectively, at September 30, 20172021 and $534 million and $363 million, respectively, at December 31, 2016. 2020.
Table 13.2 – Collateral for Short-Term Debt
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Collateral Type | | | | |
Held-for-sale residential loans | | $ | 1,478,424 | | | $ | 156,355 | |
Business purpose loans | | 254,655 | | | 127,029 | |
Real estate securities | | | | |
On balance sheet | | 14,367 | | | 23,193 | |
Sequoia securitizations (1) | | 62,075 | | | 63,105 | |
| | | | |
Freddie Mac K-Series securitization (1) | | 31,388 | | | 28,255 | |
| | | | |
Total real estate securities owned | | 107,830 | | | 114,553 | |
Restricted cash and other assets | | 1,709 | | | 315 | |
Total Collateral for Short-Term Debt Facilities | | 1,842,618 | | | 398,252 | |
Cash | | 12,975 | | | 9,978 | |
Restricted cash | | 19,872 | | | 23,220 | |
Servicer advances | | 159,408 | | | 217,656 | |
Total Collateral for Servicer Advance Financing | | 192,255 | | | 250,854 | |
Total Collateral for Short-Term Debt | | $ | 2,034,873 | | | $ | 649,106 | |
(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS debt issued from these securitizations.
For the three and nine months ended September 30, 2017,2021, the average balances of our short-term debt facilities were $1.07$1.98 billion and $0.97$1.61 billion, respectively. At September 30, 20172021 and December 31, 2016,2020, accrued interest payable on our short-term debt facilities was $5$2 million and $3$1 million, respectively.
Servicer advance financing consists of non-recourse short-term securitization debt used to finance servicer advance investments. We consolidate the securitization entity that issued the debt, but the entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. At September 30, 2021, the accrued interest payable balance on this financing was $0.1 million and the unamortized capitalized commitment costs were $0.1 million.
We also maintain a $10 million committed line of credit with a financial institution that is secured by certain mortgage-backed securities with a fair market value of $6$2 million at September 30, 2017.2021. At both September 30, 20172021 and December 31, 2016,2020, we had no outstanding borrowings on this facility.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 13. Short-Term Debt - (continued)
Remaining Maturities of Short-Term Debt
The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt as well as our convertible notes at September 30, 2017.2021.
Table 11.213.3 – Short-Term Debt by Collateral Type and Remaining Maturities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
(In Thousands) | | Within 30 days | | 31 to 90 days | | Over 90 days | | Total |
Collateral Type | | | | | | | | |
Held-for-sale residential loans | | $ | — | | | $ | 278,663 | | | $ | 1,056,801 | | | $ | 1,335,464 | |
Business purpose loans | | — | | | — | | | 183,800 | | | 183,800 | |
Real estate securities | | 43,800 | | | 35,966 | | | — | | | 79,766 | |
Total Secured Short-Term Debt | | 43,800 | | | 314,629 | | | 1,240,601 | | | 1,599,030 | |
Servicer advance financing | | — | | | 151,911 | | | — | | | 151,911 | |
| | | | | | | | |
Total Short-Term Debt | | $ | 43,800 | | | $ | 466,540 | | | $ | 1,240,601 | | | $ | 1,750,941 | |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 |
(In Thousands) | | Within 30 days | | 31 to 90 days | | Over 90 days | | Total |
Collateral Type | | | | | | | | |
Held-for-sale residential loans | | $ | — |
| | $ | 120,219 |
| | $ | 318,024 |
| | $ | 438,243 |
|
Real estate securities | | 422,300 |
| | 127,511 |
| | — |
| | 549,811 |
|
Total Secured Short-Term Debt | | 422,300 |
| | 247,730 |
| | 318,024 |
| | 988,054 |
|
Convertible notes, net | | — |
| | — |
| | 250,142 |
| | 250,142 |
|
Total Short-Term Debt | | $ | 422,300 |
| | $ | 247,730 |
| | $ | 568,166 |
| | $ | 1,238,196 |
|
Note 12.14. Asset-Backed Securities Issued
Through our Sequoia securitization program, we sponsor securitization transactions in which ABS backed by residential mortgage loans areissued represents securities issued by Sequoia entities. We consolidated the Legacy Sequoianon-recourse securitization entities and beginning in September 2017, the Sequoia Choice securitization entity, that we determined were VIEs and for which we determined we were the primary beneficiary. Each consolidated securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood. Our exposure to these entities is primarily through the financial interests we have retained, although we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a resultconsolidate under GAAP. The majority of our having sold assets directly or indirectly to these entities.
ABS issued is carried at fair value under the CFE election (see Note 4 for additional detail) with the remainder carried at amortized cost. The carrying values of ABS issued by theseour consolidated securitization entities consist of various classes of securities that pay interest on a monthly or quarterly basis. All ABS issued byat September 30, 2021 and December 31, 2020, along with other selected information, are summarized in the Sequoia Choice entity pay fixed rates of interest and substantially all ABS issued by the Legacy Sequoia entities pay variable rates of interest, which are indexed to one-, three-, or six-month LIBOR. Some ABS issued by the Legacy Sequoia entities pay hybrid rates, which are fixed rates that subsequently adjust to variable rates. ABS issued also includes some interest-only classes with coupons set at a fixed spread to a benchmark rate, or set at a spread to the interest rates earned on the assets less the interest rates paid on the liabilities of a securitization entity.following table.
Table 14.1 – Asset-Backed Securities Issued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021 | | Legacy Sequoia | | Sequoia | | CAFL (1) | | Freddie Mac SLST (2) | | Freddie Mac K-Series | | Point HEI | | Total |
(Dollars in Thousands) | | | | | | | |
Certificates with principal balance | | $ | 273,957 | | | $ | 2,199,488 | | | $ | 3,134,946 | | | $ | 1,630,252 | | | $ | 420,654 | | | $ | 145,320 | | | $ | 7,804,617 | |
Interest-only certificates | | 739 | | | 21,003 | | | 189,946 | | | 19,787 | | | 10,885 | | | — | | | 242,360 | |
Market valuation adjustments | | (35,249) | | | 22,808 | | | 68,684 | | | 60,625 | | | 19,863 | | | 117 | | | 136,848 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
ABS Issued, Net | | $ | 239,447 | | | $ | 2,243,299 | | | $ | 3,393,576 | | | $ | 1,710,664 | | | $ | 451,402 | | | $ | 145,437 | | | $ | 8,183,825 | |
Range of weighted average interest rates, by series(3) | | 0.49% to 1.45% | | 2.34% to 5.07% | | 2.34% to 5.21% | | 3.50% to 4.75% | | 3.41 | % | | 3.27 | % | | |
Stated maturities(3) | | 2024 - 2036 | | 2047 - 2051 | | 2021 - 2031 | | 2028 - 2059 | | 2025 | | 2052 | | |
Number of series | | 20 | | | 13 | | | 16 | | | 3 | | | 1 | | | 1 | | | |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 12.14. Asset-Backed Securities Issued - (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | Legacy Sequoia | | Sequoia | | CAFL | | Freddie Mac SLST (2) | | Freddie Mac K-Series | | Point HEI | | Total |
(Dollars in Thousands) | | | | | | | |
Certificates with principal balance | | $ | 329,039 | | | $ | 1,309,957 | | | $ | 2,716,425 | | | $ | 1,866,145 | | | $ | 416,339 | | | $ | — | | | $ | 6,637,905 | |
Interest-only certificates | | 1,092 | | | 4,591 | | | 162,934 | | | 23,335 | | | 13,026 | | | — | | | 204,978 | |
Market valuation adjustments | | (47,805) | | | 32,809 | | | 133,734 | | | 104,439 | | | 34,601 | | | — | | | 257,778 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
ABS Issued, Net | | $ | 282,326 | | | $ | 1,347,357 | | | $ | 3,013,093 | | | $ | 1,993,919 | | | $ | 463,966 | | | $ | — | | | $ | 7,100,661 | |
Range of weighted average interest rates, by series(3) | | 0.35% to 1.55% | | 2.25% to 5.04% | | 2.68% to 5.42% | | 3.50% to 4.75% | | 3.39 | % | | — | % | | |
Stated maturities(3) | | 2024 - 2036 | | 2047 - 2050 | | 2021 - 2031 | | 2028 - 2059 | | 2025 | | — | | | |
Number of series | | 20 | | | 10 | | | 14 | | | 3 | | | 1 | | | — | | | |
The carrying values(1)Includes $270 million (principal balance) of ABS issued by Sequoiaa CAFL bridge securitization entities wetrust sponsored by Redwood and accounted for at amortized cost at September 30, 20172021.
(2)Includes $163 million and $205 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at September 30, 2021 and December 31, 2016, along2020, respectively.
(3)Certain ABS issued by CAFL, Freddie Mac SLST, and Point HEI entities is subject to early redemption and interest rate step-ups as described below.
During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with other selected information,the securitization of CoreVest bridge loans (presented within CAFL in table 14.1 above), which we determined was a VIE and for which we determined we are summarizedthe primary beneficiary. At issuance, we sold $270 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the following table.trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2021, the principal balance of the ABS issued was $270 million, and the debt discount and deferred issuance costs were $3 million, for a net carrying value of $267 million. The weighted average stated coupon of the ABS issued was 2.34% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in March 2024, and beginning in March 2025 the interest rate on the ABS issued increases by 2% through final maturity in March 2029. The ABS issued by this securitization were backed by assets including $276 million of bridge loans and $28 million of restricted cash at September 30, 2021. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024).
During the third quarter of 2021, we consolidated the assets and liabilities of the Point HEI entity formed in connection with the securitization of HEIs, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $146 million (principal balance) of ABS issued to third parties and retained a portion of the remaining beneficial ownership interest in the trust. We elected to account for the entity under the CFE election and account for the ABS issued at fair value, with the entire change in fair value of the ABS issued (including accrued interest) recorded through Investment fair value changes, net on our consolidated statements of income (loss). The ABS issued by the Point HEI entity are subject to an optional redemption in September 2023, and beginning in September 2024 the interest rate on the ABS issued increases by 2% through final maturity in 2052.
Table 12.1 –During the third quarter of 2020, we transferred all of the subordinate securities we owned from two consolidated re-performing loan securitization VIEs sponsored by Freddie Mac SLST to a re-securitization trust, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $210 million (principal balance) of ABS issued to third parties and retained 100% of the remaining beneficial ownership interest in the trust through ownership of a subordinate security issued by the trust. The ABS was issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2021, the principal balance of the ABS issued was $163 million, and the debt discount and deferred issuance costs were $3 million, for a carrying value of $161 million. The stated coupon of the ABS issued was 4.75% at issuance and the final stated maturity occurs in July 2059. The ABS issued is subject to an optional redemption in July 2022 and in July 2023 the ABS interest rate steps up to 7.75%.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 14. Asset-Backed Securities Issued
- (continued)
|
| | | | | | | | | | | | |
September 30, 2017 | | Legacy Sequoia | | Sequoia Choice | | Total |
(Dollars in Thousands) | | | |
Certificates with principal balance | | $ | 730,312 |
| | $ | 276,873 |
| | $ | 1,007,185 |
|
Interest-only certificates | | 2,829 |
| | 4,153 |
| | 6,982 |
|
Market valuation adjustments | | (75,181 | ) | | 5,302 |
| | (69,879 | ) |
ABS Issued, Net | | $ | 657,960 |
| | $ | 286,328 |
| | $ | 944,288 |
|
Range of weighted average interest rates, by series | | 1.20% to 2.56% |
| | 4.53% |
| | |
Stated maturities | | 2024 - 2036 |
| | 2047 |
| | |
Number of series | | 20 |
| | 1 |
| | |
|
| | | | | | | | | | | | |
December 31, 2016 | | Legacy Sequoia | | Sequoia Choice | | Total |
(Dollars in Thousands) | | | |
Certificates with principal balance | | $ | 880,517 |
| | $ | — |
| | $ | 880,517 |
|
Interest-only certificates | | 3,774 |
| | — |
| | 3,774 |
|
Market valuation adjustments | | (110,829 | ) | | — |
| | (110,829 | ) |
ABS Issued, Net | | $ | 773,462 |
| | $ | — |
| | $ | 773,462 |
|
Range of weighted average interest rates, by series | | 0.74% to 2.23% |
| | — | % | | |
Stated maturities | | 2024 - 2036 |
| | N/A |
| | |
Number of series | | 20 |
| | — |
| | |
The actual maturity of each class of ABS issued is primarily determined by the rate of principal prepayments on the assets of the issuing entity. Each series is also subject to redemption prior to the stated maturity according to the terms of the respective governing documents of each ABS issuing entity. As a result, the actual maturity of ABS issued may occur earlier than its stated maturity. At September 30, 2017, all2021, the majority of the ABS issued and outstanding had contractual maturities beyond five years.
At both September 30, 2017 See Note 4 for detail on the carrying value components of the collateral for ABS issued and December 31, 2016,outstanding. The following table summarizes the accrued interest payable on ABS issued by the Legacy Sequoia entities was $1 million. Atat September 30, 2017, accrued interest payable on ABS issued by the Sequoia Choice entity was $1 million.2021 and December 31, 2020. Interest due on consolidated ABS issued is payable monthly.
Table 14.2 – Accrued Interest Payable on Asset-Backed Securities Issued
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Legacy Sequoia | | $ | 107 | | | $ | 141 | |
Sequoia | | 5,918 | | | 4,697 | |
CAFL | | 10,760 | | | 10,122 | |
Freddie Mac SLST (1) | | 4,925 | | | 5,656 | |
Freddie Mac K-Series | | 1,195 | | | 1,177 | |
Total Accrued Interest Payable on ABS Issued | | $ | 22,905 | | | $ | 21,793 | |
(1)Includes accrued interest payable on ABS issued by a re-securitization trust sponsored by Redwood.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 12. Asset-Backed Securities Issued - (continued)
The following table summarizes the carrying value components of the collateral for ABS issued and outstanding at September 30, 2017 and December 31, 2016.
Table 12.2 – Collateral for Asset-Backed Securities Issued |
| | | | | | | | | | | | |
September 30, 2017 | | Legacy Sequoia | | Sequoia Choice | | Total |
(In Thousands) | | | |
Residential loans | | $ | 673,134 |
| | $ | 317,303 |
| | $ | 990,437 |
|
Restricted cash | | 147 |
| | — |
| | 147 |
|
Accrued interest receivable | | 898 |
| | 1,266 |
| | 2,164 |
|
REO | | 3,020 |
| | — |
| | 3,020 |
|
Total Collateral for ABS Issued | | $ | 677,199 |
| | $ | 318,569 |
| | $ | 995,768 |
|
|
| | | | | | | | | | | | |
December 31, 2016 | | Legacy Sequoia | | Sequoia Choice | | Total |
(In Thousands) | | | |
Residential loans | | $ | 791,636 |
| | $ | — |
| | $ | 791,636 |
|
Restricted cash | | 148 |
| | — |
| | 148 |
|
Accrued interest receivable | | 1,000 |
| | — |
| | 1,000 |
|
REO | | 5,533 |
| | — |
| | 5,533 |
|
Total Collateral for ABS Issued | | $ | 798,317 |
| | $ | — |
| | $ | 798,317 |
|
Note 13.15. Long-Term Debt
FHLBC Borrowings
In July 2014,The table below summarizes our FHLB-member subsidiary entered into a borrowing agreement with the Federal Home Loan Bank of Chicago. At September 30, 2017, under this agreement, our subsidiary could incur borrowings up to $2.00 billion, also referred to as “advances,” from the FHLBC secured by eligible collateral, including residential mortgage loans. During the three and nine months ended September 30, 2017, our FHLB-member subsidiary made no additional borrowings under this agreement. Under a final rule published by the Federal Housing Finance Agency in January 2016, our FHLB-member subsidiary will remain an FHLB member through the five-year transition period for captive insurance companies. Our FHLB-member subsidiary's existing $2.00 billion of FHLB debt, which matures beyond this transition period, is permitted to remain outstanding until its stated maturity. As residential loans pledged as collateral for this debt pay down, we are permitted to pledge additional loans or other eligible assets to collateralize this debt; however, we do not expect to be able to increase our subsidiary's FHLB debt above the existing $2.00 billion maximum.
At September 30, 2017, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with aincluding the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at September 30, 2021.
Table 15.1 – Long-Term Debt
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 |
(Dollars in Thousands) | | Borrowings | | Unamortized Deferred Issuance Costs / Discount | | Net Carrying Value | | Limit | | Weighted Average Interest Rate (1) | | Final Maturity |
Facilities | | | | | | | | | | | | |
Recourse Subordinate Securities Financing | | | | | | | | | | | | |
Sequoia | | $ | 147,182 | | | $ | (417) | | | $ | 146,765 | | | N/A | | 4.21 | % | | 9/2024 |
CAFL | | | | | | | | | | | | |
Facility A | | 102,370 | | | (429) | | | 101,941 | | | N/A | | 4.21 | % | | 2/2025 |
Facility B | | 95,011 | | | (439) | | | 94,572 | | | N/A | | 4.75 | % | | 6/2026 |
Non-Recourse BPL Financing | | | | | | | | | | | | |
Facility C | | 105,961 | | | (320) | | | 105,641 | | | 250,000 | | | L + 3.00% | | N/A |
Recourse BPL Financing | | | | | | | | | | | | |
Facility D | | 168,228 | | | — | | | 168,228 | | | 450,000 | | | L + 3.10% | | 6/2023 |
Facility E | | 230,883 | | | (141) | | | 230,742 | | | 250,000 | | | L + 3.00% | | 9/2023 |
Total Long-Term Debt Facilities | | 849,635 | | | (1,746) | | | 847,889 | | | | | | | |
Convertible notes | | | | | | | | | | | | |
4.75% convertible senior notes | | 198,629 | | | (2,098) | | | 196,531 | | | N/A | | 4.75 | % | | 8/2023 |
5.625% convertible senior notes | | 150,200 | | | (2,262) | | | 147,938 | | | N/A | | 5.625 | % | | 7/2024 |
5.75% exchangeable senior notes | | 172,092 | | | (3,582) | | | 168,510 | | | N/A | | 5.75 | % | | 10/2025 |
Trust preferred securities and subordinated notes | | 139,500 | | | (791) | | | 138,709 | | | N/A | | L + 2.25% | | 7/2037 |
Total Long-Term Debt | | $ | 1,510,056 | | | $ | (10,479) | | | $ | 1,499,577 | | | | | | | |
(1)Variable rate borrowings are based on 1- or 3-month LIBOR ("L" in the table above) plus an applicable spread.
Recourse Subordinate Securities Financing
In the third quarter of 1.3% and2021, a weighted average maturitysubsidiary of approximately eight years. At December 31, 2016, $2.00 billionRedwood entered into a repurchase agreement providing non-marginable recourse debt financing of advances were outstanding under this agreement, which were classified as long-term debt,certain securities retained from our consolidated CAFL securitizations. The financing is guaranteed by Redwood, with a weighted averagean interest rate of 0.64%approximately 4.75% through June 2024. The financing facility may be terminated, at our option, in June 2023, and has a weighted averagefinal maturity of nine years. Advancesin June 2026, provided that the interest rate on amounts outstanding under the facility increases between June 2024 and June 2026. See "Facility B" above for details on borrowings and securities pledged as collateral under this agreement incur interest charges based on a specified margin over the FHLBC’s 13-week discount note rate, which resets every 13 weeks. Total advances under this agreement were secured by residential mortgage loans with a fair value of $2.26 billionfacility at September 30, 2017. 2021.
Non-Recourse BPL Financing Facilities
In addition, cashthe third quarter of $24 million served2021, we reclassified one of our non-recourse facilities from long-term to short-term debt as collateral for these borrowingsthe maturity of this facility was less than one year at September 30, 2017, and is presented as restricted cash on our consolidated balance sheet. This agreement also requires our subsidiary to purchase and hold stock in the FHLBC in an amount equal to a specified percentage of outstanding advances. At September 30, 2017, our subsidiary held $43 million of FHLBC stock that is included in Other assets in our consolidated balance sheets.2021.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 13.15. Long-Term Debt - (continued)
In the second quarter of 2021, we repaid one of our non-recourse BPL financing facilities that had a balance of $242 million at March 31, 2021, and entered into a new non-recourse facility to finance business purpose bridge loans with a total borrowing capacity of $250 million (see details for "Facility C" above).
Recourse BPL Financing Facilities
In the second quarter of 2021, we reclassified one of our recourse facilities with a borrowing capacity of $450 million from short-term to long-term debt as we amended the terms of this facility, including an extension of its maturity (see details for "Facility D" above).
The following table below presents maturitiesthe value of loans, securities, and other assets pledged as collateral under our FHLBC borrowings by yearlong-term debt at September 30, 2017.2021 and December 31, 2020.
Table 13.115.2 – Maturities of FHLBC Borrowings by YearCollateral for Long-Term Debt |
| | | | |
(In Thousands) | | September 30, 2017 |
2024 | | $ | 470,171 |
|
2025 | | 887,639 |
|
2026 | | 642,189 |
|
Total FHLBC Borrowings | | $ | 1,999,999 |
|
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Collateral Type | | | | |
Bridge loans | | $ | 373,597 | | | $ | 544,151 | |
Single-family rental loans | | 298,014 | | | 154,774 | |
Real estate securities | | | | |
Sequoia securitizations (1) | | 246,892 | | | 249,446 | |
CAFL securitizations (1) | | 256,976 | | | 114,044 | |
Total real estate securities owned | | 503,868 | | | 363,490 | |
Other BPL investments | | — | | | 21,414 | |
Restricted cash | | — | | | 1,100 | |
Total Collateral for Long-Term Debt | | $ | 1,175,479 | | | $ | 1,084,929 | |
(1)Represents securities we have retained from consolidated securitization entities. For additional information about our FHLBC borrowings, see Part I, Item 2 of Quarterly Report on Form 10-Q underGAAP purposes, we consolidate the heading “Risks Relating to Debt Incurred under Short-loans and Long-Term Borrowing Facilities.”non-recourse ABS debt issued from these securitizations.
Convertible Notes
In August 2017, we issued $245 million principal amount of 4.75% convertible senior notes due 2023. These convertible notes require semi-annual interest payments at a fixed coupon rate of 4.75% until maturity or conversion, which will be no later than August 15, 2023. After deducting the underwriting discount and offering costs, we received $238 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 5.3% per annum. At September 30, 2017, these notes were convertible at the option of the holder at a conversion rate of 53.8394 common shares per $1,000 principal amount of convertible senior notes (equivalent to a conversion price of $18.57 per common share). Upon conversion of these notes by a holder, the holder will receive shares of our common stock. At September 30, 2017, the outstanding principal amount of these notes was $245 million. At September 30, 2017,The following table summarizes the accrued interest payable balance on thislong-term debt was $1 millionat September 30, 2021 and December 31, 2020.
Table 15.3 – Accrued Interest Payable on Long-Term Debt
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Long-term debt facilities | | $ | 900 | | | $ | 1,799 | |
Convertible notes | | | | |
4.75% convertible senior notes | | 1,206 | | | 3,564 | |
5.625% convertible senior notes | | 1,784 | | | 3,896 | |
5.75% exchangeable senior notes | | 4,948 | | | 2,474 | |
Trust preferred securities and subordinated notes | | 572 | | | 669 | |
Total Accrued Interest Payable on Long-Term Debt | | $ | 9,410 | | | $ | 12,402 | |
Refer to our Annual Report on Form 10-K for the unamortized deferred issuance costs were $7 million.year ended December 31, 2020 for a full description of our long-term debt.
In November 2014, RWT Holdings, Inc., a wholly-owned subsidiary of Redwood Trust, Inc., issued $205 million principal amount of 5.625% exchangeable senior notes due 2019. These exchangeable notes require semi-annual interest payments at a fixed coupon rate of 5.625% until maturity or exchange, which will be no later than November 15, 2019. After deducting the underwriting discount
Note 16. Commitments and offering costs, we received $198 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these exchangeable notes is approximately 6.3% per annum. Contingencies
Lease Commitments
At September 30, 2017, these notes2021, we were exchangeable at the optionobligated under 7 non-cancelable operating leases with expiration dates through 2031 for $18 million of the holder at an exchange rate of 46.1798 common shares per $1,000 principal amount of exchangeable senior notes (equivalent to an exchange price of $21.65 per common share). Upon exchange of these notes by a holder, the holder will receive shares of our common stock. During the nine monthscumulative lease payments. Our operating lease expense was $3 million for both nine-month periods ended September 30, 2017, we did not repurchase any of these notes. During the nine months ended September 30, 2016, we repurchased $4 million par value of these notes at a discount2021 and recorded a gain on extinguishment of debt of $0.3 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $201 million. At September 30, 2017, the accrued interest payable balance on this debt was $4 million and the unamortized deferred issuance costs were $3 million.
In March 2013, we issued $288 million principal amount of 4.625% convertible senior notes due 2018. These convertible notes require semi-annual interest payments at a fixed coupon rate of 4.625% until maturity or conversion, which will be no later than April 15, 2018. After deducting the underwriting discount and offering costs, we received $279 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 4.8% per annum. At September 30, 2017, these notes were convertible at the option of the holder at a conversion rate of 41.1320 common shares per $1,000 principal amount of convertible senior notes (equivalent to a conversion price of $24.31 per common share). Upon conversion of these notes by a holder, the holder will receive shares of our common stock. During the three months ended June 30, 2017, $288 million principal amount of these convertible notes and $2 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt, as the maturity of the notes was less than one year as of April 2017. Additionally, during the three months ended June 30, 2017, we repurchased $37 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $250 million. At September 30, 2017, the accrued interest payable balance on this debt was $5 million and the unamortized deferred issuance costs were $0.3 million.2020.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 13. Long-Term Debt16. Commitments and Contingencies - (continued)
Trust Preferred Securities and Subordinated Notes
At September 30, 2017, we had trust preferred securities and subordinated notes outstanding of $100 million and $40 million, respectively. This debt requires quarterly interest payments at a floating rate equal to three-month LIBOR plus 2.25% until the notes are redeemed. The $100 million trust preferred securities will be redeemed no later than January 30, 2037, and the $40 million subordinated notes will be redeemed no later than July 30, 2037. Prior to 2014, we entered into interest rate swaps with aggregate notional values totaling $140 million to hedge the variability in this long-term debt interest expense. Including hedging costs and amortization of deferred securities issuance costs, the weighted average interest expense yield on our trust preferred securities and subordinated notes is approximately 6.8% per annum. At both September 30, 2017 and December 31, 2016, the accrued interest payable balance on our trust preferred securities and subordinated notes was $1 million.
Under the terms of this debt, we covenant, among other things, to use our best efforts to continue to qualify as a REIT. If an event of default were to occur in respect of this debt, we would generally be restricted under its terms (subject to certain exceptions) from making dividend distributions to stockholders, from repurchasing common stock or repurchasing or redeeming any other then-outstanding equity securities, and from making any other payments in respect of any equity interests in us or in respect of any then-outstanding debt that is pari passu or subordinate to this debt.
Note 14. Commitments and Contingencies
Lease Commitments
At September 30, 2017, we were obligated under four non-cancelable operating leases with expiration dates through 2028 for $18 million of cumulative lease payments. Our operating lease expense was $2 million for both nine-month periods ended September 30, 2017 and 2016.
The following table presents our future lease commitments at September 30, 2017.2021.
Table 14.116.1 – Future Lease Commitments by Year
| | | | | | | | |
(In Thousands) | | September 30, 2021 |
2021 (3 months) | | $ | 928 | |
2022 | | 3,714 | |
2023 | | 3,235 | |
2024 | | 2,411 | |
2025 | | 1,983 | |
2026 and thereafter | | 6,128 | |
Total Lease Commitments | | 18,399 | |
Less: Imputed interest | | (2,628) | |
Operating Lease Liabilities | | $ | 15,771 | |
|
| | | | |
(In Thousands) | | September 30, 2017 |
2017 (3 months) | | $ | 387 |
|
2018 | | 1,948 |
|
2019 | | 1,987 |
|
2020 | | 1,965 |
|
2021 and thereafter | | 11,691 |
|
Total Lease Commitments | | $ | 17,978 |
|
During the nine months ended September 30, 2021, we did not enter into any new office leases. During the nine months ended September 30, 2021, we increased our operating lease right-of-use assets and liabilities by $1 million as the result of an amendment to one of our existing leases. At September 30, 2021, our operating lease liabilities were $16 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $14 million, which were a component of Other assets.We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the date of adoption. At September 30, 2021, the weighted-average remaining lease term and weighted-average discount rate for our leases was 7 years and 4.9%, respectively.
Commitment to Fund Bridge Loans
As of September 30, 2021, we had commitments to fund up to $426 million of additional advances on existing bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At September 30, 2021, we carried a $1 million contingent liability related to these commitments to fund construction advances. During the three and nine months ended September 30, 2021, we recorded a net market valuation loss of $0.3 million and a net market valuation gain of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded a net market valuation gain of $1 million and a net market valuation loss of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss).
Commitment to Fund Partnerships
In 2018, we invested in 2 partnerships created to acquire and manage certain mortgage servicing related assets (see Note 10 for additional detail). In connection with this investment, we are required to fund future net servicer advances related to the underlying mortgage loans. The actual amount of net servicer advances we may fund in the future is subject to significant uncertainty and will be based on the credit and prepayment performance of the underlying loans.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 14.16. Commitments and Contingencies - (continued)
Commitment to Acquire HEIs
In the third quarter of 2021, we amended an existing flow purchase agreement with Point Digital to acquire HEIs that Point Digital originates with homeowners. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by a deed of trust or a mortgage. Our investments in HEIs allow us to share in both home price appreciation and depreciation of the associated property. At September 30, 2021, we had an outstanding commitment to fund up to $125 million under this agreement.
Loss Contingencies — Risk SharingRisk-Sharing
At September 30, 2017,During 2015 and 2016, we had sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk sharingrisk-sharing arrangements with the Agencies. At September 30, 2017,2021, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was fullypartially collateralized by assets we transferred to pledged accounts and is presented as pledged collateral in Other assets on our consolidated balance sheets. We have no recourse to any third parties that would allow us to recover any amounts related to our obligations under the arrangements. At September 30, 2017,2021, we had not incurred anyless than $0.1 million of losses under these arrangements. For the three and nine months ended September 30, 2017,2021, other income related to these arrangements was $1 million and $2 million, respectively, and net market valuation losses related to these investments were less than $0.1 million and $0.1 million, respectively. For the three and nine months ended September 30, 2016,2020, other income related to these arrangements was $1 million and $3 million, respectively. For the threerespectively, and nine months ended September 30, 2017, net market valuation losses related to these investments were $0.3 million and $1 million, respectively. For the three and nine months ended September 30, 2016, net market valuation losses related to these investments were zero and $1 million, respectively.
All of the loans in the reference pools subject to these risk sharingrisk-sharing arrangements were originated in 2014 and 2015, and at September 30, 2017,2021, the loans had an unpaid principal balance of $2.19 billion$618 million and a weighted average FICO score of 758756 (at origination) and LTV ratio of 77%74% (at origination). At September 30, 2017, $32021, $21 million of the loans were 90 days or more delinquent, and $1of which one of these loans with an unpaid principal balance of $0.2 million werewas in foreclosure. At September 30, 2017,2021, the carrying value of our guarantee obligation was $20$8 million and included $10$5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.
Our consolidated balance sheets include assets of special purpose entities ("SPEs") associated with these risk sharingrisk-sharing arrangements (i.e., the "pledged collateral" referred to above) that can only be used to settle obligations of these SPEs for which the creditors of these SPEs (the Agencies) do not have recourse to Redwood Trust, Inc. or its affiliates.us. At September 30, 20172021 and December 31, 2016,2020, assets of such SPEs totaled $47$34 million and $49$46 million, respectively, and liabilities of such SPEs totaled $20$8 million and $22$10 million, respectively.
Loss Contingencies — Residential Repurchase Reserve
We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to residential loans we have sold to securitization trusts or third parties and for conforming residential loans associated with MSRs that we have purchased from third parties. We do not originate residential loans and we believe the initial risk of loss due to loan repurchases (i.e., due to a breach of representations and warranties) would generally be a contingency to the companies from whom we acquired the loans. However, in some cases, for example, where loans were acquired from companies that have since become insolvent, repurchase claims may result in our being liable for a repurchase obligation. Additionally, for certain loans we sold during the second quarter of 2020 that were previously held for investment, we have a direct obligation to repurchase these loans in the event of any early payment defaults (or "EPDs") by the underlying mortgage borrowers within certain specified periods following the sales.
At both September��September 30, 20172021 and December 31, 2016,2020, our repurchase reserve associated with our residential loans and MSRs was $5$9 million and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. We received 13 repurchase requests during the nine months ended September 30, 2017, and repurchased one loan during this period.
During the nine months ended September 30, 20172021 and 2016,2020, we received 3 and 8 repurchase requests, respectively, and repurchased 1 and zero loans, respectively. During the nine months ended September 30, 2021 and 2020, we recorded $0.5repurchase provisions of $0.6 million of reversal of provision for repurchases and $0.3$4 million, of provision for repurchases, respectively, that were recorded in Mortgage banking activities, netnet; Investment fair value changes, net; and MSROther income net on our consolidated statements of income.income (loss).
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 14.16. Commitments and Contingencies - (continued)
Loss Contingencies — Litigation, Claims and Demands
On or about December 23, 2009,There is no significant update regarding the Federal Home Loan Bank of Seattle (the “FHLB-Seattle”) filed a complaintlitigation matters described in Note 16 within the Superior Courtfinancial statements included in Redwood’s Annual Report on Form 10-K for the State of Washington (case number 09-2-46348-4 SEA) against Redwood Trust, Inc., our subsidiary, Sequoia Residential Funding, Inc. (“SRF”), Morgan Stanley & Co., and Morgan Stanley Capital I, Inc. (collectively, the “FHLB-Seattle Defendants”) alleging that the FHLB-Seattle Defendants made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Seattle Certificate”) issued in the Sequoia Mortgage Trust 2005-4 securitization transaction (the “2005-4 RMBS”) and purchased by the FHLB-Seattle. Specifically, the complaint alleged that the alleged misstatements concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Seattle Certificate. The FHLB-Seattle alleges claimsyear ended December 31, 2020 under the Securities Act of Washington (Section 21.20.005, et seq.) and sought to rescind the purchase of the Seattle Certificate and to collect interest on the original purchase price at the statutory interest rate of 8% per annum from the date of original purchase (net of interest received) as well as attorneys’ fees and costs. The Seattle Certificate was issued with an original principal amount of approximately $133 million, and, at September 30, 2017, the FHLB-Seattle has received approximately $125 million of principal and $11 million of interest payments in respect of the Seattle Certificate. The matter was subsequently resolved and the claims were dismissed by the FHLB Seattle as to all the FHLB Seattle Defendants. At the time the Seattle Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, we could incur a loss as a result of these indemnities.
On or about July 15, 2010, The Charles Schwab Corporation (“Schwab”) filed a complaint in the Superior Court for the State of California in San Francisco (case number CGC-10-501610) against SRF and 26 other defendants (collectively, the “Schwab Defendants”) alleging that the Schwab Defendants made false or misleading statements in offering materials for various residential mortgage-backed securities sold or issued by the Schwab Defendants. Schwab alleged only a claim for negligent misrepresentation under California state law against SRF and sought unspecified damages and attorneys’ fees and costs from SRF. Schwab claimed that SRF made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Schwab Certificate”) issued in the 2005-4 RMBS and purchased by Schwab. Specifically, the complaint alleged that the misstatements for the 2005-4 RMBS concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Schwab Certificate. The Schwab Certificate was issued with an original principal amount of approximately $15 million, and, at September 30, 2017, approximately $14 million of principal and $1 million of interest payments have been made in respect of the Schwab Certificate. On November 14, 2014, Schwab voluntarily dismissed with prejudice its negligent misrepresentation claim, which resulted in the dismissal with prejudice of SRF from the action. Subsequently, the matter was resolved and Schwab dismissed its claims against the lead underwriter of the 2005-4 RMBS. At the time the Schwab Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were also named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, Redwood could incur a loss as a result of these indemnities.
Through certain of our wholly-owned subsidiaries, we have in the past engaged in, and expect to continue to engage in, activities relating to the acquisition and securitization of residential mortgage loans. In addition, certain of our wholly-owned subsidiaries have in the past engaged in activities relating to the acquisition and securitization of debt obligations and other assets through the issuance of collateralized debt obligations (commonly referred to as CDO transactions). Because of this involvement in the securitization and CDO businesses, we could become the subject of litigation relating to these businesses, including additional litigation of the type described above, and we could also become the subject of governmental investigations, enforcement actions, or lawsuits, and governmental authorities could allege that we violated applicable law or regulation in the conduct of our business. As an example, in July 2016 we became aware of a complaint filed by the State of California on April 1, 2016 against Morgan Stanley & Co. and certain of its affiliates alleging, among other things, that there were misleading statements contained in offering materials for 28 different mortgage pass-through certificates purchased by various California investors, including various California public pension systems, from Morgan Stanley and alleging that Morgan Stanley made false or fraudulent claims in connection with the sale of those certificates. Of the 28 mortgage pass-through certificates that are the subject of the complaint, two are Sequoia mortgage pass-through certificates issued in 2004 and two are Sequoia mortgage pass-through certificates issued in 2007. With respect to each of those certificates our wholly-owned subsidiary, RWT Holdings, Inc., was the sponsor and our wholly-owned subsidiary, Sequoia Residential Funding, Inc., was the depositor. At the time these
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 14. Commitments andheading “Loss Contingencies - (continued)
four Sequoia mortgage pass-through certificates were issued, Sequoia Residential Funding, Inc. and Redwood Trust agreed to indemnify the underwriters of these certificates for certain losses and expenses they might incur as a result of claims made against them relating to these certificates, including, without limitation, certain legal expenses. Regardless of the outcome of this litigation, we could incur a loss as a result of these indemnities.
In accordance with GAAP, we review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in a liability and the amount of loss, if any, can be reasonably estimated. Additionally, we record receivables for insurance recoveries relating to litigation-related losses and expenses if and when such amounts are covered by insurance and recovery of such losses or expenses are due.Litigation.” At September 30, 2017,2021, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described abovein our Annual Report on Form 10-K for the year ended December 31, 2020 was $2 million. We review our litigation matters each quarter to assess these loss contingency reserves and make adjustments in these reserves, upwards or downwards, as appropriate, in accordance with GAAP based on our review.
In the ordinary course of any litigation matter, including certain of the above-referenced matters, we have engaged and may continue to engage in formal or informal settlement communications with the plaintiffs or co-defendants. Settlement communications we have engaged in relating to certain of the above-referenced litigation matters are one of the factors that have resulted in our determination to establish the loss contingency reserves described above. We cannot be certain that any of these matters will be resolved through a settlement prior to trial and we cannot be certain that the resolution of these matters, whether through trial or settlement, will not have a material adverse effect on our financial condition or results of operations in any future period.
Future developments (including resolution of substantive pre-trial motions relating to these matters, receipt of additional information and documents relating to these matters (such as through pre-trial discovery), new or additional settlement communications with plaintiffs relating to these matters, or resolutions of similar claims against other defendants in these matters) could result in our concluding in the future to establish additional loss contingency reserves or to disclose an estimate of reasonably possible losses in excess of our established reserves with respect to these matters. Our actual losses with respect to the above-referenced litigation matters may be materially higher thanAt September 30, 2021, the aggregate amount of loss contingency reservesour accrual for estimated costs associated with the "Residential Loan Seller Demands" described in our Annual Report on Form 10-K for the year ended December 31, 2020 was $2 million, a portion of which is contingent on the successful completion of future residential loan purchase and sale transactions with certain counterparties. We believe we have established in respect of these litigation matters, including in the eventeither resolved or adequately accrued for any unresolved Residential Loan Seller Demands and that any of these matters proceedsthere are no other Residential Loan Seller Demands that are reasonably possible to trial and the plaintiff prevails. Other factors that could result in our concluding to establish additional loss contingency reserves or estimate additional reasonably possible losses, or could result in our actual losses with respect to the above-referenced litigation matters being materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters include that: there are significant factual and legal issues to be resolved; information obtained or rulings made during the lawsuits could affect the methodology for calculation of the available remedies; and we may have additional obligations pursuant to indemnity agreements, representations and warranties, and other contractual provisions with other parties relating to these litigation matters that could increase our potential losses.
a material loss.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 15.17. Equity
The following table provides a summary of changes to accumulated other comprehensive income by component for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 15.117.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Three Months Ended September 30, 2020 |
(In Thousands) | | Available-for-Sale Securities | | Interest Rate Agreements Accounted for as Cash Flow Hedges | | Available-for-Sale Securities | | Interest Rate Agreements Accounted for as Cash Flow Hedges |
Balance at beginning of period | | $ | 88,251 | | | $ | (78,511) | | | $ | 53,246 | | | $ | (82,637) | |
Other comprehensive (loss) income before reclassifications | | (2,658) | | | — | | | 8,236 | | | — | |
Amounts reclassified from other accumulated comprehensive income (loss) | | (6,200) | | | 1,041 | | | (445) | | | 1,040 | |
Net current-period other comprehensive (loss) income | | (8,858) | | | 1,041 | | | 7,791 | | | 1,040 | |
Balance at End of Period | | $ | 79,393 | | | $ | (77,470) | | | $ | 61,037 | | | $ | (81,597) | |
| | | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2021 | | Nine Months Ended September 30, 2020 |
(In Thousands) | | Net Unrealized Gains on Available-for-Sale Securities | | Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges | | Net Unrealized Gains on Available-for-Sale Securities | | Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges | (In Thousands) | | Available-for-Sale Securities | | Interest Rate Agreements Accounted for as Cash Flow Hedges | | Available-for-Sale Securities | | Interest Rate Agreements Accounted for as Cash Flow Hedges |
Balance at beginning of period | | $ | 114,364 |
| | $ | (44,688 | ) | | $ | 116,849 |
| | $ | (70,518 | ) | Balance at beginning of period | | $ | 76,336 | | | $ | (80,557) | | | $ | 92,452 | | | $ | (50,939) | |
Other comprehensive income (loss) before reclassifications (1) | | 13,158 |
| | 321 |
| | 9,038 |
| | 647 |
| |
Amounts reclassified from other accumulated comprehensive income | | (853 | ) | | 14 |
| | (1,319 | ) | | 18 |
| |
Other comprehensive income (loss) before reclassifications | | Other comprehensive income (loss) before reclassifications | | 19,552 | | | — | | | (19,890) | | | (32,806) | |
Amounts reclassified from other accumulated comprehensive income (loss) | | Amounts reclassified from other accumulated comprehensive income (loss) | | (16,495) | | | 3,087 | | | (11,525) | | | 2,148 | |
Net current-period other comprehensive income (loss) | | 12,305 |
| | 335 |
| | 7,719 |
| | 665 |
| Net current-period other comprehensive income (loss) | | 3,057 | | | 3,087 | | | (31,415) | | | (30,658) | |
Balance at End of Period | | $ | 126,669 |
| | $ | (44,353 | ) | | $ | 124,568 |
| | $ | (69,853 | ) | Balance at End of Period | | $ | 79,393 | | | $ | (77,470) | | | $ | 61,037 | | | $ | (81,597) | |
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
(In Thousands) | | Net Unrealized Gains on Available-for-Sale Securities | | Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges | | Net Unrealized Gains on Available-for-Sale Securities | | Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges |
Balance at beginning of period | | $ | 115,873 |
| | $ | (44,020 | ) | | $ | 139,356 |
| | $ | (47,363 | ) |
Other comprehensive income (loss) before reclassifications (1) | | 17,899 |
| | (375 | ) | | 5,195 |
| | (22,545 | ) |
Amounts reclassified from other accumulated comprehensive income | | (7,103 | ) | | 42 |
| | (19,983 | ) | | 55 |
|
Net current-period other comprehensive income (loss) | | 10,796 |
| | (333 | ) | | (14,788 | ) | | (22,490 | ) |
Balance at End of Period | | $ | 126,669 |
| | $ | (44,353 | ) | | $ | 124,568 |
| | $ | (69,853 | ) |
| |
(1) | Amounts presented for net unrealized gains on available-for-sale securities are net of tax benefit (provision) of zero and $(0.1) million for the three and nine months ended September 30, 2017, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2016, respectively. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 15.17. Equity - (continued)
The following table provides a summary of reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 15.217.2 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss) | | | | | | | |
| | Amount Reclassified From Accumulated Other Comprehensive Income | | Amount Reclassified From Accumulated Other Comprehensive Income |
| | Affected Line Item in the | | Three Months Ended September 30, | | Affected Line Item in the | | Three Months Ended September 30, |
(In Thousands) | | Income Statement | | 2017 | | 2016 | (In Thousands) | | Income Statement | | 2021 | | 2020 |
Net Realized (Gain) Loss on AFS Securities | | | | | Net Realized (Gain) Loss on AFS Securities | | | | | | |
Other than temporary impairment (1) | | Investment fair value changes, net | | $ | 3 |
| | $ | — |
| |
Decrease in allowance for credit losses on AFS securities | | Decrease in allowance for credit losses on AFS securities | | Investment fair value changes, net | | $ | — | | | $ | (445) | |
Gain on sale of AFS securities | | Realized gains, net | | (856 | ) | | (1,319 | ) | Gain on sale of AFS securities | | Realized gains, net | | (6,200) | | | — | |
| | | $ | (853 | ) | | $ | (1,319 | ) | | $ | (6,200) | | | $ | (445) | |
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges | | | | | Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges | | | | |
Amortization of deferred loss | | Interest expense | | $ | 14 |
| | $ | 18 |
| Amortization of deferred loss | | Interest expense | | $ | 1,041 | | | $ | 1,040 | |
| | $ | 14 |
| | $ | 18 |
| | $ | 1,041 | | | $ | 1,040 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | Amount Reclassified From Accumulated Other Comprehensive Income |
| | Affected Line Item in the | | Nine Months Ended September 30, |
(In Thousands) | | Income Statement | | 2021 | | 2020 |
Net Realized (Gain) Loss on AFS Securities | | | | | | |
(Decrease) increase in allowance for credit losses on AFS securities | | Investment fair value changes, net | | $ | (388) | | | $ | 1,026 | |
Gain on sale of AFS securities | | Realized gains, net | | (16,107) | | | (12,552) | |
| | | | | | |
| | | | $ | (16,495) | | | $ | (11,526) | |
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges | | | | | | |
Amortization of deferred loss | | Interest expense | | $ | 3,087 | | | $ | 2,148 | |
| | | | $ | 3,087 | | | $ | 2,148 | |
Issuance of Common Stock
We have an established program to sell up to an aggregate of $175 million of common stock from time to time in at-the-market ("ATM") offerings. During the nine months ended September 30, 2021, we issued 1,466,669 common shares for net proceeds of $18 million under this program. At September 30, 2021, approximately $92 million remained outstanding for future offerings under this program.
Direct Stock Purchase and Dividend Reinvestment Plan
During the nine months ended September 30, 2021, we issued 119,040 shares of common stock for net proceeds of $1 million through our Direct Stock Purchase and Dividend Reinvestment Plan. During the nine months ended September 30, 2020, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At September 30, 2021, approximately 6 million shares remained outstanding for future offerings under this plan.
|
| | | | | | | | | | |
| | | | Amount Reclassified From Accumulated Other Comprehensive Income |
| | Affected Line Item in the | | Nine Months Ended September 30, |
(In Thousands) | | Income Statement | | 2017 | | 2016 |
Net Realized (Gain) Loss on AFS Securities | | | | | | |
Other than temporary impairment (1) | | Investment fair value changes, net | | $ | 248 |
| | $ | 305 |
|
Gain on sale of AFS securities | | Realized gains, net | | (7,351 | ) | | (20,288 | ) |
| | | | $ | (7,103 | ) | | $ | (19,983 | ) |
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges | | | | | | |
Amortization of deferred loss | | Interest expense | | $ | 42 |
| | $ | 55 |
|
| | | | $ | 42 |
| | $ | 55 |
|
| |
(1) | For the nine months ended September 30, 2017, other-than-temporary impairments were $0.6 million, of which $0.2 million were recognized through our consolidated statements of income and $0.4 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet. For the three months ended September 30, 2016, there were no other-than-temporary impairments. For the nine months ended September 30, 2016, other-than-temporary impairments were $3 million, of which $0.3 million were recognized through our consolidated statements of income and $2 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 15.17. Equity - (continued)
Earnings (Loss) per Common Share
The following table provides the basic and diluted earnings (loss) per common share computations for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 15.317.3 – Basic and Diluted Earnings (Loss) per Common Share
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands, except Share Data) | | 2017 | | 2016 | | 2017 | | 2016 | (In Thousands, except Share Data) | | 2021 | | 2020 | | 2021 | | 2020 |
Basic Earnings per Common Share: | | | | | | | | | |
Net income attributable to Redwood | | $ | 36,180 |
| | $ | 52,553 |
| | $ | 109,473 |
| | $ | 105,897 |
| |
Basic Earnings (Loss) per Common Share: | | Basic Earnings (Loss) per Common Share: | | | | | | | | |
Net income (loss) attributable to Redwood | | Net income (loss) attributable to Redwood | | $ | 88,286 | | | $ | 141,812 | | | $ | 275,568 | | | $ | (636,142) | |
Less: Dividends and undistributed earnings allocated to participating securities | | (948 | ) | | (1,485 | ) | | (2,800 | ) | | (3,040 | ) | Less: Dividends and undistributed earnings allocated to participating securities | | (2,984) | | | (4,067) | | | (8,979) | | | (1,427) | |
Net income allocated to common shareholders | | $ | 35,232 |
| | $ | 51,068 |
| | $ | 106,673 |
| | $ | 102,857 |
| |
Net income (loss) allocated to common shareholders | | Net income (loss) allocated to common shareholders | | $ | 85,302 | | | $ | 137,745 | | | $ | 266,589 | | | $ | (637,569) | |
Basic weighted average common shares outstanding | | 76,850,830 |
| | 76,680,183 |
| | 76,803,324 |
| | 76,827,026 |
| Basic weighted average common shares outstanding | | 112,995,847 | | | 113,403,102 | | | 112,754,691 | | | 113,952,308 | |
Basic Earnings per Common Share | | $ | 0.46 |
| | $ | 0.67 |
| | $ | 1.39 |
| | $ | 1.34 |
| |
Diluted Earnings per Common Share: | | | | | | | | | |
Net income attributable to Redwood | | $ | 36,180 |
| | $ | 52,553 |
| | $ | 109,473 |
| | $ | 105,897 |
| |
Basic Earnings (Loss) per Common Share | | Basic Earnings (Loss) per Common Share | | $ | 0.75 | | | $ | 1.21 | | | $ | 2.36 | | | $ | (5.60) | |
Diluted Earnings (Loss) per Common Share: | | Diluted Earnings (Loss) per Common Share: | |
Net income (loss) attributable to Redwood | | Net income (loss) attributable to Redwood | | $ | 88,286 | | | $ | 141,812 | | | $ | 275,568 | | | $ | (636,142) | |
Less: Dividends and undistributed earnings allocated to participating securities | | (986 | ) | | (1,439 | ) | | (2,926 | ) | | (3,226 | ) | Less: Dividends and undistributed earnings allocated to participating securities | | (2,747) | | | (3,512) | | | (8,151) | | | (1,427) | |
Add back: Interest expense on convertible notes for the period, net of tax | | 6,564 |
| | 6,115 |
| | 18,639 |
| | 18,263 |
| Add back: Interest expense on convertible notes for the period, net of tax | | 6,870 | | | 6,990 | | | 20,585 | | | — | |
Net income allocated to common shareholders | | $ | 41,758 |
| | $ | 57,229 |
| | $ | 125,186 |
| | $ | 120,934 |
| |
Net income (loss) allocated to common shareholders | | Net income (loss) allocated to common shareholders | | $ | 92,409 | | | $ | 145,290 | | | $ | 288,002 | | | $ | (637,569) | |
Weighted average common shares outstanding | | 76,850,830 |
| | 76,680,183 |
| | 76,803,324 |
| | 76,827,026 |
| Weighted average common shares outstanding | | 112,995,847 | | | 113,403,102 | | | 112,754,691 | | | 113,952,308 | |
Net effect of dilutive equity awards | | 298,955 |
| | 54,696 |
| | 215,141 |
| | 18,665 |
| Net effect of dilutive equity awards | | 292,749 | | | — | | | 253,819 | | | — | |
Net effect of assumed convertible notes conversion to common shares | | 25,553,323 |
| | 21,096,738 |
| | 22,379,401 |
| | 21,145,987 |
| Net effect of assumed convertible notes conversion to common shares | | 28,566,875 | | | 28,566,875 | | | 28,566,875 | | | — | |
Diluted weighted average common shares outstanding | | 102,703,108 |
| | 97,831,617 |
| | 99,397,866 |
| | 97,991,678 |
| Diluted weighted average common shares outstanding | | 141,855,471 | | | 141,969,977 | | | 141,575,385 | | | 113,952,308 | |
Diluted Earnings per Common Share | | $ | 0.41 |
| | $ | 0.58 |
| | $ | 1.26 |
| | $ | 1.23 |
| |
Diluted Earnings (Loss) per Common Share | | Diluted Earnings (Loss) per Common Share | | $ | 0.65 | | | $ | 1.02 | | | $ | 2.03 | | | $ | (5.60) | |
We included participating securities, which are certain equity awards that have non-forfeitable dividend participation rights, in the calculations of basic and diluted earnings per common share as we determined that the two-class method was more dilutive than the alternative treasury stock method for these shares. Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included that may differ in certain circumstances.
During the three and nine months ended September 30, 20172021 and 2016,the three months ended September 30, 2020, certain of our convertible notes were determined to be dilutive and were included in the calculation of diluted EPS under the "if-converted" method. Under this method, the periodic interest expense (net of applicable taxes) for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether they are in or out of the money) are included in the denominator.
For the nine months ended September 30, 2020, 32.2 million of common shares related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and nine months ended September 30, 2017,2021, the number of outstanding equity awards that were antidilutive totaled 6,14922,102 and 5,843,18,736, respectively. For the three and nine months ended September 30, 2016,2020, the number of outstanding equity awards that were antidilutive totaled 6,62313,560 and 6,565,15,457, respectively.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 15.17. Equity - (continued)
Stock Repurchases
In February 2016,2018, our Board of Directors approved an authorization for the repurchase of upour common stock, increasing the total amount authorized for repurchases of common stock to $100 million, of our common stock and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization replaced allincreased the previous share repurchase plansauthorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
During the three and nine months ended September 30, 2017, there were no shares of common stock acquired under this authorization.2021, we did not repurchase any shares. At September 30, 2017, approximately $862021, $78 million of thisthe current authorization remained available for the repurchase of shares of our common stock.stock and we also continued to be authorized to repurchase outstanding debt securities.
Note 16.18. Equity Compensation Plans
At September 30, 20172021 and December 31, 2016, 1,469,9912020, 7,273,676 and 1,787,9747,957,891 shares of common stock, respectively, were available for grant under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan, which are settled by delivery of shares of common stock and purchases under the Employee Stock Purchase Plan, totaled $18$26 million at September 30, 2017,2021, as shown in the following table.
Table 16.118.1 – Activities of Equity Compensation Costs by Award Type | | | | Nine Months Ended September 30, 2017 | | | Nine Months Ended September 30, 2021 |
(In Thousands) | | Restricted Stock | | Deferred Stock Units | | Performance Stock Units | | Employee Stock Purchase Plan | | Total | (In Thousands) | | | Restricted Stock Awards | | Restricted Stock Units | | Deferred Stock Units | | Performance Stock Units | | Employee Stock Purchase Plan | | Total |
Unrecognized compensation cost at beginning of period | | $ | 2,091 |
| | $ | 11,506 |
| | $ | 4,549 |
| | $ | — |
| | $ | 18,146 |
| Unrecognized compensation cost at beginning of period | | | $ | 564 | | | $ | 3,540 | | | $ | 17,766 | | | $ | 5,794 | | | $ | — | | | $ | 27,664 | |
Equity grants | | 2,237 |
| | 5,747 |
| | — |
| | 129 |
| | 8,113 |
| Equity grants | | | — | | | 2,370 | | | 5,766 | | | — | | | 335 | | | 8,471 | |
Performance-based valuation adjustment | | Performance-based valuation adjustment | | | — | | | — | | | — | | | 1,072 | | | — | | | 1,072 | |
Equity grant forfeitures | | (174 | ) | | (472 | ) | | — |
| | — |
| | (646 | ) | Equity grant forfeitures | | | (2) | | | (670) | | | (550) | | | — | | | — | | | (1,222) | |
Equity compensation expense | | (934 | ) | | (4,866 | ) | | (1,738 | ) | | (96 | ) | | (7,634 | ) | Equity compensation expense | | | (375) | | | (1,188) | | | (5,681) | | | (2,002) | | | (251) | | | (9,497) | |
Unrecognized Compensation Cost at End of Period | | $ | 3,220 |
| | $ | 11,915 |
| | $ | 2,811 |
| | $ | 33 |
| | $ | 17,979 |
| Unrecognized Compensation Cost at End of Period | | | $ | 187 | | | $ | 4,052 | | | $ | 17,301 | | | $ | 4,864 | | | $ | 84 | | | $ | 26,488 | |
At September 30, 2017,2021, the weighted average amortization period remaining for all of our equity awards was less than two years.one year.
Restricted Stock Awards ("RSAs")
At September 30, 20172021 and December 31, 2016,2020, there were 265,84229,693 and 204,51578,998 shares, respectively, of restricted stockRSAs outstanding. Restrictions on these shares lapse through 2021.2022. During the nine months ended September 30, 2017,2021, there were 134,364 shares of restricted stockno RSAs granted, restrictions on 61,285 shares of restricted stock49,305 RSAs lapsed and those shares were distributed, and 11,752no RSAs were forfeited.
Restricted Stock Units ("RSUs")
At September 30, 2021 and December 31, 2020, there were 445,183 and 282,424 shares, respectively, of restricted stock awardsRSUs outstanding. During the nine months ended September 30, 2021, there were 272,261 RSUs granted, 64,759 RSUs distributed, and 44,743 RSUs forfeited. Unvested RSUs at September 30, 2021 vest through 2025.
Deferred Stock Units (“DSUs”)
At September 30, 20172021 and December 31, 2016,2020, there were 1,869,5773,318,540 and 1,848,8612,805,144 DSUs, respectively, outstanding of which 1,006,3941,546,724 and 939,899,1,206,125, respectively, had vested. During the nine months ended September 30, 2017,2021, there were 359,501700,552 DSUs granted, 306,911155,995 DSUs distributed, and 31,87531,161 DSUs forfeited. Unvested DSUs at September 30, 20172021 vest through 2021.
During the first quarter of 2016, equity compensation expense of $3 million was recognized in connection with the announced departures of two executives due to the full vesting of their DSUs in accordance with the terms of their employment agreements.2025.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 16.18. Equity Compensation Plans - (continued)
Performance Stock Units (“PSUs”)
At both September 30, 20172021 and December 31, 2016,2020, the target number of PSUs that were unvested was 642,879.955,710 and 978,735, respectively. Vesting for PSUs will generally occuroccurs at the end of three years from their respective grant datedates based on various total shareholder return (“TSR”) performance calculations, as discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.2020. With respect to PSUs granted in May 2018, the three-year performance period ended during the second quarter of 2021, resulting in the vesting of no shares of our common stock. During the second quarter of 2021, for PSUs granted in 2020, we adjusted the future amortization expense by $1 million to reflect our current estimate of the number of shares expected to vest in relation to the performance condition for the initial one-year vesting tranche.
Employee Stock Purchase Plan ("ESPP")
The ESPP allows a maximum of 450,000850,000 shares of common stock to be purchased in aggregate for all employees. As of September 30, 20172021 and December 31, 2016, 354,8012020, 546,093 and 337,271489,886 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at September 30, 2017.2021.
Note 17.19. Mortgage Banking Activities, Net
The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income (loss) for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 17.119.1 – Mortgage Banking Activities
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Residential Mortgage Banking Activities, Net | | | | | | | | |
Changes in fair value of: | | | | | | | | |
Residential loans, at fair value (1) | | $ | 27,862 | | | $ | 12,589 | | | $ | 75,496 | | | $ | 19,151 | |
Trading securities (2) | | 32 | | | — | | | (342) | | | — | |
Risk management derivatives (3) | | 3,963 | | | (10) | | | 37,187 | | | (31,304) | |
Other income (expense), net (4) | | 1,089 | | | (715) | | | 3,305 | | | (7,069) | |
Total residential mortgage banking activities, net | | 32,946 | | | 11,864 | | | 115,646 | | | (19,222) | |
| | | | | | | | |
Business Purpose Mortgage Banking Activities, Net: | | | | | | | | |
Changes in fair value of: | | | | | | | | |
Single-family rental loans, at fair value (1) | | 18,461 | | | 43,191 | | | 54,675 | | | 56,209 | |
Risk management derivatives (3) | | (424) | | | (89) | | | 930 | | | (21,627) | |
Bridge loans, at fair value | | 3,433 | | | 938 | | | 6,702 | | | (4,256) | |
Other income, net (5) | | 8,747 | | | 3,491 | | | 22,236 | | | 13,407 | |
Total business purpose mortgage banking activities, net | | 30,217 | | | 47,531 | | | 84,543 | | | 43,733 | |
Mortgage Banking Activities, Net | | $ | 63,163 | | | $ | 59,395 | | | $ | 200,189 | | | $ | 24,511 | |
(1)For residential loans, includes changes in fair value for associated loan purchase and forward sale commitments. For single-family rental loans, includes changes in fair value for associated interest rate lock commitments.
(2)Represents fair value changes on trading securities that are being used as hedges to manage the mark-to-market risks associated with our residential mortgage banking operations.
(3)Represents market valuation changes of derivatives that were used to manage risks associated with our mortgage banking operations.
(4)Amounts in this line item include other fee income from loan acquisitions and provisions for repurchase expense, presented net.
(5)Amounts in this line item include other fee income from loan originations.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Residential Mortgage Banking Activities, Net | | | | | | | | |
Changes in fair value of: | | | | | | | | |
Residential loans, at fair value (1) | | $ | 28,135 |
| | $ | 12,671 |
| | $ | 63,122 |
| | $ | 47,456 |
|
Sequoia securities | | — |
| | — |
| | — |
| | 1,455 |
|
Risk management derivatives (2) | | (7,077 | ) | | (3,287 | ) | | (13,787 | ) | | (22,743 | ) |
Other income, net (3) | | 142 |
| | 382 |
| | 1,515 |
| | 606 |
|
Total residential mortgage banking activities, net | | 21,200 |
| | 9,766 |
| | 50,850 |
| | 26,774 |
|
Commercial Mortgage Banking Activities, Net | | — |
| | — |
| | — |
| | (2,062 | ) |
Mortgage Banking Activities, Net | | $ | 21,200 |
| | $ | 9,766 |
| | $ | 50,850 |
| | $ | 24,712 |
|
| |
(1) | Includes changes in fair value for associated loan purchase commitments. |
| |
(2) | Represents market valuation changes of derivatives that were used to manage risks associated with our accumulation of residential loans. |
| |
(3) | Amounts in this line item include other fee income from loan acquisitions and the provision for repurchases expense, presented net. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 18. Investment Fair Value Changes, Net20. Other Income
The following table presents the components of Investment fair value changes, net,Other income recorded in our consolidated statements of income (loss) for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 18.120.1 – Investment Fair Value ChangesOther Income
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
MSR (loss) income, net (1) | | $ | 295 | | | $ | (2,362) | | | $ | 949 | | | $ | (5,595) | |
Agency risk sharing agreement income | | 575 | | | 1,200 | | | 2,318 | | | 3,146 | |
FHLBC capital stock dividend | | 3 | | | 116 | | | 53 | | | 1,201 | |
| | | | | | | | |
Bridge loan fees | | 1,131 | | | 716 | | | 2,735 | | | 2,520 | |
| | | | | | | | |
| | | | | | | | |
Other | | 384 | | | 216 | | | 2,302 | | | 2,707 | |
Other Income, Net | | $ | 2,388 | | | $ | (114) | | | $ | 8,357 | | | $ | 3,979 | |
(1)Includes servicing fees and fair value changes for MSRs and associated hedges, net.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Investment Fair Value Changes, Net | | | | | | | | |
Changes in fair value of: | | | | | | | | |
Residential loans held-for-investment, at Redwood | | $ | 2,881 |
| | $ | (655 | ) | | $ | 8,902 |
| | $ | 22,161 |
|
Trading securities | | 607 |
| | 8,898 |
| | 30,676 |
| | 3,728 |
|
Net investments in Legacy Sequoia entities (1) | | (1,045 | ) | | (255 | ) | | (3,842 | ) | | (2,086 | ) |
Net investment in Sequoia Choice entity (1) | | (256 | ) | | — |
| | (256 | ) | | — |
|
Risk sharing investments | | (267 | ) | | 15 |
| | (985 | ) | | (689 | ) |
Risk management derivatives, net | | (1,592 | ) | | 4,222 |
| | (24,557 | ) | | (41,188 | ) |
Valuation adjustments on commercial loans held-for-sale | | — |
| | (307 | ) | | 300 |
| | (307 | ) |
Impairments on AFS securities | | (4 | ) | | — |
| | (248 | ) | | (305 | ) |
Investment Fair Value Changes, Net | | $ | 324 |
| | $ | 11,918 |
| | $ | 9,990 |
| | $ | (18,686 | ) |
| |
(1) | Includes changes in fair value of the residential loans held-for-sale, REO and the ABS issued at the entities, which netted together represent the change in value of our retained investments at the consolidated VIEs. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 19. Operating21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses
Components of our operatinggeneral and administrative expenses, loan acquisition costs, and other expenses for the three and nine months ended September 30, 20172021 and 20162020 are presented in the following table.
Table 19.121.1 – Components of OperatingGeneral and Administrative Expenses, Loan Acquisition Costs, and Other Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
General and Administrative Expenses | | | | | | | | |
Fixed compensation expense | | $ | 11,285 | | | $ | 10,103 | | | $ | 34,359 | | | $ | 36,605 | |
Annual variable compensation | | 19,844 | | | 5,882 | | | 51,021 | | | 9,171 | |
Long-term incentive award expense (1) | | 4,915 | | | 2,639 | | | 14,766 | | | 7,896 | |
Acquisition-related equity compensation expense (2) | | 1,189 | | | 1,212 | | | 3,613 | | | 3,636 | |
Systems and consulting | | 2,975 | | | 2,145 | | | 9,224 | | | 7,752 | |
Office costs | | 2,197 | | | 1,859 | | | 6,029 | | | 5,854 | |
Accounting and legal | | 1,197 | | | 1,601 | | | 3,132 | | | 6,605 | |
Corporate costs | | 964 | | | 831 | | | 2,528 | | | 2,128 | |
Other | | 3,126 | | | 1,358 | | | 7,165 | | | 5,185 | |
Total General and Administrative Expenses | | 47,692 | | | 27,630 | | | 131,837 | | | 84,832 | |
| | | | | | | | |
Loan Acquisition Costs | | | | | | | | |
Commissions | | 1,906 | | | 879 | | | 4,830 | | | 3,027 | |
Underwriting costs | | 2,351 | | | 771 | | | 5,872 | | | 3,289 | |
Transfer and holding costs | | 364 | | | 508 | | | 1,226 | | | 1,400 | |
| | | | | | | | |
Total Loan Acquisition Costs | | 4,621 | | | 2,158 | | | 11,928 | | | 7,716 | |
| | | | | | | | |
Other Expenses | | | | | | | | |
Goodwill impairment expense | | — | | | — | | | — | | | 88,675 | |
Amortization of purchase-related intangible assets | | 3,873 | | | 3,873 | | | 11,619 | | | 12,052 | |
| | | | | | | | |
Other | | 150 | | | 3,915 | | | 485 | | | 3,559 | |
Total Other Expenses | | 4,023 | | | 7,788 | | | 12,104 | | | 104,286 | |
Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses | | $ | 56,336 | | | $ | 37,576 | | | $ | 155,869 | | | $ | 196,834 | |
(1)For the three months ended September 30, 2021, long-term incentive award expense includes $3 million of expense for awards settleable in shares of our common stock and $1 million of expense for awards settleable in cash. For the nine months ended September 30, 2021, long-term incentive award expense includes $10 million of expense for awards settleable in shares of our common stock and $4 million of expense for awards settleable in cash.
(2)Acquisition-related equity compensation expense relates to 588,260 shares of restricted stock that were issued to members of CoreVest management as a component of the consideration paid to them for our purchase of their interests in CoreVest. The grant date fair value of these restricted stock awards was $10 million, which is being recognized as compensation expense over the two-year vesting period on a straight-line basis in accordance with GAAP.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Fixed compensation expense | | $ | 5,233 |
| | $ | 5,253 |
| | $ | 16,556 |
| | $ | 19,022 |
|
Variable compensation expense | | 6,467 |
| | 5,802 |
| | 14,713 |
| | 11,824 |
|
Equity compensation expense | | 2,337 |
| | 2,031 |
| | 7,634 |
| | 7,117 |
|
Total compensation expense | | 14,037 |
| | 13,086 |
| | 38,903 |
| | 37,963 |
|
Systems and consulting | | 1,856 |
| | 2,692 |
| | 5,183 |
| | 7,274 |
|
Loan acquisition costs (1) | | 1,187 |
| | 1,393 |
| | 3,397 |
| | 4,680 |
|
Office costs | | 988 |
| | 1,056 |
| | 3,231 |
| | 3,501 |
|
Accounting and legal | | 519 |
| | 721 |
| | 2,322 |
| | 3,043 |
|
Corporate costs | | 415 |
| | 478 |
| | 1,363 |
| | 1,589 |
|
Other operating expenses | | 920 |
| | 925 |
| | 2,390 |
| | 2,367 |
|
Operating expenses before restructuring charges | | 19,922 |
| | 20,351 |
| | 56,789 |
| | 60,417 |
|
Restructuring charges (2) | | — |
| | 4 |
| | — |
| | 10,545 |
|
Total Operating Expenses | | $ | 19,922 |
| | $ | 20,355 |
| | $ | 56,789 |
| | $ | 70,962 |
|
| |
(1) | Loan acquisition costs primarily includes underwriting and due diligence costs related to the acquisition of residential loans held-for-sale at fair value. |
| |
(2) | For the nine months ended September 30, 2016, restructuring charges included $5 million of fixed compensation expense and $4 million of equity compensation expense related to one-time termination benefits, as well as $2 million of other contract termination costs, associated with the restructuring of our conforming and commercial mortgage banking operations and related charges associated with the departure of Redwood's President announced in the first quarter of 2016. |
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 20.22. Taxes
We believe that we have met all requirements for qualification as a REIT for federal income tax purposes. To qualify as a REIT, the Company must distribute at least 90% of its annual REIT taxable income and meet certain other requirements that relate to, among others, the assets it holds, the income it generates, and the composition of its stockholders.
For the nine months ended September 30, 20172021 and 2016,2020, we recognized a provision for income taxes of $17$14 million and $1a benefit from income taxes of $13 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at September 30, 20172021 and 2016.2020.
Table 20.122.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate
| | | | | | | | | | | | | | |
| | September 30, 2021 | | September 30, 2020 |
Federal statutory rate | | 21.0 | % | | 21.0 | % |
State statutory rate, net of Federal tax effect | | 8.6 | % | | 8.6 | % |
Differences in taxable (loss) income from GAAP income | | (13.1) | % | | (23.6) | % |
Change in valuation allowance | | (6.8) | % | | (4.0) | % |
Dividends paid deduction (1) | | (4.9) | % | | — | % |
Effective Tax Rate | | 4.8 | % | | 2.0 | % |
|
| | | | | | |
| | September 30, 2017 | | September 30, 2016 |
Federal statutory rate | | 34.0 | % | | 34.0 | % |
State statutory rate, net of Federal tax effect | | 7.2 | % | | 7.2 | % |
Differences in taxable (loss) income from GAAP income | | (6.8 | )% | | (21.7 | )% |
Change in valuation allowance | | (2.8 | )% | | 6.6 | % |
Dividends paid deduction | | (18.3 | )% | | (24.9 | )% |
Effective Tax Rate | | 13.3 | % | | 1.2 | % |
(1)The dividends paid deduction in the effective tax rate reconciliation is generally representative of the amount of distributions to shareholders that reduce REIT taxable income. For the nine months ended September 30, 2020, the dividends paid deduction is 0% because there was no REIT taxable income available to apply against the dividends paid. This was due to our REIT incurring a taxable loss during the period.We assessed our tax positions for all open tax years (i.e., Federal, 20142017 to 2017,2021, and State, 20132016 to 2017)2021) at September 30, 20172021 and December 31, 2016,2020, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.
For the three months ended September 30, 2021, we reassessed the valuation allowance on our deferred tax assets ("DTAs") noting an increase in positive evidence related to our ability to utilize certain DTAs. The positive evidence includes significant revenue growth in recent quarters and expectations regarding future profitability at our TRS. After assessing both the positive and negative evidence, we determined it was more likely than not that we will realize all of our federal DTAs. Therefore, we reversed our federal valuation allowance of $17 million as a discrete benefit in the third quarter of 2021. In addition to the federal valuation allowance release, we determined it was more likely than not that we will realize a portion of our state DTAs and, as such, reversed $3 million of state valuation allowance as a discrete item in the third quarter of 2021. Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs as realization of our state DTAs is dependent on generating sufficient taxable income in the same jurisdictions in which the DTAs exist and we project most of our state DTAs will expire prior to their utilization. Note 21.23. Segment Information
During the first quarter of 2017, we reorganized our segments to align with changesRedwood operates in how we view our segments for making operating decisions3 segments: Residential Lending, Business Purpose Lending, and assessing performance. Specifically, we eliminated our Commercial segment and renamed our Residential Investments segment as the Investment Portfolio segment. This Investment Portfolio segment now includes both residential investments and our commercial investments, which are primarily comprised of investments in multifamily securities. Our Commercial segment previously included our commercial mortgage banking operations and our commercial loan investments, which were wound-down and sold, respectively, during 2016. We conformed the presentation of prior periods, whereby commercial loan investments are included in the Investment Portfolio segment and commercial mortgage banking activities are included in Corporate/Other. Following isThird-Party Investments. For a full description of our current segments.
Our Investment Portfolio segment primarily consists of investments segments, see Part I, Item 1—Business in residential jumbo loans and real estate securities. Our securities portfolio primarily includes investments in residential mortgage-backed securities ("RMBS") retained from our Sequoia securitizations and RMBS issued by third parties, Agency issued CRT securities, as well as investments in Agency issued multifamily securities. Our residential loan investments are primarily made through a subsidiary of Redwood Trust that is a member ofAnnual Report on Form 10-K for the Federal Home Loan Bank of Chicago ("FHLBC") that utilizes attractive long-term financing from the FHLBC to make long-term investments directly in residential loans. This segment also includes residential loans from our consolidated Sequoia Choice entity. The Investment Portfolio segment’s main sources of revenue are interest income from investment portfolio securities and residential loans held-for-investment. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, hedging expenses, direct operating expenses, and tax provisions associated with these activities are also included in this segment.
Our Residential Mortgage Banking segment primarily consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to our investment portfolio. We typically acquire prime, jumbo mortgages and the related mortgage servicing rights on a flow basis from our network of loan sellers and distribute those loans through our Sequoia private-label securitization program or to institutions that acquire pools of whole loans. We occasionally supplement our flow purchases with bulk loan acquisitions. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with residential loans we acquire. Our Residential Mortgage Banking segment’s main source of revenue is income from mortgage banking activities, which includes valuation increases (or gains) on the sale or securitization of loans and valuation changes from hedges used to manage risks associated with these activities. Additionally, this segment may generate interest income on loans held pending securitization or sale. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 21. Segment Information - (continued)
year ended December 31, 2020.
Segment contribution represents the measure of profit that we usemanagement uses to assess the performance of our business segments and make resource allocation and operating decisions. Certain corporate expenses not directly assigned or allocated to one of our two3 segments, as well as activity from certain consolidated Sequoia entities, and commercial mortgage banking activities (in the prior year), are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated corporate expenses primarily include interest expense associated with certain long-term debt,from our convertible notes and trust preferred securities, indirect operatinggeneral and administrative expenses and other expense.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 23. Segment Information - (continued)
The following tables present financial information by segment for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 21.123.1 – Business Segment Financial Information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
(In Thousands) | | Residential Lending | | Business Purpose Lending | | Third-Party Investments | | Corporate/ Other | | Total |
Interest income | | $ | 44,220 | | | $ | 67,235 | | | $ | 33,218 | | | $ | 1,049 | | | $ | 145,722 | |
Interest expense | | (25,395) | | | (46,834) | | | (21,370) | | | (10,155) | | | (103,754) | |
Net interest income | | 18,825 | | | 20,401 | | | 11,848 | | | (9,106) | | | 41,968 | |
Non-interest income | | | | | | | | | | |
Mortgage banking activities, net | | 32,946 | | | 30,217 | | | — | | | — | | | 63,163 | |
Investment fair value changes, net | | 2,285 | | | 3,470 | | | 20,569 | | | (247) | | | 26,077 | |
Other income, net | | 874 | | | 1,184 | | | — | | | 330 | | | 2,388 | |
Realized gains, net | | 6,389 | | | 314 | | | — | | | — | | | 6,703 | |
Total non-interest income (loss), net | | 42,494 | | | 35,185 | | | 20,569 | | | 83 | | | 98,331 | |
General and administrative expenses | | (8,989) | | | (13,987) | | | (1,415) | | | (23,301) | | | (47,692) | |
Loan acquisition costs | | (2,395) | | | (2,175) | | | (51) | | | — | | | (4,621) | |
Other expenses | | — | | | (3,873) | | | (150) | | | — | | | (4,023) | |
(Provision for) benefit from income taxes | | (11,139) | | | (3,485) | | | (335) | | | 19,282 | | | 4,323 | |
Segment Contribution | | $ | 38,796 | | | $ | 32,066 | | | $ | 30,466 | | | $ | (13,042) | | | |
Net Income | | | | | | | | | | $ | 88,286 | |
Non-cash amortization (expense) income, net | | $ | 5,862 | | | $ | (4,713) | | | $ | 276 | | | $ | (1,995) | | | $ | (570) | |
| | | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2021 |
(In Thousands) | | Investment Portfolio | | Residential Mortgage Banking | | Corporate/ Other | | Total | (In Thousands) | | Residential Lending | | Business Purpose Lending | | Third-Party Investments | | Corporate/ Other | | Total |
Interest income | | $ | 47,023 |
| | $ | 10,626 |
| | $ | 5,088 |
| | $ | 62,737 |
| Interest income | | $ | 104,801 | | | $ | 202,155 | | | $ | 102,180 | | | $ | 3,586 | | | $ | 412,722 | |
Interest expense | | (9,445 | ) | | (4,135 | ) | | (13,863 | ) | | (27,443 | ) | Interest expense | | (65,488) | | | (151,351) | | | (66,883) | | | (30,649) | | | (314,371) | |
Net interest income (loss) | | 37,578 |
|
| 6,491 |
|
| (8,775 | ) | | 35,294 |
| |
Net interest income | | Net interest income | | 39,313 | | | 50,804 | | | 35,297 | | | (27,063) | | | 98,351 | |
Non-interest income | | | | | | | | | Non-interest income | |
Mortgage banking activities, net | | — |
| | 21,200 |
| | — |
| | 21,200 |
| Mortgage banking activities, net | | 115,646 | | | 84,543 | | | — | | | — | | | 200,189 | |
MSR income, net | | 1,615 |
| | — |
| | — |
| | 1,615 |
| |
Investment fair value changes, net | | 1,372 |
| | — |
| | (1,048 | ) | | 324 |
| Investment fair value changes, net | | 8,958 | | | 10,551 | | | 102,303 | | | (1,168) | | | 120,644 | |
Other income | | 1,197 |
| | — |
| | — |
| | 1,197 |
| |
Other income, net | | Other income, net | | 4,566 | | | 3,044 | | | 5 | | | 742 | | | 8,357 | |
Realized gains, net | | 1,734 |
| | — |
| | — |
| | 1,734 |
| Realized gains, net | | 15,484 | | | 812 | | | 1,507 | | | — | | | 17,803 | |
Total non-interest income, net | | 5,918 |
|
| 21,200 |
|
| (1,048 | ) | | 26,070 |
| Total non-interest income, net | | 144,654 | | | 98,950 | | | 103,815 | | | (426) | | | 346,993 | |
Direct operating expenses | | (1,324 | ) | | (6,107 | ) | | (12,491 | ) | | (19,922 | ) | |
Provision for income taxes | | (433 | ) | | (4,829 | ) | | — |
| | (5,262 | ) | |
General and administrative expenses | | General and administrative expenses | | (30,539) | | | (38,834) | | | (3,476) | | | (58,988) | | | (131,837) | |
Loan acquisition costs | | Loan acquisition costs | | (5,698) | | | (6,088) | | | (138) | | | (4) | | | (11,928) | |
Other expenses | | Other expenses | | (6) | | | (11,523) | | | (592) | | | 17 | | | (12,104) | |
(Provision for) benefit from income taxes | | (Provision for) benefit from income taxes | | (25,289) | | | (6,988) | | | (912) | | | 19,282 | | | (13,907) | |
Segment Contribution | | $ | 41,739 |
|
| $ | 16,755 |
|
| $ | (22,314 | ) | | | Segment Contribution | | $ | 122,435 | | | $ | 86,321 | | | $ | 133,994 | | | $ | (67,182) | | |
Net Income | | | | | | | | $ | 36,180 |
| Net Income | | | | | | | | | | $ | 275,568 | |
Non-cash amortization income (expense) | | $ | 5,222 |
| | $ | (25 | ) | | $ | (787 | ) | | $ | 4,410 |
| |
Non-cash amortization (expense) income, net | | Non-cash amortization (expense) income, net | | $ | 8,867 | | | $ | (16,154) | | | $ | 317 | | | $ | (5,845) | | | $ | (12,815) | |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 21.23. Segment Information - (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Three Months Ended September 30, 2020 |
(In Thousands) | | Residential Lending | | Business Purpose Lending | | Third-Party Investments | | Corporate/ Other | | Total |
Interest income | | $ | 26,672 | | | $ | 55,930 | | | $ | 37,576 | | | $ | 1,804 | | | $ | 121,982 | |
Interest expense | | (21,401) | | | (44,159) | | | (24,238) | | | (10,613) | | | (100,411) | |
Net interest income | | 5,271 | | | 11,771 | | | 13,338 | | | (8,809) | | | 21,571 | |
Non-interest income | | | | | | | | | | |
Mortgage banking activities, net | | 11,864 | | | 47,531 | | | — | | | — | | | 59,395 | |
Investment fair value changes, net | | 2,443 | | | 16,892 | | | 87,890 | | | (178) | | | 107,047 | |
Other income, net | | (2,011) | | | 623 | | | 340 | | | 934 | | | (114) | |
Realized gains, net | | — | | | — | | | 602 | | | — | | | 602 | |
Total non-interest income, net | | 12,296 | | | 65,046 | | | 88,832 | | | 756 | | | 166,930 | |
General and administrative expenses | | (4,602) | | | (9,321) | | | (709) | | | (12,998) | | | (27,630) | |
Loan acquisition costs | | (304) | | | (1,660) | | | (194) | | | — | | | (2,158) | |
Other expenses | | (3,309) | | | (3,874) | | | (470) | | | (135) | | | (7,788) | |
(Provision for) benefit from income taxes | | (826) | | | (8,544) | | | 257 | | | — | | | (9,113) | |
Segment Contribution | | $ | 8,526 | | | $ | 53,418 | | | $ | 101,054 | | | $ | (21,186) | | | |
Net Income | | | | | | | | | | $ | 141,812 | |
Non-cash amortization income (expense), net | | $ | 1,785 | | | $ | (6,719) | | | $ | 117 | | | $ | (1,516) | | | $ | (6,333) | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
(In Thousands) | | Residential Lending | | Business Purpose Lending | | Third-Party Investments | | Corporate/ Other | | Total |
Interest income | | $ | 123,956 | | | $ | 162,732 | | | $ | 155,583 | | | $ | 7,738 | | | $ | 450,009 | |
Interest expense | | (87,725) | | | (113,143) | | | (111,666) | | | (37,214) | | | (349,748) | |
Net interest income | | 36,231 | | | 49,589 | | | 43,917 | | | (29,476) | | | 100,261 | |
Non-interest income | | | | | | | | | | |
Mortgage banking activities, net | | (19,222) | | | 43,733 | | | — | | | — | | | 24,511 | |
Investment fair value changes, net | | (159,107) | | | (84,837) | | | (366,696) | | | (917) | | | (611,557) | |
Other income, net | | (2,278) | | | 3,493 | | | 1,072 | | | 1,692 | | | 3,979 | |
Realized gains, net | | 2,001 | | | — | | | 3,236 | | | 25,182 | | | 30,419 | |
Total non-interest income, net | | (178,606) | | | (37,611) | | | (362,388) | | | 25,957 | | | (552,648) | |
General and administrative expenses | | (12,901) | | | (29,977) | | | (4,230) | | | (37,724) | | | (84,832) | |
Loan acquisition costs | | (1,512) | | | (5,630) | | | (567) | | | (7) | | | (7,716) | |
Other expenses | | (3,309) | | | (100,743) | | | 347 | | | (581) | | | (104,286) | |
Benefit from income taxes | | 7,827 | | | 477 | | | 4,775 | | | — | | | 13,079 | |
Segment Contribution | | $ | (152,270) | | | $ | (123,895) | | | $ | (318,146) | | | $ | (41,831) | | | |
Net Loss | | | | | | | | | | $ | (636,142) | |
Non-cash amortization income (expense), net | | $ | 732 | | | $ | (18,035) | | | $ | 1,170 | | | $ | (3,244) | | | $ | (19,377) | |
Other significant non-cash expense: goodwill impairment | | $ | — | | | $ | (88,675) | | | $ | — | | | $ | — | | | $ | (88,675) | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 |
(In Thousands) | | Investment Portfolio | | Residential Mortgage Banking | | Corporate/ Other | | Total |
Interest income | | $ | 47,176 |
| | $ | 8,831 |
| | $ | 4,899 |
| | $ | 60,906 |
|
Interest expense | | (5,013 | ) | | (3,826 | ) | | (12,758 | ) | | (21,597 | ) |
Net interest income (loss) | | 42,163 |
| | 5,005 |
| | (7,859 | ) | | 39,309 |
|
Reversal of provision for loan losses | | 859 |
| | — |
| | — |
| | 859 |
|
Non-interest income | | | | | | | | |
Mortgage banking activities, net | | — |
| | 9,766 |
| | — |
| | 9,766 |
|
MSR income, net | | 3,770 |
| | — |
| | — |
| | 3,770 |
|
Investment fair value changes, net | | 12,176 |
| | — |
| | (258 | ) | | 11,918 |
|
Other income | | 1,643 |
| | — |
| | — |
| | 1,643 |
|
Realized gains, net | | 6,615 |
| | — |
| | — |
| | 6,615 |
|
Total non-interest income, net | | 24,204 |
| | 9,766 |
| | (258 | ) | | 33,712 |
|
Direct operating expenses | | (2,751 | ) | | (5,807 | ) | | (11,797 | ) | | (20,355 | ) |
Provision for income taxes | | (732 | ) | | (240 | ) | | — |
| | (972 | ) |
Segment Contribution | | $ | 63,743 |
| | $ | 8,724 |
|
| $ | (19,914 | ) | | |
Net Income | | | | | | | | $ | 52,553 |
|
Non-cash amortization income (expense) | | $ | 6,123 |
| | $ | (28 | ) | | $ | (983 | ) | | $ | 5,112 |
|
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
(In Thousands) | | Investment Portfolio | | Residential Mortgage Banking | | Corporate/ Other | | Total |
Interest income | | $ | 135,106 |
| | $ | 26,515 |
| | $ | 14,968 |
| | $ | 176,589 |
|
Interest expense | | (21,940 | ) | | (11,462 | ) | | (39,306 | ) | | (72,708 | ) |
Net interest income (loss) | | 113,166 |
|
| 15,053 |
| | (24,338 | ) | | 103,881 |
|
Non-interest income | | | | | | | | |
Mortgage banking activities, net | | — |
| | 50,850 |
| | — |
| | 50,850 |
|
MSR income, net | | 6,106 |
| | — |
| | — |
| | 6,106 |
|
Investment fair value changes, net | | 13,846 |
| | — |
| | (3,856 | ) | | 9,990 |
|
Other income | | 3,367 |
| | — |
| | — |
| | 3,367 |
|
Realized gains, net | | 9,561 |
| | — |
| | (752 | ) | | 8,809 |
|
Total non-interest income, net | | 32,880 |
|
| 50,850 |
| | (4,608 | ) | | 79,122 |
|
Direct operating expenses | | (4,371 | ) | | (18,009 | ) | | (34,409 | ) | | (56,789 | ) |
Provision for income taxes | | (4,490 | ) | | (12,251 | ) | | — |
| | (16,741 | ) |
Segment Contribution | | $ | 137,185 |
| | $ | 35,643 |
|
| $ | (63,355 | ) | | |
Net Income | | | | | | | | $ | 109,473 |
|
Non-cash amortization income (expense) | | $ | 16,263 |
| | $ | (79 | ) | | $ | (2,528 | ) | | $ | 13,656 |
|
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 21.23. Segment Information - (continued)
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2016 |
(In Thousands) | | Investment Portfolio | | Residential Mortgage Banking | | Corporate/ Other | | Total |
Interest income | | $ | 149,985 |
| | $ | 24,610 |
| | $ | 15,426 |
| | $ | 190,021 |
|
Interest expense | | (18,679 | ) | | (10,719 | ) | | (38,593 | ) | | (67,991 | ) |
Net interest income (loss) | | 131,306 |
|
| 13,891 |
| | (23,167 | ) | | 122,030 |
|
Reversal of provision for loan losses | | 7,102 |
| | — |
| | — |
| | 7,102 |
|
Non-interest income | | | | | | | | |
Mortgage banking activities, net | | — |
| | 26,774 |
| | (2,062 | ) | | 24,712 |
|
MSR income, net | | 12,834 |
| | — |
| | — |
| | 12,834 |
|
Investment fair value changes, net | | (16,505 | ) | | — |
| | (2,181 | ) | | (18,686 | ) |
Other income | | 4,157 |
| | — |
| | — |
| | 4,157 |
|
Realized gains, net | | 25,745 |
| | — |
| | 292 |
| | 26,037 |
|
Total non-interest income, net | | 26,231 |
|
| 26,774 |
| | (3,951 | ) | | 49,054 |
|
Direct operating expenses (1) | | (7,689 | ) | | (17,175 | ) | | (46,098 | ) | | (70,962 | ) |
Provision for income taxes | | (1,087 | ) | | (240 | ) | | — |
| | (1,327 | ) |
Segment Contribution | | $ | 155,863 |
| | $ | 23,250 |
| | $ | (73,216 | ) | | |
Net Income | | | | | | | | $ | 105,897 |
|
Non-cash amortization income (expense) | | $ | 20,507 |
| | $ | (102 | ) | | $ | (2,978 | ) | | $ | 17,427 |
|
| |
(1) | For the nine months ended September 30, 2016, $11 million of costs associated with the restructuring of our conforming residential mortgage loan operations and commercial operations, included in the direct operating expense line item, are presented under the Corporate/Other column. |
The following tables presenttable presents the components of Corporate/Other for the three and nine months ended September 30, 20172021 and 2016.2020.
Table
21.223.2 – Components of Corporate/Other
| | | | Three Months Ended September 30, | | Three Months Ended September 30, |
| | 2017 | | 2016 | | 2021 | | 2020 |
(In Thousands) | | Legacy Consolidated VIEs (1) | | Other | | Total | | Legacy Consolidated VIEs (1) | | Other | | Total | (In Thousands) | | Legacy Consolidated VIEs (1) | | Other | | Total | | Legacy Consolidated VIEs (1) | | Other | | Total |
Interest income | | $ | 4,875 |
| | $ | 213 |
| | $ | 5,088 |
| | $ | 4,837 |
| | $ | 62 |
| | $ | 4,899 |
| Interest income | | $ | 1,042 | | | $ | 7 | | | $ | 1,049 | | | $ | 1,795 | | | $ | 9 | | | $ | 1,804 | |
Interest expense | | (3,838 | ) | | (10,025 | ) | | (13,863 | ) | | (3,274 | ) | | (9,484 | ) | | (12,758 | ) | Interest expense | | (641) | | | (9,514) | | | (10,155) | | | (1,059) | | | (9,554) | | | (10,613) | |
Net interest income (loss) | | 1,037 |
| | (9,812 | ) | | (8,775 | ) | | 1,563 |
| | (9,422 | ) | | (7,859 | ) | |
Net interest income | | Net interest income | | 401 | | | (9,507) | | | (9,106) | | | 736 | | | (9,545) | | | (8,809) | |
Non-interest income | | | | | | | | | | | | | Non-interest income | |
| Investment fair value changes, net | | (1,045 | ) | | (3 | ) | | (1,048 | ) | | (255 | ) | | (3 | ) | | (258 | ) | Investment fair value changes, net | | (247) | | | — | | | (247) | | | (81) | | | (97) | | | (178) | |
Other income | | Other income | | — | | | 330 | | | 330 | | | — | | | 934 | | | 934 | |
| Total non-interest income, net | | (1,045 | ) | | (3 | ) | | (1,048 | ) | | (255 | ) | | (3 | ) | | (258 | ) | Total non-interest income, net | | (247) | | | 330 | | | 83 | | | (81) | | | 837 | | | 756 | |
Direct operating expenses | | — |
| | (12,491 | ) | | (12,491 | ) | | — |
| | (11,797 | ) | | (11,797 | ) | |
General and administrative expenses | | General and administrative expenses | | — | | | (23,301) | | | (23,301) | | | — | | | (12,998) | | | (12,998) | |
| Other expenses | | Other expenses | | — | | | — | | | — | | | — | | | (135) | | | (135) | |
Provision for income taxes | | Provision for income taxes | | — | | | 19,282 | | | 19,282 | | | — | | | — | | | — | |
Total | | $ | (8 | ) | | $ | (22,306 | ) | | $ | (22,314 | ) | | $ | 1,308 |
| | $ | (21,222 | ) | | $ | (19,914 | ) | Total | | $ | 154 | | | $ | (13,196) | | | $ | (13,042) | | | $ | 655 | | | $ | (21,841) | | | $ | (21,186) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
(In Thousands) | | Legacy Consolidated VIEs (1) | | Other | | Total | | Legacy Consolidated VIEs (1) | | Other | | Total |
Interest income | | $ | 3,559 | | | $ | 27 | | | $ | 3,586 | | | $ | 7,674 | | | $ | 64 | | | $ | 7,738 | |
Interest expense | | (2,271) | | | (28,378) | | | (30,649) | | | (5,099) | | | (32,115) | | | (37,214) | |
Net interest income | | 1,288 | | | (28,351) | | | (27,063) | | | 2,575 | | | (32,051) | | | (29,476) | |
Non-interest income | | | | | | | | | | | | |
| | | | | | | | | | | | |
Investment fair value changes, net | | (1,162) | | | (6) | | | (1,168) | | | (702) | | | (215) | | | (917) | |
Other income | | — | | | 742 | | | 742 | | | — | | | 1,692 | | | 1,692 | |
Realized gains, net | | — | | | — | | | — | | | — | | | 25,182 | | | 25,182 | |
Total non-interest income, net | | (1,162) | | | 736 | | | (426) | | | (702) | | | 26,659 | | | 25,957 | |
General and administrative expenses | | — | | | (58,988) | | | (58,988) | | | — | | | (37,724) | | | (37,724) | |
Loan acquisition costs | | — | | | (4) | | | (4) | | | — | | | (7) | | | (7) | |
Other expenses | | — | | | 17 | | | 17 | | | — | | | (581) | | | (581) | |
Provision for income taxes | | — | | | 19,282 | | | 19,282 | | | — | | | — | | | — | |
Total | | $ | 126 | | | $ | (67,308) | | | $ | (67,182) | | | $ | 1,873 | | | $ | (43,704) | | | $ | (41,831) | |
(1) Legacy consolidated VIEs represent Legacy Sequoia entities that are consolidated for GAAP financial reporting purposes. See Note 4 for further discussion on VIEs.
REDWOOD TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172021
(Unaudited)
Note 21.23. Segment Information - (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
(In Thousands) | | Legacy Consolidated VIEs (1) | | Other | | Total | | Legacy Consolidated VIEs (1) | | Other | | Total |
Interest income | | $ | 14,576 |
| | $ | 392 |
| | $ | 14,968 |
| | $ | 14,525 |
| | $ | 901 |
| | $ | 15,426 |
|
Interest expense | | (11,046 | ) | | (28,260 | ) | | (39,306 | ) | | (9,842 | ) | | (28,751 | ) | | (38,593 | ) |
Net interest income (loss) | | 3,530 |
| | (27,868 | ) | | (24,338 | ) | | 4,683 |
| | (27,850 | ) | | (23,167 | ) |
Non-interest income | | | | | | | | | | | | |
Investment fair value changes, net | | (3,842 | ) | | (14 | ) | | (3,856 | ) | | (2,086 | ) | | (95 | ) | | (2,181 | ) |
Realized gains, net | | — |
| | (752 | ) | | (752 | ) | | — |
| | 292 |
| | 292 |
|
Total non-interest income, net | | (3,842 | ) | | (766 | ) | | (4,608 | ) | | (2,086 | ) | | (1,865 | ) | | (3,951 | ) |
Direct operating expenses | | — |
| | (34,409 | ) | | (34,409 | ) | | — |
| | (46,098 | ) | | (46,098 | ) |
Total | | $ | (312 | ) | | $ | (63,043 | ) | | $ | (63,355 | ) | | $ | 2,597 |
| | $ | (75,813 | ) | | $ | (73,216 | ) |
| |
(1) | Legacy consolidated VIEs represent Legacy Sequoia entities that are consolidated for GAAP financial reporting purposes. See Note 4 for further discussion on VIEs.
|
The following table presents supplemental information by segment at September 30, 20172021 and December 31, 2016.2020.
Table 21.323.3 – Supplemental Segment Information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | | Residential Lending | | Business Purpose Lending | | | | Third-Party Investments | | Corporate/ Other | | Total |
September 30, 2021 | | | | | | | | | | | | |
Residential loans | | $ | 3,974,829 | | | $ | — | | | | | $ | 1,999,405 | | | $ | 242,234 | | | $ | 6,216,468 | |
Business purpose loans | | — | | | 4,693,555 | | | | | — | | | — | | | 4,693,555 | |
Multifamily loans | | — | | | — | | | | | 482,791 | | | — | | | 482,791 | |
Real estate securities | | 150,368 | | | — | | | | | 202,918 | | | — | | | 353,286 | |
Other investments | | 12,389 | | | 6,767 | | | | | 379,102 | | | 24,108 | | | 422,366 | |
Intangible assets | | — | | | 45,246 | | | | | — | | | — | | | 45,246 | |
Total assets | | 4,219,950 | | | 4,860,226 | | | | | 3,088,815 | | | 903,723 | | | 13,072,714 | |
| | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | |
Residential loans | | $ | 1,741,963 | | | $ | — | | | | | $ | 2,221,153 | | | $ | 285,935 | | | $ | 4,249,051 | |
Business purpose loans | | — | | | 4,136,353 | | | | | — | | | — | | | 4,136,353 | |
Multifamily loans | | — | | | — | | | | | 492,221 | | | — | | | 492,221 | |
Real estate securities | | 160,780 | | | — | | | | | 183,345 | | | — | | | 344,125 | |
Other investments | | 8,815 | | | 21,627 | | | | | 317,282 | | | 451 | | | 348,175 | |
Intangible assets | | — | | | 56,865 | | | | | — | | | — | | | 56,865 | |
Total assets | | 1,989,802 | | | 4,323,040 | | | | | 3,232,415 | | | 809,809 | | | 10,355,066 | |
|
| | | | | | | | | | | | | | | | |
(In Thousands) | | Investment Portfolio | | Residential Mortgage Banking | | Corporate/ Other | | Total |
September 30, 2017 | | | | | | | | |
Residential loans | | $ | 2,586,105 |
| | $ | 925,681 |
| | $ | 673,134 |
| | $ | 4,184,920 |
|
Real estate securities | | 1,356,272 |
| | — |
| | — |
| | 1,356,272 |
|
Mortgage servicing rights | | 62,928 |
| | — |
| | — |
| | 62,928 |
|
Total assets | | 4,236,023 |
| | 947,503 |
| | 947,173 |
| | 6,130,699 |
|
| | | | | | | | |
December 31, 2016 | | | | | | | | |
Residential loans | | $ | 2,261,016 |
| | $ | 835,399 |
| | $ | 791,636 |
| | $ | 3,888,051 |
|
Real estate securities | | 1,018,439 |
| | — |
| | — |
| | 1,018,439 |
|
Mortgage servicing rights | | 118,526 |
| | — |
| | — |
| | 118,526 |
|
Total assets | | 3,615,535 |
| | 866,356 |
| | 1,001,586 |
| | 5,483,477 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six main sections:
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part II, Item 8, Financial Statements and Supplementary Data in our most recent Annual Report on Form 10-K, as well as the sections entitled “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, as well as other cautionary statements and risks described elsewhere in this report and our most recent Annual Report on Form 10-K. The discussion in this MD&A contains forward-looking statements that involve substantial risks and uncertainties. Our actual results could differ materially from those anticipated in these forward lookingforward-looking statements as a result of various factors, such as those discussed in the Cautionary Statement below.
References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires. Financial information concerning our business is set forth in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and notes thereto, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our website can be found at www.redwoodtrust.com. We make available, free of charge through the investor information section of our website, access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). We also make available, free of charge, access to our charters for our Audit Committee, Compensation Committee, and Governance and Nominating Committee, our Corporate Governance Standards, and our Code of Ethics governing our directors, officers, and employees. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any executive officer or director or senior officer (as defined in the Code).of Redwood. In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, and may include disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time. The information on our website is not part of this Quarterly Report on Form 10-Q.
Our Investor Relations Department can be contacted at One Belvedere Place, Suite 300, Mill Valley, CA 94941, Attn: Investor Relations, telephone (866) 269-4976.
Our Business
Redwood Trust, Inc., together with its subsidiaries, focusesis a specialty finance company focused on investingseveral distinct areas of housing credit. Our operating platforms occupy a unique position in mortgages and other real estate-related assets and engaging in mortgage banking activities.the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not served by government programs. We seekdeliver customized housing credit investments to invest in real estate-related assets that have the potential to generate attractive cash flow returns over time and to generate incomea diverse mix of investors through our mortgage banking activities.best-in-class securitization platforms, whole-loan distribution activities and our publicly-traded shares. Our consolidated investment portfolio has evolved to incorporate a diverse mix of residential, business purpose and multifamily investments. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in twothree segments: Investment PortfolioResidential Lending, Business Purpose Lending, and Residential Mortgage Banking.
Our primary sources of income are net interest income from our investment portfolio and non-interest income from our mortgage banking activities. Net interest income consists of the interest income we earn on investments less the interest expense we incur on borrowed funds and other liabilities. Income from mortgage banking activities consists of the profit we seek to generate through the acquisition of loans and their subsequent sale or securitization.
Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable year ended December 31, 1994. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our operating subsidiaries” or “our taxable REIT subsidiaries” or “TRS.” Our mortgage banking activities and investments in MSRs are generally carried out through our taxable REIT subsidiaries, while our portfolio of mortgage- and other real estate-related investments is primarily held at our REIT. We generally intend to retain profits generated and taxed at our taxable REIT subsidiaries, and to distribute as dividends at least 90% of the taxable income we generate at our REIT.
Redwood Trust, Inc. was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. Our executive offices are located at One Belvedere Place, Suite 300, Mill Valley, California 94941.
Our Business Segments
During the first quarter of 2017, we reorganized our segments to align with changes in how we view our segments for making operating decisions and assessing performance. Specifically, we eliminated our Commercial segment and renamed our Residential Investments segment as the Investment Portfolio segment. This Investment Portfolio segment now includes both residential investments and our commercial investments, which are primarily comprised of investments in multifamily securities. Our Commercial segment previously included our commercial mortgage banking operations and our commercial loan investments, which were wound-down and sold, respectively, during 2016. We conformed the presentation of prior periods, whereby commercial loan investments are included in the Investment Portfolio segment and commercial mortgage banking activities are included in Corporate/Other. Following isThird-Party Investments. For a full description of our current segments.
Our Investment Portfolio segment primarily consists of investments segments, see Part 1, Item 1—Business in residential jumbo loans and real estate securities. Our securities portfolio primarily includes investments in residential mortgage-backed securities ("RMBS") retained from our Sequoia securitizations and RMBS issued by third parties, Agency issued credit risk transfer ("CRT") securities, as well as investments in Agency issued multifamily securities. Our residential loan investments are primarily made through a subsidiary of Redwood Trust that is a member of the Federal Home Loan Bank of Chicago ("FHLBC") that utilizes attractive long-term financing from the FHLBC to make long-term investments directly in residential loans. The Investment Portfolio segment’s main sources of revenue are interest income from investment portfolio securities and residential loans held-for-investment. Additionally, this segment may realize gains and losses upon the sale of securities. Funding expenses, hedging expenses, direct operating expenses, and tax provisions associated with these activities are also included in this segment.
Our Residential Mortgage Banking segment primarily consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to our investment portfolio. We typically acquire prime, jumbo mortgages and the related mortgage servicing rightsAnnual Report on a flow basis from our network of loan sellers and distribute those loans through our Sequoia private-label securitization program or to institutions that acquire pools of whole loans. We occasionally supplement our flow purchases with bulk loan acquisitions. This segment also includes various derivative financial instruments that we utilize to manage certain risks associated with residential loans we acquire. Our Residential Mortgage Banking segment’s main source of revenue is income from mortgage banking activities, which includes valuation increases (or gains) on the sale or securitization of loans and valuation changes from hedges used to manage risks associated with these activities. Additionally, this segment may generate interest income on loans held pending securitization or sale. Funding expenses, direct operating expenses, and tax expenses associated with these activities are also included in this segment.
Consolidated Securitization Entities
We sponsor our Sequoia securitization program, which we useForm 10-K for the securitization of residential mortgage loans. We are required under Generally Accepted Accounting Principles in the United States (“GAAP”) to consolidate the assets and liabilities of certain Sequoia securitization entities we have sponsored for financial reporting purposes. However, each of these entities is independent of Redwood and of each other, and the assets and liabilities of these entities are not owned by us or legal obligations of ours, respectively, although we are exposed to certain financial risks associated with our role as the sponsor or depositor of these entities and, to the extent we hold securities issued by, or other investments in, these entities, we are exposed to the performance of these entities and the assets they hold. We refer to certain of these securitization entities issued prior to 2012 as “consolidated Legacy Sequoia entities,” and the securitization entity formed in connection with the securitization of Redwood Choice expanded-prime loans as the "consolidated Sequoia Choice entity." Where applicable, in analyzing our results of operations, we distinguish results from current operations “at Redwood” and from consolidated Legacy Sequoia entities or the consolidated Sequoia Choice entity.year ended December 31, 2020.
Cautionary Statement
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, and this Quarterly Report on Form 10-Q, in each case2020, under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood’sRedwood's business strategy and strategic focus, including statements relating to our overall market position, strategy and long-term prospects;prospects (including trends driving the flow of capital in the housing finance market, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, our ability to pay dividends in the future, and the prospects for federal housing finance reform); (ii) statements regardingrelated to our long-term debtfinancial outlook and upcoming maturity of convertible notes in 2018;expectations for 2021 and future years; (iii) statements regardingrelated to our opportunities for growth, including by continuing to creatively expand distribution channels for our loans products; (iv) statements related to our investment portfolio, including thethat there remains potential impactupside in our portfolio through a combination of changesaccretable market discount and call rights that we control, and that we reinitiated our flow purchase arrangement with Point, providing us with continuing HEI acquisition and securitization opportunities; (v) statements related to the capital requirement under our FHLB borrowing facility; (iv)residential and business purpose lending platforms, including that we expect CoreVest to continue to consider issuing bridge loan securitizations in conjunction with our traditional SFR loan securitizations; (vi) statements regarding our mortgage banking activities, including expectations relating to residential mortgage banking margins, securitization execution, and our expanded-prime Redwood Choice loan program; (v)estimate of our available capital (including that we estimate our available capital at September 30, 2021 was approximately $350 million); (vii) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan to purchase, including the amount of such loans that we identified for purchase during the third quarter of 20172021 and at September 30, 2017,2021, and expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase; (vi) statements relating to our estimate of our available capital (including that we estimate our available capital as of September 30, 2017 was approximately $330 million, expectations relating to our upcoming $250 million convertible debt maturity, and that we believe we can source incremental capital on an as-needed basis for redeployment through continued optimization of our investment portfolio); (vii)(viii) statements we make regarding future dividends, including with respect to our dividend policy, including our intention to pay a regular dividend of $0.28 per share per quarterquarterly dividends in 2017;2021; and (viii)(ix) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.
Many of the factors that could affect our actual results are summarized below. One of the most significant factors, however, is the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Moreover, each of the factors summarized below is likely to also be impacted directly or indirectly by the ongoing impact of the pandemic and investors are cautioned to interpret substantially all of the risks identified in the Company’s previously published “Risk Factors” as being heightened as a result of the ongoing impact of the pandemic.
Important factors, among others, that may affect our actual results include:
•the pace at which we redeploy our available capital into new investments;impact of the COVID-19 pandemic;
interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;
changes in the demand from investors for residential mortgages and investments, and our ability to distribute residential mortgages through our whole-loan distribution channel;
our ability to finance our investments in securities and our acquisition of residential mortgages with short-term debt;
changes in the values of assets we own;
•general economic trends and the performance of the housing, real estate, mortgage credit,finance, and broader financial markets, and their effects on the prices of earning assets and the credit status of borrowers;markets;
•federal and state legislative and regulatory developments and the actions of governmental authorities includingand entities;
•changing benchmark interest rates, and the new U.S. presidential administration,Federal Reserve’s actions and in particular those affecting the mortgage industry orstatements regarding monetary policy;
•our ability to compete successfully;
•our ability to adapt our business (including, but not limitedmodel and strategies to the Federal Housing Finance Agency’s rules relating to FHLB membership requirements and the implications for our captive insurance subsidiary’s membership in the FHLB);changing circumstances;
•strategic business and capital deployment decisions we make;
developments related•our use of financial leverage;
•our exposure to the fixed income and mortgage finance markets and the Federal Reserve’s statements regarding its future open market activity and monetary policy;a breach of our cybersecurity or data security;
•our exposure to credit risk and the timing of credit losses within our portfolio;
•the concentration of the credit risks we are exposed to, including due to the structure of assets we hold, and the geographical concentration of real estate underlying assets we own;
own, and our exposure to adjustable-rate mortgage loans;environmental and climate-related risks;
•the efficacy and expense of our efforts to manage or hedge credit risk, interest rate risk, and other financial and operational risks;
•changes in credit ratings on assets we own and changes in the rating agencies’ credit rating methodologies;
changes in interest rates; •changes in mortgage prepayment rates;
•changes in interest rates;
•our ability to redeploy our available capital into new investments;
•interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;
•our ability to finance the acquisition of real estate-related assets with short-term debt;
•changes in the values of assets we own;
•the ability of counterparties to satisfy their obligations to us;
•our exposure to the discontinuation of LIBOR;
•our exposure to liquidity risk, risks associated with the use of leverage, and market risks;
•changes in the demand from investors for residential and business purpose mortgages and investments, and our ability to distribute residential and business purpose mortgages through our whole-loan distribution channel;
•our involvement in securitization transactions, the profitability of those transactions, and the risks we are exposed to in engaging in securitization transactions;
•exposure to claims and litigation, including litigation arising from our involvement in loan origination and securitization transactions;
ongoing litigation against various trustees of RMBS transactions;
•whether we have sufficient liquid assets to meet short-term needs;
•our ability to successfully compete and retain or attract key personnel;
our ability to adapt our business model and strategies to changing circumstances;
•changes in our investment, financing, and hedging strategies and new risks we may be exposed to if we expand our business activities;
•our exposure to a disruption or breach of the security of our technology infrastructure and systems;
exposure to environmental liabilities;
our failure to comply with applicable laws and regulations;
our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;
•the impact on our reputation that could result from our actions or omissions or from those of others;
•our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;
•the termination of our captive insurance subsidiary’s membership in the Federal Home Loan Bank and the implications for our income generating abilities;
•the impact of changes in accounting principlesto U.S. federal income tax laws on the U.S. housing market, mortgage finance markets, and tax rules;our business;
•our failure to comply with applicable laws and regulation, including our ability to obtain or maintain the governmental licenses;
•our ability to maintain our status as a REIT for tax purposes;
•limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940;
•our common stock may experience price declines, volatility, and poor liquidity, and we may reduce our dividends in a variety of circumstances;
•decisions about raising, managing, and distributing capital;
•our exposure to broad market fluctuations; and
•other factors not presently identified.
This Quarterly Report on Form 10-Q may contain statistics and other data that in some cases have been obtained from or compiled from information made available by servicers and other third-party service providers.
OVERVIEW
Business Update
During the third quarter, we hosted Redwood’s third annual Investor Day. During our event we affirmed our commitment to our corporate mission to make quality housing, whether rented or owned, accessible to all American households, and discussed the Company's vision of being the leading operator and strategic capital provider driving sustainable innovation in housing finance.
We hadhave significantly broadened our business within the housing market over the past several years. This includes expanding our mortgage banking platform and investment portfolio beyond the jumbo residential mortgage space, while maintaining the core competencies of the firm around our expertise in residential housing credit. Our expansion includes our acquisition of CoreVest in 2019 – which has now been part of our platform for two years – and investments in several other areas of housing finance. More recently, our approach to capital deployment has continued to evolve. Our progress this year growing our RWT Horizons initiative – investing in advanced technologies with the potential to transform our businesses – reflects an important step in that process. While our capital remains predominantly allocated to our operating businesses and investment portfolio, RWT Horizons reflects our belief in the strategic importance of innovation and partnership in driving profitable scale.
Our strategic vision is based upon the vast addressable market we see in front of us, driven by macroeconomic and market forces that have made liquidity sourced from the private markets essential for a strongrobust housing finance system, for both consumers and investors alike. The recent modest increase in benchmark rates belies a lack of yield in the market that – but for some brief and notable intervals – has been persistent for over a decade. Taken together, this puts a premium on enterprises that can directly access markets efficiently and with discipline. We believe that these competencies, coupled with capital optimization and efficiency gains, will drive our financial results, and continuing to creatively expand distribution channels for mortgage loans we originate or acquire will be an important part of our evolution.
Turning to the third quarter of 2017 operationally and financially, and are well positioned to achieve the operating metrics we set out for2021, after a successful first half of the year, and buildour team continued its strong performance. CoreVest maintained its momentum, as we head towards 2018. Perhaps most importantly, we completed our executive search process with the hiring of Dash Robinson, who started with us in late September in his capacity as Executive Vice President. We also completed three successful securitization issuances, including our first expanded-prime Redwood Choice ("Choice") transaction, and issued convertible debt at an attractive level. We deployed $119 million of capital in new investments, much of it after asset pricing declines in early September. We timed our capital deployment well, as asset prices subsequently reverted, in most cases finishing the quarter at or above June 30, 2017 levels.
In this update, we review our mortgage banking activities, provide our thoughts on capital and investing, and conclude with our outlook for the balance of 2017.
Residential Mortgage Banking
Our mortgage banking team had a strong third quarter of 2017, with our expanded-prime Choice program continuing to drive outperformance. Our initial Choice securitization, backed by $318funding $639 million of loans was received favorably byfor the market,quarter, including $239 million in September alone. Our third quarter results saw strong contributions from both our SFR and attracted a good numberBridge lending teams, and we made key progress in our correspondent loan business, including our strategic investment in Churchill. Meanwhile, the Residential business identified $4.7 billion of both new and existing investors. The issuance created $31 millionloans for purchase in the third quarter (locked loans, unadjusted for fallout). Notwithstanding that benchmark interest rates hit lows not seen since February, almost 60% of investments for our portfolio, utilizing approximately $13 million of capital - more than doubleresidential loan locks during the investment for our portfolio thanthird quarter were on purchase-money loans, which we believe is produced through a traditional Sequoia securitization. Given the current pace and expected growth of loan purchases under our Choice program, we expect to issue Choice securitizations on a regular basis.
We also completed our fifth and sixth traditional Sequoia securitizationsindicative of the yearquality of our pipeline and our sellers.
Our investment portfolio remained in step with this operating progress, appreciating in value by approximately 2% during the third quarter of 2017, backed by loans totaling $839 million; this was followed closely by2021. We believe there remains potential upside in our securities portfolio from a combination of accretable market discount and call rights that we control.
These factors contributed to another traditional Sequoia securitization in early October. In addition, we sold $212 million of whole loans to portfolio buyers during the third quarter.
As loan and RMBS pricing has improved, our loan purchase volumes have risen and we have become more competitive with bank retail and correspondent mortgage channels. Loan purchase commitments, adjusted for fallout, increased to $1.6 billion in the thirdstrong quarter of 2017, up from $1.4 billion and $1.1 billion in the second and first quarters of 2017, respectively. We had strong growth during the third quarterfinancial results, with our Choice program, which accounted for approximately 30% of our total third quarter loan purchase commitments, adjusted for fallout, versus approximately 20% in the second quarter of 2017. Overall margins remained at or above our long-term expectations of 75-100 basis points during the third quarter of 2017.
Capital and Investing
We aggressively pursued new investments in September when volatility due to hurricane activity drove asset prices down. The bulk of the quarter’s $119 million of capital deployment occurred during this period, and included $63 million in GSE residential credit risk transfer (CRT) securities, $39 million in Sequoia and third-party RMBS, and $17 million in multifamily securities. Year-to-date through September 30, 2017, we have deployed $393 million of capital towards new investments (including $37 million of debt repurchases).
We also sold $49 million of mostly lower yielding securities in the third quarter of 2017, freeing up $20 million of capital for reinvestment, after the repayment of associated debt. Additionally, we issued $245 million of six-year, 4.75% convertible debt in August.
As of September 30, 2017, we estimate that our available capital was approximately $330 million, versus $180 million at June 30, 2017. Although we continue to evaluate our options with regard to the April 2018 maturity of $250 million of our convertible debt, at current market prices the excess cost to retire this debt prior to maturity is unattractive relative to alternative short-term uses of cash. In addition, we believe we can source incremental capital on an as-needed basis for redeployment through continued optimization of our investment portfolio.
We continue to evaluate the potential impact of hurricane activity in Houston and Florida on our investment portfolio, although it is still very early in the process. The vast majority of our non-Agency loans and securities were not impacted by the storms and, to date, we have not incurred any realized losses related to properties in the affected areas. Although we did see some impact to pricing from the hurricanes, most of our investments had positive net market valuation adjustments as the benefit from overall credit spread tightening exceeded any negative impact from the hurricanes.
Outlook
As we progress through the fourth quarter of 2017, our current operating metrics are in line with our expectations. While investment portfolio returns have been bolstered by persistent market value increases, we have also maintained consistent levels of net interest income and refined our portfolio mix by selling lower-yielding investments and realizing gains where appropriate. Mortgage banking margins continue to be robust and we are encouraged by the relative mix of Select and Choice loans in our pipeline.
We remain cognizant of forces outside of our control (both financial and otherwise) and their potential impact on our business. With this backdrop, a fully-seated executive team is an important milestone as we continue to think critically about our business assumptions and look ahead to next year and beyond.
Financial and Operational Overview - Third Quarter of 2017
Highlights
Our GAAP earnings were $0.41of $0.65 per diluted share, a 27% annualized return on equity for the third quarter of 2017, as compared with $0.43 per share for the second quarter of 2017. Higher mortgage banking income and interest income were offset by higher interest costs and less benefit from market2021. Book value increases on our trading securities portfolio relative to the second quarter of 2017.
Our GAAP book value was $15.67 per share at September 30, 2017, as compared with $15.29 per share at June 30, 2017. This increase was primarily driven by our quarterly earnings exceeding our dividend, and higher fair values on our available-for-sale securities.
We deployed $119 million of capitalincreased 4.7% in the third quarter to $12.00 per share, contributing to an overall year-to-date increase of 2017 toward21%. We declared a third quarter dividend of $0.21 per share and have now earned a 27% economic return year to date, which represents growth in GAAP book value combined with dividends paid.
Additionally, we executed a series of strategic and novel transactions across various disciplines within our firm that both positively contributed to earnings and provided indicators of our operating progress. Our Residential team completed a securitization leveraging blockchain technology for enhanced payment reporting for Sequoia investors. Historically, RMBS investors have needed to wait until well into the following month to see a month’s worth of remittance details on underlying loans. Liquid Mortgage – an early portfolio company of RWT Horizons – has coordinated with our sub-servicer to publish daily remittance information on a public blockchain. We believe this implementation is just the first step in the application of this type of technology to our business.
Next, we completed CoreVest’s first securitization of bridge loans, which priced competitively against comparable transactions in the market. This new investments, including $63 millionform of distribution provides a valuable capital management tool with a 30-month reinvestment feature. We expect CoreVest to continue to consider issuing bridge loan securitizations in Agencyconjunction with our traditional single-family rental ("SFR") loan securitizations, having recently priced the 19th overall CAFL securitization in October 2021.
Finally, we co-sponsored a securitization backed entirely by residential CRT securities, $39 millionHome Equity Investment contracts (“HEIs”). Co-sponsored with Point Digital, a financial technology company, this transaction allowed investors to participate in Sequoiaa new sector of the residential housing finance market that enables homeowners to participate in the benefits of home price appreciation without having to sell their homes or incur additional debt obligations. In parallel with this securitization, we renewed our flow purchase arrangement with Point, providing us with continuing HEI acquisition and third-party RMBS, and $17 million in Agency multifamily securities. Year-to-date through September 30, 2017, we deployed $393 million of capital into newsecuritization opportunities.
RWT Horizons also continued its investment activity, completing six investments (including $37 million of debt repurchases).
We sold $49 million of securities during the third quarter while continuing to analyze a broad array of 2017, freeing up $20opportunities in the pipeline, including several in the climate analytics area, which continues to be of interest as traditional methods of predicting how climate change can impact property valuation and insurability continue to evolve. With a direct relationship to our firmwide ESG work, we expect to continue dedicating focus to this type of opportunity through RWT Horizons.
As we approach the end of 2021, we are proceeding cautiously. We see several macro and market risks ahead, including COVID-19 variants, rising inflation, central bank tapering (now officially signaled by the Federal Reserve) and Federal debt ceiling extension uncertainty, among others. More fundamentally, recent trends in unemployment claims data suggest that the economy is still in a recovery phase and the current economic situation is far from stable, notwithstanding consistent upward pressure on home prices and rents that has otherwise been favorable to our business results. Our interest rate, capital and broader risk management posture reflects this cautious view: while we have generated strong earnings thus far in 2021, we have done so with record levels of cash on hand – including $557 million of capital for reinvestment after the repayment of associated debt. Year-to-date throughat September 30, 2017, we sold $148 million of mostly lower yielding securities and $53 million of conforming MSRs, freeing up $131 million of capital for reinvestment after the repayment of associated debt.2021.
We purchased $1.5 billionare also focused on making a positive impact for our people, our customers, our communities, and the overall society within which we operate. We believe this focus on a business model vision and a set of residential jumbo loans duringcore values can produce long-term and sustainable benefits for all our stakeholders. Going forward, we expect to continue operating to fulfill our broadly-conceived mission, focusing on the third quartersignificant addressable markets in front of 2017,us, embracing the cusp of innovation, running a business grounded in fundamentals and $3.8 billion year-to-date through September 30, 2017. At September 30, 2017,sound analysis, and nurturing a diverse talent bench engaged and aligned with our pipeline of jumbo residential loans identified for purchase was $1.5 billion.values.
Residential loan sales totaled $1.4 billion during the third quarter of 2017 and included $0.2 billion of whole loan sales to third parties and $1.2 billion of loans that were securitized. Year-to-date through September 30, 2017, residential loan sales totaled $3.5 billion, and included $0.9 billion of whole loan sales to third parties and $2.6 billion of loans that were securitized in seven separate transactions including our first expanded-prime Choice securitization.
We issued $245 million of six-year, 4.75% convertible debt during the third quarter of 2017.
Key Earnings MetricsThird Quarter Overview
The following table presents key earningsfinancial metrics for the three and nine months ended September 30, 2017.2021.
Table 1 – Key EarningsFinancial Metrics
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands, except per Share Data) | | September 30, 2021 | | September 30, 2021 |
Net income per diluted common share | | $ | 0.65 | | | $ | 2.03 | |
Annualized GAAP return on equity | | 26.7 | % | | 29.6 | % |
Dividends per share | | $ | 0.21 | | | $ | 0.55 | |
Book value per share | | $ | 12.00 | | | $ | 12.00 | |
Economic return on book value (1) | | 6.5 | % | | 26.6 | % |
|
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands, except per Share Data) | | September 30, 2017 | | September 30, 2017 |
Net income | | $ | 36,180 |
| | $ | 109,473 |
|
Net income per diluted common share | | $ | 0.41 |
| | $ | 1.26 |
|
Annualized GAAP return on equity | | 12 | % | | 12 | % |
REIT taxable income per share | | $ | 0.26 |
| | $ | 0.73 |
|
Dividends per share | | $ | 0.28 |
| | $ | 0.84 |
|
(1)Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period.
A detailed discussion•Our third quarter 2021 results reflect ongoing strength of our third quarter of 2017 net income is includedoperating platforms with higher volumes and strong margins driving increased revenues, improved returns in our investment portfolio from more efficient financing, and a tax benefit realized during the quarter. These results, along with an increase in the Resultsvalue of Operations section of this MD&A that follows.
Book Value per Share
At September 30, 2017, our book value was $1.21 billion, or $15.67 per share, ansecurities portfolio attributable to continued positive fundamental trends, contributed to a 4.7% increase from $15.29 per share at June 30, 2017 and $14.96 at December 31, 2016. The following table sets forth the changes in our book value per share during the quarter.
•In September 2021, we announced a 17% increase in our quarterly dividend to $0.21 per share for the three and nine months ended September 30, 2017.third quarter of 2021.
Table 2 – Changes in Book Value per Share
|
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Dollars, per share basis) | | September 30, 2017 | | September 30, 2017 |
Beginning book value per share | | $ | 15.29 |
| | $ | 14.96 |
|
Net income | | 0.41 |
| | 1.26 |
|
Changes in unrealized gains on securities, net from: | | | | |
Realized gains recognized in net income | | (0.03 | ) | | (0.09 | ) |
Amortization income recognized in net income | | (0.05 | ) | | (0.15 | ) |
Mark-to-market adjustments, net | | 0.27 |
| | 0.47 |
|
Total change in unrealized gains on securities, net | | 0.19 |
| | 0.23 |
|
Dividends | | (0.28 | ) | | (0.84 | ) |
Equity compensation, net | | 0.02 |
| | 0.01 |
|
Changes in unrealized losses on derivatives hedging long-term debt | | — |
| | (0.01 | ) |
Other, net | | 0.04 |
| | 0.06 |
|
Ending Book Value per Share | | $ | 15.67 |
| | $ | 15.67 |
|
•Our GAAP book value per share increased $0.38$0.54 per share to $15.67$12.00 per share during the third quarter of 2017. This increase was primarily driven by positive mark-to-market adjustments on our available-for-sale securities and our quarterly2021, as basic earnings exceeding our dividend.
Unrealized gains on our available-for-sale securities increased $0.19 per share duringsignificantly exceeded our third quarter dividend of $0.21 per share.
•Our business purpose lending platform funded $639 million of business purpose mortgage loans in the third quarter, including $394 million of single-family rental loans and $245 million of residential bridge loans.
•During the third quarter of 2017, primarily as2021, we locked a resultrecord $4.74 billion of a positive $0.27 per share mark-to-market adjustment on our available-for-sale securities due to credit spread tightening during the quarter. This increase was partially offset by $0.05 per sharejumbo loans with over 125 discrete sellers, jumbo loan purchase commitments were $3.29 billion, and we purchased $3.18 billion of discount amortization income recognized in earnings from the appreciation in the amortized cost basis of our available-for-sale securities, and $0.03 per share of previously unrealized net gains that were realized as income from the sale of securities.residential jumbo loans.
Capital Allocation Summary
This section provides an overview of our capital position and how it was allocated at the end of•During the third quarter of 2017. A detailed discussion2021, we securitized $1.03 billion of loans through three securitizations across Residential and Business Purpose Lending, and distributed $2.43 billion of jumbo loans through whole loan sales.
•During the third quarter of 2021, we completed a securitization backed entirely by residential home equity investment contracts ("HEIs"), issuing approximately $146 million of securities through a transaction co-sponsored with Point Digital.
•During the third quarter of 2021, we funded six venture investments through our RWT Horizons venture investment initiative.
•During the third quarter of 2021, we added over $350 million of financing capacity to support growth of our liquidityoperating platforms and capital resources is providedcompleted a new $100 million non-marginable term financing collateralized by retained securities in the Liquidity and Capital Resources section of this MD&A that follows.our investment portfolio.
We use a combination of equity and corporate debt (which we collectively refer to as “capital”) to fund our business. We also utilize various forms of collateralized short-term and long-term debt to finance certain investments and to warehouse some of our inventory of residential loans held-for-sale. We do not consider this collateralized debt as "capital" and, therefore, it is presented separately from allocated capital in the table below. The following table presents how our capital was allocated between business segments and investment types at•At September 30, 2017.
Table 3 – Capital Allocation Summary
|
| | | | | | | | | | | | | | | |
At September 30, 2017 | | | | | | | | |
(Dollars in Thousands) | | Fair Value | | Collateralized Debt | | Allocated Capital | | % of Total Capital |
Investment portfolio | | | | | | | | |
Residential loans/FHLB stock | | $ | 2,312,195 |
| | $ | (1,999,999 | ) | | $ | 312,196 |
| | 17 | % |
Residential securities (1) | | 1,144,397 |
| | (370,838 | ) | | 773,559 |
| | 43 | % |
Commercial/Multifamily securities (2) | | 243,071 |
| | (178,973 | ) | | 64,098 |
| | 4 | % |
Mortgage servicing rights | | 62,928 |
| | — |
| | 62,928 |
| | 4 | % |
Other assets/(other liabilities) | | 187,325 |
| | (53,551 | ) | | 133,774 |
| | 7 | % |
Cash and liquidity capital | | | | | | 266,746 |
| | 15 | % |
Total investment portfolio | | $ | 3,949,916 |
| | $ | (2,603,361 | ) | | 1,613,301 |
| | 90 | % |
Residential mortgage banking | | | | | | 170,000 |
| | 10 | % |
Total | | | | | | $ | 1,783,301 |
| | 100 | % |
| |
(1) | Residential securities presented above includes our $31 million net economic investment in our consolidated Sequoia Choice securitization. This net investment represents the fair value of the securities we retained from this securitization. |
| |
(2) | Includes $223 million of multifamily securities and $20 million of investment grade CMBS. |
Our total capital2021, our unrestricted cash was $1.78 billion at September 30, 2017,$557 million, and included $1.21 billion of equity capital and $0.57 billion of the total $2.57 billion of long-term debt on our consolidated balance sheet. This portion of debt included $201 million of exchangeable debt due in 2019, $245 million of convertible debt due in 2023, and $140 million of trust-preferred securities due in 2037.
Of our $1.78 billion of total capital at September 30, 2017, $1.61 billion (or 90%) was allocated to our investments with the remaining $170 million (or 10%) allocated to our residential mortgage banking activities.
As of September 30, 2017, we estimate that ourestimated available capital was approximately $330$350 million. Although we continue to evaluate our options with regard to the April 2018 maturity of $250 million of our convertible debt, at current market prices the excess cost to retire this debt prior to maturity is unattractive relative to alternative short-term uses of cash. In addition, we believe we can source incremental capital on an as-needed basis for redeployment through continued optimization of our investment portfolio.
RESULTS OF OPERATIONS
Within this Results of Operations section, we provide commentary that compares results year-over-year for 20172021 and 2016.2020. Most tables include a "change" column that shows the amount by which the results from 20172021 are greater or less than the results from the respective period in 2016.2020. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the third quarter of 2017,2021, compared to the third quarter of 2016,2020, and increases or decreases in the "nine-month periods" refer to the change in results for the first nine months of 2017,2021, compared to the first nine months of 2016.2020.
Consolidated Results of Operations
The following table presents the components of our net income for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 42 – Net Income (Loss)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands, except per Share Data) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Net Interest Income | | $ | 35,294 |
| | $ | 39,309 |
| | $ | (4,015 | ) | | | $ | 103,881 |
| | $ | 122,030 |
| | $ | (18,149 | ) |
Reversal of provision for loan losses | | — |
| | 859 |
| | (859 | ) | | | — |
| | 7,102 |
| | (7,102 | ) |
Net Interest Income After Provision | | 35,294 |
| | 40,168 |
| | (4,874 | ) | | | 103,881 |
| | 129,132 |
| | (25,251 | ) |
Non-interest Income | | | | | |
|
| | | | | | |
|
|
Mortgage banking activities, net | | 21,200 |
| | 9,766 |
| | 11,434 |
| | | 50,850 |
| | 24,712 |
| | 26,138 |
|
MSR income, net | | 1,615 |
| | 3,770 |
| | (2,155 | ) | | | 6,106 |
| | 12,834 |
| | (6,728 | ) |
Investment fair value changes, net | | 324 |
| | 11,918 |
| | (11,594 | ) | | | 9,990 |
| | (18,686 | ) | | 28,676 |
|
Other income | | 1,197 |
| | 1,643 |
| | (446 | ) | | | 3,367 |
| | 4,157 |
| | (790 | ) |
Realized gains, net | | 1,734 |
| | 6,615 |
| | (4,881 | ) | | | 8,809 |
| | 26,037 |
| | (17,228 | ) |
Total non-interest income, net | | 26,070 |
| | 33,712 |
| | (7,642 | ) | | | 79,122 |
| | 49,054 |
| | 30,068 |
|
Operating expenses | | (19,922 | ) | | (20,355 | ) | | 433 |
| | | (56,789 | ) | | (70,962 | ) | | 14,173 |
|
Net income before income taxes | | 41,442 |
| | 53,525 |
| | (12,083 | ) | | | 126,214 |
| | 107,224 |
| | 18,990 |
|
Provision for income taxes | | (5,262 | ) | | (972 | ) | | (4,290 | ) | | | (16,741 | ) | | (1,327 | ) | | (15,414 | ) |
Net Income | | $ | 36,180 |
| | $ | 52,553 |
| | $ | (16,373 | ) | | | $ | 109,473 |
| | $ | 105,897 |
| | $ | 3,576 |
|
Diluted earnings per common share | | $ | 0.41 |
| | $ | 0.58 |
| | $ | (0.17 | ) | | | $ | 1.26 |
| | $ | 1.23 |
| | $ | 0.03 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands, except per Share Data) | | 2021 | | 2020 | | Change | | | 2021 | | 2020 | | Change |
Net Interest Income | | $ | 41,968 | | | $ | 21,571 | | | $ | 20,397 | | | | $ | 98,351 | | | $ | 100,261 | | | $ | (1,910) | |
Non-interest Income | | | | | | | | | | | | | |
Mortgage banking activities, net | | 63,163 | | | 59,395 | | | 3,768 | | | | 200,189 | | | 24,511 | | | 175,678 | |
Investment fair value changes, net | | 26,077 | | | 107,047 | | | (80,970) | | | | 120,644 | | | (611,557) | | | 732,201 | |
Other income | | 2,388 | | | (114) | | | 2,502 | | | | 8,357 | | | 3,979 | | | 4,378 | |
Realized gains, net | | 6,703 | | | 602 | | | 6,101 | | | | 17,803 | | | 30,419 | | | (12,616) | |
Total non-interest income (loss), net | | 98,331 | | | 166,930 | | | (68,599) | | | | 346,993 | | | (552,648) | | | 899,641 | |
General and administrative expenses | | (47,692) | | | (27,630) | | | (20,062) | | | | (131,837) | | | (84,832) | | | (47,005) | |
Loan acquisition costs | | (4,621) | | | (2,158) | | | (2,463) | | | | (11,928) | | | (7,716) | | | (4,212) | |
Other expenses | | (4,023) | | | (7,788) | | | 3,765 | | | | (12,104) | | | (104,286) | | | 92,182 | |
Net income (loss) before income taxes | | 83,963 | | | 150,925 | | | (66,962) | | | | 289,475 | | | (649,221) | | | 938,696 | |
Benefit from (provision for) income taxes | | 4,323 | | | (9,113) | | | 13,436 | | | | (13,907) | | | 13,079 | | | (26,986) | |
Net Income (Loss) | | $ | 88,286 | | | $ | 141,812 | | | $ | (53,526) | | | | $ | 275,568 | | | $ | (636,142) | | | $ | 911,710 | |
Diluted earnings (loss) per common share | | $ | 0.65 | | | $ | 1.02 | | | $ | (0.37) | | | | $ | 2.03 | | | $ | (5.60) | | | $ | 7.63 | |
Net Interest Income
The decreaseincrease in net interest income during the three- and nine-monththree-month periods was primarily resulted fromdue to higher average asset balances during the salethird quarter of our commercial mezzanine loans during 2016. This decline was partially offset by2021, as well as a higher net interest income frommargin, driven by the combination of a lower average cost of funds and higher discount accretion on our residential investments as a result of capital redeploymentavailable-for-sale securities. For the nine-month periods, the decrease in net interest expense was primarily related to higher average asset balances during 2016 and the first nine monthshalf of 2017.2020, as we repositioned our portfolio during the second quarter of 2020, selling a significant amount of assets.
Provision for Loan Losses
The reversal of provision for loan lossesAdditional detail on net interest income is provided in 2016 was related to our commercial mezzanine loans. Prior to their sale in 2016, the commercial loans were reclassified to held-for-sale status, at which point the allowance for loan losses was reversed and no longer maintained for these loans.“Net Interest Income” section that follows.
Mortgage Banking Activities, Net
Income from mortgage banking activities, net includes results from our residential jumbo mortgage banking operations and, prior to the second quarter of 2016, results from our residential conforming and commercial mortgage banking operations. The increase in income from mortgage banking activities during the three- and nine-month periods was predominantlyprimarily due to higher gross margins froman increase in loan acquisition and origination volumes at both our jumbo residential and business purpose mortgage banking activities on higher volume.businesses during 2021, due to pandemic-related disruptions in 2020, which adversely impacted our origination volumes in 2020.
A more detailed analysis of the changes in this line item is included in Residential Mortgage Banking portion of the “Results of Operations by Segment” section that follows.
MSR income, net is comprised of the net fee income we earn from our MSR investments as well as changes in their market value and the market value of their associated derivatives. MSR income decreased in 2017 primarily due to lower average balances of MSRs outstanding during 2017, as sales and paydowns outpaced new acquisitions.
Investment Fair Value Changes, Net
Investment fair value changes, net, is primarily comprised of the change in fair values of our residential loans held-for-investmentportfolio investments accounted for under the fair value option and, financed with FHLB borrowings, our investment securities classified as trading, andprior to the second quarter of 2020, interest rate hedges associated with each of these investments.
During the three and nine months ended September 30, 2017, the2021, positive investment fair value changes primarily resulted from net increasesreflected continuing improvement in credit performance and spread tightening across our investment portfolio, particularly in our third-party re-performing loan ("RPL") and retained CAFL SFR securities. Additional detail on our investment fair value changes during 2021 is included in the fair value“Results of our trading securities and their associated hedges, which were primarily due to tightening credit spreads on these securities during these periods. For the nine months ended September 30, 2017, the increase was partially offsetOperations by net decreases in the fair value of our residential loans held-for-investment and their associated hedges, primarily resulting from principal paydowns and hedging costs.Segment” section that follows.
During the three months ended September 30, 2016, the positive2020, investment fair value changes resulted fromreflected increases in the fair value of our investments in both trading securitiesinvestment assets from improved credit performance and loans held-for-investment, which were primarily the result of tightening credit spreads.spread tightening. During the nine months ended September 30, 2016,2020, the negative investment fair value changes primarily resulted from decreasesreflected significant declines in the fair value of our loans held for investment and their associated hedges. These decreases were primarily the result of hedging costs due to interest rate volatility duringinvestments in the first nine monthsquarter of the year, as well as decreases in fair value2020 resulting from market dislocations caused by the write-off of premium from loan repayments.pandemic.
Additional detail on our investment fair value changes is included in the Investment Portfolio portion of the “Results of Operations bySegment” section that follows.
Other Income
OtherThe increase in other income in bothfor the three- and nine-month periods was primarily comprisedthe result of an increase in income from our residential loan risk sharing arrangements with Fannie Mae and Freddie Mac.MSR investments, which generally benefited from a stabilization in prepayment speeds during 2021.
Realized Gains, Net
During the third quarter of 2017, we realized gains of $2 million, primarily from the sale of $23 million of AFS securities. During the third quarter of 2016,three and nine months ended September 30, 2021, we realized gains of $7 million which included $2and $18 million, respectively, primarily resulting from the salecall of $26 million of AFS securitiestwo and $5 million fromsix seasoned Sequoia securitizations, respectively. During the sale of $208 million of commercial mezzanine loans.
During thethree and nine months ended September 30, 2017,2020, we realized gains of $9$1 million which included $10and $30 million, of realized gainsrespectively, primarily resulting from the sale of $61 million of AFS securities, partially offset by $1and for the nine-month period, a $25 million of realized lossgain from the repurchase of $37$125 million of convertible debt. Duringdebt during the nine months ended September 30, 2016, we realized gainssecond quarter of $26 million, which included $21 million of realized gains primarily from the sale of $241 million of AFS securities2020.
General and $5 million of realized gains from the sale of $208 million of commercial mezzanine loans.
OperatingAdministrative Expenses
The decreaseincrease in operatinggeneral and administrative expenses duringfor the three- and nine-month periods primarily resulted from increased accruals of variable compensation expense associated with improved financial results in 2021 as compared to 2020, as well as long-term incentive award expense from awards granted in the second half of 2020.
Loan Acquisition Costs
The increase in loan acquisition costs for the three- and nine-month periods was primarily due to higher loan origination volumes throughout 2021 as compared to 2020.
Other Expenses
The decrease in other expenses for the restructuringnine-month periods was primarily due to $89 million of goodwill impairment expense at our residential conforming and commercial mortgage banking operations duringBusiness Purpose Lending segment recorded in the first quarter of 2016, which resulted in2020 that was taken as a lower run-rateresult of expenses. Excluding $11 millionthe onset of restructuring charges recorded during the nine months ended September 30, 2016, operating expenses for that period were $60 million.pandemic- and liquidity-related disruptions.
Provision for Income Taxes
Our provision for income taxes resultis almost entirely fromrelated to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments.investments, as well as certain other investment and hedging activities. For both the three-three-month periods, our income tax provision decreased as we realized a $19 million benefit from the release of valuation allowance on a portion of our deferred tax assets. This decrease was partially offset by an increase in GAAP income recorded at our TRS and state taxes during 2021. For the nine-month periods, the increasetax provision in provision for2021 is reflective of the positive income earned at our taxable subsidiaries, partially offset by the benefit from the release of valuation allowance and higher state taxes, resulted primarily from higher income from our mortgage banking activities. as compared to a tax benefit in 2020 reflective of a net loss incurred in that period.
For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.
Net Interest Income
The following tables presenttable presents the components of net interest income for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 53 – Net Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 |
(Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield |
Interest Income | | | | | | | | | | | | |
Residential loans, held-for-sale | | $ | 15,377 | | | $ | 1,936,882 | | | 3.2 | % | | $ | 434 | | | $ | 53,297 | | | 3.3 | % |
Residential loans - HFI at Redwood (2) | | — | | | — | | | — | % | | 77 | | | — | | | — | % |
Residential loans - HFI at Legacy Sequoia (2) | | 1,042 | | | 248,791 | | | 1.7 | % | | 1,795 | | | 285,077 | | | 2.5 | % |
Residential loans - HFI at Sequoia (2) | | 18,867 | | | 2,104,357 | | | 3.6 | % | | 20,919 | | | 1,910,771 | | | 4.4 | % |
Residential loans - HFI at Freddie Mac SLST (2) | | 18,707 | | | 2,043,813 | | | 3.7 | % | | 21,696 | | | 2,153,447 | | | 4.0 | % |
Business purpose loans at Redwood | | 18,192 | | | 1,019,393 | | | 7.1 | % | | 19,456 | | | 1,149,171 | | | 6.8 | % |
Single-family rental loans - HFI at CAFL | | 48,723 | | | 3,455,645 | | | 5.6 | % | | 36,181 | | | 2,663,541 | | | 5.4 | % |
Bridge loans - HFI at CAFL | | 214 | | | 12,015 | | | 7.1 | % | | — | | | — | | | — | % |
Multifamily loans - HFI at Freddie Mac K-Series | | 4,846 | | | 483,930 | | | 4.0 | % | | 4,918 | | | 489,736 | | | 4.0 | % |
Trading securities | | 5,710 | | | 147,925 | | | 15.4 | % | | 6,539 | | | 140,892 | | | 18.6 | % |
Available-for-sale securities | | 8,532 | | | 120,183 | | | 28.4 | % | | 3,596 | | | 135,942 | | | 10.6 | % |
Other interest income | | 5,512 | | | 769,308 | | | 2.9 | % | | 6,371 | | | 859,808 | | | 3.0 | % |
Total interest income | | 145,722 | | | 12,342,242 | | | 4.7 | % | | 121,982 | | | 9,841,682 | | | 5.0 | % |
Interest Expense | | | | | | | | | | | | |
Short-term debt facilities | | (10,808) | | | 1,982,726 | | | (2.2) | % | | (3,558) | | | 313,190 | | | (4.5) | % |
Short-term debt - servicer advance financing | | (1,018) | | | 149,450 | | | (2.7) | % | | (1,587) | | | 218,885 | | | (2.9) | % |
| | | | | | | | | | | | |
ABS issued - Legacy Sequoia (2) | | (641) | | | 245,910 | | | (1.0) | % | | (1,058) | | | 280,954 | | | (1.5) | % |
ABS issued - Sequoia (2) | | (15,368) | | | 1,872,636 | | | (3.3) | % | | (17,828) | | | 1,708,687 | | | (4.2) | % |
ABS issued - Freddie Mac SLST (2) | | (15,774) | | | 1,765,465 | | | (3.6) | % | | (16,819) | | | 1,892,967 | | | (3.6) | % |
ABS issued - Freddie Mac K-Series | | (4,460) | | | 453,031 | | | (3.9) | % | | (4,426) | | | 464,693 | | | (3.8) | % |
ABS issued - CAFL | | (37,489) | | | 3,118,792 | | | (4.8) | % | | (26,383) | | | 2,509,828 | | | (4.2) | % |
Long-term debt facilities | | (8,715) | | | 881,669 | | | (4.0) | % | | (19,198) | | | 1,094,608 | | | (7.0) | % |
Long-term debt - FHLBC | | — | | | — | | | — | % | | (1) | | | 1,000 | | | (0.4) | % |
Long-term debt - corporate | | (9,481) | | | 651,468 | | | (5.8) | % | | (9,553) | | | 648,923 | | | (5.9) | % |
Total interest expense | | (103,754) | | | 11,121,147 | | | (3.7) | % | | (100,411) | | | 9,133,735 | | | (4.4) | % |
Net Interest Income | | $ | 41,968 | | | | | | | $ | 21,571 | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2021 | | 2020 |
(Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | (Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield |
Interest Income | | | | | | | | | | | | | Interest Income | | | | | | | | | | | | |
Residential loans, held-for-sale | | $ | 10,396 |
| | $ | 980,067 |
| | 4.2 | % | | $ | 8,835 |
| | $ | 995,136 |
| | 3.6 | % | Residential loans, held-for-sale | | $ | 35,308 | | | $ | 1,568,966 | | | 3.0 | % | | $ | 17,220 | | | $ | 599,609 | | | 3.8 | % |
Residential loans - HFI at Redwood (2) | | 23,145 |
| | 2,344,427 |
| | 3.9 | % | | 21,923 |
| | 2,260,895 |
| | 3.9 | % | Residential loans - HFI at Redwood (2) | | — | | | — | | | — | % | | 21,003 | | | 659,998 | | | 4.2 | % |
Residential loans - HFI at Legacy Sequoia (2) | | 4,873 |
| | 682,772 |
| | 2.9 | % | | 4,837 |
| | 849,234 |
| | 2.3 | % | Residential loans - HFI at Legacy Sequoia (2) | | 3,559 | | | 262,007 | | | 1.8 | % | | 7,673 | | | 327,460 | | | 3.1 | % |
Residential loans - HFI at Sequoia Choice (2) | | 127 |
| | 10,365 |
| | 4.9 | % | | — |
| | — |
| | — | % | |
Commercial loans | | — |
| | — |
| | — | % | | 6,453 |
| | 261,194 |
| | 9.9 | % | |
Residential loans - HFI at Sequoia (2) | | Residential loans - HFI at Sequoia (2) | | 48,842 | | | 1,644,256 | | | 4.0 | % | | 68,566 | | | 1,957,484 | | | 4.7 | % |
Residential loans - HFI at Freddie Mac SLST (2) | | Residential loans - HFI at Freddie Mac SLST (2) | | 58,372 | | | 2,110,555 | | | 3.7 | % | | 64,869 | | | 2,203,677 | | | 3.9 | % |
Business purpose loans | | Business purpose loans | | 48,982 | | | 945,899 | | | 6.9 | % | | 62,541 | | | 1,266,493 | | | 6.6 | % |
Single-family rental loans - HFI at CAFL | | Single-family rental loans - HFI at CAFL | | 152,444 | | | 3,349,828 | | | 6.1 | % | | 99,169 | | | 2,411,312 | | | 5.5 | % |
Bridge loans - HFI at CAFL | | Bridge loans - HFI at CAFL | | 214 | | | 4,049 | | | 7.0 | % | | — | | | — | | | — | % |
Multifamily loans - HFI at Freddie Mac K-Series | | Multifamily loans - HFI at Freddie Mac K-Series | | 14,492 | | | 488,804 | | | 4.0 | % | | 49,960 | | | 1,711,123 | | | 3.9 | % |
Trading securities | | 12,691 |
| | 737,186 |
| | 6.9 | % | | 5,831 |
| | 301,110 |
| | 7.7 | % | Trading securities | | 17,133 | | | 140,241 | | | 16.3 | % | | 26,789 | | | 336,151 | | | 10.6 | % |
Available-for-sale securities | | 10,734 |
| | 420,896 |
| | 10.2 | % | | 12,769 |
| | 488,842 |
| | 10.4 | % | Available-for-sale securities | | 16,051 | | | 128,564 | | | 16.6 | % | | 11,682 | | | 139,487 | | | 11.2 | % |
Other interest income | | 771 |
| | 202,019 |
| | 1.5 | % | | 258 |
| | 226,730 |
| | 0.5 | % | Other interest income | | 17,325 | | | 790,499 | | | 2.9 | % | | 20,537 | | | 763,898 | | | 3.6 | % |
Total interest income | | 62,737 |
| | 5,377,732 |
| | 4.7 | % | | 60,906 |
| | 5,383,141 |
| | 4.5 | % | Total interest income | | 412,722 | | | 11,433,668 | | | 4.8 | % | | 450,009 | | | 12,376,692 | | | 4.8 | % |
Interest Expense | | | | | | | | | | | | | Interest Expense | |
Short-term debt facilities | | (7,158 | ) | | 1,066,695 |
| | (2.7 | )% | | (5,405 | ) | | 1,071,757 |
| | (2.0 | )% | Short-term debt facilities | | (27,380) | | | 1,609,295 | | | (2.3) | % | | (40,158) | | | 1,415,975 | | | (3.8) | % |
Short-term debt - convertible notes, net | | (3,024 | ) | | 250,098 |
| | (4.8 | )% | | — |
| | — |
| | — | % | |
Short-term debt - servicer advance financing | | Short-term debt - servicer advance financing | | (3,414) | | | 166,605 | | | (2.7) | % | | (4,961) | | | 199,517 | | | (3.3) | % |
| ABS issued - Legacy Sequoia (2) | | (3,852 | ) | | 667,070 |
| | (2.3 | )% | | (3,193 | ) | | 828,411 |
| | (1.5 | )% | ABS issued - Legacy Sequoia (2) | | (2,271) | | | 258,915 | | | (1.2) | % | | (5,099) | | | 322,829 | | | (2.1) | % |
ABS issued - Sequoia Choice (2) | | (104 | ) | | 9,349 |
| | (4.4 | )% | | — |
| | — |
| | — | % | |
ABS issued - Sequoia (2) | | ABS issued - Sequoia (2) | | (38,848) | | | 1,419,153 | | | (3.6) | % | | (58,455) | | | 1,757,851 | | | (4.4) | % |
ABS issued - Freddie Mac SLST (2) | | ABS issued - Freddie Mac SLST (2) | | (49,756) | | | 1,859,559 | | | (3.6) | % | | (48,840) | | | 1,861,309 | | | (3.5) | % |
ABS issued - Freddie Mac K-Series | | ABS issued - Freddie Mac K-Series | | (13,294) | | | 459,648 | | | (3.9) | % | | (47,154) | | | 1,614,333 | | | (3.9) | % |
ABS issued - CAFL | | ABS issued - CAFL | | (118,543) | | | 3,041,714 | | | (5.2) | % | | (72,768) | | | 2,247,583 | | | (4.3) | % |
Long-term debt facilities | | Long-term debt facilities | | (32,518) | | | 776,846 | | | (5.6) | % | | (29,789) | | | 641,094 | | | (6.2) | % |
Long-term debt - FHLBC | | (6,319 | ) | | 1,999,999 |
| | (1.3 | )% | | (2,892 | ) | | 1,999,999 |
| | (0.6 | )% | Long-term debt - FHLBC | | (2) | | | 374 | | | (0.7) | % | | (10,411) | | | 786,790 | | | (1.8) | % |
Long-term debt - other | | (6,986 | ) | | 444,440 |
| | (6.3 | )% | | (10,107 | ) | | 674,131 |
| | (6.0 | )% | |
Long-term debt - corporate | | Long-term debt - corporate | | (28,345) | | | 650,828 | | | (5.8) | % | | (32,113) | | | 708,708 | | | (6.0) | % |
Total interest expense | | (27,443 | ) | | 4,437,651 |
| | (2.5 | )% | | (21,597 | ) | | 4,574,298 |
| | (1.9 | )% | Total interest expense | | (314,371) | | | 10,242,937 | | | (4.1) | % | | (349,748) | | | 11,555,989 | | | (4.0) | % |
Net Interest Income | | $ | 35,294 |
| | | | | | $ | 39,309 |
| | | | | Net Interest Income | | $ | 98,351 | | | $ | 100,261 | | |
(1)Average balances for residential loans held-for-sale, residential loans held-for-investment, business purpose loans, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for available-for-sale securities and debt are calculated based upon amortized historical cost, except for ABS issued, which is based upon fair value.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
(Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield |
Interest Income | | | | | | | | | | | | |
Residential loans, held-for-sale | | $ | 26,246 |
| | $ | 846,335 |
| | 4.1 | % | | $ | 24,062 |
| | $ | 886,777 |
| | 3.6 | % |
Residential loans - HFI at Redwood (2) | | 68,591 |
| | 2,318,064 |
| | 3.9 | % | | 63,562 |
| | 2,178,997 |
| | 3.9 | % |
Residential loans - HFI at Legacy Sequoia (2) | | 14,574 |
| | 718,691 |
| | 2.7 | % | | 14,525 |
| | 907,617 |
| | 2.1 | % |
Residential loans - HFI at Sequoia Choice (2) | | 127 |
| | 3,493 |
| | 4.8 | % | | — |
| | — |
| | — | % |
Commercial loans | | 345 |
| | 1,424 |
| | N/A |
| | 28,834 |
| | 338,390 |
| | 11.4 | % |
Trading securities | | 31,622 |
| | 643,736 |
| | 6.5 | % | | 15,639 |
| | 271,758 |
| | 7.7 | % |
Available-for-sale securities | | 33,446 |
| | 441,038 |
| | 10.1 | % | | 42,473 |
| | 553,278 |
| | 10.2 | % |
Other interest income | | 1,638 |
| | 210,765 |
| | 1.0 | % | | 926 |
| | 318,138 |
| | 0.4 | % |
Total interest income | | 176,589 |
| | 5,183,546 |
| | 4.5 | % | | 190,021 |
| | 5,454,955 |
| | 4.6 | % |
Interest Expense | | | | | |
|
| | | | | |
|
|
Short-term debt facilities | | (18,174 | ) | | 967,834 |
| | (2.5 | )% | | (17,439 | ) | | 1,150,206 |
| | (2.0 | )% |
Short-term debt - convertible notes, net | | (5,811 | ) | | 159,744 |
| | (4.9 | )% | | — |
| | — |
| | — | % |
ABS issued - Redwood | | — |
| | — |
| | — | % | | (1,615 | ) | | 28,264 |
| | (7.6 | )% |
ABS issued - Legacy Sequoia (2) | | (11,087 | ) | | 702,084 |
| | (2.1 | )% | | (9,842 | ) | | 885,752 |
| | (1.5 | )% |
ABS issued - Sequoia Choice (2) | | (104 | ) | | 3,151 |
| | (4.4 | )% | | — |
| | — |
| | — | % |
Long-term debt - FHLBC | | (15,125 | ) | | 1,999,999 |
| | (1.0 | )% | | (8,634 | ) | | 1,974,582 |
| | (0.6 | )% |
Long-term debt - other | | (22,407 | ) | | 481,232 |
| | (6.2 | )% | | (30,461 | ) | | 680,576 |
| | (6.0 | )% |
Total interest expense | | (72,708 | ) | | 4,314,044 |
| | (2.2 | )% | | (67,991 | ) | | 4,719,380 |
| | (1.9 | )% |
Net Interest Income | | $ | 103,881 |
| | | | | | $ | 122,030 |
| | | | |
| |
(1) | Average balances for residential loans held-for-sale, residential loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for available-for-sale securities and debt are calculated based upon amortized historical cost, except for ABS issued, which is based upon fair value. |
| |
(2) | (2)Interest income from residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia or Freddie Mac SLST entities. Interest income from residential loans - HFI at Legacy Sequoia and the interest expense from ABS issued - Legacy Sequoia represent activity from our consolidated Legacy Sequoia entities. Interest income from residential loans - HFI at Sequoia Choice and the interest expense from ABS issued - Sequoia Choice represent activity from our consolidated Sequoia Choice entity. |
The following table presents net interest income by segment for the three and nine months ended September 30, 2017 and 2016.
Table 6 – Net Interest Income by Segment
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Net Interest Income by Segment | | | | | | | | | | | | | |
Investment Portfolio | | $ | 37,578 |
| | $ | 42,163 |
| | $ | (4,585 | ) | | | $ | 113,166 |
| | $ | 131,306 |
| | $ | (18,140 | ) |
Residential Mortgage Banking | | 6,491 |
| | 5,005 |
| | 1,486 |
| | | 15,053 |
| | 13,891 |
| | 1,162 |
|
Corporate/Other | | (8,775 | ) | | (7,859 | ) | | (916 | ) | | | (24,338 | ) | | (23,167 | ) | | (1,171 | ) |
Net Interest Income | | $ | 35,294 |
| | $ | 39,309 |
| | $ | (4,015 | ) | | | $ | 103,881 |
| | $ | 122,030 |
| | $ | (18,149 | ) |
Additional details regarding the activities impacting net interest income at each segment are included in the “Results of Operations by Segment” section that follows.
The Corporate/Other line item in the table above primarily includes interest expense related to long-term debt not directly allocated to our segments and net interest income from consolidated Legacy Sequoia entities. Details regarding consolidated LegacyInterest income from residential loans - HFI at Sequoia entities are included in the "Results of Consolidated Legacy Sequoia Entities" section that follows.
The following table presents the net interest rate spread between the yield on unsecuritized loans and securities and the debt yield ofinterest expense from ABS issued - Sequoia represent activity from our consolidated Sequoia entities. Interest income from residential loans - HFI at Freddie Mac SLST and the short-term debt used in part to finance each investment type at September 30, 2017.interest expense from ABS issued - Freddie Mac SLST represent activity from our consolidated Freddie Mac SLST entities.
Table 7 – Interest Expense — Specific Borrowing Costs
|
| | | | | | |
September 30, 2017 | | Residential Loans Held-for-Sale | | Residential Securities |
Asset yield | | 4.09 | % | | 5.10 | % |
Short-term debt yield | | 2.80 | % | | 2.46 | % |
Net Spread | | 1.29 | % | | 2.64 | % |
For additional discussion on short-term debt, including information regarding margin requirements and financial covenants, see “Risks Relating to Debt Incurred under Short-Term and Long-Term Borrowing Facilities" in the Liquidity and Capital Resources section of this MD&A.
Net Interest Income
The increase in net interest income during the three-month periods was primarily due to higher average asset balances during the third quarter of 2021, as well as a higher net interest margin, driven by the combination of a lower average cost of funds and higher discount accretion on our available-for-sale securities. For the nine-month periods, the decrease in net interest expense was primarily related to higher average asset balances during the first half of 2020, as we repositioned our portfolio during the second quarter of 2020, selling a significant amount of assets.
Additional detail on net interest income is provided in the “Net Interest Income” section that follows.
Mortgage Banking Activities, Net
The increase in income from mortgage banking activities during the three- and nine-month periods was primarily due to an increase in loan acquisition and origination volumes at both our residential and business purpose mortgage banking businesses during 2021, due to pandemic-related disruptions in 2020, which adversely impacted our origination volumes in 2020.
A more detailed analysis of the changes in this line item is included in the “Results of Operations by Segment” section that follows.
Investment Fair Value Changes, Net
Investment fair value changes, net, is primarily comprised of the change in fair values of our portfolio investments accounted for under the fair value option and, prior to the second quarter of 2020, interest rate hedges associated with these investments. During the three and nine months ended September 30, 2021, positive investment fair value changes reflected continuing improvement in credit performance and spread tightening across our investment portfolio, particularly in our third-party re-performing loan ("RPL") and retained CAFL SFR securities. Additional detail on our investment fair value changes during 2021 is included in the “Results of Operations bySegment” section that follows.
As discussedDuring the three months ended September 30, 2020, investment fair value changes reflected increases in the Introduction sectionfair value of this MD&A, we changed our reportable segmentsinvestment assets from improved credit performance and spread tightening. During the nine months ended September 30, 2020, the negative investment fair value changes reflected significant declines in the value of our investments in the first quarter of 20172020 resulting from market dislocations caused by the pandemic.
Other Income
The increase in other income for the three- and now reportnine-month periods was primarily the result of an increase in income from our MSR investments, which generally benefited from a stabilization in prepayment speeds during 2021.
Realized Gains, Net
During the three and nine months ended September 30, 2021, we realized gains of $7 million and $18 million, respectively, primarily resulting from the call of two and six seasoned Sequoia securitizations, respectively. During the three and nine months ended September 30, 2020, we realized gains of $1 million and $30 million, respectively, primarily resulting from the sale of AFS securities, and for the nine-month period, a $25 million gain from the repurchase of $125 million of convertible debt during the second quarter of 2020.
General and Administrative Expenses
The increase in general and administrative expenses for the three- and nine-month periods primarily resulted from increased accruals of variable compensation expense associated with improved financial results in 2021 as compared to 2020, as well as long-term incentive award expense from awards granted in the second half of 2020.
Loan Acquisition Costs
The increase in loan acquisition costs for the three- and nine-month periods was primarily due to higher loan origination volumes throughout 2021 as compared to 2020.
Other Expenses
The decrease in other expenses for the nine-month periods was primarily due to $89 million of goodwill impairment expense at our Business Purpose Lending segment recorded in the first quarter of 2020 that was taken as a result of the onset of pandemic- and liquidity-related disruptions.
Provision for Income Taxes
Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. For the three-month periods, our income tax provision decreased as we realized a $19 million benefit from the release of valuation allowance on a portion of our business using two distinct segments: Investment Portfoliodeferred tax assets. This decrease was partially offset by an increase in GAAP income recorded at our TRS and Residential Mortgage Banking. Our segments are based onstate taxes during 2021. For the nine-month periods, the tax provision in 2021 is reflective of the positive income earned at our organizationaltaxable subsidiaries, partially offset by the benefit from the release of valuation allowance and management structure, which aligns with how our results are monitored and performance is assessed. higher state taxes, as compared to a tax benefit in 2020 reflective of a net loss incurred in that period.
For additional informationdetail on our segments, refer to Note 21 of our Notes to Consolidated Financial Statements in Part I, Item I of this Quarterly Report on Form 10-Q. income taxes, see the “Taxable Income and Tax Provision” section that follows.
Net Interest Income
The following table presents the segment contribution from our two segments, reconciled to our consolidatedcomponents of net interest income for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 83 – Segment Results SummaryNet Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 |
(Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield |
Interest Income | | | | | | | | | | | | |
Residential loans, held-for-sale | | $ | 15,377 | | | $ | 1,936,882 | | | 3.2 | % | | $ | 434 | | | $ | 53,297 | | | 3.3 | % |
Residential loans - HFI at Redwood (2) | | — | | | — | | | — | % | | 77 | | | — | | | — | % |
Residential loans - HFI at Legacy Sequoia (2) | | 1,042 | | | 248,791 | | | 1.7 | % | | 1,795 | | | 285,077 | | | 2.5 | % |
Residential loans - HFI at Sequoia (2) | | 18,867 | | | 2,104,357 | | | 3.6 | % | | 20,919 | | | 1,910,771 | | | 4.4 | % |
Residential loans - HFI at Freddie Mac SLST (2) | | 18,707 | | | 2,043,813 | | | 3.7 | % | | 21,696 | | | 2,153,447 | | | 4.0 | % |
Business purpose loans at Redwood | | 18,192 | | | 1,019,393 | | | 7.1 | % | | 19,456 | | | 1,149,171 | | | 6.8 | % |
Single-family rental loans - HFI at CAFL | | 48,723 | | | 3,455,645 | | | 5.6 | % | | 36,181 | | | 2,663,541 | | | 5.4 | % |
Bridge loans - HFI at CAFL | | 214 | | | 12,015 | | | 7.1 | % | | — | | | — | | | — | % |
Multifamily loans - HFI at Freddie Mac K-Series | | 4,846 | | | 483,930 | | | 4.0 | % | | 4,918 | | | 489,736 | | | 4.0 | % |
Trading securities | | 5,710 | | | 147,925 | | | 15.4 | % | | 6,539 | | | 140,892 | | | 18.6 | % |
Available-for-sale securities | | 8,532 | | | 120,183 | | | 28.4 | % | | 3,596 | | | 135,942 | | | 10.6 | % |
Other interest income | | 5,512 | | | 769,308 | | | 2.9 | % | | 6,371 | | | 859,808 | | | 3.0 | % |
Total interest income | | 145,722 | | | 12,342,242 | | | 4.7 | % | | 121,982 | | | 9,841,682 | | | 5.0 | % |
Interest Expense | | | | | | | | | | | | |
Short-term debt facilities | | (10,808) | | | 1,982,726 | | | (2.2) | % | | (3,558) | | | 313,190 | | | (4.5) | % |
Short-term debt - servicer advance financing | | (1,018) | | | 149,450 | | | (2.7) | % | | (1,587) | | | 218,885 | | | (2.9) | % |
| | | | | | | | | | | | |
ABS issued - Legacy Sequoia (2) | | (641) | | | 245,910 | | | (1.0) | % | | (1,058) | | | 280,954 | | | (1.5) | % |
ABS issued - Sequoia (2) | | (15,368) | | | 1,872,636 | | | (3.3) | % | | (17,828) | | | 1,708,687 | | | (4.2) | % |
ABS issued - Freddie Mac SLST (2) | | (15,774) | | | 1,765,465 | | | (3.6) | % | | (16,819) | | | 1,892,967 | | | (3.6) | % |
ABS issued - Freddie Mac K-Series | | (4,460) | | | 453,031 | | | (3.9) | % | | (4,426) | | | 464,693 | | | (3.8) | % |
ABS issued - CAFL | | (37,489) | | | 3,118,792 | | | (4.8) | % | | (26,383) | | | 2,509,828 | | | (4.2) | % |
Long-term debt facilities | | (8,715) | | | 881,669 | | | (4.0) | % | | (19,198) | | | 1,094,608 | | | (7.0) | % |
Long-term debt - FHLBC | | — | | | — | | | — | % | | (1) | | | 1,000 | | | (0.4) | % |
Long-term debt - corporate | | (9,481) | | | 651,468 | | | (5.8) | % | | (9,553) | | | 648,923 | | | (5.9) | % |
Total interest expense | | (103,754) | | | 11,121,147 | | | (3.7) | % | | (100,411) | | | 9,133,735 | | | (4.4) | % |
Net Interest Income | | $ | 41,968 | | | | | | | $ | 21,571 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Segment Contribution from: | | | | | | | | | | | | | |
Investment Portfolio | | $ | 41,739 |
| | $ | 63,743 |
| | $ | (22,004 | ) | | | $ | 137,185 |
| | $ | 155,863 |
| | $ | (18,678 | ) |
Residential Mortgage Banking | | 16,755 |
| | 8,724 |
| | 8,031 |
| | | 35,643 |
| | 23,250 |
| | 12,393 |
|
Corporate/Other | | (22,314 | ) | | (19,914 | ) | | (2,400 | ) | | | (63,355 | ) | | (73,216 | ) | | 9,861 |
|
Net Income | | $ | 36,180 |
| | $ | 52,553 |
| | $ | (16,373 | ) | | | $ | 109,473 |
| | $ | 105,897 |
| | $ | 3,576 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
(Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield |
Interest Income | | | | | | | | | | | | |
Residential loans, held-for-sale | | $ | 35,308 | | | $ | 1,568,966 | | | 3.0 | % | | $ | 17,220 | | | $ | 599,609 | | | 3.8 | % |
Residential loans - HFI at Redwood (2) | | — | | | — | | | — | % | | 21,003 | | | 659,998 | | | 4.2 | % |
Residential loans - HFI at Legacy Sequoia (2) | | 3,559 | | | 262,007 | | | 1.8 | % | | 7,673 | | | 327,460 | | | 3.1 | % |
Residential loans - HFI at Sequoia (2) | | 48,842 | | | 1,644,256 | | | 4.0 | % | | 68,566 | | | 1,957,484 | | | 4.7 | % |
Residential loans - HFI at Freddie Mac SLST (2) | | 58,372 | | | 2,110,555 | | | 3.7 | % | | 64,869 | | | 2,203,677 | | | 3.9 | % |
Business purpose loans | | 48,982 | | | 945,899 | | | 6.9 | % | | 62,541 | | | 1,266,493 | | | 6.6 | % |
Single-family rental loans - HFI at CAFL | | 152,444 | | | 3,349,828 | | | 6.1 | % | | 99,169 | | | 2,411,312 | | | 5.5 | % |
Bridge loans - HFI at CAFL | | 214 | | | 4,049 | | | 7.0 | % | | — | | | — | | | — | % |
Multifamily loans - HFI at Freddie Mac K-Series | | 14,492 | | | 488,804 | | | 4.0 | % | | 49,960 | | | 1,711,123 | | | 3.9 | % |
Trading securities | | 17,133 | | | 140,241 | | | 16.3 | % | | 26,789 | | | 336,151 | | | 10.6 | % |
Available-for-sale securities | | 16,051 | | | 128,564 | | | 16.6 | % | | 11,682 | | | 139,487 | | | 11.2 | % |
Other interest income | | 17,325 | | | 790,499 | | | 2.9 | % | | 20,537 | | | 763,898 | | | 3.6 | % |
Total interest income | | 412,722 | | | 11,433,668 | | | 4.8 | % | | 450,009 | | | 12,376,692 | | | 4.8 | % |
Interest Expense | | | | | | | | | | | | |
Short-term debt facilities | | (27,380) | | | 1,609,295 | | | (2.3) | % | | (40,158) | | | 1,415,975 | | | (3.8) | % |
Short-term debt - servicer advance financing | | (3,414) | | | 166,605 | | | (2.7) | % | | (4,961) | | | 199,517 | | | (3.3) | % |
| | | | | | | | | | | | |
ABS issued - Legacy Sequoia (2) | | (2,271) | | | 258,915 | | | (1.2) | % | | (5,099) | | | 322,829 | | | (2.1) | % |
ABS issued - Sequoia (2) | | (38,848) | | | 1,419,153 | | | (3.6) | % | | (58,455) | | | 1,757,851 | | | (4.4) | % |
ABS issued - Freddie Mac SLST (2) | | (49,756) | | | 1,859,559 | | | (3.6) | % | | (48,840) | | | 1,861,309 | | | (3.5) | % |
ABS issued - Freddie Mac K-Series | | (13,294) | | | 459,648 | | | (3.9) | % | | (47,154) | | | 1,614,333 | | | (3.9) | % |
ABS issued - CAFL | | (118,543) | | | 3,041,714 | | | (5.2) | % | | (72,768) | | | 2,247,583 | | | (4.3) | % |
Long-term debt facilities | | (32,518) | | | 776,846 | | | (5.6) | % | | (29,789) | | | 641,094 | | | (6.2) | % |
Long-term debt - FHLBC | | (2) | | | 374 | | | (0.7) | % | | (10,411) | | | 786,790 | | | (1.8) | % |
Long-term debt - corporate | | (28,345) | | | 650,828 | | | (5.8) | % | | (32,113) | | | 708,708 | | | (6.0) | % |
Total interest expense | | (314,371) | | | 10,242,937 | | | (4.1) | % | | (349,748) | | | 11,555,989 | | | (4.0) | % |
Net Interest Income | | $ | 98,351 | | | | | | | $ | 100,261 | | | | | |
The following sections provide a detailed discussion of the results of operations at each of our two(1)Average balances for residential loans held-for-sale, residential loans held-for-investment, business segmentspurpose loans, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for the threeavailable-for-sale securities and nine months ended September 30, 2017 and 2016.debt are calculated based upon amortized historical cost, except for ABS issued, which is based upon fair value.
The $2 million decrease in net(2)Interest income from Corporate/Other forresidential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia or Freddie Mac SLST entities. Interest income from residential loans - HFI at Legacy Sequoia and the three-month periods was primarily due to a $1 million increase in interest expense from convertible debtABS issued in the third quarter of 2017, a $1 million decrease in income- Legacy Sequoia represent activity from our consolidated Legacy Sequoia entities (the details of which are discussed in the "Results of Consolidated Legacy Sequoia Entities" section that follows), and $2 million of upfront costs associated with the hiring of a new executive in the third quarter of 2017. The $10 million improvemententities. Interest income from Corporate/Other for the nine-month periods was primarily due to the $11 million of costs incurred in association with the restructuring of our residential conforming and commercial mortgage banking operations during the first quarter of 2016. In addition, $3 million of net losses related to our commercial mortgage banking operations were included in Corporate/Other for the first quarter of 2016, prior to those operations being wound down.
Investment Portfolio Segment
Our Investment Portfolio segment is primarily comprised of our portfolio of residential mortgage loans held-for-investment and financed through the FHLBC and our real estate securities portfolio. Additionally, beginning in the third quarter of 2017, this segment includes residential loans held-for-investment- HFI at Sequoia and the interest expense from ABS issued - Sequoia represent activity from our consolidated Sequoia Choice entity.
For segment reporting purposes, certain of our Sequoia senior trading securities were included in our Residential Mortgage Banking segment. As such, they are excluded from any amounts and tables in this section and may not agree with similarly titled amounts and tables in our consolidated financial statements and footnotes.
The following table presents the components of segment contribution for the Investment Portfolio segment for the three and nine months ended September 30, 2017 and 2016.
Table 9 – Investment Portfolio Segment Contribution |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Interest income | | $ | 47,023 |
| | $ | 47,176 |
| | $ | (153 | ) | | | $ | 135,106 |
| | $ | 149,985 |
| | $ | (14,879 | ) |
Interest expense | | (9,445 | ) | | (5,013 | ) | | (4,432 | ) | | | (21,940 | ) | | (18,679 | ) | | (3,261 | ) |
Net interest income | | 37,578 |
| | 42,163 |
| | (4,585 | ) | | | 113,166 |
| | 131,306 |
| | (18,140 | ) |
Reversal of provision for loan losses | | — |
| | 859 |
| | (859 | ) | | | — |
| | 7,102 |
| | (7,102 | ) |
Net Interest Income after Provision | | 37,578 |
| | 43,022 |
| | (5,444 | ) | | | 113,166 |
| | 138,408 |
| | (25,242 | ) |
Non-interest income | | | | | | | | | | | | | |
MSR income, net | | 1,615 |
| | 3,770 |
| | (2,155 | ) | | | 6,106 |
| | 12,834 |
| | (6,728 | ) |
Investment fair value changes, net | | 1,372 |
| | 12,176 |
| | (10,804 | ) | | | 13,846 |
| | (16,505 | ) | | 30,351 |
|
Other income | | 1,197 |
| | 1,643 |
| | (446 | ) | | | 3,367 |
| | 4,157 |
| | (790 | ) |
Realized gains, net | | 1,734 |
| | 6,615 |
| | (4,881 | ) | | | 9,561 |
| | 25,745 |
| | (16,184 | ) |
Total non-interest income, net | | 5,918 |
| | 24,204 |
| | (18,286 | ) | | | 32,880 |
| | 26,231 |
| | 6,649 |
|
Direct operating expenses | | (1,324 | ) | | (2,751 | ) | | 1,427 |
| | | (4,371 | ) | | (7,689 | ) | | 3,318 |
|
Segment contribution before income taxes | | 42,172 |
| | 64,475 |
| | (22,303 | ) | | | 141,675 |
| | 156,950 |
| | (15,275 | ) |
Provision for income taxes | | (433 | ) | | (732 | ) | | 299 |
| | | (4,490 | ) | | (1,087 | ) | | (3,403 | ) |
Total Segment Contribution | | $ | 41,739 |
| | $ | 63,743 |
| | $ | (22,004 | ) | | | $ | 137,185 |
| | $ | 155,863 |
| | $ | (18,678 | ) |
The following table presents our primary portfolios of investment assets in our Investment Portfolio segment at September 30, 2017 and December 31, 2016.
Table 10 – Investment Portfolio
|
| | | | | | | | | | | | |
(In Thousands) | | September 30, 2017 | | December 31, 2016 | | Change |
Residential loans held-for-investment at Redwood | | $ | 2,268,802 |
| | $ | 2,261,016 |
| | $ | 7,786 |
|
Residential securities | | 1,113,201 |
| | 926,669 |
| | 186,532 |
|
Commercial/Multifamily securities | | 243,071 |
| | 91,770 |
| | 151,301 |
|
Residential loans held-for-investment at Sequoia Choice | | 317,303 |
| | — |
| | 317,303 |
|
Mortgage servicing rights | | 62,928 |
| | 118,526 |
| | (55,598 | ) |
Other assets | | 230,718 |
| | 217,554 |
| | 13,164 |
|
Total Assets at Investment Portfolio | | $ | 4,236,023 |
| | $ | 3,615,535 |
| | $ | 620,488 |
|
Overview
The increase in our total investments in the first nine months of 2017 was primarily attributable to the deployment of $230 million of capital into new residential and multifamily securities investments. Additionally, we consolidated $317 million of residential Sequoia Choice loans from a securitization we completed during the third quarter. At September 30, 2017, our economic investment in the Sequoia Choice entity was $31 million, representing subordinate securities we retained in the securitization. For the nine months ended September 30, 2017, the segment contribution from our Investment Portfolio was comprised of $43 millionentities. Interest income from residential loans $73 million- HFI at Freddie Mac SLST and the interest expense from residential securities, $18 millionABS issued - Freddie Mac SLST represent activity from commercial/multifamily securities, and $4 million from MSRs.our consolidated Freddie Mac SLST entities.
Net Interest Income
The increase in net interest income during the three-month periods was primarily due to higher average asset balances during the third quarter of 2021, as well as a higher net interest margin, driven by the combination of a lower average cost of funds and higher discount accretion on our available-for-sale securities. For the nine-month periods, the decrease in net interest expense was primarily related to higher average asset balances during the first half of 2020, as we repositioned our portfolio during the second quarter of 2020, selling a significant amount of assets.
Additional detail on net interest income is provided in the “Net Interest Income” section that follows.
Mortgage Banking Activities, Net
The increase in income from mortgage banking activities during the three- and nine-month periods was primarily due to an increase in loan acquisition and origination volumes at both our residential and business purpose mortgage banking businesses during 2021, due to pandemic-related disruptions in 2020, which adversely impacted our origination volumes in 2020.
A more detailed analysis of the changes in this line item is included in the “Results of Operations by Segment” section that follows.
Investment Fair Value Changes, Net
Investment fair value changes, net, is primarily comprised of the change in fair values of our portfolio investments accounted for under the fair value option and, prior to the second quarter of 2020, interest rate hedges associated with these investments. During the three and nine months ended September 30, 2021, positive investment fair value changes reflected continuing improvement in credit performance and spread tightening across our investment portfolio, particularly in our third-party re-performing loan ("RPL") and retained CAFL SFR securities. Additional detail on our investment fair value changes during 2021 is included in the “Results of Operations bySegment” section that follows.
During the three months ended September 30, 2020, investment fair value changes reflected increases in the fair value of our investment assets from improved credit performance and spread tightening. During the nine months ended September 30, 2020, the negative investment fair value changes reflected significant declines in the value of our investments in the first quarter of 2020 resulting from market dislocations caused by the pandemic.
Other Income
The increase in other income for the three- and nine-month periods was primarily the result of an increase in income from our Investment PortfolioMSR investments, which generally benefited from a stabilization in prepayment speeds during 2021.
Realized Gains, Net
During the three and nine months ended September 30, 2021, we realized gains of $7 million and $18 million, respectively, primarily includes interest incomeresulting from our residential loans held-for-investmentthe call of two and oursix seasoned Sequoia securitizations, respectively. During the three and nine months ended September 30, 2020, we realized gains of $1 million and $30 million, respectively, primarily resulting from the sale of AFS securities, and for the nine-month period, a $25 million gain from the repurchase of $125 million of convertible debt during the second quarter of 2020.
General and Administrative Expenses
The increase in general and administrative expenses for the three- and nine-month periods primarily resulted from increased accruals of variable compensation expense associated with improved financial results in 2021 as compared to 2020, as well as the associated interestlong-term incentive award expense from short-term debt, FHLBC borrowings,awards granted in the second half of 2020.
Loan Acquisition Costs
The increase in loan acquisition costs for the three- and ABS issued. nine-month periods was primarily due to higher loan origination volumes throughout 2021 as compared to 2020.
Other Expenses
The decrease in other expenses for the nine-month periods was primarily due to $89 million of goodwill impairment expense at our Business Purpose Lending segment recorded in the first quarter of 2020 that was taken as a result of the onset of pandemic- and liquidity-related disruptions.
Provision for Income Taxes
Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. For the three-month periods, our income tax provision decreased as we realized a $19 million benefit from the release of valuation allowance on a portion of our deferred tax assets. This decrease was partially offset by an increase in GAAP income recorded at our TRS and state taxes during 2021. For the nine-month periods, the tax provision in 2021 is reflective of the positive income earned at our taxable subsidiaries, partially offset by the benefit from the release of valuation allowance and higher state taxes, as compared to a tax benefit in 2020 reflective of a net loss incurred in that period.
For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.
Net Interest Income
The following table presents the components of net interest income for the three and nine months ended September 30, 2021 and 2020.
Table 3 – Net Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 |
(Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield |
Interest Income | | | | | | | | | | | | |
Residential loans, held-for-sale | | $ | 15,377 | | | $ | 1,936,882 | | | 3.2 | % | | $ | 434 | | | $ | 53,297 | | | 3.3 | % |
Residential loans - HFI at Redwood (2) | | — | | | — | | | — | % | | 77 | | | — | | | — | % |
Residential loans - HFI at Legacy Sequoia (2) | | 1,042 | | | 248,791 | | | 1.7 | % | | 1,795 | | | 285,077 | | | 2.5 | % |
Residential loans - HFI at Sequoia (2) | | 18,867 | | | 2,104,357 | | | 3.6 | % | | 20,919 | | | 1,910,771 | | | 4.4 | % |
Residential loans - HFI at Freddie Mac SLST (2) | | 18,707 | | | 2,043,813 | | | 3.7 | % | | 21,696 | | | 2,153,447 | | | 4.0 | % |
Business purpose loans at Redwood | | 18,192 | | | 1,019,393 | | | 7.1 | % | | 19,456 | | | 1,149,171 | | | 6.8 | % |
Single-family rental loans - HFI at CAFL | | 48,723 | | | 3,455,645 | | | 5.6 | % | | 36,181 | | | 2,663,541 | | | 5.4 | % |
Bridge loans - HFI at CAFL | | 214 | | | 12,015 | | | 7.1 | % | | — | | | — | | | — | % |
Multifamily loans - HFI at Freddie Mac K-Series | | 4,846 | | | 483,930 | | | 4.0 | % | | 4,918 | | | 489,736 | | | 4.0 | % |
Trading securities | | 5,710 | | | 147,925 | | | 15.4 | % | | 6,539 | | | 140,892 | | | 18.6 | % |
Available-for-sale securities | | 8,532 | | | 120,183 | | | 28.4 | % | | 3,596 | | | 135,942 | | | 10.6 | % |
Other interest income | | 5,512 | | | 769,308 | | | 2.9 | % | | 6,371 | | | 859,808 | | | 3.0 | % |
Total interest income | | 145,722 | | | 12,342,242 | | | 4.7 | % | | 121,982 | | | 9,841,682 | | | 5.0 | % |
Interest Expense | | | | | | | | | | | | |
Short-term debt facilities | | (10,808) | | | 1,982,726 | | | (2.2) | % | | (3,558) | | | 313,190 | | | (4.5) | % |
Short-term debt - servicer advance financing | | (1,018) | | | 149,450 | | | (2.7) | % | | (1,587) | | | 218,885 | | | (2.9) | % |
| | | | | | | | | | | | |
ABS issued - Legacy Sequoia (2) | | (641) | | | 245,910 | | | (1.0) | % | | (1,058) | | | 280,954 | | | (1.5) | % |
ABS issued - Sequoia (2) | | (15,368) | | | 1,872,636 | | | (3.3) | % | | (17,828) | | | 1,708,687 | | | (4.2) | % |
ABS issued - Freddie Mac SLST (2) | | (15,774) | | | 1,765,465 | | | (3.6) | % | | (16,819) | | | 1,892,967 | | | (3.6) | % |
ABS issued - Freddie Mac K-Series | | (4,460) | | | 453,031 | | | (3.9) | % | | (4,426) | | | 464,693 | | | (3.8) | % |
ABS issued - CAFL | | (37,489) | | | 3,118,792 | | | (4.8) | % | | (26,383) | | | 2,509,828 | | | (4.2) | % |
Long-term debt facilities | | (8,715) | | | 881,669 | | | (4.0) | % | | (19,198) | | | 1,094,608 | | | (7.0) | % |
Long-term debt - FHLBC | | — | | | — | | | — | % | | (1) | | | 1,000 | | | (0.4) | % |
Long-term debt - corporate | | (9,481) | | | 651,468 | | | (5.8) | % | | (9,553) | | | 648,923 | | | (5.9) | % |
Total interest expense | | (103,754) | | | 11,121,147 | | | (3.7) | % | | (100,411) | | | 9,133,735 | | | (4.4) | % |
Net Interest Income | | $ | 41,968 | | | | | | | $ | 21,571 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
(Dollars in Thousands) | | Interest Income/ (Expense) | | Average Balance (1) | | Yield | | Interest Income/ (Expense) | | Average Balance (1) | | Yield |
Interest Income | | | | | | | | | | | | |
Residential loans, held-for-sale | | $ | 35,308 | | | $ | 1,568,966 | | | 3.0 | % | | $ | 17,220 | | | $ | 599,609 | | | 3.8 | % |
Residential loans - HFI at Redwood (2) | | — | | | — | | | — | % | | 21,003 | | | 659,998 | | | 4.2 | % |
Residential loans - HFI at Legacy Sequoia (2) | | 3,559 | | | 262,007 | | | 1.8 | % | | 7,673 | | | 327,460 | | | 3.1 | % |
Residential loans - HFI at Sequoia (2) | | 48,842 | | | 1,644,256 | | | 4.0 | % | | 68,566 | | | 1,957,484 | | | 4.7 | % |
Residential loans - HFI at Freddie Mac SLST (2) | | 58,372 | | | 2,110,555 | | | 3.7 | % | | 64,869 | | | 2,203,677 | | | 3.9 | % |
Business purpose loans | | 48,982 | | | 945,899 | | | 6.9 | % | | 62,541 | | | 1,266,493 | | | 6.6 | % |
Single-family rental loans - HFI at CAFL | | 152,444 | | | 3,349,828 | | | 6.1 | % | | 99,169 | | | 2,411,312 | | | 5.5 | % |
Bridge loans - HFI at CAFL | | 214 | | | 4,049 | | | 7.0 | % | | — | | | — | | | — | % |
Multifamily loans - HFI at Freddie Mac K-Series | | 14,492 | | | 488,804 | | | 4.0 | % | | 49,960 | | | 1,711,123 | | | 3.9 | % |
Trading securities | | 17,133 | | | 140,241 | | | 16.3 | % | | 26,789 | | | 336,151 | | | 10.6 | % |
Available-for-sale securities | | 16,051 | | | 128,564 | | | 16.6 | % | | 11,682 | | | 139,487 | | | 11.2 | % |
Other interest income | | 17,325 | | | 790,499 | | | 2.9 | % | | 20,537 | | | 763,898 | | | 3.6 | % |
Total interest income | | 412,722 | | | 11,433,668 | | | 4.8 | % | | 450,009 | | | 12,376,692 | | | 4.8 | % |
Interest Expense | | | | | | | | | | | | |
Short-term debt facilities | | (27,380) | | | 1,609,295 | | | (2.3) | % | | (40,158) | | | 1,415,975 | | | (3.8) | % |
Short-term debt - servicer advance financing | | (3,414) | | | 166,605 | | | (2.7) | % | | (4,961) | | | 199,517 | | | (3.3) | % |
| | | | | | | | | | | | |
ABS issued - Legacy Sequoia (2) | | (2,271) | | | 258,915 | | | (1.2) | % | | (5,099) | | | 322,829 | | | (2.1) | % |
ABS issued - Sequoia (2) | | (38,848) | | | 1,419,153 | | | (3.6) | % | | (58,455) | | | 1,757,851 | | | (4.4) | % |
ABS issued - Freddie Mac SLST (2) | | (49,756) | | | 1,859,559 | | | (3.6) | % | | (48,840) | | | 1,861,309 | | | (3.5) | % |
ABS issued - Freddie Mac K-Series | | (13,294) | | | 459,648 | | | (3.9) | % | | (47,154) | | | 1,614,333 | | | (3.9) | % |
ABS issued - CAFL | | (118,543) | | | 3,041,714 | | | (5.2) | % | | (72,768) | | | 2,247,583 | | | (4.3) | % |
Long-term debt facilities | | (32,518) | | | 776,846 | | | (5.6) | % | | (29,789) | | | 641,094 | | | (6.2) | % |
Long-term debt - FHLBC | | (2) | | | 374 | | | (0.7) | % | | (10,411) | | | 786,790 | | | (1.8) | % |
Long-term debt - corporate | | (28,345) | | | 650,828 | | | (5.8) | % | | (32,113) | | | 708,708 | | | (6.0) | % |
Total interest expense | | (314,371) | | | 10,242,937 | | | (4.1) | % | | (349,748) | | | 11,555,989 | | | (4.0) | % |
Net Interest Income | | $ | 98,351 | | | | | | | $ | 100,261 | | | | | |
(1)Average balances for residential loans held-for-sale, residential loans held-for-investment, business purpose loans, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for available-for-sale securities and debt are calculated based upon amortized historical cost, except for ABS issued, which is based upon fair value.
(2)Interest income from residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia or Freddie Mac SLST entities. Interest income from residential loans - HFI at Legacy Sequoia and the interest expense from ABS issued - Legacy Sequoia represent activity from our Investment Portfolioconsolidated Legacy Sequoia entities. Interest income from residential loans - HFI at Sequoia and the interest expense from ABS issued - Sequoia represent activity from our consolidated Sequoia entities. Interest income from residential loans - HFI at Freddie Mac SLST and the interest expense from ABS issued - Freddie Mac SLST represent activity from our consolidated Freddie Mac SLST entities.
Results of Operations by Segment
We report on our business using three distinct segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. For additional information on our segments, refer to Note 23 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following table presents the segment contribution from our three segments reconciled to our consolidated net income for the three and nine months ended September 30, 20172021 and 2016.2020.
Table 11 - Net Interest Income ("NII") from Investment Portfolio4 – Segment Results Summary
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2021 | | 2020 | | Change | | | 2021 | | 2020 | | Change |
Segment Contribution from: | | | | | | | | | | | | | |
Residential Lending | | $ | 38,796 | | | $ | 8,526 | | | $ | 30,270 | | | | $ | 122,435 | | | $ | (152,270) | | | $ | 274,705 | |
Business Purpose Lending | | 32,066 | | | 53,418 | | | (21,352) | | | | 86,321 | | | (123,895) | | | 210,216 | |
Third-Party Investments | | 30,466 | | | 101,054 | | | (70,588) | | | | 133,994 | | | (318,146) | | | 452,140 | |
Corporate/Other | | (13,042) | | | (21,186) | | | 8,144 | | | | (67,182) | | | (41,831) | | | (25,351) | |
Net Income (Loss) | | $ | 88,286 | | | $ | 141,812 | | | $ | (53,526) | | | | $ | 275,568 | | | $ | (636,142) | | | $ | 911,710 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Net interest income from: | | | | | | | | | | | | | |
HFI residential loans at Redwood | | $ | 16,826 |
| | $ | 19,031 |
| | $ | (2,205 | ) | | | $ | 53,466 |
| | $ | 54,920 |
| | $ | (1,454 | ) |
HFI residential loans at Sequoia Choice | | 23 |
| | — |
| | 23 |
| | | 23 |
| | — |
| | 23 |
|
Residential securities | | 19,105 |
| | 16,279 |
| | 2,826 |
| | | 53,969 |
| | 51,013 |
| | 2,956 |
|
Commercial/Multifamily securities | | 1,298 |
| | 742 |
| | 556 |
| | | 4,388 |
| | 1,093 |
| | 3,295 |
|
Commercial mezzanine loans | | — |
| | 5,911 |
| | (5,911 | ) | | | 345 |
| | 23,477 |
| | (23,132 | ) |
Other interest income | | 326 |
| | 200 |
| | 126 |
| | | 975 |
| | 803 |
| | 172 |
|
NII from Investment Portfolio | | $ | 37,578 |
| | $ | 42,163 |
| | $ | (4,585 | ) | | | $ | 113,166 |
| | $ | 131,306 |
| | $ | (18,140 | ) |
The following sections provide a discussion of the results of operations at each of our three business segments for the three and nine months ended September 30, 2021.
The decrease in net interest incomeexpense from Corporate/Other for the three-month periods was primarily due to the reversal of $19 million of valuation allowance on our Investment Portfolio segment duringdeferred tax assets in the three- andthird quarter of 2021. This decrease was partially offset by higher accruals of variable compensation expense associated with improved financial results in 2021. The increase in net expense for the nine-month periods was primarily due to the sale of our commercial mezzanine loans during 2016, as well as from higher interest costs on our FHLB borrowings during 2017 and higher interest expensea $25 million gain associated with securities that were financedthe repurchase of $125 million of convertible debt in the second quarter of 2020.
Residential Lending Segment
Overview
Our Residential Lending segment generated $39 million of net income during the secondthird quarter of 2021, driven primarily by $40 million of mortgage banking income and third quarters$12 million of 2017. These decreases were partially offset by higher net interest income from real estate securities, primarily resulting from higher average balances of these investmentsinvestments. Mortgage banking income increased from the redeploymentsecond quarter of capital.2021, as loan purchase commitments of $3.3 billion in the third quarter were 20% higher than the second quarter and margins improved from the second quarter. Net interest income from investments increased approximately $5 million in the third quarter of 2021 from the second quarter of 2021, due to increased discount amortization on our available-for-sale securities.
Investment fair value changes,Our Residential Lending segment generated $31 million of net income during the second quarter of 2021, driven primarily by $27 million of mortgage banking income and $6 million of net interest income from investments. Mortgage banking income decreased from the first quarter of 2021, as loan purchase commitments of $2.7 billion in the second quarter were 22% lower than the first quarter and margins normalized towards the high end of our historic target range.
Market valuation changes includedOur Residential Lending segment generated $53 million of net income during the first quarter of 2021, driven primarily by $64 million of mortgage banking income and $6 million of net interest income from investments. Mortgage banking income increased significantly during the quarter, as loan purchase commitments increased 41% from the fourth quarter of 2020 to $3.51 billion, and gross margins nearly doubled.
Mortgage Banking
The following table provides the activity of residential loans held in Investment fair value changes, net, result from changes ininventory for sale at our mortgage banking business during the three and nine months ended September 30, 2021.
Table 5 – Loan Inventory for Residential Mortgage Banking Operations — Activity
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands) | | September 30, 2021 | | September 30, 2021 |
Balance at beginning of period | | $ | 1,063,722 | | | $ | 176,641 | |
Acquisitions | | 3,176,004 | | | 9,758,766 | |
Sales | | (2,426,858) | | | (6,958,670) | |
Transfers between portfolios (1) | | (464,189) | | | (1,669,683) | |
Principal repayments | | (15,280) | | | (26,155) | |
Changes in fair value, net | | 10,630 | | | 63,130 | |
Balance at End of Period | | $ | 1,344,029 | | | $ | 1,344,029 | |
(1)Represents the fair value of investmentsthe net transfers of loans from held-for-sale to held-for-investment within our Residential Lending investment portfolio, associated with securitizations we sponsored that we consolidate under GAAP.
The following table presents our mortgage banking income and theirloan purchase commitments during the three and nine months ended September 30, 2021.
Table 6 – Mortgage Banking Income and Residential Loan Purchase Commitments
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands) | | September 30, 2021 | | September 30, 2021 |
Mortgage banking income | | $ | 40,121 | | | $ | 131,281 | |
Loan purchase commitments entered into | | $ | 3,288,102 | | | $ | 9,541,499 | |
Mortgage banking income is comprised of net interest income from loans held-for-sale in inventory and mortgage banking activities. Income from mortgage banking activities is comprised of mark-to-market adjustments on loans from the time they are purchased to when they are sold, mark-to-market adjustments on new and outstanding loan purchase commitments, gains/losses from associated hedges, generally due to changes in market interest rates, changes in credit spreads, and reductions in the basis of investments due to changes in principal balances. See other miscellaneous income/expenses (see Note 18 19 of our Notes to Consolidated Financial Statements in Part I, Item I1 of this Quarterly Report on Form 10-Q for additional detail regardingfurther detail).
During the componentsthree months ended September 30, 2021, our residential mortgage loan conduit locked $4.74 billion of Investment fair value changes, net presentedloans ($3.29 billion adjusted for expected pipeline fallout - i.e, loan purchase commitments), including $4.21 billion of Select loans and $0.53 billion of Choice loans, and purchased $3.18 billion of loans. Approximately 59% of loans locked in the third quarter were purchase-money loans and 41% were refinancings. During the three months ended September 30, 2021, we distributed $2.43 billion of loans through whole loan sales, and completed one securitization backed by $449 million of loans (unpaid principal balance).
At September 30, 2021, we had $1.34 billion of loans in inventory on our balance sheet, our loan pipeline included $2.77 billion of loans identified for purchase (locked loans, unadjusted for fallout), and we had entered into forward sale agreements for $662 million of loans.
Our gross margin (mortgage banking income earned in the period divided by loan purchase commitments entered into during the period) for the three months ended September 30, 2021 was 122 basis points, up from 98 basis points in the second quarter of 2021.
We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At September 30, 2021, we had residential warehouse facilities outstanding with seven different counterparties, with $2.70 billion of total capacity and $1.36 billion of available capacity. These included non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral that is non-delinquent) facilities with $1.18 billion of total capacity and marginable facilities with $1.53 billion of total capacity.
Investment Portfolio
The following table presents details of our Residential Lending investment portfolio at September 30, 2021 and December 31, 2020.
Table 7 – Residential Lending Investments
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Residential loans at Redwood (1) | | $ | 151,050 | | | $ | — | |
Residential securities at Redwood (2) | | 145,430 | | | 155,501 | |
Residential securities at consolidated Sequoia entities (3) | | 236,451 | | | 217,965 | |
Other investments | | 12,389 | | | 8,815 | |
Total Segment Investments | | $ | 545,320 | | | $ | 382,281 | |
(1)Balance consists of loans called from Sequoia securitizations. Excludes Sequoia loans held at VIEs that we consolidated statementsfor GAAP purposes.
(2)Excludes $5 million of income.trading securities that are designated as hedges for our mortgage banking operations and are not considered part of our investment portfolio.
(3)Represents our retained economic investment in the consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $2.48 billion of loans and $2.24 billion of ABS issued associated with these investments at September 30, 2021.
During the third quarter of 2021, we purchased $66 million of loans from Sequoia securitizations we called, and we retained $2 million of securities from one Sequoia securitization we completed during the quarter. During the second quarter of 2021, we purchased $83 million of loans from Sequoia securitizations we called, and we retained $8 million of securities from three Sequoia securitizations we completed during the quarter. During the first quarter of 2021, we sold $4 million of securities from our residential lending investment portfolio and retained $8 million of securities from two Sequoia securitizations we completed during the quarter. See the "Investments Detail" section that follows for additional details on our investments and their associated borrowings.
During the third quarter of 2021, net interest income from our residential lending investment portfolio was $12 million, which increased $5 million from the second quarter of 2021, and other income was $1 million in the third quarter of 2021, consistent with the second quarter of 2021. The increase in net interest income was primarily due to higher discount accretion income on our available-for-sale securities, driven by expectations for certain of our retained Sequoia securities to be called over the next several quarters, affecting our cash flow forecasts and effective yields for those investments.
The following table presents the components of investment fair value changes for the Investment Portfolioour Residential Lending segment by investment type inclusive of fair value changes of associated risk management derivatives, for the three and nine months ended September 30, 2017 and 2016.2021.
Table 12 -8 – Investment Portfolio Fair Value Changes, Net by Investment Typefrom Residential Lending
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands) | | September 30, 2021 | | September 30, 2021 |
Investment Fair Value Changes, Net | | | | |
Changes in fair value of: | | | | |
Residential loans at Redwood | | $ | 816 | | | $ | 2,423 | |
Trading securities | | (1,825) | | | (6,553) | |
Net investments in Sequoia entities (1) | | 3,314 | | | 13,118 | |
Risk-sharing and other investments | | (20) | | | (63) | |
| | | | |
Recoveries (impairments) on AFS securities | | — | | | 33 | |
Investment Fair Value Changes, Net | | $ | 2,285 | | | $ | 8,958 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Market valuation changes: | | | | | | | | | | | | | |
Residential loans held-for-investment at Redwood | | $ | 1,412 |
| | $ | 3,187 |
| | $ | (1,775 | ) | | | $ | (11,065 | ) | | $ | (19,218 | ) | | $ | 8,153 |
|
Net investment in Sequoia Choice entity (1) | | (256 | ) | | — |
| | (256 | ) | | | (256 | ) | | — |
| | (256 | ) |
Residential trading securities | | (721 | ) | | 8,770 |
| | (9,491 | ) | | | 13,074 |
| | 3,227 |
| | 9,847 |
|
Commercial/Multifamily trading securities | | 1,210 |
| | 203 |
| | 1,007 |
| | | 13,327 |
| | 408 |
| | 12,919 |
|
Other valuation changes | | (273 | ) | | 16 |
| | (289 | ) | | | (1,234 | ) | | (922 | ) | | (312 | ) |
Investment Portfolio Fair Value Changes, Net | | $ | 1,372 |
| | $ | 12,176 |
| | $ | (10,804 | ) | | | $ | 13,846 |
| | $ | (16,505 | ) | | $ | 30,351 |
|
| |
(1) | Includes changes in fair value of the residential loans held-for-sale and the ABS issued at the entity,(1)Includes changes in fair value of the loans held-for-investment and the ABS issued at the entities, which netted together represent the change in value of our retained investment (subordinate securities) at the consolidated VIE. |
During the three and nine months ended September 30, 2017, the positive investment fair value changes primarily resulted from net increases in the fair value of our trading securities and their associated hedges, which were primarily due to tightening credit spreads on these securities during these periods. In addition, for the three months ended September 30, 2017, investment fair value changes, net benefited from an increase in the fair value of residential loans, driven by tighter credit spreads on these investments during that period. In both the three and nine months ended September 30, 2017, these increases were partially offset by decreases in the fair value of our residential loans held-for-investment and their associated hedges, primarily resulting from principal paydowns and hedging costs.
During the three months ended September 30, 2016, the positive investment fair value changes resulted from increases in the fair value of our investments (subordinate securities) at the consolidated VIEs.
Strengthening credit performance helped drive spreads tighter during the three-and nine-month periods for most of our subordinate securities, which resulted in both trading securities and loans held-for-investment, which were primarily the result of tightening credit spreads. During the nine months ended September 30, 2016, the negative investmentnet positive fair value changes primarily resulted from decreases in the fair value offor our loans held for investment and their associated hedges. These decreases were primarily the result of hedging costs due to interest rate volatilityresidential lending investments. Additionally, during the first nine months of the year, as well as decreases in2021, most of our investment securities experienced elevated prepayments, which generally benefited our subordinate securities, but negatively impacted our interest-only and certificated servicing securities, causing a net negative fair value resultingchange for our trading securities.
Business Purpose Lending Segment
Overview
Our Business Purpose Lending segment generated $32 million of net income during the third quarter of 2021, driven primarily by $32 million of mortgage banking income and $18 million of net interest income from the write-off of premium from loan repayments.
Theinvestments. Our business purpose investments saw an increase in interest income in the third quarter from a higher average balance of investments and lower cost of funds, compared to the second quarter of 2021, and increased positive fair values from commercial/multifamily trading securities and their associated derivatives during the three- and nine-month periods primarily resulted from credit spread tightening during each period.
MSR Income, net
The following table presents the components of MSR income, net for the three and nine months ended September 30, 2017 and 2016.
Table 13 – MSR Income, net
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Net servicing fee income | | $ | 3,396 |
| | $ | 8,726 |
| | $ | 14,775 |
| | $ | 27,241 |
|
Changes in fair value of MSR from the receipt of expected cash flows | | (1,914 | ) | | (5,705 | ) | | (7,392 | ) | | (17,766 | ) |
MSR reversal of provision for repurchases | | (8 | ) | | — |
| | 304 |
| | 208 |
|
MSR income before the effect of changes in interest rates and other assumptions | | 1,474 |
| | 3,021 |
| | 7,687 |
| | 9,683 |
|
Changes in fair value of MSRs from interest rates and other assumptions (1) | | 563 |
| | 7,085 |
| | (3,450 | ) | | (52,723 | ) |
Changes in fair value of associated derivatives | | (422 | ) | | (6,336 | ) | | 1,869 |
| | 55,874 |
|
Total net effect of changes in assumptions and rates | | 141 |
| | 749 |
| | (1,581 | ) | | 3,151 |
|
MSR Income, Net | | $ | 1,615 |
| | $ | 3,770 |
| | $ | 6,106 |
| | $ | 12,834 |
|
| |
(1) | Primarily reflectsvalue changes in prepayment assumptions on our MSRs due to changes in benchmark interest rates. |
MSR income before the effect of changes in interest rates and other assumptions declined in both the three- and nine-month periods, primarily due to the salecontinued strength in credit performance and spread tightening.
Our Business Purpose Lending segment generated $33 million of our conforming MSRsnet income during the second quarter of 2017. The total2021, driven primarily by $35 million of mortgage banking income and $15 million of net effectinterest income from investments. Business purpose mortgage banking income in the second quarter of changes2021 benefited from a 37% increase in assumptionsorigination volume from the first quarter of 2021 and rates decreasedmodest spread tightening on securitization execution during the nine-month periods, primarilysecond quarter. Our business purpose investments saw an increase in interest income in the second quarter from a higher average balance of investments compared to the first quarter of 2021 and increased positive fair value changes due to lower hedging expenses on MSRscontinued spread tightening.
Our Business Purpose Lending segment generated $21 million of net income during the first quarter of 2016.
Realized Gains,2021, driven primarily by $22 million of mortgage banking income and $13 million of net
During interest income from investments. Business purpose mortgage banking income normalized in the first quarter of 2021, relative to the third and fourth quarters of 2020, as more modest spread tightening on securitization execution during the quarter had a reduced impact to the valuation of our loans held in inventory at the beginning of the quarter. Net interest income from BPL investments increased from the fourth quarter of 2017, we realized gains of $2 million, primarily2020 due to higher yield maintenance income on our SFR securities resulting from the sale of $23 million of AFS securities. During the third quarter of 2016, we realized gains of $7 million, which included $2 million primarilyfaster prepayments, and reduced debt costs on our bridge loan portfolio resulting from the sale of $26 million of AFS securities and $5 million from the sale of $208 million of commercial mezzanine loans.
Direct Operating Expenses and Provision for Income Taxes
Thea decrease in operating expenses at our Investment Portfolio segment for the three and nine months ended September 30, 2017 was primarily attributable to lower operating costs associated with the management of our servicing portfolio. For the three and nine months ended September 30, 2017, the provision for income taxes at our Investment Portfolio segment resulted from GAAP income earned at our TRS during those periods, primarily from MSR income and incomeleverage on certain securities we hold at our TRS.these assets.
Residential Loans Held-for-Investment at Redwood PortfolioMortgage Banking
The following table provides thebusiness purpose loans funding activity of residential loans held-for-investment at Redwood during the three and nine months ended September 30, 2017 and 2016.2021.
Table 149 – ResidentialBusiness Purpose Loans Held-for-Investment— Funding Activity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
(In Thousands) | | Single-Family Rental | | Bridge (1) | | Total | | Single-Family Rental | | Bridge (1) | | Total |
Fair value at beginning of period | | $ | 418,442 | | | $ | — | | | $ | 418,442 | | | $ | 245,394 | | | $ | — | | | $ | 245,394 | |
Fundings | | 395,083 | | | 244,652 | | | 639,735 | | | 960,398 | | | 593,041 | | | 1,553,439 | |
| | | | | | | | | | | | |
Sales | | — | | | (253) | | | (253) | | | — | | | (2,484) | | | (2,484) | |
Transfers between portfolios (2) | | (332,670) | | | (246,096) | | | (578,766) | | | (754,453) | | | (593,774) | | | (1,348,227) | |
Principal repayments | | (36,970) | | | — | | | (36,970) | | | (47,090) | | | — | | | (47,090) | |
Changes in fair value, net | | 22,461 | | | 1,697 | | | 24,158 | | | 62,097 | | | 3,217 | | | 65,314 | |
Fair Value at End of Period | | $ | 466,346 | | | $ | — | | | $ | 466,346 | | | $ | 466,346 | | | $ | — | | | $ | 466,346 | |
(1)We originate bridge loans at Redwood - Activityour TRS and then transfer them to our REIT. Origination fees and any fair value changes on these loans prior to transfer are recognized within Mortgage banking activities, net on our consolidated statements of income (loss). Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge securitization, we record any changes in fair value from the date of origination or purchase to the time of securitization as Mortgage banking activities, net on our consolidated statements of income (loss). Once loans are transferred into this securitization, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the carrying value and activity of our bridge loans held-for-investment, see the Investments section that follows.
(2)For single-family rental loans, amounts represent the fair value of transfers of loans from held-for-sale to held-for-investment, including when loans are securitized (and consolidated for GAAP purposes). For bridge loans, represents the transfer of loans originated at our TRS to our REIT as described in preceding footnote.
Business purpose mortgage banking income was $23 million, $35 million and $32 million in the first, second and third quarters of 2021, respectively. Mortgage banking income is comprised of net interest income from single-family rental loans held-for-sale in inventory and mortgage banking activities income from single family rental and bridge loans (see Note 19 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on mortgage banking activities).
Business purpose funding volumes increased steadily through the first nine months of 2021. These growing volumes, along with improved SFR securitization execution in the second and third quarters of 2021, drove strong mortgage banking income results for those periods. Approximately 66% of total origination volumes in the third quarter were from repeat borrowers.
We utilize a combination of capital and loan warehouse facilities to manage our inventory of single-family rental loans that we hold for sale. At September 30, 2021, we had business purpose warehouse facilities outstanding with four different counterparties, with $1.30 billion of total capacity (used for both SFR and bridge loans) and $663 million of available capacity (inclusive of capacity on non-recourse facilities). All of these facilities are non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral that is non-delinquent).
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Fair value at beginning of period | | $ | 2,360,234 |
| | $ | 2,277,561 |
| | $ | 2,261,016 |
| | $ | 1,791,195 |
|
Transfers between portfolios (1) | | (20,025 | ) | | 151,919 |
| | 226,893 |
| | 821,273 |
|
Principal repayments | | (74,550 | ) | | (146,151 | ) | | (228,271 | ) | | (351,955 | ) |
Changes in fair value, net | | 3,143 |
| | (655 | ) | | 9,164 |
| | 22,161 |
|
Fair Value at End of Period | | $ | 2,268,802 |
| | $ | 2,282,674 |
| | $ | 2,268,802 |
| | $ | 2,282,674 |
|
Investment Portfolio | |
(1) | Represents the net transfers of loans into our Investment Portfolio segment from our Residential Mortgage Banking segment and their reclassification from held-for-sale to held-for-investment. |
DuringThe following table presents details of our Business Purpose Lending investment portfolio at September 30, 2021 and December 31, 2020.
Table 10 – Business Purpose Lending Investments
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
| | | | |
Bridge loans | | $ | 824,799 | | | $ | 641,765 | |
Single-family rental securities at consolidated CAFL entities (1) | | 287,813 | | | 238,630 | |
| | | | |
Other investments | | 6,767 | | | 21,627 | |
Total Segment Investments | | $ | 1,119,379 | | | $ | 902,022 | |
(1)Represents our economic investment in securities issued by consolidated CAFL securitization VIEs. For GAAP purposes, we consolidated $3.40 billion of loans and $3.13 billion of ABS issued associated with these investments at September 30, 2021.
In September 2021, we completed a CAFL securitization backed by $272 million (principal balance) of bridge loans. See the "Investments Detail" section that follows for additional details on our investments and their associated borrowings.
The following table presents the components of investment fair value changes for our Business Purpose Lending segment by investment type for the three and nine months ended September 30, 2017,2021.
Table 11 – Investment Fair Value Changes, Net from Business Purpose Lending
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands) | | September 30, 2021 | | September 30, 2021 |
Investment Fair Value Changes, Net | | | | |
Changes in fair value of: | | | | |
| | | | |
Bridge loans held-for-investment | | $ | 900 | | | $ | 4,142 | |
REO | | 108 | | | 536 | |
Net investments in CAFL SFR entities (1) | | 2,943 | | | 6,354 | |
Other | | (481) | | | (481) | |
| | | | |
Investment Fair Value Changes, Net | | $ | 3,470 | | | $ | 10,551 | |
(1)Includes changes in fair value of the loans held-for-investment and the ABS issued at the entities, which netted together represent the change in value of our investments (subordinate securities) at the consolidated VIEs.
Spreads tightened throughout 2021 for our CAFL subordinate securities, with positive fair value changes for these assets more than offsetting the decline in the value of our CAFL interest-only securities from a reduction in their basis through the receipt of regular cash flows. We also had positive resolutions on several previously delinquent bridge loans during 2021, resulting in positive fair value changes for recoveries in excess of carrying values.
Third-Party Investments Segment
Overview
Our Third-Party Investments segment generated $30 million of net income during the third quarter of 2021, driven primarily by $21 million of positive investment fair value changes and $12 million of net interest income. Our Third-Party Investments segment generated $54 million of net income during the second quarter of 2021, driven primarily by $42 million of positive investment fair value changes and $12 million of net interest income, and generated $50 million of net income during the first quarter of 2021, driven primarily by $40 million of positive investment fair value changes and $12 million of net interest income. Positive investment fair value changes in 2021 reflected continuing improvement in credit performance and spread tightening, particularly for our RPL and multifamily securities.
Investment Portfolio
The following table presents details of the investments in our Third-Party Investments segment at September 30, 2021 and December 31, 2020.
Table 12 – Third-Party Investments
| | | | | | | | | | | | | | |
(In Thousands) | | September 30, 2021 | | December 31, 2020 |
Residential securities at Redwood | | $ | 160,300 | | | $ | 134,090 | |
Residential securities at consolidated Freddie Mac SLST entities (1) | | 451,252 | | | 428,179 | |
Multifamily securities at Redwood | | 42,618 | | | 49,255 | |
Multifamily securities at consolidated Freddie Mac K-Series entity (2) | | 31,389 | | | 28,255 | |
Other investments (3) | | 379,102 | | | 317,282 | |
Total Segment Investments | | $ | 1,064,661 | | | $ | 957,061 | |
(1)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we had net transfersconsolidated $2.00 billion of $20loans and $1.55 billion of ABS issued associated with these investments at September 30, 2021.
(2)Represents our economic investment in securities issued by a consolidated Freddie Mac K-Series securitization entity. For GAAP purposes, we consolidated $483 million of loans and $227$451 million respectively, of residential loans from our Residential Mortgage Banking segment to our Investment Portfolio segment. ABS issued associated with this investment at September 30, 2021.
(3)At September 30, 2017, $2.26 billion of loans were held by our FHLB-member subsidiary and were financed with $2.00 billion of borrowings from the FHLBC. In connection with these borrowings, our FHLB-member subsidiary is required to hold $432021, Other investments presented in this table includes $188 million of FHLB stock.
servicing investments owned in our consolidated Servicing Investment entities. At September 30, 2017, the weighted average maturity2021, our economic investment in these entities was $60 million (for GAAP purposes, we consolidated $188 million of these FHLB borrowings was approximately eight years and they had a weighted average costservicing investments, $152 million of 1.3% per annum. This interest cost resets every 13 weeks and we seek to fix the interest cost of these FHLB borrowings over their weighted average maturity by using a combination of swaps, TBAs and other derivatives.
In October 2017, the FHLB increased the capital requirement on our borrowing facility, which effectively increases the portion of loans we finance with equity relative to what was required previously. This change will result in additional capital being allocated to these investmentsnon-recourse short-term securitization debt, as well as a lower return on the capitalother assets and liabilities for these entities). Additionally, at September 30, 2021, Other investments presented in this table includes $167 million of HEIs owned in our consolidated Point HEI entity. At September 30, 2021, our economic investment in this entity was $10 million (for GAAP purposes, we consolidated $167 million of HEIs and $145 million of ABS issued, as leverage on this portfolio will be reduced.
Under a final rule published by the Federal Housing Finance Agency in January 2016, our FHLB-member subsidiary will remain an FHLB member through the five-year transition period for captive insurance companies. Our FHLB-member subsidiary's existing $2.00 billion of FHLB debt, which matures beyond this transition period, is permitted to remain outstanding until its stated maturity. As residential loans pledgedwell as collateralother assets and liabilities for this debt pay down,entity).
During the third quarter of 2021, in conjunction with co-sponsoring a securitization of HEIs, we are permittedpurchased $122 million of additional HEIs from other contributors to pledgethe securitization, then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS. We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity.
Additionally, during the third quarter of 2021, we purchased $11 million of other third-party investments. During the second quarter, we purchased $3 million of third-party investments and sold $11 million of third-party investments. During the first quarter, we purchased $16 million of third-party investments and sold $34 million of third-party investments.
See the "Investments Detail" section that follows for additional loans or other eligible assets to collateralize this debt; however, we do not expect to be able to increase our subsidiary's FHLB debt above the existing $2.00 billion.details on these investments and their associated borrowings.
The following table presents the unpaid principal balancescomponents of investment fair value changes for residential real estateour Third-Party Investments segment by investment type for the three and nine months ended September 30, 2021.
Table 13 – Investment Fair Value Changes, Net from Third-Party Investments
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands) | | September 30, 2021 | | September 30, 2021 |
Investment Fair Value Changes, Net | | | | |
Changes in fair value of: | | | | |
Residential securities | | $ | 3,371 | | | $ | 31,620 | |
Net investments in Freddie Mac SLST entities (1) | | 13,849 | | | 54,282 | |
Net investment in Freddie Mac K-Series entity (1) | | 554 | | | 11,330 | |
Net investment in Point HEI entity (1) | | 47 | | | 47 | |
Servicer advance investments | | (2,079) | | | (3,179) | |
Excess MSRs | | (803) | | | (5,233) | |
HEIs at Redwood | | 5,622 | | | 13,017 | |
| | | | |
Other | | 8 | | | 65 | |
Recoveries (impairments) on AFS securities | | — | | | 354 | |
Investment Fair Value Changes, Net | | $ | 20,569 | | | $ | 102,303 | |
(1)Includes changes in fair value of the loans held-for-investment, securitized Point HEIs, and the ABS issued at fairthe entities, which netted together represent the change in value of our investments (subordinate securities) at the consolidated VIEs.
Continued strengthening of credit and elevated prepayment speeds helped drive credit spreads tighter on our third-party assets in 2021, in particular for our investments in re-performing loan assets (primarily represented by product type atour net investment in Freddie Mac SLST entities in the table above). HEI valuations benefited from our securitization of HEIs in the third quarter of 2021. The decline in value of our Servicer advance investments and excess MSRs is primarily attributable to a reduction in their basis through the receipt of regular cash flows.
Investments Detail
This section presents additional details on our investment assets and their activity during the three and nine months ended September 30, 2017.2021.
Table 15 – Characteristics of Residential Real Estate Loans Held-for-Investment at Redwood
|
| | | | | | | |
September 30, 2017 | | | | |
(Dollars in Thousands) | | Principal Balance | | Weighted Average Coupon |
Fixed - 30 year | | $ | 2,031,944 |
| | 4.10 | % |
Fixed - 15, 20, & 25 year | | 71,138 |
| | 3.64 | % |
Hybrid | | 128,343 |
| | 4.00 | % |
Total Outstanding Principal | | $ | 2,231,425 |
| | |
The outstanding loans held-for-investment at Redwood at September 30, 2017 were prime-quality, first lien loans, of which 95% were originated between 2013 and 2017 and 5% were originated in 2012 and prior years. The weighted average FICO score of borrowers backing these loans was 772 (at origination) and the weighted average loan-to-value ("LTV") ratio was 65% (at origination). At September 30, 2017, none of these loans were greater than 90 days delinquent or in foreclosure.
Real Estate Securities Portfolio
The following table sets forthpresents activity of our real estate securities activityon balance sheet by collateral type for the three and nine months ended September 30, 2021.
Table 14 – Activity of Real Estate Securities at Redwood by Collateral Type
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2021 | | Residential | | Multifamily | | Total |
(In Thousands) | | Senior | | Mezzanine | | Subordinate | | Mezzanine | |
Beginning fair value | | $ | 25,267 | | | $ | — | | | $ | 287,140 | | | $ | 42,479 | | | $ | 354,886 | |
Transfers | | — | | | — | | | — | | | — | | | — | |
Acquisitions | | — | | | — | | | 6,750 | | | 4,000 | | | 10,750 | |
Sales | | — | | | — | | | (755) | | | — | | | (755) | |
Gains on sales and calls, net | | — | | | — | | | 6,389 | | | — | | | 6,389 | |
Effect of principal payments (1) | | — | | | — | | | (13,204) | | | (3,261) | | | (16,465) | |
Change in fair value, net | | (2,773) | | | — | | | 1,854 | | | (600) | | | (1,519) | |
Ending Fair Value | | $ | 22,494 | | | $ | — | | | $ | 288,174 | | | $ | 42,618 | | | $ | 353,286 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2021 | | Residential | | Multifamily | | Total |
(In Thousands) | | Senior | | Mezzanine | | Subordinate | | Mezzanine | |
Beginning fair value | | $ | 28,464 | | | $ | 5,663 | | | $ | 260,743 | | | $ | 49,255 | | | $ | 344,125 | |
| | | | | | | | | | |
Acquisitions | | 8,737 | | | — | | | 21,050 | | | 8,930 | | | 38,717 | |
Sales | | — | | | (5,724) | | | (31,765) | | | — | | | (37,489) | |
Gains on sales and calls, net | | — | | | 60 | | | 16,931 | | | — | | | 16,991 | |
Effect of principal payments (1) | | — | | | (26) | | | (30,751) | | | (14,064) | | | (44,841) | |
Change in fair value, net | | (14,707) | | | 27 | | | 51,966 | | | (1,503) | | | 35,783 | |
Ending Fair Value | | $ | 22,494 | | | $ | — | | | $ | 288,174 | | | $ | 42,618 | | | $ | 353,286 | |
(1)The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.
At September 30, 2021, our securities at Redwood (exclusive of securities owned in consolidated entities) consisted of fixed-rate assets (86%), adjustable-rate assets (11%), and hybrid assets that reset within the next year (3%).
The following table sets forth activity in our Investment Portfolioentire real estate securities portfolio by segment for the three and nine months ended September 30, 2017.2021. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.
Table 15 – Activity of Real Estate Securities at Redwood and in Consolidated Entities by Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2021 | | Residential(1) | | BPL | | Third-Party Investments | | Total |
| Sequoia Securities on Balance Sheet | | Consolidated Sequoia Securities | | Consolidated CAFL Securities | | Consolidated SLST Securities | | Consolidated Multifamily Securities | | Other Third-Party Securities(1) | |
(In Thousands) | | | | | | | |
Beginning fair value | | $ | 160,847 | | | $ | 232,005 | | | $ | 268,131 | | | $ | 450,173 | | | $ | 30,834 | | | $ | 194,039 | | | $ | 1,336,029 | |
Acquisitions | | — | | | 1,965 | | | 16,646 | | | — | | | — | | | 10,750 | | | 29,361 | |
Sales | | — | | | — | | | — | | | — | | | — | | | (755) | | | (755) | |
Gains on sales and calls, net | | 6,389 | | | — | | | — | | | — | | | — | | | — | | | 6,389 | |
Effect of principal payments (2) | | (12,212) | | | (832) | | | — | | | (12,769) | | | — | | | (4,253) | | | (30,066) | |
Change in fair value, net | | (7,770) | | | 3,313 | | | 2,943 | | | 13,849 | | | 554 | | | 6,251 | | | 19,140 | |
Ending Fair Value | | 147,254 | | | 236,451 | | | 287,720 | | | 451,253 | | | 31,388 | | | 206,032 | | | 1,360,098 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2021 | | Residential | | BPL | | Third-Party Investments | | Total |
| Sequoia Securities on Balance Sheet | | Consolidated Sequoia Securities | | Consolidated CAFL Securities | | Consolidated SLST Securities | | Consolidated Multifamily Securities | | Other Third-Party Securities | |
(In Thousands) | | | | | | | |
Beginning fair value | | $ | 157,456 | | | $ | 217,965 | | | $ | 238,630 | | | $ | 428,178 | | | $ | 28,255 | | | $ | 186,669 | | | $ | 1,257,153 | |
Acquisitions | | 9,375 | | | 7,746 | | | 53,846 | | | — | | | — | | | 29,342 | | | 100,309 | |
Sales | | (3,664) | | | — | | | — | | | — | | | (8,197) | | | (33,825) | | | (45,686) | |
Gains on sales and calls, net | | 15,484 | | | — | | | — | | | — | | | — | | | 1,507 | | | 16,991 | |
Effect of principal payments (2) | | (28,928) | | | (2,377) | | | (11,110) | | | (31,207) | | | — | | | (15,913) | | | (89,535) | |
Change in fair value, net | | (2,469) | | | 13,117 | | | 6,354 | | | 54,282 | | | 11,330 | | | 38,252 | | | 120,866 | |
Ending Fair Value | | 147,254 | | | 236,451 | | | 287,720 | | | 451,253 | | | 31,388 | | | 206,032 | | | 1,360,098 | |
(1)At September 30, 2021, $3 million of securities used as hedges for our residential mortgage banking operations are included within the "Other third-party securities" column of this table. These same securities are presented as a component of securities within our residential lending segment on our segment balance sheet.
(2)The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.
The following table summarizes the credit characteristics of our entire real estate securities portfolio by collateral type at September 30, 2021. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.
Table 16 – Real Estate Securities ActivityCredit Statistics
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021 | | | | | | | | Weighted Average Values for Non-IO Securities |
| Market Value - IO Securities | | Market Value - Non-IO Securities | | Principal Balance - Non-IO Securities | | Coupon | | 90+ Delinquency | | 3-Month Prepayment Rate | | Investment Thickness(1) |
(Dollars in Thousands) | | | | | | | |
Sequoia securities on balance sheet | | $ | 18,380 | | | $ | 128,874 | | | $ | 153,388 | | | 3.7 | % | | 0.66 | % | | 42 | % | | 7 | % |
Consolidated Sequoia securities | | 9,329 | | | 227,122 | | | 243,524 | | | 4.6 | % | | 2.84 | % | | 51 | % | | 31 | % |
Total Sequoia Securities | | 27,709 | | | 355,996 | | | 396,912 | | | 4.3 | % | | 2.05 | % | | 48 | % | | 22 | % |
Consolidated Freddie Mac SLST securities | | 17,714 | | | 433,539 | | | 547,393 | | | 3.1 | % | | 10.98 | % | | 14 | % | | 28 | % |
RPL securities on balance sheet | | 998 | | | 64,845 | | | 143,877 | | | 3.6 | % | | 5.11 | % | | 16 | % | | 7 | % |
Total RPL Securities | | 18,712 | | | 498,384 | | | 691,270 | | | 3.2 | % | | 10.21 | % | | 14 | % | | 25 | % |
Consolidated Freddie Mac K-Series securities | | — | | | 31,388 | | | 36,468 | | | 4.1 | % | | — | % | | — | % | | 20 | % |
Multifamily securities on balance sheet | | 2,039 | | | 40,579 | | | 41,241 | | | 3.2 | % | | 0.02 | % | | 15 | % | | 8 | % |
Total Multifamily Securities | | 2,039 | | | 71,967 | | | 77,709 | | | 3.6 | % | | 0.01 | % | | 8 | % | | 13 | % |
Consolidated CAFL securities | | 49,828 | | | 237,892 | | | 354,319 | | | 5.1 | % | | 1.87 | % | | 15 | % | | 13 | % |
Other third-party securities | | 3,164 | | | 94,407 | | | 116,725 | | | 4.5 | % | | 2.03 | % | | 34 | % | | 5 | % |
Total Securities | | $ | 101,452 | | | $ | 1,258,646 | | | $ | 1,636,935 | | | | | | | | | |
(1)Investment thickness represents the average size of the subordinate securities we own as investments in securitizations, relative to the average overall size of the securitizations. For example, if our investment thickness (of first-loss securities) with respect to a particular securitization is 10%, we have exposure to the first 10% of credit losses resulting from loans underlying that securitization. We generally own first loss positions in Sequoia, RPL and CAFL securities. We own both first loss and mezzanine positions (positions credit enhanced by Collateral Type
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
Three Months Ended September 30, 2017 | | Senior | | Re-REMIC | | Subordinate | | Total |
(In Thousands) | | Residential | | Residential (1) | | Residential | | Commercial (2) | |
Beginning fair value | | $ | 176,962 |
| | $ | 73,337 |
| | $ | 797,895 |
| | $ | 170,309 |
| | $ | 1,218,503 |
|
Transfers | | 34,375 |
| | (34,375 | ) | | — |
| | — |
| | — |
|
Acquisitions | | | | | | | | | | |
Sequoia securities | | 5,908 |
| | — |
| | 23,125 |
| | — |
| | 29,033 |
|
Third-party securities | | 10,475 |
| | — |
| | 74,507 |
| | 74,123 |
| | 159,105 |
|
Sales | | | | | | | | | | |
Sequoia securities | | — |
| | — |
| | — |
| | — |
| | — |
|
Third-party securities | | (3,324 | ) | | — |
| | (45,486 | ) | | — |
| | (48,810 | ) |
Gains on sales and calls, net | | 824 |
| | — |
| | 910 |
| | — |
| | 1,734 |
|
Effect of principal payments (3) | | (7,324 | ) | | (1,745 | ) | | (7,944 | ) | | (2,484 | ) | | (19,497 | ) |
Change in fair value, net | | (1,897 | ) | | 1,816 |
| | 15,162 |
| | 1,123 |
| | 16,204 |
|
Ending Fair Value | | $ | 215,999 |
| | $ | 39,033 |
| | $ | 858,169 |
| | $ | 243,071 |
| | $ | 1,356,272 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 | | Senior | | Re-REMIC | | Subordinate | | Total |
(In Thousands) | | Residential | | Residential (1) | | Residential | | Commercial (2) | |
Beginning fair value | | $ | 173,613 |
| | $ | 85,479 |
| | $ | 667,577 |
| | $ | 91,770 |
| | $ | 1,018,439 |
|
Transfers | | 46,604 |
| | (46,604 | ) | | — |
| | — |
| | — |
|
Acquisitions | | | | | | | | | | |
Sequoia securities | | 11,555 |
| | — |
| | 55,529 |
| | — |
| | 67,084 |
|
Third-party securities | | 20,901 |
| | — |
| | 231,494 |
| | 156,248 |
| | 408,643 |
|
Sales | | | | | | | | | | |
Sequoia securities | | — |
| | — |
| | (26,601 | ) | | — |
| | (26,601 | ) |
Third-party securities | | (13,399 | ) | | — |
| | (92,035 | ) | | (15,858 | ) | | (121,292 | ) |
Gains on sales and calls, net | | 5,327 |
| | — |
| | 4,234 |
| | — |
| | 9,561 |
|
Effect of principal payments (3) | | (21,399 | ) | | (3,099 | ) | | (22,592 | ) | | (3,172 | ) | | (50,262 | ) |
Change in fair value, net | | (7,203 | ) | | 3,257 |
| | 40,563 |
| | 14,083 |
| | 50,700 |
|
Ending Fair Value | | $ | 215,999 |
| | $ | 39,033 |
| | $ | 858,169 |
| | $ | 243,071 |
| | $ | 1,356,272 |
|
| |
(1) | Re-REMIC securities, as presented herein, were created by third parties through the resecuritization of certain senior RMBS. |
| |
(2) | Our commercial securities are primarily comprised of Agencysubordinate securities) in multifamily securities. |
| |
(3) | The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security. |
At September 30, 2017, our securities consisted of fixed-rate assets (78%), adjustable-rate assets (5%), hybrid assets that reset within the next year (9%), and hybrid assets that reset between 12 and 36 months (8%).
other third-party securities.
We directly finance our holdings of real estate securities with a combination of capital and collateralized debt in the form of repurchase (or “repo”) financing. The following table presents the fair value of our real estate securities that were financed with repurchase debt at September 30, 2017.
Table 17 – Real Estate Securities Financed with Repurchase Debt |
| | | | | | | | | | | | | | | | | | | |
September 30, 2017 | | Real Estate Securities | | Repurchase Debt | | Allocated Capital | | Weighted Average Price(1) | | Financing Haircut(2) |
(Dollars in Thousands, except Weighted Average Price) | | | | | |
Residential Securities | | | | | | | | | | |
Senior | | $ | 102,697 |
| | $ | (90,205 | ) | | $ | 12,492 |
| | $ | 98 |
| | 13 | % |
Subordinate - Mezzanine | | 337,153 |
| | (280,633 | ) | | 56,520 |
| | 99 |
| | 17 | % |
Total Residential Securities | | 439,850 |
| | (370,838 | ) | | 69,012 |
| | 99 |
| | 16 | % |
Commercial/Multifamily Securities | | 223,269 |
| | (178,973 | ) | | 44,296 |
| | 96 |
| | 20 | % |
Total | | $ | 663,119 |
| | $ | (549,811 | ) | | $ | 113,308 |
| | | |
|
| |
(1) | GAAP fair value per $100 of principal. |
| |
(2) | Allocated capital divided by GAAP fair value. |
At September 30, 2017,2021, we had short-term debt incurred through repurchase facilities of $550$80 million with three different counterparties, which was secured by $663$108 million of real estate securities.securities (including securities owned in consolidated securitization entities).
At September 30, 2021, real estate securities with a fair value of $504 million (including securities owned in consolidated Sequoia and CAFL securitization entities), were financed with long-term, non-mark-to-market recourse debt through our subordinate securities financing facilities. Additionally, at September 30, 2021, we had $451 million of re-performing loan securities financed with $161 million of non-recourse securitization debt. The remaining $693$297 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital. Our repo borrowings were made under facilities with eight different counterparties, and the weighted average cost of funds for these facilities during the third quarter of 2017 was approximately 2.48% per annum.
At September 30, 2017, the securities we financed through repurchase facilities had no material credit issues. In addition to the allocated capital listed in the table above that directly supports our repurchase facilities (the "financing haircut”), we continue to hold a designated amount of supplemental risk capital available for potential margin calls or future obligations relating to these facilities.
The majority of the $103 million of senior securities noted in the table above are supported by seasoned residential loans originated prior to 2008. The $337 million of mezzanine securities financed through repurchase facilities at September 30, 2017 carry investment grade credit ratings and are supported by residential loans originated between 2012 and 2017. The loans underlying these securities have experienced minimal delinquencies to date. The $223 million of multifamily securities financed through repurchase facilities at September 30, 2017 carry investment grade credit ratings with 7%-8% of structural credit enhancement.
Bridge Loans Held-for-Investment
The following table presents our residential securities at September 30, 2017 and December 31, 2016, categorized by portfolio vintage (the yearsprovides the securities were issued), and by priorityactivity of cash flows (senior, re-REMIC, and subordinate). We have additionally separated securities issued through our Sequoia platform or by third parties, including the Agencies.
Table 18 – Residential Securities by Vintage and Type
|
| | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 | | Sequoia 2012-2017 | | Third Party 2013-2017 | | Agency CRT 2013-2017 | | Third Party <=2008 | | Total Residential Securities | | % of Total Residential Securities |
(Dollars in Thousands) | | | | | |
Senior | | $ | 34,276 |
| | $ | 24,574 |
| | $ | — |
| | $ | 157,149 |
| | $ | 215,999 |
| | 19 | % |
Re-REMIC | | — |
| | — |
| | — |
| | 39,033 |
| | 39,033 |
| | 4 | % |
Subordinate | | | | | | | | | | | | |
Mezzanine (1) | | 157,050 |
| | 177,865 |
| | — |
| | — |
| | 334,915 |
| | 30 | % |
Subordinate | | 131,929 |
| | 77,625 |
| | 286,780 |
| | 26,920 |
| | 523,254 |
| | 47 | % |
Total Subordinate | | 288,979 |
| | 255,490 |
| | 286,780 |
| | 26,920 |
| | 858,169 |
| | 77 | % |
Total Securities (2) | | $ | 323,255 |
| | $ | 280,064 |
| | $ | 286,780 |
| | $ | 223,102 |
| | $ | 1,113,201 |
| | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | Sequoia 2012-2016 | | Third Party 2013-2016 | | Agency CRT 2013-2016 | | Third Party <=2008 | | Total Residential Securities | | % of Total Residential Securities |
(Dollars in Thousands) | | | | | |
Senior | | $ | 26,618 |
| | $ | 5,611 |
| | $ | — |
| | $ | 141,384 |
| | $ | 173,613 |
| | 19 | % |
Re-REMIC | | — |
| | — |
| | — |
| | 85,479 |
| | 85,479 |
| | 9 | % |
Subordinate | | | | | | | | | | | | |
Mezzanine (1) | | 136,007 |
| | 179,390 |
| | — |
| | — |
| | 315,397 |
| | 34 | % |
Subordinate | | 113,310 |
| | 64,450 |
| | 152,126 |
| | 22,294 |
| | 352,180 |
| | 38 | % |
Total Subordinate | | 249,317 |
| | 243,840 |
| | 152,126 |
| | 22,294 |
| | 667,577 |
| | 72 | % |
Total Securities | | $ | 275,935 |
| | $ | 249,451 |
| | $ | 152,126 |
| | $ | 249,157 |
| | $ | 926,669 |
|
| 100 | % |
| |
(1) | Mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later. |
| |
(2) | Excludes $31 million of securities retained from our consolidated Sequoia Choice securitization. For GAAP purposes we consolidated $317 million of residential loans and $286 million of non-recourse ABS debt associated with these retained securities. |
At September 30, 2017 and December 31, 2016, we held $243 million and $92 million, respectively, of commercial securities that were all classified as subordinate securities and issued from 2015 through 2017. At September 30, 2017 and December 31, 2016, commercial securities included $223 million and $74 million, respectively, of multifamily securities issued by Agencies and the remainder were third-party CMBS.
At both September 30, 2017 and December 31, 2016, our available-for-sale securities were entirely comprised of residential securities. The following tables present the components of the interest income we earned on AFS securities for the three and nine months ended September 30, 2017 and 2016.
Table 19 – Interest Income — AFS Securities
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2017 | | | | | | | | | | Yield as a Result of |
| | Interest Income | | Discount (Premium) Amortization | | Total Interest Income | | Average Amortized Cost | | Interest Income | | Discount (Premium) Amortization | | Total Interest Income |
(Dollars in Thousands) | | | | | | | |
Residential | | | | | | | | | | | | | | |
Senior | | $ | 1,374 |
| | $ | 1,928 |
| | $ | 3,302 |
| | $ | 103,781 |
| | 5.30 | % | | 7.43 | % | | 12.73 | % |
Re-REMIC | | 696 |
| | 734 |
| | 1,430 |
| | 46,646 |
| | 5.97 | % | | 6.29 | % | | 12.26 | % |
Subordinate | | | | | | | | | | | | | | |
Mezzanine | | 1,136 |
| | 509 |
| | 1,645 |
| | 115,565 |
| | 3.93 | % | | 1.76 | % | | 5.69 | % |
Subordinate | | 2,897 |
| | 1,460 |
| | 4,357 |
| | 154,904 |
| | 7.48 | % | | 3.77 | % | | 11.25 | % |
Total AFS Securities | | $ | 6,103 |
| | $ | 4,631 |
| | $ | 10,734 |
| | $ | 420,896 |
| | 5.80 | % | | 4.40 | % | | 10.20 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | | | | Yield as a Result of |
| | Interest Income | | Discount (Premium) Amortization | | Total Interest Income | | Average Amortized Cost | | Interest Income | | Discount (Premium) Amortization | | Total Interest Income |
(Dollars in Thousands) | | | | | | | |
Residential | | | | | | | | | | | | | | |
Senior | | $ | 609 |
| | $ | 529 |
| | $ | 1,138 |
| | $ | 68,219 |
| | 3.57 | % | | 3.10 | % | | 6.67 | % |
Re-REMIC | | 1,799 |
| | 3,596 |
| | 5,395 |
| | 113,638 |
| | 6.33 | % | | 12.66 | % | | 18.99 | % |
Subordinate | | | | | | | | | | | | | | |
Mezzanine | | 1,764 |
| | 665 |
| | 2,429 |
| | 180,108 |
| | 3.92 | % | | 1.48 | % | | 5.40 | % |
Subordinate | | 2,473 |
| | 1,334 |
| | 3,807 |
| | 126,877 |
| | 7.80 | % | | 4.21 | % | | 12.01 | % |
Total AFS Securities | | $ | 6,645 |
| | $ | 6,124 |
| | $ | 12,769 |
| | $ | 488,842 |
| | 5.44 | % | | 5.01 | % | | 10.45 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 | | | | | | | | | | Yield as a Result of |
| | Interest Income | | Discount (Premium) Amortization | | Total Interest Income | | Average Amortized Cost | | Interest Income | | Discount (Premium) Amortization | | Total Interest Income |
(Dollars in Thousands) | | | | | | | |
Residential | | | | | | | | | | | | | | |
Senior | | $ | 3,976 |
| | $ | 5,971 |
| | $ | 9,947 |
| | $ | 100,808 |
| | 5.26 | % | | 7.90 | % | | 13.16 | % |
Re-REMIC | | 2,476 |
| | 2,619 |
| | 5,095 |
| | 57,283 |
| | 5.76 | % | | 6.10 | % | | 11.86 | % |
Subordinate | | | | | | | | | | | | | | |
Mezzanine | | 3,818 |
| | 1,777 |
| | 5,595 |
| | 131,460 |
| | 3.87 | % | | 1.80 | % | | 5.67 | % |
Subordinate | | 8,479 |
| | 4,330 |
| | 12,809 |
| | 151,487 |
| | 7.46 | % | | 3.81 | % | | 11.27 | % |
Total AFS Securities | | $ | 18,749 |
| | $ | 14,697 |
| | $ | 33,446 |
| | $ | 441,038 |
| | 5.67 | % | | 4.44 | % | | 10.11 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | | Yield as a Result of |
| | Interest Income | | Discount (Premium) Amortization | | Total Interest Income | | Average Amortized Cost | | Interest Income | | Discount (Premium) Amortization | | Total Interest Income |
(Dollars in Thousands) | | | | | | | |
Residential | | | | | | | | | | | | | | |
Senior | | $ | 3,594 |
| | $ | 3,832 |
| | $ | 7,426 |
| | $ | 126,592 |
| | 3.79 | % | | 4.04 | % | | 7.83 | % |
Re-REMIC | | 5,484 |
| | 10,400 |
| | 15,884 |
| | 112,029 |
| | 6.53 | % | | 12.38 | % | | 18.91 | % |
Subordinate | | | | | | | | | | | | | | |
Mezzanine | | 5,745 |
| | 2,038 |
| | 7,783 |
| | 193,643 |
| | 3.96 | % | | 1.40 | % | | 5.36 | % |
Subordinate | | 7,119 |
| | 4,261 |
| | 11,380 |
| | 121,014 |
| | 7.84 | % | | 4.69 | % | | 12.53 | % |
Total AFS Securities | | $ | 21,942 |
| | $ | 20,531 |
| | $ | 42,473 |
| | $ | 553,278 |
| | 5.29 | % | | 4.95 | % | | 10.24 | % |
During the fourth quarter of 2016 and the first nine months of 2017, several Re-REMIC securities we held were exchanged for the underlying senior securities. Several of these exchanged investments had higher relative yields and, as such, the balance of our investments in Re-REMICs and their associated yields declined and the yields of our senior securities increasedbridge loans held-for-investment during the three and nine months ended September 30, 2017,2021.
Table 17 – Bridge Loans Held-for-Investment - Activity
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In Thousands) | | September 30, 2021 | | September 30, 2021 |
Fair value at beginning of period | | $ | 726,569 | | | $ | 641,765 | |
| | | | |
| | | | |
Sales | | — | | | (7,000) | |
Transfers between portfolios (1) | | 246,096 | | | 593,775 | |
Transfers to REO | | (4,785) | | | (7,074) | |
Principal repayments | | (145,975) | | | (402,701) | |
Changes in fair value, net | | 2,894 | | | 6,034 | |
Fair Value at End of Period | | $ | 824,799 | | | $ | 824,799 | |
(1)We originate bridge loans at our TRS and then transfer them to our REIT. Origination fees and any fair value changes on these loans prior to transfer are recognized within Mortgage banking activities, net on our consolidated statements of income (loss). Once the loans are transferred to our REIT, they are classified as comparedheld-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge securitization, we record any changes in fair value from the date of origination or purchase to the same periodstime of securitization as Mortgage banking activities, net on our consolidated statements of income (loss). Once loans are transferred into this securitization, any changes in 2016.
The following tables presentfair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the components of carrying value and activity of our bridge loans held-for-investment, see the Investments section that follows.
Our $825 million of bridge loans held-for-investment at September 30, 2017 and December 31, 2016 for our AFS securities.
Table 20 – Carrying Value of AFS Securities
|
| | | | | | | | | | | | | | | | |
September 30, 2017 | | Senior | | Re-REMIC | | Subordinate | | Total |
(In Thousands) | | | | |
Principal balance | | $ | 156,936 |
| | $ | 44,896 |
| | $ | 442,219 |
| | $ | 644,051 |
|
Credit reserve | | (3,024 | ) | | (5,810 | ) | | (38,041 | ) | | (46,875 | ) |
Unamortized discount, net | | (36,575 | ) | | (10,412 | ) | | (142,405 | ) | | (189,392 | ) |
Amortized cost | | 117,337 |
| | 28,674 |
| | 261,773 |
| | 407,784 |
|
Gross unrealized gains | | 37,155 |
| | 10,359 |
| | 83,185 |
| | 130,699 |
|
Gross unrealized losses | | (1,260 | ) | | — |
| | (1,085 | ) | | (2,345 | ) |
Carrying Value | | $ | 153,232 |
| | $ | 39,033 |
| | $ | 343,873 |
| | $ | 536,138 |
|
|
| | | | | | | | | | | | | | | | |
December 31, 2016 | | Senior | | Re-REMIC | | Subordinate | | Total |
(In Thousands) | | | | |
Principal balance | | $ | 148,862 |
| | $ | 95,608 |
| | $ | 456,359 |
| | $ | 700,829 |
|
Credit reserve | | (4,814 | ) | | (6,857 | ) | | (35,802 | ) | | (47,473 | ) |
Unamortized discount, net | | (41,877 | ) | | (19,613 | ) | | (136,622 | ) | | (198,112 | ) |
Amortized cost | | 102,171 |
| | 69,138 |
| | 283,935 |
| | 455,244 |
|
Gross unrealized gains | | 36,304 |
| | 16,341 |
| | 68,032 |
| | 120,677 |
|
Gross unrealized losses | | (1,929 | ) | | — |
| | (1,240 | ) | | (3,169 | ) |
Carrying Value | | $ | 136,546 |
| | $ | 85,479 |
| | $ | 350,727 |
| | $ | 572,752 |
|
We designate any amount of unpaid principal balance that we do not expect to receive and thus do not expect to earn or recover as a credit reserve on each security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method.
At September 30, 2017, credit reserves for our AFS securities totaled $47 million, or 7.3% of the principal balance of our AFS securities, as compared to $47 million, or 6.8%, at December 31, 2016. During the nine months ended September 30, 2017, increases resulting from acquisitions and impairments2021 were partially offset by reductions in the credit reserve from realized losses, sales and transfers out of credit reserve to accretable discount. During the three and nine months ended September 30, 2017, realized credit losses on our residential securities totaled $1 million and $3 million, respectively. During the three and nine months ended September 30, 2016, realized credit losses on our residential securities totaled $0.3 million and $3 million, respectively.
Residential Loans Held-for-Investment at Sequoia Choice Portfolio
During the third quarter of 2017, we issued our first securitization primarily comprised of expanded-prime Choice loans. We consolidate this Sequoia Choice securitization entity for financial reporting purposes in accordancefirst-lien, interest-only loans with GAAP. This entity is independent of Redwood and the assets and liabilities of this entity are not, respectively, owned by us or legal obligations of ours. We record the assets and liabilities of the consolidated Sequoia Choice entity at fair value, based on the estimated fair value of the debt securities (ABS) issued from the securitizations, in accordance with GAAP provisions for collateralized financing entities. At September 30, 2017, the estimated fair value of our economic investment in the consolidated Sequoia Choice entity was $31 million, and was comprised of retained subordinate securities.
The following table presents the balance sheets of the consolidated Sequoia Choice entity at September 30, 2017 and December 31, 2016.
Table 21 – Consolidated Sequoia Choice Entity Balance Sheets
|
| | | | | | | | |
(In Thousands) | | September 30, 2017 | | December 31, 2016 |
Residential loans, held-for-investment, at fair value | | $ | 317,303 |
| | $ | — |
|
Other assets | | 1,266 |
| | — |
|
Total Assets | | $ | 318,569 |
|
| $ | — |
|
Other liabilities | | $ | 1,045 |
| | $ | — |
|
Asset-backed securities issued, at fair value | | 286,328 |
| | — |
|
Total liabilities | | 287,373 |
|
| — |
|
Equity (fair value of Redwood's retained investments in entity) | | 31,196 |
| | — |
|
Total Liabilities and Equity | | $ | 318,569 |
|
| $ | — |
|
The following table provides details of residential loan activity at the consolidated Sequoia Choice entity for the three and nine months ended September 30, 2017 and 2016.
Table 22 – Residential Loans Held-for-Investment at Sequoia Choice - Activity
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
New securitization issuance | | 318,129 |
| | | | 318,129 |
| | |
Changes in fair value, net | | (826 | ) | | — |
| | (826 | ) | | — |
|
Balance at End of Period | | $ | 317,303 |
|
| $ | — |
|
| $ | 317,303 |
|
| $ | — |
|
The outstanding loans held-for-investment at our Sequoia Choice entity at September 30, 2017 were prime-quality, first lien, 30-year, fixed-rate loans and were originated in 2014 or later. The grossa weighted average couponcoupon of these loans was 4.98%,7.48% and original maturities of six to 24 months. At origination, the weighted average FICO score of borrowers backing these loans was 744 (at origination)741 and the weighted average original LTV ratio of these loans was 75% (at origination)68%. At September 30, 2017, none2021, of the 1,092 loans in this portfolio, 34 of these loans with an aggregate fair value of $23 million and an aggregate unpaid principal balance of $26 million were in foreclosure, of which 35 loans with an aggregate fair value of $27 million and an unpaid principal balance of $30 million were greater than 90 days delinquent ordelinquent.
We finance our bridge loans with a combination of recourse, non-marginable warehouse facilities and non-recourse, non-marginable warehouse facilities. At September 30, 2021, we had $83 million of debt incurred through short-term warehouse facilities with one different counterparty, which was secured by $127 million of loans, and $279 million of debt incurred through long-term facilities with three different counterparties, which was secured by $374 million of loans. Additionally, in foreclosure.the third quarter of 2021, we completed a securitization of CoreVest bridge loans. The ABS issued by this securitization were backed by assets including $276 million of bridge loans and $28 million of restricted cash at September 30, 2021. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024).
Mortgage Servicing Rights Portfolio
Our MSRs are held and managed at our taxable REIT subsidiary and typically are acquired together with loans from originators and then separately recognized under GAAP when the MSR is retained and the associated loan is sold to a third party or transferred to a Sequoia residential securitization sponsored by us that meets the GAAP criteria for sale. In addition, we have also purchased MSRs on a flow basis from third parties that sold the associated loans directly to the Agencies. Although we own the rights to service loans, we contract with sub-servicers to perform these activities. Our receipt of MSR income is not subject to any covenants other than customary performance obligations associated with servicing residential loans. If a sub-servicer we contract with was to fail to perform these obligations, our servicing rights could be terminated and we would evaluate our MSR asset for impairment at that time.Other Investments
The following table provides thesets forth our other investments activity for MSRs by portfolio for the three and nine months ended September 30, 2017.
Table 23 – MSR Activity by Portfolio
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
(In Thousands) | | Jumbo | | Conforming | | Total MSRs | | Jumbo | | Conforming | | Total MSRs |
Balance at beginning of period | | $ | 63,084 |
| | $ | 686 |
| | $ | 63,770 |
| | $ | 60,003 |
| | $ | 58,523 |
| | $ | 118,526 |
|
Additions | | | | | | | | | | | | |
MSRs retained from Sequoia securitizations | | — |
| | — |
| | — |
| | 7,123 |
| | — |
| | 7,123 |
|
MSRs retained from third-party loan sales | | — |
| | — |
| | — |
| | 263 |
| | — |
| | 263 |
|
Purchased MSRs | | — |
| | 256 |
| | 256 |
| | — |
| | 571 |
| | 571 |
|
Sold MSRs | | — |
| | — |
| | — |
| | — |
| | (52,966 | ) | | (52,966 | ) |
Market valuation adjustments | | (1,281 | ) | | 183 |
| | (1,098 | ) | | (5,586 | ) | | (5,003 | ) | | (10,589 | ) |
Balance at End of Period | | $ | 61,803 |
| | $ | 1,125 |
| | $ | 62,928 |
| | $ | 61,803 |
| | $ | 1,125 |
| | $ | 62,928 |
|
During the nine months ended September 30, 2017, we sold conforming MSRs with a fair value of $53 million. The remaining $63 million of MSRs are primarily associated with loans transferred to Sequoia securitizations we completed over the past several years.
The following table presents characteristics of our MSR investments and their associated loans at September 30, 2017.
Table 24 – Characteristics of MSR Investments Portfolio
|
| | | | |
(Dollars In Thousands) | | September 30, 2017 |
Unpaid principal balance | | $ | 5,747,006 |
|
Fair value of MSRs | | $ | 62,928 |
|
MSR values as percent of unpaid principal balance | | 1.09 | % |
Gross cash yield (1) | | 0.26 | % |
Number of loans | | 8,900 |
|
Average loan size | | $ | 646 |
|
Average coupon | | 3.96 | % |
Average loan age (months) | | 38 |
|
Average original loan-to-value | | 67 | % |
Average original FICO score | | 770 |
|
60+ day delinquencies | | 0.08 | % |
| |
(1) | Gross cash yield is calculated by dividing the annualized quarterly gross servicing fees we received for the three months ended September 30, 2017, by the weighted average notional balance of loans associated with MSRs we owned during that period. |
At September 30, 2017, nearly all of our MSRs were comprised of base MSRs and we did not own any portion of a servicing right related to any loan where we did not own the entire servicing right. At September 30, 2017 and December 31, 2016, we had $0.5 million and $1 million of servicer advances outstanding related to our MSRs, respectively, which are presented in Other assets on our consolidated balance sheets.
Residential Mortgage Banking Segment
The following table presents the components of segment contribution for the Residential Mortgage Banking segment for the three and nine months ended September 30, 2017 and 2016.2021.
Table 2518 – Residential Mortgage BankingOther Investments by Segment Contribution- Activity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2021 | | Residential | | BPL | | Third-Party Investments(1) | | Corporate/Other | | Total |
(In Thousands) | | | | | |
Balance at beginning of period | | $ | 8,721 | | | $ | 13,168 | | | $ | 267,850 | | | $ | 18,992 | | | $ | 308,731 | |
New/additional investments | | 4,782 | | | — | | | 125,373 | | | 5,050 | | | 135,205 | |
| | | | | | | | | | |
Reductions in investments | | — | | | (6,959) | | | (17,116) | | | — | | | (24,075) | |
Changes in fair value, net | | (1,047) | | | 482 | | | 2,995 | | | 66 | | | 2,496 | |
Other | | (67) | | | 76 | | | — | | | — | | | 9 | |
Balance at End of Period | | $ | 12,389 | | | $ | 6,767 | | | $ | 379,102 | | | $ | 24,108 | | | $ | 422,366 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Interest income | | | | | | | | | | | | | |
Loans | | $ | 10,626 |
| | $ | 8,831 |
| | $ | 1,795 |
| | | $ | 26,515 |
| | $ | 24,038 |
| | $ | 2,477 |
|
Sequoia securities | | — |
| | — |
| | — |
| | | — |
| | 572 |
| | (572 | ) |
Total interest income | | 10,626 |
| | 8,831 |
| | 1,795 |
| | | 26,515 |
| | 24,610 |
| | 1,905 |
|
Interest expense | | (4,135 | ) | | (3,826 | ) | | (309 | ) | | | (11,462 | ) | | (10,719 | ) | | (743 | ) |
Net interest income | | 6,491 |
| | 5,005 |
| | 1,486 |
| | | 15,053 |
| | 13,891 |
| | 1,162 |
|
Mortgage banking activities, net | | 21,200 |
| | 9,766 |
| | 11,434 |
| | | 50,850 |
| | 26,774 |
| | 24,076 |
|
Direct operating expenses | | (6,107 | ) | | (5,807 | ) | | (300 | ) | | | (18,009 | ) | | (17,175 | ) | | (834 | ) |
Segment contribution before income taxes | | 21,584 |
| | 8,964 |
| | 12,620 |
| | | 47,894 |
| | 23,490 |
| | 24,404 |
|
Provision for income taxes | | (4,829 | ) | | (240 | ) | | (4,589 | ) | | | (12,251 | ) | | (240 | ) | | (12,011 | ) |
Segment Contribution | | $ | 16,755 |
| | $ | 8,724 |
| | $ | 8,031 |
| | | $ | 35,643 |
| | $ | 23,250 |
| | $ | 12,393 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2021 | | Residential | | BPL | | Third-Party Investments | | Corporate/Other | | Total |
(In Thousands) | | | | | |
Balance at beginning of period | | $ | 8,815 | | | $ | 21,627 | | | $ | 317,283 | | | $ | 451 | | | $ | 348,176 | |
New/additional investments | | 7,065 | | | — | | | 125,373 | | | 23,550 | | | 155,988 | |
| | | | | | | | | | |
Reductions in investments | | — | | | (16,012) | | | (68,470) | | | — | | | (84,482) | |
Changes in fair value, net | | (3,299) | | | 1,076 | | | 4,916 | | | 106 | | | 2,799 | |
Other | | (192) | | | 76 | | | — | | | 1 | | | (115) | |
Balance at End of Period | | $ | 12,389 | | | $ | 6,767 | | | $ | 379,102 | | | $ | 24,108 | | | $ | 422,366 | |
The following tables provide the activity of unsecuritized residential loans during the three and nine months ended(1)At September 30, 20172021 (our "Balance at End of Period"), Third-party investments presented in this table includes $188 million of servicing investments owned in our consolidated Servicing Investment entities. At September 30, 2021, our economic investment in these entities was $60 million (for GAAP purposes, we consolidated $188 million of servicing investments, $152 million of non-recourse short-term securitization debt, as well as other assets and 2016.liabilities for these entities). Additionally, At September 30, 2021, Third-party investments presented in this table includes $167 million of HEIs owned in our consolidated Point HEI entity. At September 30, 2021, our economic investment in this entity was $10 million (for GAAP purposes, we consolidated $167 million of HEIs and $145 million of ABS issued, as well as other assets and liabilities for this entity).
Table 26 – Residential Loans Held-for-Sale — Activity
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | 837,371 |
| | $ | 882,380 |
| | $ | 835,399 |
| | $ | 1,115,738 |
|
Acquisitions | | 1,462,116 |
| | 1,252,135 |
| | 3,791,471 |
| | 3,812,863 |
|
Sales (1) | | (1,393,323 | ) | | (774,106 | ) | | (3,465,835 | ) | | (2,874,215 | ) |
Transfers between portfolios (2) | | 20,025 |
| | (151,919 | ) | | (226,893 | ) | | (821,273 | ) |
Principal repayments | | (16,436 | ) | | (20,574 | ) | | (38,704 | ) | | (56,495 | ) |
Changes in fair value, net | | 15,928 |
| | 598 |
| | 30,243 |
| | 11,896 |
|
Balance at End of Period | | $ | 925,681 |
| | $ | 1,188,514 |
| | $ | 925,681 |
| | $ | 1,188,514 |
|
| |
(1) | Includes $318 million of Choice loans securitized during the third quarter of 2017, which were not treated as sales for GAAP purposes and continue to be reported on our consolidated balance sheets within our Investment Portfolio segment. |
| |
(2) | Represents the net transfers of loans out of our Residential Mortgage Banking segment into our Investment Portfolio segment and their reclassification from held-for-sale to held-for-investment. |
OverviewDuring the third quarter of 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased $122 million of additional HEIs from other contributors to the securitization (included within "Third-Party Investments" in the table above), then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS. We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity.
During the first nine months of 2017, we purchased $3.79 billion of predominately prime residential jumbo loans, sold $874 million of jumbo loans2021, in addition to third parties and securitized $2.59 billion of jumbo loans through our Sequoia platform. In addition, we had net transfers of $227 million of jumbo loans to our Investment Portfolio segment and financed them with borrowings from the FHLBC. Our pipeline of loans identified for purchase at September 30, 2017 included $1.49 billion of jumbo loans.
We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At September 30, 2017, we had $438 million of warehouse debt outstanding to fund our residential loans held-for-sale. The weighted average cost of the borrowings outstanding under these facilities duringHEIs acquired in the third quarter of 2017 was 2.86% per annum. Our warehouse capacitydescribed above, other new/ additional investments included MSRs retained from whole loan sales at September 30, 2017 totaled $1.33 billion across four separate counterparties, which should continue to provide sufficient liquidity to fund our residential mortgage banking operations in the near-term.Residential Segment and strategic investments through our RWT Horizons venture investment strategy within Corporate/Other.
Our residential mortgage banking operations created investments that allowed us to deploy $57 million of capital into our investment portfolio duringDuring the first nine months of 2017. At September 30, 2017, we had 446 loan sellers, up from 406 at2021, reductions in investments for Third-Party Investments was primarily attributable to the endrecovery of 2016. This included 187 jumbo sellers and 259 sellers from various FHLB districts participating in the FHLB's MPF Direct program.
Net Interest Income
Net interest income from residential mortgage banking is primarily comprised of interest income earned on residential loans from the time we purchase the loans to when we sell or securitize them, offset by interest expense incurred on short-term warehouse debt used in part to finance the loans while we hold them onservicing advances within our consolidated balance sheet.
Net interest income from residential mortgage banking increased for both the three- and nine-month periods, primarily due to lower loan warehouse borrowings used to finance our residential loans held-for-sale for each periodservicing VIEs. Our economic investment in 2017, as compared to 2016.
The amount of net interest income we earn on loans held-for-sale is dependent on many variables, including the amount of loans and the time they are outstanding on our consolidated balance sheet and their interest rates, as well as the amount of leverage we employ through the use of short-term debt to finance the loans and the interest rates on that debt. These factors will impact net interest income in future periods.
Mortgage Banking Activities, Net
Mortgage banking activities, net, includes the changes in market value of both the loans we hold for sale and commitments for loans we intend to purchase (collectively, our loan pipeline), as well as the effect of hedges we utilize to manage risks associated with our loan pipeline. Our loan sale profit margins are measured over the period from when we commit to purchase a loan and subsequently sell or securitize the loan. Accordingly, these profit margins may encompass positive or negative market valuation adjustments on loans, hedging gains or losses associated with our loan pipeline, and any other related transaction expenses, and may be realized over the course of one or more quarters for financial reporting purposes.
The following table presents the components of residential mortgage banking activities, net. Amounts presented include both the changes in market values for loans that were sold and associated derivative positions that were settled during the periods presented, as well as changes in market values of loans, derivatives and hedges outstanding at the end of each period.
Table 27 – Components of Residential Mortgage Banking Activities, Net
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change | | | 2017 | | 2016 | | Change |
Changes in fair value of: | | | | | | | | | | | | | |
Residential loans, at fair value (1) | | $ | 28,135 |
| | $ | 12,671 |
| | $ | 15,464 |
| | | $ | 63,122 |
| | $ | 47,456 |
| | $ | 15,666 |
|
Sequoia securities | | — |
| | — |
| | — |
| | | — |
| | 1,455 |
| | (1,455 | ) |
Risk management derivatives (2) | | (7,077 | ) | | (3,287 | ) | | (3,790 | ) | | | (13,787 | ) | | (22,743 | ) | | 8,956 |
|
Other income, net (3) | | 142 |
| | 382 |
| | (240 | ) | | | 1,515 |
| | 606 |
| | 909 |
|
Total Residential Mortgage Banking Activities, Net | | $ | 21,200 |
| | $ | 9,766 |
| | $ | 11,434 |
| | | $ | 50,850 |
| | $ | 26,774 |
| | $ | 24,076 |
|
| |
(1) | Includes changes in fair value for loan purchase commitments. |
| |
(2) | Represents market valuation changes of derivatives that are used to manage risks associated with our accumulation of residential loans. |
| |
(3) | Amounts in this line include other fee income from loan acquisitions and the provision for repurchase expense, presented net. |
The increases in mortgage banking activities, net for both the three- and nine-month periods were primarily due to higher loan purchase volume and higher gross margins primarily due to improved securitization execution in 2017 as compared to 2016.
Loan purchase commitments ("LPCs"), adjusted for fallout expectations, were $1.57 billion and $4.07 billion for the three and nine months ended September 30, 2017, respectively. Our gross margins for our jumbo loans, which we define as net interest income plus income from mortgage banking activities, divided by LPCs, benefited from tightening credit spreads for both securitizations and whole loans during the first nine months of 2017 and remained above our long-term expectations.
At both September 30, 2017 and December 31, 2016, we had repurchase reserves of $4entities was $60 million outstanding related to residential loans sold through this segment. For the nine months ended September 30, 2017 and 2016, we recorded $0.2 million of reversal of provision for repurchases and $0.5 million of provision for repurchases, respectively, that was included in income from mortgage banking activities, net, in this segment. We review our loan repurchase reserves each quarter and adjust them as necessary based on current information available at each reporting date.
The following table details outstanding principal balances for residential loans held-for-sale by product type at September 30, 2017.
Table 28 – Characteristics of Residential Loans Held-for-Sale2021 and $68 million at December 31, 2020.
|
| | | | | | | |
September 30, 2017 | | Principal Value | | Weighted Average Coupon |
(Dollars in Thousands) | | |
First Lien Prime | | | | |
Fixed - 30 year | | $ | 771,172 |
| | 4.34 | % |
Fixed - 10, 15, 20, & 25 year | | 28,869 |
| | 3.75 | % |
Hybrid | | 102,843 |
| | 3.50 | % |
ARM | | 703 |
| | 2.53 | % |
Total Outstanding Principal | | $ | 903,587 |
| |
|
|
Operating Expenses andIncome Taxes
Operating expensesTaxable Income, REIT Status and Dividend Characterization
As a REIT, under the Internal Revenue Code, Redwood is required to distribute to shareholders at least 90% of its annual REIT taxable income, excluding net capital gains, and meet certain other requirements that relate to, among other matters, the assets it holds, the income it generates, and the composition of its stockholders. To the extent Redwood retains REIT taxable income, including net capital gains, it is taxed at corporate tax rates. Redwood also earns taxable income at its taxable REIT subsidiaries (TRS), which it is not required to distribute under the Internal Revenue Code.
In September 2021, our Board of Directors declared a regular dividend of $0.21 per share for this segment primarily include costs associatedthe third quarter of 2021, which was paid on September 30, 2021 to shareholders of record on September 23, 2021. As of September 30, 2021, our year-to-date dividend distributions of $0.55 per share exceeded our minimum distribution requirements and we believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the underwriting, purchaserequirements for qualification as a REIT and sale of jumbo residential loans. Operating expenses were relatively consistentthe requirements for both the three- and nine-month periods.
All residential mortgage banking activities are performed atstatutory relief, we would be subject to federal corporate income tax on our taxable REIT subsidiary and the provision for income taxes is generally correlated to the amount of this segment's contribution before income taxes in relation to the TRS's overall GAAP income and associated tax provision. The increase in provisionwe would not be able to elect to be taxed as a REIT for income taxes in both the three- and nine-month periods primarily resulted from higher segment contribution before income taxes for both periods in 2017. In addition, during 2016 we reversed our valuation allowancefour years thereafter. Such an outcome could have a material adverse impact on certain deferred tax assets, which further reduced our tax provision in those periods.
Results of Consolidated Legacy Sequoia Entities
We sponsored Sequoia securitization entities prior to 2012 that are reported on our consolidated balance sheets for financial reporting purposes in accordance with GAAP. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not, respectively, owned by us or legal obligations of ours. We record the assets and liabilities of the consolidated Legacy Sequoia entities at fair value, based on the estimated fair value of the debt securities (ABS) issued from the securitizations, in accordance with GAAP provisions for collateralized financing entities. At September 30, 2017, the estimated fair value of our investments in the consolidated Legacy Sequoia entities was $19 million.
The following tables present the statements of income for the three and nine months ended September 30, 2017, and the balance sheets of the consolidated Legacy Sequoia entities at September 30, 2017 and December 31, 2016. All amounts in the statements of income and balance sheets presented below are included in our consolidated financial statements.
Table 29 – Consolidated Legacy Sequoia Entities StatementsWhile our minimum REIT dividend requirement is generally 90% of Income
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | | Nine Months Ended September 30, | | |
(In Thousands) | | 2017 | | 2016 | | Change |
| | 2017 | | 2016 | | Change |
Interest income | | $ | 4,875 |
| | $ | 4,837 |
| | $ | 38 |
| | | $ | 14,576 |
| | $ | 14,525 |
| | $ | 51 |
|
Interest expense | | (3,838 | ) | | (3,274 | ) | | (564 | ) | | | (11,046 | ) | | (9,842 | ) | | (1,204 | ) |
Net interest income | | 1,037 |
| | 1,563 |
| | (526 | ) | | | 3,530 |
| | 4,683 |
| | (1,153 | ) |
Investment fair value changes, net | | (1,045 | ) | | (255 | ) | | (790 | ) | | | (3,842 | ) | | (2,086 | ) | | (1,756 | ) |
Net Income from Consolidated Legacy Sequoia Entities | | $ | (8 | ) | | $ | 1,308 |
| | $ | (1,316 | ) | | | $ | (312 | ) | | $ | 2,597 |
| | $ | (2,909 | ) |
Table 30 – Consolidated Legacy Sequoia Entities Balance Sheets
|
| | | | | | | | |
(In Thousands) | | September 30, 2017 | | December 31, 2016 |
Residential loans, held-for-investment, at fair value | | $ | 673,134 |
| | $ | 791,636 |
|
Other assets | | 4,065 |
| | 6,681 |
|
Total Assets | | $ | 677,199 |
| | $ | 798,317 |
|
Other liabilities | | $ | 540 |
| | $ | 518 |
|
Asset-backed securities issued, at fair value | | 657,960 |
| | 773,462 |
|
Total liabilities | | 658,500 |
| | 773,980 |
|
Equity (fair value of Redwood's retained investments in entities) | | 18,699 |
| | 24,337 |
|
Total Liabilities and Equity | | $ | 677,199 |
| | $ | 798,317 |
|
Net Interest Incomeour annual REIT taxable income, we carried a $37 million federal net operating loss carry forward (NOL) into 2021 at Consolidated Legacy Sequoia Entities
The decreases in net interestour REIT that affords us the ability to retain REIT taxable income for the three- and nine-month periods were primarily attributableup to the continued pay downNOL amount, tax free, rather than distributing it as dividends. Federal income tax rules require the dividends paid deduction to be applied to reduce REIT taxable income before the applicability of loans at the consolidated entities.
Investment Fair Value Changes, net at Consolidated Legacy Sequoia Entities
Investment fair value changes, net at consolidated Legacy Sequoia entities includes the change 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 valueNOLs is considered; therefore, REIT taxable income must exceed our dividend distribution for us to utilize a portion of our retained investments in the consolidated Legacy Sequoia entities. The negative investment fair value changes in both three-NOL and nine-month periods were primarily related to the reduction in basis of retained IO securities as the loans underlying these securities continued to pay down.
Residential Loans at Consolidated Legacy Sequoia Entities
The following table provides details of residential loan activity at consolidated Legacy Sequoia entities for the three and nine months ended September 30, 2017 and 2016.
Table 31 – Residential Loans at Consolidated Legacy Sequoia Entities — Activity
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | | $ | 707,686 |
| | $ | 880,197 |
| | $ | 791,636 |
| | $ | 1,021,870 |
|
Principal repayments | | (37,742 | ) | | (46,810 | ) | | (139,099 | ) | | (147,748 | ) |
Transfers to REO | | (1,133 | ) | | (2,612 | ) | | (3,177 | ) | | (8,412 | ) |
Deconsolidation adjustments | | — |
| | — |
| | — |
| | (6,871 | ) |
Changes in fair value, net | | 4,323 |
| | 9,201 |
| | 23,774 |
| | (18,863 | ) |
Balance at End of Period | | $ | 673,134 |
| | $ | 839,976 |
| | $ | 673,134 |
| | $ | 839,976 |
|
Characteristics of Loans at Consolidated Legacy Sequoia Entities
The following table highlights unpaid principal balances for loans at consolidated Legacy Sequoia entities by product type at September 30, 2017.
Table 32 – Characteristics of Loans at Consolidated Legacy Sequoia Entities
|
| | | | | | | |
September 30, 2017 | | | | |
(Dollars in Thousands) | | Principal Balance | | Weighted Average Coupon |
First Lien | | | | |
Hybrid (1) | | $ | 15,709 |
| | 3.29 | % |
ARM | | 722,133 |
| | 2.62 | % |
Total Outstanding Principal | | $ | 737,842 |
| | |
| |
(1) | All of these loans have reached the initial interest rate reset date and are currently adjustable rate mortgages. |
First lien adjustable rate mortgage ("ARM") and hybrid loans comprise all of the loans in the consolidated Legacy Sequoia entities and were primarily originated in 2006 or prior. For outstanding loans at consolidated Legacy Sequoia entities at September 30, 2017, the weighted average FICO score of borrowers backing these loans was 728 (at origination) and the weighted average original LTV ratio was 66% (at origination). At September 30, 2017 and December 31, 2016, the unpaid principal balance of loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $14 million and $19 million, respectively, and the unpaid principal balance of loans in foreclosure was $12 million and $11 million, respectively.
Taxable Income and Tax Provision
Taxable Income
The following table summarizes our taxable income and distributions to shareholders for the three and nine months ended September 30, 2017 and 2016. For each of these periods, we had no undistributed REIT taxable income.
Table 33 – Taxable Income
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In Thousands, except per Share Data) | | 2017 est. (1) | | 2016 | | 2017 est. (1) | | 2016 |
REIT taxable income | | $ | 19,923 |
| | $ | 26,001 |
| | $ | 56,042 |
| | $ | 71,169 |
|
Taxable REIT subsidiary income | | 17,781 |
| | 10,896 |
| | 36,528 |
| | 41,010 |
|
Total Taxable Income | | $ | 37,704 |
| | $ | 36,897 |
| | $ | 92,570 |
| | $ | 112,179 |
|
| | | | | | | | |
REIT taxable income per share | | $ | 0.26 |
| | $ | 0.34 |
| | $ | 0.73 |
| | $ | 0.93 |
|
Total taxable income per share | | $ | 0.49 |
| | $ | 0.48 |
| | $ | 1.21 |
| | $ | 1.46 |
|
| | | | | | | | |
Distributions to shareholders | | $ | 21,593 |
| | $ | 21,536 |
| | $ | 64,753 |
| | $ | 64,759 |
|
Distributions to shareholders per share | | $ | 0.28 |
| | $ | 0.28 |
| | $ | 0.84 |
| | $ | 0.84 |
|
| |
(1) | Our tax results for the three and nine months ended September 30, 2017 are estimates until we file our tax return for 2017. |
any remaining NOL amount will carry forward into future years.
We currently expect all or nearly all of the dividends we distribute in 2017 willour 2021 dividend distributions to be taxable to shareholders as ordinary income and a smaller portion, if any, willfor federal income tax purposes. Any remaining amount is currently expected to be characterized as a return of capital, which in general is generally non-taxable. Based onnontaxable (provided it does not exceed a shareholder's tax basis in Redwood shares) and reduces a shareholder's basis in Redwood shares (but not below zero). To the extent such distributions exceed a shareholder's basis in Redwood shares, such excess amount would be taxable as capital gain. Under the federal income tax rules relatedapplicable to capital loss carryforwards,REITs, none of our 2017Redwood’s 2021 dividend distributions are currently expected to be characterized as long-term capital gains for federalgain dividends. The income or loss generated at our TRS will not directly affect the tax purposes.characterization of our 2021 dividends; however, any dividends paid from our TRS to our REIT would allow a portion of our REIT’s dividends to be classified as qualified dividends.
Tax Provision under GAAP
For the three and nine months ended September 30, 2017,2021, we recorded a tax provisionsbenefit of $5$4 million and $17 million, respectively, compared to a tax provision of $1$14 million, for bothrespectively. For the three and nine months ended September 30, 2016.2020, we recorded a tax provision of $9 million and a tax benefit of $13 million, respectively. Our tax provision is primarily derived from the activities at our TRS as we do not book a material tax provision associated with income generated at our REIT. The change inFor the nine-month periods, the switch to a tax provision from a tax benefit year-over-year was primarily the result of us benefitingGAAP income being recorded at our TRS during this period in 2021 versus GAAP losses being recorded at our TRS during this period in 2020. For the three-month periods, the switch to a tax benefit from a tax provision year-over-year was due to the reversalrelease of the valuation allowance recorded againston a portion of our federal net deferred tax assets, ("DTAs")partially offset by an increase in 2016. As the federal valuation allowance was fully released in 2016,state taxes. While our TRS effective tax rate in 2017 is expected to be approximately equal tothe prior year approximated the federal statutory rate. The income orcorporate tax rate (due to state NOL carryforwards), for 2021 and 2022 we expect it to increase (exclusive of the valuation allowance release) due to California’s temporary suspension of net operating loss generated at our TRS will not affect the tax characterization of our 2017 dividends.
carryforwards.
Realization of our DTAsdeferred tax assets ("DTAs") is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determine the extent to which realization of our DTAs is not assured and establish a valuation allowance accordingly. At December 31, 2016,2020, we reported net federal ordinary and capital DTAs with a full valuation allowance of $17 million recorded against our net federal ordinary DTAs based on our determination that their realization was not assured. However, no valuation allowance was recorded against our net federal capital DTAs as we currently expect to utilize these DTAs due to our ability to recognize capital losses and carry them back to prior years. At December 31, 2020, we reported a valuation allowance of $134 million recorded against our net state DTAs.
For the three months ended September 30, 2021, we reassessed the valuation allowance noting the increase in positive evidence related to our ability to utilize certain deferred tax liabilities ("DTLs"),assets. The positive evidence includes significant revenue growth and expectations regarding future profitability at our TRS. After assessing both the positive evidence and negative evidence, we determined it was more likely than not that we will realize all of our federal deferred tax assets. Therefore, we reversed our federal valuation allowance of $17 million as a discrete benefit in the third quarter of 2021. In addition to the federal valuation allowance release, we determined it was more likely than not that we will realize a portion of our state deferred assets and, as such, had no associated valuation allowance. As a resultreversed $3 million of GAAP income at our TRS, we forecast that we will report net federal ordinary and capital DTLs at December 31, 2017 and consequently nostate valuation allowance is expected to be recorded against any federal DTA.as a discrete item in the third quarter of 2021. Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state DTAs. Our estimateDTAs as realization of net deferred tax assets could change in future periods to the extent that actual or revised estimates of futureour state DTAs is dependent on generating sufficient taxable income during the carryforward periods change from current expectations.
Differences between Estimated Total Taxable Income and GAAP Income
Differences between estimated taxable income and GAAP income are largely due to the following: (i) we cannot establish loss reserves for future anticipated events for tax but we can for GAAP, as realized credit losses are expensed when incurred for tax and these losses are anticipated through lower yields on assets or through loss provisions for GAAP; (ii) the timing, and possibly the amount, of some expenses (e.g., certain compensation expenses) are different for tax than for GAAP; (iii) since amortization and impairments differ for tax and GAAP, the tax and GAAP gains and losses on sales may differ, resulting in differences in realized gains on sale; (iv) at the REIT and certain TRS entities, unrealized gains and losses on market valuation adjustments of securities and derivatives are not recognized for tax until the instrument is sold or extinguished; (v) for tax, basis may not be assigned to mortgage servicing rights retained when whole loans are sold resulting in lower tax gain on sale; (vi) for tax, we do not consolidate securitization entities as we do under GAAP; and, (vii) dividend distributions to our REIT from our TRS are included in REIT taxable income, but not GAAP income. As a result of these differences in accounting, our estimated taxable income can vary significantly from our GAAP income during certain reporting periods.
The table below reconciles our estimated total taxable income to our GAAP income for the nine months ended September 30, 2017.
Table 34 – Differences between Estimated Total Taxable Income and GAAP Net Income
|
| | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
(In Thousands, except per Share Data) | | REIT (Est.) | | TRS (Est.) | | | Total Tax (Est.) | | GAAP | | Differences |
Interest income | | $ | 137,254 |
| | $ | 27,299 |
| | | $ | 164,553 |
| | $ | 176,589 |
| | $ | (12,036 | ) |
Interest expense | | (41,251 | ) | | (21,038 | ) | | | (62,289 | ) | | (72,708 | ) | | 10,419 |
|
Net interest income | | 96,003 |
| | 6,261 |
| | | 102,264 |
| | 103,881 |
| | (1,617 | ) |
Realized credit losses | | (2,865 | ) | | — |
| | | (2,865 | ) | | — |
| | (2,865 | ) |
Mortgage banking activities, net | | — |
| | 41,905 |
| | | 41,905 |
| | 50,850 |
| | (8,945 | ) |
MSR income, net | | — |
| | 5,149 |
| | | 5,149 |
| | 6,106 |
| | (957 | ) |
Investment fair value changes, net | | (14,476 | ) | | 5,213 |
| | | (9,263 | ) | | 9,990 |
| | (19,253 | ) |
Operating expenses | | (32,883 | ) | | (22,684 | ) | | | (55,567 | ) | | (56,789 | ) | | 1,222 |
|
Other income | | 11,021 |
| | 779 |
| | | 11,800 |
| | 3,367 |
| | 8,433 |
|
Realized gains, net | | (736 | ) | | — |
| | | (736 | ) | | 8,809 |
| | (9,545 | ) |
Provision for income taxes | | (22 | ) | | (95 | ) | | | (117 | ) | | (16,741 | ) | | 16,624 |
|
Net Income | | $ | 56,042 |
| | $ | 36,528 |
| | | $ | 92,570 |
| | $ | 109,473 |
| | $ | (16,903 | ) |
| | | | | | | | | | | |
Income per basic common share | | $ | 0.73 |
| | $ | 0.48 |
| | | $ | 1.21 |
| | $ | 1.39 |
| | $ | (0.18 | ) |
Potential Taxable Income Volatility
We expect period-to-period volatility in our estimated taxable income. A description of the factors that can cause this volatility is described in the Taxable Income portion ofsame jurisdictions in which the Results of Operations section in the MD&A included in Part II, Item 7,DTAs exist and we project most of our Annual Report on Form 10-K.state DTAs will expire prior to their utilization.
LIQUIDITY AND CAPITAL RESOURCES
Summary
OurIn addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash consist of borrowings under mortgage loan warehouse facilities, securities repurchase agreements, payments of principal and interest we receive from our investment portfolios, proceeds from the sale of portfolio assets, and cash generated from our operating activities. Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking operations, to fund investments in residential loans, to purchase investment securities and make other investments, to repay principal and interest on our warehouse facilities, repurchase agreements,debt, to meet margin calls associated with our debt and long-term debt,other obligations, to make dividend payments on our capital stock, and to fund our operations.
OurAt September 30, 2021, our total capital was $1.78$2.03 billion at September 30, 2017, and included $1.21$1.38 billion of equity capital and $0.57 billion$652 million of the total $2.57 billion ofconvertible notes and long-term debt on our consolidated balance sheet. This portionsheet, including $199 million of convertible debt included $201due in 2023, $150 million of convertible debt due in 2024, $172 million of exchangeable debt due in 2019, $245 million of convertible debt due in 2023,2025, and $140 million of trust-preferred securities due in 2037.
As of September 30, 2017,2021, our unrestricted cash was $557 million, and we estimate thatwe had approximately $350 million of available capital. While we believe our available cash is sufficient to fund our operations, we may raise equity or debt capital from time to time to increase our unrestricted cash and liquidity, to repay existing debt, to make long-term portfolio investments, to fund strategic acquisitions and investments, or for other purposes. To the extent we seek to raise additional capital, our approach will continue to be based on what we believe to be in the best interests of the company.
In the discussion that follows and throughout this document, we distinguish between marginable and non-marginable debt. When we refer to non-marginable debt and marginable debt, we are referring to whether or not such debt is subject to market value-based margin calls on underlying collateral that is non-delinquent. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is generally determined by the counterparty under the facility), we will be subject to a margin call, meaning we will be required to either immediately reacquire the loan or meet a margin requirement to pledge additional collateral, such as cash or additional residential loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency of the mortgage or security being financed, or a decline in the value of the underlying asset securing the collateral. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the value of the property securing the mortgage loan that is financed by us under a loan warehouse facility.
We also distinguish between recourse and non-recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.
We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential loan warehouse facilities, securities repurchase facilities, and other short- and long-term debt facilities and other risks relating to our use of derivatives. A further discussion of these risks is set forth below under the heading “Risks Relating to Debt Incurred under Short-and Long-Term Borrowing Facilities."
Cash Flows and Liquidity for the Nine Months Ended September 30, 2021
Cash flows from our mortgage banking activities and our investments can be volatile from quarter to quarter depending on many factors, including the profitability of mortgage banking activities, the timing and amount of securities acquisitions, sales and repayments, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these investments or activities.
Cash Flows from Operating Activities
Cash flows from operating activities were negative $3.78 billion during the nine months ended September 30, 2021. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. Excluding cash flows from the purchase, origination, sale, and principal payments of loans classified as held-for-sale, cash flows from operating activities were positive $84 million and positive $94 million during the first nine months of 2021 and 2020, respectively.
Cash Flows from Investing Activities
During the nine months ended September 30, 2021, our net cash provided by investing activities was approximately $330 million.$1.36 billion and primarily resulted from proceeds from principal payments on loans held-for-investment. Although we continuegenerally intend to evaluatehold our options with regardloans and investment securities as long-term investments, we may sell certain of these assets in order to manage our upcoming $250 million convertible debt maturity, at currentliquidity needs and interest rate risk, to meet other operating objectives, and to adapt to market prices the excess cost to retire this debt prior to maturity is unattractive relative to alternative short-term uses of cash. In addition, we believe we can source incremental capital on an as-needed basis for redeployment through continued optimizationconditions.
Because many of our investment portfolio.securities and loans are financed through various borrowing agreements, a significant portion of the proceeds from any sales or principal payments of these assets are generally used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans at consolidated securitization entities would generally be used to repay ABS issued by those entities.
As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the nine months ended September 30, 2021, we transferred loans between held-for-sale and held-for-investment classification and retained securities from securitizations we sponsored, which represent significant non-cash transactions that were not included in cash flows from investing activities.
Cash Flows from Financing Activities
During the nine months ended September 30, 2021, our net cash provided by financing activities was $2.52 billion. This primarily resulted from $1.40 billion of proceeds from net short-term debt borrowings used to finance higher levels of loan inventory for our mortgage banking businesses, particularly for residential loans held-for-sale, as that business has seen a sustained increase in acquisition volumes. Additionally, $1.27 billion of net proceeds were generated from ABS issued. These cash inflows were partially offset by $107 million of net repayments of long-term debt.
During the nine months ended September 30, 2021, we declared dividends of $0.55 per common share. On September 13, 2021, the Board of Directors declared a regular dividend of $0.21 per share for the third quarter of 2021, which was paid on September 30, 2021 to shareholders of record on September 23, 2021.
In accordance with the terms of our outstanding deferred stock units, cash-settled deferred stock units, and restricted stock units, which are generally long-term compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent cash payment in that same per share amount on each outstanding deferred stock unit, cash-settled deferred stock unit, and restricted stock unit.
Repurchase Authorization
In February 2016,2018, our Board of Directors approved an authorization for the repurchase of upour common stock, increasing the total amount authorized for repurchases of common stock to $100 million, of our common stock and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization replaced allincreased the previous share repurchase plansauthorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, 2017, there were no shares acquired under this authorization.2021, we did not repurchase any shares. At September 30, 2017, approximately $862021, $78 million of thisthe current authorization remained available for the repurchasesrepurchase of shares of our common stock.stock and we also continued to be authorized to repurchase outstanding debt securities. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital and unrestricted cash described above.
While we believe our available capital is sufficient to fund our currently contemplated investment activities, we may raise capital from time-to-time to make long-term investments or for other purposes. To the extent we seek additional capital to fund our operations and investment activities or repay existing debt, our approach to raising capital will continue to be based on what we believe to be in the best long-term interests of shareholders.Loan Warehouse Facilities
We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential and commercialmaintain loan warehouse facilities securities repurchaseto finance our residential jumbo loan inventory, SFR loan inventory and for our bridge loan investments. These facilities can be classified as short-term or long-term depending on their specific terms and other short-provisions. At September 30, 2021, we had residential warehouse facilities outstanding with seven different counterparties, with $2.70 billion of total capacity and long-term debt$1.36 billion of available capacity. These included non-marginable facilities with $1.18 billion of total capacity and other risks relating to our usemarginable facilities with $1.53 billion of derivatives. A further discussiontotal capacity. At September 30, 2021, we had business purpose warehouse facilities outstanding with four different counterparties, with $1.30 billion of total capacity and $663 million of available capacity. All $1.30 billion of these risks is set forth below under the heading “Risks Relating to Debt Incurred under Short-and Long-Term Borrowing Facilities."facilities are non-marginable.
Cash Flows and Liquidity for the Nine Months Ended September 30, 2017
Cash flows from our mortgage banking activities and our investments can be volatile from quarter to quarter depending on many factors, including the timing and amount of loan and securities acquisitions and sales and repayments, the profitability of mortgage banking activities, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these investments or activities.
Cash Flows from Operating Activities
Cash flows from operating activities were negative $629 million during the nine months ended September 30, 2017. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term debt, for which changes in cash are included as a component of financing activities. Excluding cash flows from the purchase, sale, and principal payments of loans classified as held-for-sale, cash flows from operating activities were positive $13 million and positive $75 million during the first nine months of 2017 and 2016, respectively. Contributing to the negative cash flows from operating activities during the first nine months of 2017 were $38 million of net cash outflows associated with margin funding requirements for our derivatives and short-term debt, which are presented as Other assets on our consolidated balance sheets.
Cash Flows from Investing Activities
During the nine months ended September 30, 2017, our net cash provided by investing activities was $205 million and primarily resulted from principal payments on loans held-for-investment at Redwood and at our consolidated Sequoia entities, proceeds from sales of MSRs, and principal payments from, and proceeds from net sales of, real estate securities. Although we generally intend to hold our investment securities as long-term investments, we may sell certain of these securities in order to manage our interest rate risk and liquidity needs, to meet other operating objectives, and to adapt to market conditions. We cannot predict the timing and impact of future sales of investment securities, if any.
Because many of our investment securities are financed through repurchase agreements, a significant portion of the proceeds from any sales or principal payments of our investment securities would generally be used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans at consolidated Sequoia entities (as detailed in the subsection titled "Residential Loans at Consolidated Sequoia Entities" in the Results of Operations section of this MD&A) would generally be used to repay ABS issued by those entities.
In addition, during the nine months ended September 30, 2017, we had transfers of residential loans with a carrying value of $644 million from held-for-sale to held-for-investment, and we retained MSRs with a carrying value of $7 million from the sale of residential loans. These non-cash transactions were not included in cash flows from investing activities.
Cash Flows from Financing Activities
During the nine months ended September 30, 2017, our net cash provided by financing activities was $468 million. This primarily resulted from the issuance of asset-backed securities from our Sequoia Choice securitization in the third quarter of 2017, the issuance of convertible debt in August 2017, and $159 million of net borrowings of short-term debt, which were partially offset by $146 million of repayments of ABS issued.
In December 2016, our Board of Directors announced its intention to pay a regular dividend of $0.28 per share per quarter in 2017. During the nine months ended September 30, 2017, we paid $66 million of cash dividends on our common stock, representing cumulative dividends of $0.84 per share. Additionally, in November 2017, the Board of Directors declared a regular dividend of $0.28 per share for the fourth quarter of 2017, which is payable on December 28, 2017 to shareholders of record on December 15, 2017.
In accordance with the terms of our outstanding deferred stock units, which are stock-based compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent payment in that same per share amount on each outstanding deferred stock unit.
Short-Term Debt
In the ordinary course of our business, we use recourse debt throughutilize several different types of borrowing facilities and use cash borrowings under these facilities to, among other things, fund the acquisition of residential loans (including those we acquire and originate in anticipation of securitization), finance investments in securities, BPL bridge loans and other investments, and otherwise fund our business and operations.
At September 30, 2017,2021, we had four short-term residential loan warehouse facilities with a total outstanding debt balance of $438 million (secured by residential loans with an aggregate fair value of $493 million) and a total uncommitted borrowing limit of $1.33 billion. In addition, at September 30, 2017, we had an aggregate outstanding short-term debt balance of $550 million under eight securities repurchase facilities, which were secured by securities with a fair market value of $663 million. We also had a secured line of credit with no outstanding debt balance and a total borrowing limit of $10 million (secured by securities with a fair market value of $6 million) at September 30, 2017.
During the three months ended June 30, 2017, $288 million principal amount of our convertible notes due in 2018 and $2 million of associated unamortized deferred issuance costs were reclassified from long-term debt to short-term debt, as the maturity of the notes was less than one year as of April 2017. Additionally, during the three months ended June 30, 2017, we repurchased $37 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $250 million.
At September 30, 2017, we had $1.24$1.75 billion of short-term debt outstanding. During the first nine months of 2017,2021, the highest balance of our short-term debt outstanding was $1.60$2.66 billion.
For further detail on our short-term debt, see Note 13 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Long-Term Debt
FHLBC BorrowingsThe following discusses significant activity related to our long-term debt during the first nine months of 2021. For further detail on our long-term debt, see Note 15 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Recourse Subordinate Securities Financing
In July 2014, our FHLB-memberthe third quarter of 2021, a subsidiary of Redwood entered into a borrowingrepurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations. The financing is guaranteed by Redwood, with the Federal Home Loan Bank of Chicago. At September 30, 2017, under this agreement, our subsidiary could incur borrowings up to $2.00 billion, also referred to as “advances,” from the FHLBC secured by eligible collateral, including, but not limited to residential mortgage loans. During the nine months ended September 30, 2017, our FHLB-member subsidiary made no additional borrowings under this agreement. Under a final rule published by the Federal Housing Finance Agency in January 2016, our FHLB-member subsidiary will remain an FHLB member through a five-year transition period for captive insurance companies. Our FHLB-member subsidiary's existing $2.00 billion of FHLB debt, which matures beyond this transition period, is permitted to remain outstanding until stated maturity. As residential loans pledged as collateral for this debt pay down, we are permitted to pledge additional loans or other eligible assets to collateralize this debt; however, we do not expect to be able to increase our subsidiary's FHLB debt above the existing $2.00 billion maximum.
At September 30, 2017, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with a weighted average interest rate of 1.26% per annumapproximately 4.75% through June 2024. The financing facility may be terminated, at our option, in June 2023, and has a weighted averagefinal maturity of eight years. At September 30, 2017, accruedin June 2026, provided that the interest payablerate on these borrowings was $4 million. Advancesamounts outstanding under this agreement are charged interest based on a specified margin over the FHLBC’s 13-week discount note rate, which resets every 13 weeks. Our total advances under this agreement were secured by residential mortgage loans with a fair value of $2.26 billion at September 30, 2017. In addition, cash of $24 million served as collateral for these borrowings at September 30, 2017,facility increases between June 2024 and is presented as restricted cash on our consolidated balance sheet. This agreement also requires our subsidiary to purchase and hold stock in the FHLBC in an amount equal to a specified percentage of outstanding advances. At September 30, 2017, our subsidiary held $43 million of FHLBC stock that is included in Other assets on our consolidated balance sheets.June 2026.
Convertible NotesNon-Recourse BPL Financing Facilities
In August 2017,the third quarter of 2021, we issued $245 million principal amount of 4.75% convertible senior notes due 2023. After deducting the underwriting discount and issuance costs, we received approximately $238 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 5.3% per annum. At September 30, 2017, the outstanding principal amount of these notes was $245 million. At September 30, 2017, the accrued interest payable balance on this debt was $1 million.
In November 2014,reclassified one of our taxable subsidiaries issued $205 million principal amount of 5.625% exchangeable senior notes due 2019. After deducting the underwriting discount and issuance costs, we received approximately $198 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these exchangeable notes is approximately 6.3% per annum. During the nine months ended September 30, 2016, we repurchased $4 million par value of these notes at a discount and recorded a gain on extinguishment of debt of $0.3 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $201 million. At September 30, 2017, the accrued interest payable balance on this debt was $4 million.
In March 2013, we issued $288 million principal amount of 4.625% convertible senior notes due 2018. After deducting the underwriting discount and issuance costs, we received approximately $279 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 4.8% per annum. During the three months ended June 30, 2017, $288 million principal amount of these convertible notes and $2 million of unamortized deferred issuance costs were reclassifiednon-recourse facilities from long-term debt to short-term debt as the maturity of the notesthis facility was less than one year at September 30, 2021.
In the second quarter of 2021, we repaid one of our non-recourse BPL financing facilities that had a balance of $242 million at March 31, 2021, and entered into a new non-recourse facility to finance business purpose bridge loans with a total borrowing capacity of $250 million.
Recourse BPL Financing Facilities
In the second quarter of 2021, we reclassified one of our recourse facilities with a borrowing capacity of $450 million from short-term to long-term debt as we amended the terms of April 2017.this facility, including an extension of its maturity.
Asset-Backed Securities Issued
During the three and nine months ended September 30, 2021, we issued $1.19 billion and $2.82 billion of ABS through our consolidated securitization entities, respectively. This included $583 million and $1.01 billion of CAFL ABS issued during the three and nine months ended September 30, 2021, respectively, and $462 million and $1.66 billion of Sequoia ABS issued during the three and nine months ended September 30, 2021, respectively. Additionally, during the three months ended JuneSeptember 30, 2017,2021, we repurchased $37issued $146 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, netPoint ABS. For further detail on our consolidated statementsAsset-backed Securities Issued, see Note 14 of income. At September 30, 2017, the outstanding principal amount of these notes was $250 million. At September 30, 2017, the accrued interest payable balance on this debt was $5 million.
Trust Preferred Securities and Subordinated our Notes
At September 30, 2017, we had trust preferred securities and subordinated notes outstanding of $100 million and $40 million, respectively, issued by us to Consolidated Financial Statements in 2006 and 2007. This debt requires quarterly interest payments at a floating rate equal to three-month LIBOR plus 2.25% and must be redeemed no later than 2037. Prior to 2014, we entered into interest rate swaps with aggregate notional values totaling $140 million to hedge the variability in this long-term debt interest expense. Including hedging costs and amortization of deferred securities issuance costs, the weighted average interest expense yield on our trust preferred securities and subordinated notes is approximately 6.8% per annum. These swaps are accounted for as cash flow hedges with all interest recorded as a component of net interest income and other valuation changes recorded as a component of equity.
Asset-Backed Securities
At September 30, 2017, there were $738 million (principal balance) of loans owned at consolidated Legacy Sequoia securitization entities, which were funded with $730 million (principal balance) of ABS issued at these entities. In addition, at September 30, 2017, there were $308 million (principal balance) of loans owned at the consolidated Sequoia Choice securitization entity, which was funded with $277 million (principal balance) of ABS issued at this entity. The loans and ABS issued from these entities are reported at estimated fair value. See the subsections titled "Residential Loans at Sequoia Choice" and "Results of Consolidated Legacy Sequoia Entities"in the Results of Operations sectionPart I, Item 1 of this MD&AQuarterly Report on Form 10-Q.
Other Commitments and Contingencies
For additional information on commitments and contingencies that could impact our liquidity and capital resources, see Note 16 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for additional details on these entities.the year ended December 31, 2020.
Risks Relating to Debt Incurred underUnder Short- and Long-Term Borrowing Facilities
As described above under the heading “Results of Operations,” in the ordinary course of our business, we use debt financing obtained through several different types of borrowing facilities to, among other things, finance the acquisition and origination of residential and business purpose mortgage loans (including those we acquire and originate in anticipation of sale or securitization), and finance investments in securities and other investments. We may also use short- and long-term borrowings to fund other aspects of our business and operations, including the repurchase of shares of our common stock. DebtRecourse debt incurred under these facilities is generally either the direct obligation of Redwood Trust, Inc., or the direct obligation of subsidiaries of Redwood Trust, Inc. and guaranteed by Redwood Trust, Inc. Risks relating to debt incurred under these facilities are described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2016,2020, under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities.Facilities,” and under the caption “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. Many of the risks described above materialized during the first quarter of 2020 as a result of pandemic- and liquidity-related disruptions and their impacts on the economy and financial markets, as described under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” within our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
Our sources of debt financing include short-term secured borrowings under residential and business purpose mortgage loan warehouse facilities (including recourse and non-recourse warehouse facilities), short-term securities repurchase facilities, a $10 million committed line of short-term secured credit from a bank, short-term servicer advance financing, a secured, revolving debt facility collateralized by mortgage servicing rights, and secured borrowings by our wholly-owned subsidiary, RWT Financial, LLC, under its borrowing facility with the FHLBC.subordinate securities financing facilities.
Aggregate borrowing limits are stated under certain of these facilities, and certain other facilities have no stated borrowing limit, but eachmany of the facilities (with the exception of the $10 million committed line of short-term secured credit) isare uncommitted, which means that any request we make to borrow funds under these uncommitted facilities may be declined for any reason, even if at the time of the borrowing request we have then-outstanding borrowings that are less than the borrowing limits under these facilities. In general, financing under these facilities is obtained by transferring or pledging mortgage loans or securities to the counterparty in exchange for cash proceeds (in an amount less than 100% of the principal amount of the transferred or pledged assets). While
Under many of our mortgage loan warehouse facilities, our short-term securities repurchase facilities, and our secured, revolving debt facility collateralized by mortgage service rights, while transferred or pledged assets are financed under athe facility, to the extent the market value of the assets, or the collateral underlying those assets, declines, we are generally required to either immediately reacquire the assets or meet a margin requirement to transfer or pledge additional assets or cash in an amount at least equal to the decline in value. During the second quarter of 2020, we amended several of our mortgage loan warehouse facilities to revise these margin call provisions to remove obligations to make margin calls for changes in the market value of transferred or pledged assets, which determinations of market value were generally within the sole discretion of the lending counterparty. Under these revised agreements, if the estimated value of a property securing a financed mortgage loan declines, based on, for example, an appraisal or broker-price opinion, then the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional residential mortgage loans) with a value equal to the amount of the decline. Of our active financing arrangements with outstanding balances at September 30, 2021, only our short-term securities repurchase facilities (with $80 million of borrowings outstanding at September 30, 2021), and four of our residential mortgage loan warehouse facilities (with $618 million of borrowings outstanding at September 30, 2021) retain market-value based margin call provisions.
Margin call provisions under these facilities are further described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 20162020 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in these facilities are further described Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 20162020 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Financial Covenants Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in
Because many of these facilities are further described Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2016 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Financial Covenants Associated with Short-Term Debt and Other Debt Financing.”
Because these warehouseborrowing facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20162020 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 20162020 under the heading “Market Risks.” In addition, with respect to residentialmortgage loans that at any given time are already being financed through these warehouse facilities, we are exposed to market, credit, liquidity, and other risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20162020 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 20162020 under the heading “Market Risks,” if and when those loans or securities become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility. Additionally, our access to financing under the borrowing facility with the FHLBC is subject to the risks described under the heading “Risk Factors - Recently adopted Federal regulations may limit, eliminate, or reduce the attractiveness of our subsidiary’s ability to use borrowings from the Federal Home Loan Bank of Chicago to finance the mortgage loans and securities it holds and acquires, which could negatively impact our business and operating results” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.
At September 30, 2017,2021, and through the date of this Quarterly Report on Form 10-Q, we were in compliance with the financial covenants associated with our short-term debt and other debt financing facilities. In particular, with respect to: (i) financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth at Redwood, at September 30, 20172021 our level of stockholders’ equity and tangible net worth resulted in our being in compliance with these covenants by more than $200 million; and (ii) financial covenants that require us to maintain recourse indebtedness below a specified ratio at Redwood, at September 30, 20172021 our level of recourse indebtedness resulted in our being in compliance with these covenants at a level such that we could incur at least $600 million in additional recourse indebtedness.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Off Balance Sheet Arrangements
We do not have any material offIn the normal course of business, we enter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the balance sheet, arrangements.while others are off-balance sheet or recorded on the balance sheet in amounts different from the full contract or notional amount of the transaction.
Contractual Obligations
The following table presentsFor additional information on our contractual obligations, see the Off-Balance Sheet Arrangements and Contractual Obligations section in the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.
For additional information on our commitments atand contingencies as of September 30, 2017, as well as the obligations 2021, see Note 16 of the securitization entities that we consolidate for financial reporting purposes.our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Table 35 – Contractual Obligations and Commitments
|
| | | | | | | | | | | | | | | | | | | | |
September 30, 2017 | | Payments Due or Commitment Expiration by Period |
(In Millions) | | Less Than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | After 5 Years | | Total |
Obligations of Redwood | | | | | | | | | | |
Short-term debt | | $ | 988 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 988 |
|
Convertible notes | | 250 |
| | 201 |
| | — |
| | 245 |
| | 696 |
|
Anticipated interest payments on convertible notes | | 35 |
| | 40 |
| | 23 |
| | 12 |
| | 110 |
|
FHLBC borrowings | | — |
| | — |
| | — |
| | 2,000 |
| | 2,000 |
|
Anticipated interest payments on FHLBC borrowings | | 36 |
| | 88 |
| | 98 |
| | 154 |
| | 376 |
|
Other long-term debt | | — |
| | — |
| | — |
| | 140 |
| | 140 |
|
Anticipated interest payments on other long-term debt (1) | | 9 |
| | 19 |
| | 19 |
| | 136 |
| | 183 |
|
Accrued interest payable | | 17 |
| | — |
| | — |
| | — |
| | 17 |
|
Operating leases | | 2 |
| | 4 |
| | 3 |
| | 9 |
| | 18 |
|
Total Redwood Obligations and Commitments | | $ | 1,337 |
| | $ | 352 |
| | $ | 143 |
| | $ | 2,696 |
| | $ | 4,528 |
|
Obligations of Consolidated Entities for Financial Reporting Purposes | | | | | | | | | | |
Consolidated ABS (2) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,007 |
| | $ | 1,007 |
|
Anticipated interest payments on ABS (3) | | 28 |
| | 57 |
| | 55 |
| | 249 |
| | 389 |
|
Accrued interest payable | | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Total Obligations of Entities Consolidated for Financial Reporting Purposes | | 30 |
| | 57 |
| | 55 |
| | 1,256 |
| | 1,398 |
|
Total Consolidated Obligations and Commitments | | $ | 1,367 |
| | $ | 409 |
| | $ | 198 |
| | $ | 3,952 |
| | $ | 5,926 |
|
| |
(1) | Includes anticipated interest payments related to hedges. |
| |
(2) | All consolidated ABS issued are collateralized by real estate loans. Although the stated maturity is as shown, the ABS obligations will pay down as the principal balances of these real estate loans or securities pay down. The amount shown is the principal balance of the ABS issued and not necessarily the value reported in our consolidated financial statements. |
| |
(3) | The anticipated interest payments on consolidated ABS issued is calculated based on the contractual maturity of the ABS and therefore assumes no prepayments of the principal outstanding at September 30, 2017. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part I, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.2020. Management discusses the ongoing development and selection of these critical accounting policies with the audit committee of the board of directors.
We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, including the timing and amount of purchases, sales, calls, and repayment of consolidated assets, changes in the fair values of consolidated assets and liabilities, increases or decreases in earnings from mortgage banking activities, and certain non-recurring events. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates. Our critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements are included in the"Critical Accounting Policies and Estimates" section of Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
In addition to the regular volatility we may experience on a quarterly basis, the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets, has caused additional volatility impacting many of our estimates. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of the pandemic and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Continued volatility resulting from the pandemic could impact our critical estimates and lead to significant period-to-period earnings volatility. Market Risks
We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2020.
Other Risks
In addition to the market and other risks described above, our business and results of operations are subject to a variety of types of risks and uncertainties, including, among other things, those described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, and in this Quarterly Report on Form 10-Q.2020.
NEW ACCOUNTING STANDARDS
A discussion of new accounting standards and the possible effects of these standards on our consolidated financial statements is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information concerning market risk is incorporated herein by reference to Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2020, as supplemented by the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”and “Market Risks” within Item 2 above. Other than the developments described thereunder, including changes in the fair values of our assets, there have been no other material changes in our quantitative or qualitative exposure to market risk since December 31, 2016.2020.
Item 4. Controls and Procedures
We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed on our reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that the information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) of the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.
There have been no changes in our internal control over financial reporting during the third quarter of 20172021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about December 23, 2009,For information on our legal proceedings, see Note 16 to the Federal Home Loan Bank of Seattle (the “FHLB-Seattle”) filed a complaintFinancial Statements within this Quarterly Report on Form 10-Q under the heading "Loss Contingencies - Litigation, Claims and Demands," which supplements the disclosures included in Note 16 to the Superior CourtFinancial Statements included in our Annual Report on Form 10-K for the State of Washington (case number 09-2-46348-4 SEA) against Redwood Trust, Inc., our subsidiary, Sequoia Residential Funding, Inc. (“SRF”), Morgan Stanley & Co., and Morgan Stanley Capital I, Inc. (collectively, the “FHLB-Seattle Defendants”) alleging that the FHLB-Seattle Defendants made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Seattle Certificate”) issued in the Sequoia Mortgage Trust 2005-4 securitization transaction (the “2005-4 RMBS”) and purchased by the FHLB-Seattle. Specifically, the complaint alleged that the alleged misstatements concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Seattle Certificate. The FHLB-Seattle alleges claimsyear ended December 31, 2020 under the Securities Act of Washington (Section 21.20.005, et seq.)heading “Loss Contingencies - Litigation, Claims and sought to rescind the purchase of the Seattle Certificate and to collect interest on the original purchase price at the statutory interest rate of 8% per annum from the date of original purchase (net of interest received) as well as attorneys’ fees and costs. The Seattle Certificate was issued with an original principal amount of approximately $133 million, and, at September 30, 2017, the FHLB-Seattle has received approximately $125 million of principal and $11 million of interest payments in respect of the Seattle Certificate. As of September 30, 2017, the Seattle Certificate had a remaining outstanding principal amount of approximately $8 million. The matter was subsequently resolved and the claims were dismissed by the FHLB Seattle as to all the FHLB Seattle Defendants. At the time the Seattle Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, we could incur a loss as a result of these indemnities.Demands.”
On or about July 15, 2010, The Charles Schwab Corporation (“Schwab”) filed a complaint in the Superior Court for the State of California in San Francisco (case number CGC-10-501610) against SRF and 26 other defendants (collectively, the “Schwab Defendants”) alleging that the Schwab Defendants made false or misleading statements in offering materials for various residential mortgage-backed securities sold or issued by the Schwab Defendants. Schwab alleged only a claim for negligent misrepresentation under California state law against SRF and sought unspecified damages and attorneys’ fees and costs from SRF. Schwab claimed that SRF made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Schwab Certificate”) issued in the 2005-4 RMBS and purchased by Schwab. Specifically, the complaint alleged that the misstatements for the 2005-4 RMBS concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Schwab Certificate. The Schwab Certificate was issued with an original principal amount of approximately $15 million, and, at September 30, 2017, approximately $14 million of principal and $1 million of interest payments have been made in respect of the Schwab Certificate. As of September 30, 2017, the Schwab Certificate had a remaining outstanding principal amount of approximately $1 million. On November 14, 2014, Schwab voluntarily dismissed with prejudice its negligent misrepresentation claim, which resulted in the dismissal with prejudice of SRF from the action. Subsequently, the matter was resolved and Schwab dismissed its claims against the lead underwriter of the 2005-4 RMBS. At the time the Schwab Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were also named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, Redwood could incur a loss as a result of these indemnities.
Through certain of our wholly-owned subsidiaries, we have in the past engaged in, and expect to continue to engage in, activities relating to the acquisition and securitization of residential mortgage loans. In addition, certain of our wholly-owned subsidiaries have in the past engaged in activities relating to the acquisition and securitization of debt obligations and other assets through the issuance of collateralized debt obligations (commonly referred to as CDO transactions). Because of this involvement in the securitization and CDO businesses, we could become the subject of litigation relating to these businesses, including additional litigation of the type described above, and we could also become the subject of governmental investigations, enforcement actions, or lawsuits, and governmental authorities could allege that we violated applicable law or regulation in the conduct of our business. As an example, in July 2016 we became aware of a complaint filed by the State of California on April 1, 2016 against Morgan Stanley & Co. and certain of its affiliates alleging, among other things, that there were misleading statements contained in offering materials for 28 different mortgage pass-through certificates purchased by various California investors, including various California public pension systems, from Morgan Stanley and alleging that Morgan Stanley made false or fraudulent claims in connection with the sale of those certificates. Of the 28 mortgage pass-through certificates that are the subject of the complaint, two are Sequoia mortgage pass-through certificates issued in 2004 and two are Sequoia mortgage pass-through certificates issued in 2007. With respect to each of those certificates our wholly-owned subsidiary, RWT Holdings, Inc., was the sponsor and our wholly-owned subsidiary, Sequoia Residential Funding, Inc., was the depositor. At the time these four Sequoia mortgage pass-through certificates were issued, Sequoia Residential Funding, Inc. and Redwood Trust agreed to indemnify the underwriters of these certificates for certain losses and expenses they might incur as a result of claims made against them relating to these certificates, including, without limitation, certain legal expenses. Regardless of the outcome of this litigation, we could incur a loss as a result of these indemnities.
In accordance with GAAP, we review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in a liability and the amount of loss, if any, can be reasonably estimated. Additionally, we record receivables for insurance recoveries relating to litigation-related losses and expenses if and when such amounts are covered by insurance and recovery of such losses or expenses are due. At September 30, 2017, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described above was $2 million. We review our litigation matters each quarter to assess these loss contingency reserves and make adjustments in these reserves, upwards or downwards, as appropriate, in accordance with GAAP based on our review.
In the ordinary course of any litigation matter, including certain of the above-referenced matters, we have engaged and may continue to engage in formal or informal settlement communications with the plaintiffs or co-defendants. Settlement communications we have engaged in relating to certain of the above-referenced litigation matters are one of the factors that have resulted in our determination to establish the loss contingency reserves described above. We cannot be certain that any of these matters will be resolved through a settlement prior to trial and we cannot be certain that the resolution of these matters, whether through trial or settlement, will not have a material adverse effect on our financial condition or results of operations in any future period.
Future developments (including resolution of substantive pre-trial motions relating to these matters, receipt of additional information and documents relating to these matters (such as through pre-trial discovery), new or additional settlement communications with plaintiffs relating to these matters, or resolutions of similar claims against other defendants in these matters) could result in our concluding in the future to establish additional loss contingency reserves or to disclose an estimate of reasonably possible losses in excess of our established reserves with respect to these matters. Our actual losses with respect to the above-referenced litigation matters may be materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters, including in the event that any of these matters proceeds to trial and the plaintiff prevails. Other factors that could result in our concluding to establish additional loss contingency reserves or estimate additional reasonably possible losses, or could result in our actual losses with respect to the above-referenced litigation matters being materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters include that: there are significant factual and legal issues to be resolved; information obtained or rulings made during the lawsuits could affect the methodology for calculation of the available remedies; and we may have additional obligations pursuant to indemnity agreements, representations and warranties, and other contractual provisions with other parties relating to these litigation matters that could increase our potential losses.
Item 1A. Risk Factors
Our risk factors are discussed under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 and under Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. In addition, the following risk factor reflects recent developments.2020.
Risks Related to the Potential Elimination or Reduction of the Mortgage-Interest Tax Deduction
Proposed federal tax legislation that was released on November 2, 2017 by the Chair of the Ways and Means Committee of the U.S. House of Representatives would limit the personal income tax deduction of mortgage interest on newly originated residential mortgages in several ways. It is unclear whether this proposed tax reform proposal will be enacted into law as proposed, modified, or abandoned. Elimination of, or restrictions on, the mortgage-interest tax deduction could negatively affect the U.S. housing market, the market value of residential mortgage loans and residential mortgage-backed securities, and the volume of future originations of residential mortgage loans, particularly jumbo mortgage loans, all of which could negatively impact our business or financial results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2017,2021, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.
In February 2016,2018, our Board of Directors approved an authorization for the repurchase of upour common stock, increasing the total amount authorized for repurchases of common stock to $100 million, of our common stock and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization replaced allincreased the previous share repurchase plansauthorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three and nine months ended September 30, 2017, there were no shares acquired under this authorization.2021, we did not repurchase any shares. At September 30, 2017, approximately $862021, $78 million of this current authorization remained available for the repurchase of shares of our common stock.stock and we also continued to be authorized to repurchase outstanding debt securities.
The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended September 30, 2017.2021.
|
| | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased or Acquired | | Average Price per Share Paid | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs |
(In Thousands, except per Share Data) | | | | |
July 1, 2017 - July 31, 2017 | | — |
| (1 | ) | $ | 17.04 |
| | — |
| | $ | — |
|
August 1, 2017 - August 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
September 1, 2017 - September 30, 2017 | | — |
| | $ | — |
| | — |
| | $ | 86,109 |
|
Total | | — |
| | $ | 17.04 |
| | — |
| | $ | 86,109 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Represents fewer than 1,000 shares reacquired to satisfy tax withholding requirements related to | Total Number of Shares Purchased or Acquired | | Average Price per Share Paid | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the vesting of restricted shares.Plans or Programs |
(In Thousands, except per Share Data) | | | | |
July 1, 2021 - July 31, 2021 | | — | | | $ | — | | | — | | | $ | — | |
August 1, 2021 - August 31, 2021 | | — | | | $ | — | | | — | | | $ | — | |
September 1, 2021 - September 30, 2021 | | — | | | $ | — | | | — | | | $ | 78,369 | |
Total | | — | | | $ | — | | | — | | | $ | 78,369 | |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Not Applicable
Item 5. Other Information
None.Effective November 3, 2021, our Board of Directors adopted Amended and Restated Bylaws of the Company in order to, among other things:
•Reflect changes to the Maryland General Corporation Law or Maryland law practice;
•Clarify timing of delivery with respect to electronically delivered notices of annual meetings of stockholders;
•Clarify that it is permitted for the Board to hold, or allow stockholder participation at, meetings of stockholders by remote communications technology to the extent permitted under Maryland law;
•Clarify that a stockholder be a stockholder of record, as of the record date set for determining stockholders entitled to vote at the annual meeting, for any such stockholder proponent to make nominations or proposals;
•Update the information that a stockholder proponent must provide, including information about a director nominee proposed by such stockholder proponent, information such proponent must provide relating to certain persons acting in concert with such stockholder, and certain written undertakings required from a proposed nominee;
•Require a stockholder proponent to appear in person or by proxy at the meeting set for such proponent’s proposal in order for the proposal to be considered at such meeting;
•Update the record date determination applicable to a meeting of stockholders that has been postponed or adjourned;
•Address recent developments in public company governance;
•Clarify certain corporate roles, responsibilities and procedures; and
•Clarify and conform language, style and practice.
The preceding summary of the amendment and restatement of the Bylaws of the Company is qualified in its entirety by reference to, and should be read in connection with, the complete copy of the Amended and Restated Bylaws attached hereto as Exhibit 3.2.1 and incorporated by reference herein.
Item 6. Exhibits
|
| | | | | | | |
Exhibit
Number | | Exhibit |
3.1 | | |
3.1.1 | | |
3.1.2 | | |
3.1.3 | | |
3.1.4 | | |
3.1.5 | | |
3.1.6 | | |
3.1.7 | | |
3.1.8 | | |
3.1.9 | | |
3.1.10 | | |
3.2.13.1.11 | | |
3.1.12 | | |
3.2.23.2.1 | | |
4.131.1 | | |
4.2 | | |
10.1* | | |
10.2* | | |
10.3 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101 | | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2017,2021, is filed in inline XBRL-formatted interactive data files:
(i) Consolidated Balance Sheets at September 30, 20172021 and December 31, 2016;
2020; (ii) Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 20172021 and 2016; 2020; (iii) Statements of Consolidated Comprehensive Income (Loss) for the three and nine months ended September 30, 20172021 and 2016; 2020; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 20172021 and 2016; 2020; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 20172021 and 2016;2020; and (vi) Notes to Consolidated Financial Statements.
|
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* Indicates exhibits that include management contracts or compensatory plan or arrangements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | REDWOOD TRUST, INC. |
| | | |
Date: | November 4, 2021 | REDWOOD TRUST, INC. |
By: | | | |
Date: | November 7, 2017 | By: | /s/ Martin S. Hughes |
| | | Martin S. Hughes |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
Date: | November 7, 2017 | By: | /s/ Collin L. Cochrane |
| | | Collin L. Cochrane |
| | | Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
EXHIBIT INDEX
Christopher J. Abate |
| | |
Exhibit
Number | | ExhibitChristopher J. Abate |
3.1 | | |
3.1.1 | | |
3.1.2 | | |
3.1.3 | | |
3.1.4 | | |
3.1.5 | | |
3.1.6 | | |
3.1.7 | | |
3.1.8 | | |
3.1.9 | | |
3.1.10 | | |
3.2.1 | | |
3.2.2 | | |
4.1 | | |
4.2 | | |
10.1* | | |
10.2* | | |
10.3 | | |
31.1 | | |
31.2 | | | (Principal Executive Officer) |
| | | |
Date: | November 4, 2021 | By: | /s/ Brooke E. Carillo |
| | | Brooke E. Carillo |
| | | Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | | | (Principal Financial Officer) |
32.2 | | | |
101Date: | November 4, 2021 | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, is filed in XBRL-formatted interactive data files:
(i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016;
(ii) Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016;
(iii) Statements of Consolidated Comprehensive Income for the three and nine months ended September 30, 2017 and 2016;
(iv) Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2017 and 2016;
(v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and
(vi) Notes to Consolidated Financial Statements. By: | /s/ Collin L. Cochrane |
| | | Collin L. Cochrane |
| | | Chief Accounting Officer |
| | | (Principal Accounting Officer) |
* Indicates exhibits that include management contracts or compensatory plan or arrangements.