| Fair Value of Financial Instruments | 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. 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 June 30, 2016 and December 31, 2015 . Table 5.1 – Carrying Values and Fair Values of Assets and Liabilities June 30, 2016 December 31, 2015 Carrying Value Fair Value Carrying Value Fair Value (In Thousands) Assets Residential loans, held-for-sale At fair value $ 881,100 $ 881,100 $ 1,114,305 $ 1,114,305 At lower of cost or fair value 1,280 1,472 1,433 1,635 Residential loans, held-for-investment At fair value 3,157,758 3,157,758 2,813,065 2,813,065 Commercial loans, held-for-sale At fair value 69,720 69,720 39,141 39,141 At lower of cost or fair value 233,058 236,824 — — Commercial loans, held-for-investment At fair value — — 67,657 67,657 At amortized cost 22,285 22,421 295,849 300,824 Trading securities 273,531 273,531 404,011 404,011 Available-for-sale securities 610,270 610,270 829,245 829,245 MSRs 110,046 110,046 191,976 191,976 Cash and cash equivalents 216,923 216,923 220,229 220,229 Restricted cash 8,293 8,293 5,567 5,567 Accrued interest receivable 20,594 20,594 23,290 23,290 Derivative assets 57,610 57,610 16,393 16,393 REO (1) 6,493 7,951 4,896 5,282 Margin receivable (1) 104,108 104,108 83,191 83,191 FHLBC stock (1) 43,393 43,393 34,437 34,437 Guarantee asset (1) 3,320 3,320 5,697 5,697 Pledged collateral (1) 44,095 44,095 53,600 53,600 Liabilities Short-term debt $ 1,059,045 $ 1,059,045 $ 1,855,003 $ 1,855,003 Accrued interest payable 9,515 9,515 8,936 8,936 Margin payable 19,592 19,592 6,415 6,415 Guarantee obligation 24,022 22,203 22,704 22,702 Derivative liabilities 119,161 119,161 62,794 62,794 ABS issued, net (2) Fair value 859,628 859,628 996,820 996,820 Amortized cost — — 52,595 53,137 FHLBC long-term borrowings 1,999,999 1,999,999 1,343,023 1,343,023 Commercial secured borrowings 65,240 65,240 63,152 63,152 Convertible notes, net (2) 480,597 482,812 483,119 461,053 Trust preferred securities and subordinated notes, net (2) 138,466 79,515 138,443 83,700 (1) These assets are included in other assets on our consolidated balance sheets. (2) On January 1, 2016, we adopted ASU 2015-03 and began to present ABS issued, convertible notes, and trust preferred securities and subordinated notes, each net of deferred debt issuance costs. See Note 3 for further discussion. During the three and six months ended June 30, 2016 , we elected the fair value option for $75 million and $123 million of subordinate securities, $1.32 billion and $2.51 billion of residential loans (principal balance), zero and $38 million of commercial loans (principal balance), and $11 million and $19 million of MSRs, respectively. We anticipate electing the fair value option for all future purchases of residential loans that we intend to sell to third parties or transfer to securitizations as well as for MSRs purchased or retained from sales of residential loans. The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at June 30, 2016 and December 31, 2015 , 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 June 30, 2016 Carrying Value Fair Value Measurements Using (In Thousands) Level 1 Level 2 Level 3 Assets Residential loans $ 4,038,858 $ — $ — $ 4,038,858 Commercial loans 69,720 — — 69,720 Trading securities 273,531 — — 273,531 Available-for-sale securities 610,270 — — 610,270 Derivative assets 57,610 9,662 40,500 7,448 MSRs 110,046 — — 110,046 Pledged collateral 44,095 44,095 — — FHLBC stock 43,393 — 43,393 — Guarantee asset 3,320 — — 3,320 Liabilities Derivative liabilities $ 119,161 $ 10,151 $ 108,497 $ 513 Commercial secured borrowings 65,240 — — 65,240 ABS issued 859,628 — — 859,628 December 31, 2015 Carrying Value Fair Value Measurements Using (In Thousands) Level 1 Level 2 Level 3 Assets Residential loans $ 3,927,370 $ — $ 129,819 $ 3,797,551 Commercial loans 106,798 — — 106,798 Trading securities 404,011 — — 404,011 Available-for-sale securities 829,245 — — 829,245 Derivative assets 16,393 2,734 8,988 4,671 MSRs 191,976 — — 191,976 Pledged collateral 53,600 53,600 — — FHLBC stock 34,437 — 34,437 — Guarantee asset 5,697 — — 5,697 Liabilities Derivative liabilities $ 62,794 $ 2,963 $ 58,368 $ 1,463 Commercial secured borrowings 63,152 — — 63,152 ABS issued 996,820 — — 996,820 The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2016 . Table 5.3 – Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis Assets Liabilities Residential Loans Commercial Loans Trading Securities AFS Securities MSRs Guarantee Asset Derivatives (1) Commercial Secured Borrowings ABS Issued (In Thousands) Beginning balance - December 31, 2015 $ 3,797,551 $ 106,798 $ 404,011 $ 829,245 $ 191,976 $ 5,697 $ 3,208 $ 63,152 $ 996,820 Acquisitions 2,362,866 37,625 122,942 17,419 19,498 — — — — Sales (1,770,079 ) (77,183 ) (239,896 ) (214,944 ) (29,559 ) — — — — Principal paydowns (356,565 ) (322 ) (9,546 ) (31,920 ) — — — (306 ) (105,380 ) Gains (losses) in net income, net 3,988 2,802 (3,980 ) 33,423 (71,869 ) (2,377 ) 27,194 2,369 (24,941 ) Unrealized losses in OCI, net — — — (22,953 ) — — — — — Other settlements, net (2) 1,097 — — — — — (23,467 ) 25 (6,871 ) Ending Balance - June 30, 2016 $ 4,038,858 $ 69,720 $ 273,531 $ 610,270 $ 110,046 $ 3,320 $ 6,935 $ 65,240 $ 859,628 (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. The following table presents the portion of gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at June 30, 2016 and 2015 . Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and six months ended June 30, 2016 and 2015 are not included in this presentation. Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at June 30, 2016 and 2015 Included in Net Income Included in Net Income Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2016 2015 2016 2015 Assets Residential loans at Redwood $ 8,165 $ (7,508 ) $ 32,969 $ (5,441 ) Residential loans at consolidated Sequoia entities 7,592 2,476 (28,064 ) 5,331 Commercial loans 198 (1,565 ) 2,369 (56 ) Trading securities (230 ) 4,601 (8,353 ) (5,254 ) Available-for-sale securities (305 ) — (305 ) — MSRs (19,948 ) 21,296 (48,692 ) 10,277 Loan purchase commitments 6,873 — 7,248 — Other assets - Guarantee asset (952 ) 228 (2,377 ) (700 ) Liabilities Loan purchase commitments $ — $ (3,810 ) $ — $ (1,826 ) Commercial secured borrowing 198 2,713 2,369 1,204 ABS issued 8,574 (3,552 ) (24,941 ) (6,498 ) The following table presents information on assets recorded at fair value on a non-recurring basis at June 30, 2016 . 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 sheet at June 30, 2016 . Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at June 30, 2016 Gain (Loss) for June 30, 2016 Carrying Value Fair Value Measurements Using Three Months Ended Six Months Ended (In Thousands) Level 1 Level 2 Level 3 June 30, 2016 June 30, 2016 Assets Residential loans, at lower of cost or fair value $ 961 $ — $ — $ 961 $ 49 $ 33 REO 5,396 — — 5,396 (591 ) (734 ) The following table presents the net gains and losses recorded in each line item of our consolidated statements of income for the three and six months ended June 30, 2016 and 2015 . Table 5.6 – Market Valuation Gains and Losses, Net Three Months Ended June 30, Six Months Ended June 30, (In Thousands) 2016 2015 2016 2015 Mortgage Banking Activities, Net Residential loans held-for-sale, at fair value $ 5,859 $ (3,176 ) $ 11,298 $ (1,118 ) Residential loan purchase and forward sale commitments 10,852 1,054 23,487 19,309 Commercial loans, at fair value (1) — 987 433 6,845 Sequoia securities (29 ) — 1,455 (14,359 ) Risk management derivatives, net (9,240 ) 7,019 (21,994 ) (3,563 ) Total mortgage banking activities, net (2) $ 7,442 $ 5,884 $ 14,679 $ 7,114 Investment Fair Value Changes, Net Residential loans held-for-investment at Redwood $ (647 ) $ (5,885 ) $ 22,816 $ (3,907 ) Trading securities 431 6,927 (5,170 ) 7,197 Net investments in consolidated Sequoia entities (251 ) (684 ) (1,831 ) (1,777 ) Risk sharing investments (694 ) 228 (704 ) (701 ) Risk management derivatives, net (9,600 ) (2,374 ) (45,410 ) (3,748 ) Impairments on AFS securities (305 ) — (305 ) — Total investment fair value changes, net $ (11,066 ) $ (1,788 ) $ (30,604 ) $ (2,936 ) MSR Income (Loss), Net MSRs $ (27,265 ) $ 15,675 $ (71,869 ) $ (3,842 ) Risk management derivatives, net 21,153 (21,814 ) 62,210 (21,814 ) Total MSR loss, net (3) $ (6,112 ) $ (6,139 ) $ (9,659 ) $ (25,656 ) Total Market Valuation Losses, Net $ (9,736 ) $ (2,043 ) $ (25,584 ) $ (21,478 ) (1) Commercial loans at fair value does not include commercial A-notes, which were sold in 2014, but did not qualify for sale treatment under GAAP. The market valuation gains and losses on the commercial A-notes and associated commercial secured borrowings net to zero in each period presented. (2) 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. (3) MSR income (loss), net presented above does not include net fee income or provisions for repurchases that are components of MSR income (loss), net on our consolidated statements of income, as these amounts do not represent market valuation adjustments. In addition, we did not specifically identify derivatives used to hedge MSRs in the first quarter of 2015. See Note 2 for additional detail. At June 30, 2016 , 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, 2015 . 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 June 30, 2016 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 $ 2,430,143 Whole loan spread to TBA price $ 3.25 - $ 4.63 $ 4.31 Whole loan spread to swap rate 325 - 375 bps 370 bps Jumbo hybrid loans 274,733 Prepayment rate (annual CPR) 15 - 15 % 15 % Spread to swap rate 135 - 185 bps 155 bps Jumbo loans committed to sell 453,785 Committed Sales Price $ 102.19 - $ 102.83 $ 102.67 Loans held by consolidated Sequoia entities (1) 880,197 Liability price N/A N/A Residential loans, at lower of cost or fair value 961 Loss severity 15 - 30 % 27 % Commercial loans, at fair value 69,720 Spread to swap rate 214 - 214 bps 214 bps Credit support 25 - 25 % 25 % Trading and AFS securities 883,801 Discount rate 5 - 12 % 7 % Prepayment rate (annual CPR) 1 - 45 % 17 % Default rate 0 - 35 % 2 % Loss severity 20 - 65 % 21 % Credit support 0 - 48 % 4 % MSRs 110,046 Discount rate 11 - 11 % 11 % Prepayment rate (annual CPR) 9 - 28 % 20 % Per loan annual cost to service $ 72 - $ 82 $ 78 Guarantee asset 3,320 Discount rate 11 - 11 % 11 % Prepayment rate (annual CPR) 24 - 24 % 24 % REO 5,396 Loss severity 3 - 100 % 18 % Loan purchase commitments, net (2) 6,935 MSR Multiple 0.1 - 4.1 x 2.3 x Fallout rate 1 - 90 % 27 % Whole loan spread to TBA price 3.38 - 4.63 4.52 Whole loan spread to swap rate 300 - 375 bps 370 bps Prepayment rate (annual CPR) 15 - 15 % 15 % Spread to swap rate - hybrid loans 135 - 185 bps 157 bps Liabilities ABS issued 859,628 Discount rate 5 - 9 % 5 % Prepayment rate (annual CPR) 6 - 20 % 14 % Default rate 1 - 12 % 7 % Loss severity 20 - 32 % 27 % Credit support 0 - 34 % 9 % Commercial secured borrowings 65,240 Spread to swap rate 214 - 214 bps 214 bps Credit support 25 - 25 % 25 % Footnotes to Table 5.7 (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. (2) For the purpose of this presentation, loan purchase commitment assets and liabilities are presented net. 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 Estimated fair values for residential loans are determined using models that incorporate various observable inputs, including pricing information from recent securitizations and whole loan sales. Certain significant inputs in these models are considered unobservable and are therefore Level 3 in nature. 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 (Level 3). Pricing inputs obtained from market whole loan transaction activity include indicative spreads to indexed to be announced ("TBA") prices and indexed swap rates for fixed-rate loans and indexed swap rates for hybrid loans (Level 3). Other observable inputs include benchmark interest rates, and prepayment rates. At June 30, 2016 , our jumbo fixed-rate loans were priced exclusively 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. Estimated fair values for conforming loans are determined based upon quoted market prices (Level 2). Conforming loans are mortgage loans that conform to Agency guidelines. As necessary, these values are adjusted for servicing value, market conditions and liquidity. Commercial loans Estimated fair values for senior commercial loans held-for-sale are determined by an exit price to securitization. Certain significant inputs in the valuation analysis are Level 3 in nature. Relevant market indicators that are factored into the analyses include pricing points for current third-party commercial mortgage-backed securities (“CMBS”) sales, pricing points for secondary sales of CMBS, yields for synthetic instruments that use CMBS bonds as an underlying index, indexed swap yields, credit rating agency guidance on expected credit enhancement levels for newly issued CMBS transactions, and interest rates (Level 3). The estimated fair value of our senior commercial loans would generally decrease based upon an increase in credit spreads or required credit support. Estimated fair values for mezzanine commercial loans are determined by both market comparable pricing and discounted cash flow analysis valuation techniques (Level 3). Our discounted cash flow models utilize certain significant unobservable inputs including the underwritten net operating income and debt coverage ratio assumptions and actual performance relative to those underwritten metrics as well as estimated market discount rates. In certain cases, commercial loans are valued based on third-party offers for the loans (Level 2). An increase in market discount rates would generally reduce the estimated fair value of the commercial loans. Real estate securities Real estate securities include residential, commercial, and other asset-backed securities that are generally illiquid in nature and trade infrequently. 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 analyses 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 June 30, 2016 , we received dealer price indications on 73% of our securities, representing 87% 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. Derivative assets and liabilities Our derivative instruments include swaps, swaptions, TBAs, financial futures, CMBX credit default index swaps, loan purchase commitments ("LPCs"), and forward sale commitments ("FSCs"). 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 conforming loans are estimated based on quoted Agency mortgage-backed securities ("MBS") prices, estimates of the fair value of the MSRs we expect to retain in the sale of the loans, and the probability that the mortgage loan will be purchased (Level 3). FSC fair values for conforming loans are obtained using quoted Agency prices. 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 (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 absence of such inputs, management’s best estimate is used (Level 3). MSRs MSRs include the rights to service jumbo and conforming residential mortgage loans. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. These inputs include market discount rates, prepayment rates of serviced loans, and the market cost of servicing. Changes in the fair value of MSRs occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputs and assumptions. Estimated fair values are based on applying 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 prepayment rate and discount rate assumptions. An increase in these unobservable inputs would generally reduce the estimated fair value of the MSRs. 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 3% 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 inputs include prepayment rates and market discount rate (Level 3). An increase in prepayment speed or market 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 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). Restricted cash Restricted cash primarily includes interest-earning cash balances at consolidated Sequoia entities and at the Residential Resecuritization and Commercial Securitization 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 prepayment assumptions, loss assumptions, and discount rates. An increase in discount rates or loss rates, or a decrease in prepayment rates, would reduce the estimated fair value of the guarantee obligations. 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). ABS issued ABS issued includes asset-backed securities issued through the Sequoia, Residential Resecuritization, and Commercial 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 analyses 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). These liabilities would generally decrease in value (become a larger liability) if credit losses decreased or if the prepayment rate or discount rate were to increase. 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). Commercial secured borrowings Commercial secured borrowings represent liabilities recognized as a result of transfers of portions of senior commercial mortgage loans to third parties that do not meet the criteria for sale treatment under GAAP and are accounted for as secured borrowings. Fair values for commercial secured borrowings are based on the fair values of the senior commercial loans associated with the borrowings (Level 3). Convertible notes Convertible notes include unsecured convertible and exchangeable senior notes. Fair values are determined using quoted prices in 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). |
