rwt-20210630

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: June 30, 2021


☐			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)


Maryland						68-0329422
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)


One Belvedere Place, Suite 300
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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:


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.


Common Stock, $0.01 par value per share						113,055,422			shares outstanding as of August 2, 2021

REDWOOD TRUST, INC.

2021 FORM 10-Q REPORT

TABLE OF CONTENTS


		Page
PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at June 30, 2021 (Unaudited) and December 31, 2020	2
	Consolidated Statements of Income (Loss) for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	9
	Note 1. Organization	9
	Note 2. Basis of Presentation	9
	Note 3. Summary of Significant Accounting Policies	11
	Note 4. Principles of Consolidation	15
	Note 5. Fair Value of Financial Instruments	23
	Note 6. Residential Loans	31
	Note 7. Business Purpose Loans	35
	Note 8. Multifamily Loans	38
	Note 9. Real Estate Securities	38
	Note 10. Other Investments	43
	Note 11. Derivative Financial Instruments	45
	Note 12. Other Assets and Liabilities	47
	Note 13. Short-Term Debt	49
	Note 14. Asset-Backed Securities Issued	51
	Note 15. Long-Term Debt	53
	Note 16. Commitments and Contingencies	54
	Note 17. Equity	57
	Note 18. Equity Compensation Plans	60
	Note 19. Mortgage Banking Activities, Net	61
	Note 20. Other Income	62
	Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	63
	Note 22. Taxes	64
	Note 23. Segment Information	64
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	69
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	95
Item 4.	Controls and Procedures	95

PART II —	OTHER INFORMATION
Item 1.	Legal Proceedings	96
Item 1A.	Risk Factors	96
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96
Item 3.	Defaults Upon Senior Securities	96
Item 4.	Mine Safety Disclosures (Not Applicable)	96
Item 5.	Other Information	97
Item 6.	Exhibits	98
Signatures		100

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(In Thousands, except Share Data) (Unaudited)	June 30, 2021		December 31, 2020
ASSETS (1)
Residential loans, held-for-sale, at fair value	$	1,160,548	$	176,641
Residential loans, held-for-investment, at fair value	4,582,052		4,072,410
Business purpose loans, held-for-sale, at fair value	418,442		245,394
Business purpose loans, held-for-investment, at fair value	3,990,447		3,890,959
Multifamily loans, held-for-investment, at fair value	485,157		492,221
Real estate securities, at fair value	354,886		344,125
Other investments	308,732		348,175
Cash and cash equivalents	421,223		461,260
Restricted cash	55,048		83,190
Intangible assets	49,119		56,865


Derivative assets	34,305		53,238
Other assets	136,432		130,588
Total Assets	$	11,996,391	$	10,355,066

LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net	$	1,484,999	$	522,609

Derivative liabilities	3,240		16,072
Accrued expenses and other liabilities	191,705		179,340

Asset-backed securities issued (includes $7,360,766 and $6,900,362 at fair value), net	7,536,997		7,100,661
Long-term debt, net	1,484,308		1,425,485
Total liabilities	10,701,249		9,244,167
Commitments and Contingencies (see Note 16)
Equity
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 113,052,780 and 112,090,006 issued and outstanding	1,131		1,121
Additional paid-in capital	2,287,412		2,264,874
Accumulated other comprehensive income (loss)	9,740		(4,221)
Cumulative earnings	1,184,559		997,277
Cumulative distributions to stockholders	(2,187,700)		(2,148,152)
Total equity	1,295,142		1,110,899
Total Liabilities and Equity	$	11,996,391	$	10,355,066

——————

(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 June 30, 2021 and December 31, 2020, assets of consolidated VIEs totaled $8,616,435 and $8,141,069, respectively. At June 30, 2021 and December 31, 2020, liabilities of consolidated VIEs totaled $7,562,367 and $7,148,414, 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 INCOME (LOSS)


(In Thousands, except Share Data)	Three Months Ended June 30,				Six Months Ended June 30,
(Unaudited)	2021		2020		2021		2020
Interest Income
Residential loans	$	48,433	$	54,974	$	92,088	$	134,410
Business purpose loans	70,323		53,419		134,511		106,073
Multifamily loans	4,860		4,870		9,646		45,042
Real estate securities	9,279		10,027		18,942		28,336
Other interest income	5,800		6,656		11,813		14,166
Total interest income	138,695		129,946		267,000		328,027
Interest Expense
Short-term debt	(11,195)		(16,907)		(18,968)		(39,974)
Asset-backed securities issued	(76,419)		(65,304)		(148,980)		(165,802)
Long-term debt	(20,451)		(20,455)		(42,669)		(43,561)
Total interest expense	(108,065)		(102,666)		(210,617)		(249,337)
Net Interest Income	30,630		27,280		56,383		78,690
Non-interest Income (Loss)
Mortgage banking activities, net	54,419		(5,982)		137,026		(34,884)
Investment fair value changes, net	49,480		152,228		94,567		(718,604)
Other income, net	2,126		1,165		5,969		4,093
Realized gains, net	8,384		25,965		11,100		29,817
Total non-interest income (loss), net	114,409		173,376		248,662		(719,578)
General and administrative expenses	(40,594)		(28,520)		(84,145)		(57,202)
Loan acquisition costs	(3,748)		(1,572)		(7,307)		(5,558)
Other expenses	(3,985)		(5,083)		(8,081)		(96,498)
Net Income (Loss) before (Provision for) Benefit from Income Taxes	96,712		165,481		205,512		(800,146)
(Provision for) benefit from income taxes	(6,687)		(37)		(18,230)		22,192
Net Income (Loss)	$	90,025	$	165,444	$	187,282	$	(777,954)

Basic earnings (loss) per common share	$	0.77	$	1.41	$	1.61	$	(6.82)
Diluted earnings (loss) per common share	$	0.66	$	1.00	$	1.38	$	(6.82)
Basic weighted average shares outstanding	112,921,070		114,383,289		112,337,984		114,229,928
Diluted weighted average shares outstanding	141,761,084		147,099,079		141,139,212		114,229,928

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)	Three Months Ended June 30,				Six Months Ended June 30,
(Unaudited)	2021		2020		2021		2020
Net Income (Loss)	$	90,025	$	165,444	$	187,282	$	(777,954)
Other comprehensive income (loss):
Net unrealized gain (loss) on available-for-sale securities	11,224		52,393		22,210		(28,126)
Reclassification of unrealized (gain) loss on available-for-sale securities to net income	(7,500)		2,718		(10,295)		(11,080)
Net unrealized loss on interest rate agreements	—		—		—		(32,806)
Reclassification of unrealized loss on interest rate agreements to net income	1,028		1,029		2,046		1,108
Total other comprehensive income (loss)	4,752		56,140		13,961		(70,904)
Total Comprehensive Income (Loss)	$	94,777	$	221,584	$	201,243	$	(848,858)

The accompanying notes are an integral part of these consolidated financial statements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended June 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
March 31, 2021	112,998,732	$	1,130	$	2,281,647	$	4,988	$	1,094,534	$	(2,166,724)	$	1,215,575
Net income	—	—		—		—		90,025		—		90,025
Other comprehensive income	—	—		—		4,752		—		—		4,752


Employee stock purchase and incentive plans	54,048	1		122		—		—		—		123
Non-cash equity award compensation	—	—		5,643		—		—		—		5,643

Common dividends declared ($0.18 per share)	—	—		—		—		—		(20,976)		(20,976)
June 30, 2021	113,052,780	$	1,131	$	2,287,412	$	9,740	$	1,184,559	$	(2,187,700)	$	1,295,142

For the Six Months Ended June 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	—	—		—		—		187,282		—		187,282
Other comprehensive income	—	—		—		13,961		—		—		13,961
Issuance of common stock	806,068	8		13,366		—		—		—		13,374

Employee stock purchase and incentive plans	156,706	2		(689)		—		—		—		(687)
Non-cash equity award compensation	—	—		9,861		—		—		—		9,861

Common dividends declared ($0.34 per share)	—	—		—		—		—		(39,548)		(39,548)
June 30, 2021	113,052,780	$	1,131	$	2,287,412	$	9,740	$	1,184,559	$	(2,187,700)	$	1,295,142

For the Three Months Ended June 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
March 31, 2020	114,837,533	$	1,148	$	2,275,808	$	(85,531)	$	635,726	$	(2,101,949)	$	725,202
Net income	—	—		—		—		165,444		—		165,444
Other comprehensive income	—	—		—		56,140		—		—		56,140


Employee stock purchase and incentive plans	102,664	1		(235)		—		—		—		(234)
Non-cash equity award compensation	—	—		4,052		—		—		—		4,052

Common dividends declared ($0.125 per share)	—	—		—		—		—		(14,028)		(14,028)
June 30, 2020	114,940,197	$	1,149	$	2,279,625	$	(29,391)	$	801,170	$	(2,115,977)	$	936,576

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Six Months Ended June 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	—	—		—		—		(777,954)		—		(777,954)
Other comprehensive loss	—	—		—		(70,904)		—		—		(70,904)
Issuance of common stock	350,088	3		5,544		—		—		—		5,547

Employee stock purchase and incentive plans	237,073	2		(2,776)		—		—		—		(2,774)
Non-cash equity award compensation	—	—		7,240		—		—		—		7,240

Common dividends declared ($0.445 per share)	—	—		—		—		—		(51,810)		(51,810)
June 30, 2020	114,940,197	$	1,149	$	2,279,625	$	(29,391)	$	801,170	$	(2,115,977)	$	936,576

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)	Six Months Ended June 30,
	2021		2020
Cash Flows From Operating Activities:
Net income (loss)	$	187,282	$	(777,954)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Amortization of premiums, discounts, and securities issuance costs, net	3,998		4,083
Depreciation and amortization of non-financial assets	8,405		8,962
Originations of held-for-sale loans	(567,546)		(457,510)
Purchases of held-for-sale loans	(6,682,864)		(2,720,245)
Proceeds from sales of held-for-sale loans	4,526,370		3,126,860
Principal payments on held-for-sale loans	19,856		48,901
Net settlements of derivatives	39,697		(183,373)

Non-cash equity award compensation expense	9,861		7,240
Goodwill impairment expense	—		88,675
Market valuation adjustments	(213,641)		765,647
Realized gains, net	(11,100)		(29,817)
Net change in:
Accrued interest receivable and other assets	10,260		254,368
Accrued interest payable and accrued expenses and other liabilities	17,327		(80,219)
Net cash (used in) provided by operating activities	(2,652,095)		55,618
Cash Flows From Investing Activities:
Originations of loan investments	(348,389)		(263,544)

Proceeds from sales of loan investments	9,231		1,574,160
Principal payments on loan investments	1,312,064		1,136,000
Purchases of real estate securities	(18,593)		(52,260)


Sales of securities held in consolidated securitization trusts	8,197		142,990
Proceeds from sales of real estate securities	36,735		621,730
Principal payments on real estate securities	29,786		16,405
Purchases of servicer advance investments	—		(179,419)
Principal repayments from servicer advance investments	45,838		75,478






Other investing activities, net	(5,025)		(11,139)
Net cash provided by investing activities	1,069,844		3,060,401
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt	6,604,603		3,655,530
Repayments on short-term debt	(5,421,494)		(5,322,519)
Proceeds from issuance of asset-backed securities	1,629,218		827,644
Repayments on asset-backed securities issued	(1,088,809)		(673,323)

Proceeds from borrowings on long-term debt	487,975		944,282

Repayments on long-term debt	(654,893)		(2,128,805)
Net settlements of derivatives	—		(84,336)
Net proceeds from issuance of common stock	255		5,707

Taxes paid on equity award distributions	(943)		(2,934)
Dividends paid	(39,548)		(51,810)
Other financing activities, net	(2,292)		(3,180)
Net cash provided by (used in) financing activities	1,514,072		(2,833,744)
Net (decrease) increase in cash, cash equivalents and restricted cash	(68,179)		282,275
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)	$	476,271	$	573,108

REDWOOD TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


(In Thousands) (Unaudited)	Six Months Ended June 30,
	2021		2020
























































Supplemental Cash Flow Information:
Cash paid during the period for:
Interest	$	198,364	$	267,787
Taxes	19,183		209
Supplemental Noncash Information:
Real estate securities retained from loan securitizations	$	9,374	$	46,560



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	1,998,535		706,775
Transfers from loans held-for-investment to loans held-for-sale	44,922		—
Transfers from residential loans to real estate owned	15,827		9,645
Transfers from long-term debt to short-term debt	47,994		—
Right-of-use asset obtained in exchange for operating lease liability	1,135		5,362


Issuance of common stock for 5 Arches acquisition	13,375		3,375

(1) Cash, cash equivalents, and restricted cash at June 30, 2021 includes cash and cash equivalents of $421 million and restricted cash of $55 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

June 30, 2021

(Unaudited)

Note 1. Organization

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing credit. Our operating platforms occupy a unique position in the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not served by government programs. We deliver customized housing credit investments to a diverse mix of investors, through our 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 three segments: Residential Lending, Business Purpose Lending, and Third-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 interest 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 loans, and their subsequent sale, securitization, or transfer to 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 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 taxable REIT subsidiaries” or “TRS.”

Redwood was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires.

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at June 30, 2021 and December 31, 2020, and for the three and six months ended June 30, 2021 and 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, 2020. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the Company at June 30, 2021 and results of operations for all periods presented have been made. The results of operations for the three and six months ended June 30, 2021 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

June 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 ("Legacy Sequoia"), certain entities formed in connection with the securitization of Redwood Choice expanded-prime loans and, beginning in the second quarter of 2021, Redwood Select loans ("Sequoia"), and entities formed in connection with the securitization of CoreVest single-family rental loans ("CAFL"). 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 the consolidated Sequoia and CAFL entities we are exposed to certain financial risks associated with our role as a sponsor, servicing 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, and the underlying single-family rental loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment 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 other income and expenses associated with these entities' activities. See Note 14 for further discussion on ABS issued.

We also consolidate two 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.

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.

Acquisitions

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

June 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 June 30, 2021.

Table 2.1 – Intangible Assets – Activity


	Intangible Assets at Acquisition		Accumulated Amortization at June 30, 2021		Carrying Value at June 30, 2021		Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network	$	45,300	$	(11,055)	$	34,245	7
Broker network	18,100		(8,447)		9,653		5
Non-compete agreements	9,500		(6,014)		3,486		3
Tradenames	4,000		(2,528)		1,472		3
Developed technology	1,800		(1,537)		263		2
Loan administration fees on existing loan assets	2,600		(2,600)		—		1
Total	$	81,300	$	(32,181)	$	49,119	6

All of our intangible assets are amortized on a straight-line basis. For each of the six months ended June 30, 2021 and 2020, we recorded intangible asset amortization expense of $8 million. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year



(In Thousands)	June 30, 2021
2021 (6 months)	$	7,558
2022	12,800
2023	10,091
2024	7,073
2025 and thereafter	11,597
Total Future Intangible Asset Amortization	$	49,119

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 June 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 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's consolidated financial position and results of operations for the three and six months ended June 30, 2021.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 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 October 2020, the FASB issued ASU 2020-10, "Codification Improvements." This new guidance updates 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.

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 equity securities, equity method investments, and certain forward contracts and purchased options. This new guidance is effective for fiscal years beginning 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 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 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

June 30, 2021

(Unaudited)

Note 3. Summary of Significant Accounting Policies - (continued)

Other Recent Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)." This new guidance simplifies the accounting for convertible debt by reducing the number of accounting models to separately present certain conversion features in equity. This new guidance is effective for fiscal years beginning after December 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 March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This new guidance provides 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 clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. This new guidance is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact the adoption of this standard would have on our consolidated financial statements. Through June 30, 2021, we have not elected to apply the optional expedients and exceptions to any of our existing contracts, hedging relationships, or 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

June 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 June 30, 2021 and December 31, 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
June 30, 2021 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	17,746	$	—	$	17,746	$	(957)	$	(11,238)	$	5,551

TBAs	2,064		—		2,064		(478)		(1,393)		193
Futures	304		—		304		(194)		—		110
Total Assets	$	20,114	$	—	$	20,114	$	(1,629)	$	(12,631)	$	5,854

Liabilities (2)
Interest rate agreements	$	(957)	$	—	$	(957)	$	957	$	—	$	—
TBAs	(1,367)		—		(1,367)		478		889		—
Futures	(194)		—		(194)		194		—		—
Loan warehouse debt	(1,049,144)		—		(1,049,144)		1,049,144		—		—
Security repurchase agreements	(80,938)		—		(80,938)		80,938		—		—
Total Liabilities	$	(1,132,600)	$	—	$	(1,132,600)	$	1,131,711	$	889	$	—

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(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)

(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 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.

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

June 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

Analysis of Consolidated VIEs

At June 30, 2021, we consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, and Freddie Mac K-Series securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. 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 the consolidated Legacy Sequoia, Sequoia and CAFL entities we are exposed to certain financial risks associated with our role as a sponsor, servicing administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities. At June 30, 2021, the estimated fair value of our investments in the consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, and Freddie Mac K-Series entities was $4 million, $234 million, $272 million, $452 million, and $31 million, respectively.

We also consolidate two 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 June 30, 2021, we held an 80% ownership interest in, and were responsible for the management 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 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. At June 30, 2021, the estimated fair value of our investment in the Servicing Investment entities was $62 million.

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


June 30, 2021	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	260,875	$	2,222,553	$	—	$	2,098,624	$	—	$	—	$	4,582,052
Business purpose loans, held-for-investment	—		—		3,263,878		—		—		—		3,263,878
Multifamily loans, held-for-investment	—		—		—		—		485,157		—		485,157

Other investments	—		—		—		—		—		202,369		202,369
Cash and cash equivalents	—		—		—		—		—		12,459		12,459
Restricted cash	148		—		—		—		—		19,028		19,176
Accrued interest receivable	258		7,559		13,102		6,325		1,326		1,606		30,176
Other assets	659		—		12,596		1,636		—		6,277		21,168
Total Assets	$	261,940	$	2,230,112	$	3,289,576	$	2,106,585	$	486,483	$	241,739	$	8,616,435
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	163,629	$	163,629
Accrued interest payable	124		5,521		10,183		4,490		1,200		94		21,612
Accrued expenses and other liabilities	—		—		—		—		—		16,360		16,360
Asset-backed securities issued	258,211		1,990,548		3,007,596		1,650,087		454,324		—		7,360,766
Total Liabilities	$	258,335	$	1,996,069	$	3,017,779	$	1,654,577	$	455,524	$	180,083	$	7,562,367

Number of VIEs	20		12		14		3		1		3		53

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2020	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated 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

Number of VIEs	20		10		14		2		1		3		50

The following table presents income (loss) from these VIEs for the three and six months ended June 30, 2021 and 2020.

Table 4.2 – Income (Loss) from Consolidated VIEs Accounted for as Collateralized Financing Entities


	Three Months Ended June 30, 2021
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,169	$	14,492	$	54,849	$	19,506	$	4,860	$	4,041	$	98,917
Interest expense	(755)		(11,374)		(43,201)		(13,927)		(4,478)		(1,110)		(74,845)
Net interest income	414		3,118		11,648		5,579		382		2,931		24,072
Non-interest income

Investment fair value changes, net	(216)		4,906		3,697		36,316		1,855		(2,320)		44,238


Total non-interest income, net	(216)		4,906		3,697		36,316		1,855		(2,320)		44,238
General and administrative expenses	—		—		—		—		—		(52)		(52)
Other expenses	—		—		—		—		—		(112)		(112)

Income from Consolidated VIEs	$	198	$	8,024	$	15,345	$	41,895	$	2,237	$	447	$	68,146

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)


	Six Months Ended June 30, 2021
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	2,517	$	29,975	$	103,722	$	39,665	$	9,646	$	8,263	$	193,788
Interest expense	(1,630)		(23,480)		(81,054)		(28,395)		(8,834)		(2,396)		(145,789)
Net interest income	887		6,495		22,668		11,270		812		5,867		47,999
Non-interest income

Investment fair value changes, net	(915)		9,804		3,411		40,433		10,776		(3,566)		59,943


Total non-interest income, net	(915)		9,804		3,411		40,433		10,776		(3,566)		59,943
General and administrative expenses	—		—		—		—		—		(90)		(90)
Other expenses	—		—		—		—		—		(442)		(442)

Income (Loss) from Consolidated VIEs	$	(28)	$	16,299	$	26,079	$	51,703	$	11,588	$	1,769	$	107,410


	Three Months Ended June 30, 2020
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	2,685	$	22,564	$	32,978	$	21,187	$	4,870	$	4,540	$	88,824
Interest expense	(1,518)		(19,117)		(24,446)		(15,846)		(4,380)		(1,797)		(67,104)
Net interest income	1,167		3,447		8,532		5,341		490		2,743		21,720
Non-interest income

Investment fair value changes, net	(230)		39,752		16,313		26,866		1,599		3,291		87,591


Total non-interest income, net	(230)		39,752		16,313		26,866		1,599		3,291		87,591
General and administrative expenses	—		—		—		—		—		(712)		(712)
Other expenses	—		—		—		—		—		(1,065)		(1,065)

Income from Consolidated VIEs	$	937	$	43,199	$	24,845	$	32,207	$	2,089	$	4,257	$	107,534


	Six Months Ended June 30, 2020
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	5,879	$	47,647	$	62,988	$	43,173	$	45,042	$	8,623	$	213,352
Interest expense	(4,040)		(40,627)		(46,385)		(32,022)		(42,728)		(3,374)		(169,176)
Net interest income	1,839		7,020		16,603		11,151		2,314		5,249		44,176
Non-interest income

Investment fair value changes, net	(621)		(29,916)		(51,533)		(115,295)		(84,910)		(8,593)		(290,868)


Total non-interest income, net	(621)		(29,916)		(51,533)		(115,295)		(84,910)		(8,593)		(290,868)
General and administrative expenses	—		—		—		—		—		(743)		(743)
Other expenses	—		—		—		—		—		817		817

Income (Loss) from Consolidated VIEs	$	1,218	$	(22,896)	$	(34,930)	$	(104,144)	$	(82,596)	$	(3,270)	$	(246,618)

We consolidate the assets and liabilities of certain Sequoia and CAFL 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 and CAFL 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; 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 and CAFL entities in accordance with GAAP.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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 June 30, 2021, we called one 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 52 Sequoia securitization entities sponsored by us that are still outstanding as of June 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 continued to hold the servicing rights following the transfer, we recorded mortgage 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 servicing 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 June 30, 2021, we called three of our unconsolidated Sequoia entities, and purchased $83 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $7 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 six months ended June 30, 2021, we called four of our unconsolidated Sequoia entities, and purchased $101 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $9 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 June 30, 2021, we held $97 million of loans for sale at fair value that were acquired following the calls.

The following table presents information related to securitization transactions that occurred during the three and six months ended June 30, 2021 and 2020.

Table 4.3 – Securitization Activity Related to Unconsolidated VIEs Sponsored by Redwood


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Principal balance of loans transferred	$	355,924	$	—	$	1,231,803	$	1,573,703
Trading securities retained, at fair value	1,225		—		7,774		43,362
AFS securities retained, at fair value	522		—		1,600		3,198

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table summarizes the cash flows during the three and six months ended June 30, 2021 and 2020 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

Table 4.4 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Proceeds from new transfers	$	361,673	$	—	$	1,266,063	$	1,610,761
MSR fees received	1,336		2,475		2,943		5,165
Funding of compensating interest, net	(70)		(205)		(170)		(297)
Cash flows received on retained securities	16,764		6,788		25,393		13,369

The following table presents the key weighted-average assumptions used to value securities retained at the date of securitization for securitizations completed during the three and six months ended June 30, 2021 and 2020.

Table 4.5 – Assumptions Related to Assets Retained from Unconsolidated VIEs Sponsored by Redwood

Three Months Ended June 30, 2021

Three Months Ended June 30, 2020

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

Prepayment rates

8 %

N/A

Discount rates

15 %

7 %

N/A

Credit loss assumptions

0.25 %

N/A


	Six Months Ended June 30, 2021			Six Months Ended June 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	%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents additional information at June 30, 2021 and December 31, 2020, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.6 – Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	June 30, 2021		December 31, 2020
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	20,527	$	20,982
Subordinate securities, classified as AFS	140,321		136,475
Mortgage servicing rights	6,496		8,413
Maximum loss exposure (1)	$	167,344	$	165,870
Assets transferred:
Principal balance of loans outstanding	$	6,326,188	$	7,728,432
Principal balance of loans 30+ days delinquent	58,362		138,029

(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 June 30, 2021 and December 31, 2020.

Table 4.7 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood


June 30, 2021	MSRs		Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)
Fair value at June 30, 2021	$	6,496	$	20,527		$	140,321
Expected life (in years) (2)	2		4			8
Prepayment speed assumption (annual CPR) (2)	38 %		25		%	33 %
Decrease in fair value from:
10% adverse change	$	613	$	1,374		$	238
25% adverse change	1,422		3,120			440
Discount rate assumption (2)	12 %		18		%	3.5		%
Decrease in fair value from:
100 basis point increase	$	139	$	462		$	10,058
200 basis point increase	271		900			19,174
Credit loss assumption (2)	N/A		0.39		%	0.39		%
Decrease in fair value from:
10% higher losses	N/A		$	—		$	2,671
25% higher losses	N/A		—			6,384

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(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

(1)Senior securities included $21 million and $17 million of interest-only securities at June 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.

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 June 30, 2021 and December 31, 2020, grouped by asset type.

Table 4.8 – Third-Party Sponsored VIE Summary


(In Thousands)	June 30, 2021		December 31, 2020
Mortgage-Backed Securities
Senior	$	4,740	$	11,131
Mezzanine	—		2,014
Subordinate	189,298		173,523
Total Mortgage-Backed Securities	194,038		186,668
Excess MSR	12,170		14,133
Total Investments in Third-Party Sponsored VIEs	$	206,208	$	200,801

We determined that we are not the primary beneficiary of these 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

June 30, 2021

(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

June 30, 2021

(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 June 30, 2021 and December 31, 2020.

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


	June 30, 2021				December 31, 2020
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value	$	1,160,513	$	1,160,513	$	176,604	$	176,604
Residential loans, held-for-investment	4,582,052		4,582,052		4,072,410		4,072,410
Business purpose loans, held-for-sale	418,442		418,442		245,394		245,394
Business purpose loans, held-for-investment	3,990,447		3,990,447		3,890,959		3,890,959
Multifamily loans	485,157		485,157		492,221		492,221
Real estate securities	354,886		354,886		344,125		344,125
Servicer advance investments (1)	184,551		184,551		231,489		231,489
MSRs (1)	8,721		8,721		8,815		8,815
Excess MSRs (1)	29,988		29,988		34,418		34,418
Shared home appreciation options (1)	44,319		44,319		42,440		42,440
Other financial instruments (2)	28,556		28,556		10,203		10,203
Cash and cash equivalents	421,223		421,223		461,260		461,260
Restricted cash	55,048		55,048		83,190		83,190
Derivative assets	34,305		34,305		53,238		53,238
REO (3)	15,489		17,718		8,413		9,229
Margin receivable (3)	10,269		10,269		4,758		4,758
FHLBC stock (3)	10		10		5,000		5,000
Pledged collateral (3)	—		—		1,177		1,177
Liabilities
Short-term debt	$	1,484,999	$	1,484,999	$	522,609	$	522,609
Margin payable (4)	19,503		19,503		—		—
Guarantee obligation (4)	8,446		5,932		10,039		7,843

Derivative liabilities	3,240		3,240		16,072		16,072
ABS issued, net
Fair value	7,360,766		7,360,766		6,900,362		6,900,362
Amortized cost	176,231		180,080		200,299		204,892

Other long-term debt, net (5)	833,272		834,214		774,726		783,570
Convertible notes, net (5)	512,339		531,473		511,085		499,865
Trust preferred securities and subordinated notes, net (5)	138,697		87,188		138,674		80,910

(1)These investments are included in Other investments on our consolidated balance sheets.

(2)Includes equity, debt, and loan investments 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.

During the three and six months ended June 30, 2021, we elected the fair value option for $4 million and $26 million of securities, respectively, $3.48 billion and $6.58 billion of residential loans (principal balance), respectively, and $527 million and $914 million of business purpose loans (principal balance), respectively. Additionally, during the three months ended June 30, 2021, we elected the fair value option for $2 million of MSRs and $2 million of other financial instruments. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, for business purpose bridge loans we hold for investment, as well as for MSRs retained from sales of residential loans, and for certain securities we purchase, including IO securities and fixed-rate securities rated investment grade or higher.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)

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, 2021 and December 31, 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


June 30, 2021	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	5,742,565	$	—	$	—	$	5,742,565
Business purpose loans	4,408,889		—		—		4,408,889
Multifamily loans	485,157		—		—		485,157
Real estate securities	354,886		—		—		354,886
Servicer advance investments	184,551		—		—		184,551
MSRs	8,721		—		—		8,721
Excess MSRs	29,988		—		—		29,988
Shared home appreciation options	44,319		—		—		44,319
Derivative assets	34,305		2,368		17,746		14,191



Liabilities
Derivative liabilities	$	3,240	$	1,561	$	957	$	722
ABS issued	7,360,766		—		—		7,360,766


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
Shared home appreciation options	42,440		—		—		42,440
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

June 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 six months ended June 30, 2021.

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


	Assets
	Residential Loans		Business Purpose Loans		Multifamily Loans		Trading Securities		AFS Securities		Servicer Advance Investments		MSRs		Excess MSRs		Shared Home Appreciation Options
(In Thousands)
Beginning balance - December 31, 2020	$	4,249,014	$	4,136,353	$	492,221	$	125,667	$	218,458	$	231,489	$	8,815	$	34,418	$	42,440

Acquisitions	6,684,292		—		—		26,367		1,600		—		2,283		—		—
Originations	—		913,704		—		—		—		—		—		—		—
Sales	(4,531,811)		(9,231)		—		(31,949)		(4,785)		—		—		—		—
Principal paydowns	(727,627)		(599,889)		(3,806)		(807)		(28,979)		(45,838)		—		—		(5,516)

Gains (losses) in net income (loss), net	70,184		(17,835)		(3,258)		23,147		14,172		(1,100)		(2,251)		(4,430)		7,395
Unrealized losses in OCI, net	—		—		—		—		11,995		—		—		—		—
Other settlements, net (1)	(1,487)		(14,213)		—		—		—		—		(126)		—		—
Ending balance - June 30, 2021	$	5,742,565	$	4,408,889	$	485,157	$	142,425	$	212,461	$	184,551	$	8,721	$	29,988	$	44,319

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


	Liabilities
		Derivatives (2)		ABS Issued
(In Thousands)
Beginning balance - December 31, 2020		$	14,450	$	6,900,362

Acquisitions		—		1,629,218

Principal paydowns		—		(1,055,541)

Gains (losses) in net income (loss), net		(197)		(113,273)

Other settlements, net (1)		(784)		—
Ending balance - June 30, 2021		$	13,469	$	7,360,766

(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

June 30, 2021

(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 June 30, 2021 and 2020. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and six months ended June 30, 2021 and 2020 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, 2021 and 2020 Included in Net Income


	Included in Net Income
	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Assets
Residential loans at Redwood	$	14,130	$	(359)	$	10,481	$	(746)
Business purpose loans	28,404		31,187		40,003		(21,026)
Net investments in consolidated Sequoia entities (1)	4,693		39,558		8,893		(30,502)
Net investments in consolidated Freddie Mac SLST entities (1)	36,137		26,867		40,225		(115,295)
Net investments in consolidated Freddie Mac K-Series entity (1)	1,855		1,599		10,776		(13,180)
Net investments in consolidated CAFL entities (1)	2,908		17,125		2,556		(50,721)
Trading securities	1,772		30,647		2,262		(79,633)

Servicer advance investments	(940)		(136)		(1,100)		(6,198)
MSRs	(330)		(1,591)		273		(16,507)
Excess MSRs	(2,477)		2,971		(4,430)		(6,523)
Shared home appreciation options	2,080		884		7,395		(6,670)
Loan purchase and interest rate lock commitments	14,550		357		14,171		357



Liabilities
Loan purchase commitments	$	(696)	$	2,137	$	(724)	$	(1,634)

(1) Represents the portion of net gains or losses included in our consolidated statements of income (loss) related to loans and the associated ABS issued at our consolidated securitization entities held at June 30, 2021 and 2020, which netted together represent the change in value of our investments at the consolidated VIEs, excluding REO.

The following table presents information on assets recorded at fair value on a non-recurring basis at June 30, 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 sheets at June 30, 2021.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at June 30, 2021


									Gain (Loss) for
June 30, 2021	Carrying Value		Fair Value Measurements Using						Three Months Ended		Six Months Ended
(In Thousands)			Level 1		Level 2		Level 3		June 30, 2021		June 30, 2021
Assets


REO	$	1,233	$	—	$	—	$	1,233	$	(3)	$	(7)

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 six months ended June 30, 2021 and 2020.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)

Table 5.6 – Market Valuation Gains and Losses, Net


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	24,988	$	(2,014)	$	48,100	$	(15,494)
Residential loan purchase and forward sale commitments	51,919		621		(466)		22,056
Single-family rental loans held-for-sale, at fair value	25,222		1,210		35,470		12,677
Single-family rental loan purchase and interest rate lock commitments	744		—		744		341
Bridge loans	2,225		(1,260)		3,269		(5,194)
Trading securities (1)	(1,095)		—		(374)		—
Risk management derivatives, net	(58,244)		—		34,578		(52,832)
Total mortgage banking activities, net (2)	$	45,759	$	(1,443)	$	121,321	$	(38,446)
Investment Fair Value Changes, Net
Residential loans at Redwood	$	1,290	$	104	$	1,607	$	(93,532)
Single-family rental loans held-for-investment	—		2,222		—		(20,806)
Bridge loans held-for-investment	(62)		21,774		3,242		(16,828)
Trading securities	2,893		42,246		23,521		(221,079)
Servicer advance investments	(940)		(136)		(1,100)		(6,198)
Excess MSRs	(2,477)		2,971		(4,430)		(6,523)
Net investments in Legacy Sequoia entities (3)	(216)		(230)		(915)		(621)
Net investments in Sequoia entities (3)	4,906		39,753		9,804		(29,916)
Net investments in Freddie Mac SLST entities (3)	36,316		26,867		40,433		(115,295)
Net investment in Freddie Mac K-Series entity (3)	1,855		1,599		10,776		(84,910)
Net investments in CAFL entities (3)	3,697		17,125		3,411		(50,721)
Shared home appreciation options	2,080		884		7,395		(6,670)
Other investments	125		(3,005)		435		(4,892)
Risk management derivatives, net	—		—		—		(59,142)
Credit recoveries (losses) on AFS securities	13		54		388		(1,471)
Total investment fair value changes, net	$	49,480	$	152,228	$	94,567	$	(718,604)
Other Income
MSRs	$	(1,381)	$	(3,955)	$	(2,247)	$	(22,563)
Risk management derivatives, net	—		—		—		13,966

Total other income (4)	$	(1,381)	$	(3,955)	$	(2,247)	$	(8,597)
Total Market Valuation Gains (Losses), Net	$	93,858	$	146,830	$	213,641	$	(765,647)

(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, 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

June 30, 2021

(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)

At June 30, 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, 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


June 30, 2021	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average(1)
Assets
Residential loans, at fair value:

Jumbo fixed-rate loans	$	232,343	Prepayment rate (annual CPR)	20		-	20		%	20		%
			Whole loan spread to TBA price	$	2.00	-	$	2.00		$	2.00
			Whole loan spread to swap rate	215		-	215		bps	215		bps





Jumbo loans committed to sell	928,170		Whole loan committed sales price	$	100.88	-	$	103.03		$	102.38






Loans held by Legacy Sequoia (2)	260,875		Liability price				N/A			N/A

Loans held by Sequoia (2)	2,222,553		Liability price				N/A			N/A

Loans held by Freddie Mac SLST (2)	2,098,624		Liability price				N/A			N/A

Business purpose loans:
Single-family rental loans	418,442		Senior credit spread	70		-	70		bps	70		bps
			Subordinate credit spread	105		-	1,531		bps	391		bps
			Senior credit support	34		-	34		%	34		%
			IO discount rate	9		-	9		%	9		%
			Prepayment rate (annual CPR)	3		-	3		%	3		%
			Non-securitizable loan dollar price	$	82	-	$	102		$	99

Single-family rental loans held by CAFL	3,263,878		Liability price				N/A			N/A

Bridge loans	726,569		Discount rate	6		-	15		%	8		%


Multifamily loans held by Freddie Mac K-Series (2)	485,157		Liability price				N/A			N/A



Trading and AFS securities	354,886		Discount rate	2		-	31		%	7		%
			Prepayment rate (annual CPR)	8		-	62		%	28		%
			Default rate	—		-	25		%	4		%
			Loss severity	—		-	50		%	22		%
			CRT dollar price	$	95	-	$	113		$	102

Servicer advance investments	184,551		Discount rate	3		-	3		%	3		%
			Prepayment rate (annual CPR)	20		-	30		%	21		%
			Expected remaining life (3)	4		-	4		years	4		years
			Mortgage servicing income	—		-	15		bps	9		bps

MSRs	8,721		Discount rate	12		-	12		%	12		%
			Prepayment rate (annual CPR)	7		-	84		%	36		%
			Per loan annual cost to service	$	96	-	$	96		$	96

Excess MSRs	29,988		Discount rate	13		-	16		%	15		%
			Prepayment rate (annual CPR)	21		-	30		%	24		%
			Excess mortgage servicing income	8		-	17		bps	11		bps

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)

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


June 30, 2021	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average (1)
Assets (continued)
















































Shared home appreciation options	$	44,319	Discount rate	13		-	13		%	13		%
			Prepayment rate (annual CPR)	16		-	24		%	17		%
			Home price appreciation	3		-	4		%	3		%

REO	1,233		Loss severity	4		-	40		%	23		%

Residential loan purchase commitments, net	12,725		Committed sales price	$	102.00	-	$	103.03		$	102.64
			Pull-through rate	21		-	100		%	72		%
			Whole loan spread to TBA price	$	2.00	-	$	2.00		$	2.00
			Whole loan spread to swap rate	191		-	215		bps	201		bps
			Prepayment rate (annual CPR)	20		-	20		%	20		%


Single-family rental interest rate lock commitments	744		Senior credit spread	70		-	70		bps	70		bps
			Subordinate credit spread	105		-	1,531		bps	391		bps
			Senior credit support	34		-	34		%	34		%
			IO discount rate	10		-	11		%	10		%
			Prepayment rate (annual CPR)	3		-	3		%	3		%
			Pull-through rate	100		-	100		%	100		%

Liabilities
ABS issued (2):
At consolidated Sequoia entities	2,248,759		Discount rate	1		-	18		%	3		%
			Prepayment rate (annual CPR)	7		-	51		%	33		%
			Default rate	—		-	39		%	2		%
			Loss severity	25		-	50		%	32		%

At consolidated CAFL entities (4)	3,007,596		Discount rate	1		-	13		%	3		%
			Prepayment rate (annual CPR)	3		-	3		%	3		%
			Default rate	3		-	18		%	9		%
			Loss severity	30		-	30		%	30		%

At consolidated Freddie Mac SLST entities	1,650,087		Discount rate	2		-	7		%	3		%

			Prepayment rate (annual CPR)	6		-	8		%	6		%
			Default rate	9		-	10		%	9		%
			Loss severity	35		-	35		%	35		%

At consolidated Freddie Mac K-Series entities (4)	454,324		Discount rate	1		-	9		%	2		%

(1)The weighted average input values for all loan types are based on the unpaid principal balance. The weighted average input values for all other assets and liabilities are based on relative fair value.

(2)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities. At June 30, 2021, the fair value of securities we owned at the consolidated Sequoia, CAFL, Freddie Mac SLST, and Freddie Mac K-Series entities was $235 million, $268 million, $450 million, and $31 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

June 30, 2021

(Unaudited)

Note 5. Fair Value of Financial Instruments - (continued)

Determination of Fair Value

We generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets and liabilities. Use of these techniques requires determination of relevant 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.

Included in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2020 is a more detailed description of our financial instruments measured at fair value and their significant inputs, as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy.

Note 6. Residential Loans

We acquire residential loans from third-party 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 June 30, 2021 and December 31, 2020.

Table 6.1 – Classifications and Carrying Values of Residential Loans


June 30, 2021			Legacy				Freddie Mac
(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	$	1,160,548	$	—	$	—	$	—	$	1,160,548
Held-for-investment at fair value	—		260,875		2,222,553		2,098,624		4,582,052
Total Residential Loans	$	1,160,548	$	260,875	$	2,222,553	$	2,098,624	$	5,742,600


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 June 30, 2021, we owned mortgage servicing rights associated with $1.10 billion (principal balance) of 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Sale

At Fair Value

The following table summarizes the characteristics of residential loans held-for-sale at June 30, 2021 and December 31, 2020.

Table 6.2 – Characteristics of Residential Loans Held-for-Sale


(Dollars in Thousands)	June 30, 2021		December 31, 2020
Number of loans	1,316		198
Unpaid principal balance	$	1,135,356	$	172,748
Fair value of loans	$	1,160,548	$	176,641
Market value of loans pledged as collateral under short-term borrowing agreements	$	1,152,267	$	156,355

Delinquency information
Number of loans with 90+ day delinquencies	2		1
Unpaid principal balance of loans with 90+ day delinquencies	$	2,100	$	1,882
Fair value of loans with 90+ day delinquencies	$	1,397	$	1,223
Number of loans in foreclosure	—		—

The following table provides the activity of residential loans held-for-sale during the three and six months ended June 30, 2021 and 2020.

Table 6.3 – Activity of Residential Loans Held-for-Sale


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Principal balance of loans acquired	$	3,484,633	$	57,743	$	6,580,681	$	2,687,651
Principal balance of loans sold	3,324,919		2,280,076		5,600,751		4,936,795
Net market valuation gains (losses) recorded (1)	26,278		(2,014)		49,707		(15,494)

(1)Net market valuation gains (losses) on residential loans held-for-sale are recorded primarily through Mortgage banking activities, net on our consolidated statements of income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Investment at Fair Value

We 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 June 30, 2021 and December 31, 2020.

Table 6.4 – Characteristics of Residential Loans Held-for-Investment


June 30, 2021	Legacy				Freddie Mac
(Dollars in Thousands)	Sequoia		Sequoia		SLST
Number of loans	1,733		2,775		12,902
Unpaid principal balance	$	295,368	$	2,193,269	$	2,107,256
Fair value of loans	$	260,875	$	2,222,553	$	2,098,624

Delinquency information
Number of loans with 90+ day delinquencies (1)	43		48		1,446
Unpaid principal balance of loans with 90+ day delinquencies	$	14,878	$	38,502	$	261,504
Fair value of loans with 90+ day delinquencies (2)	N/A		N/A		N/A
Number of loans in foreclosure	18		3		308
Unpaid principal balance of loans in foreclosure	$	3,830	$	2,257	$	51,191


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 held at consolidated entities, the number of loans greater than 90 days delinquent includes loans in foreclosure.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 6. Residential Loans - (continued)

The following table provides the activity of residential loans held-for-investment at Redwood during the three and six months ended June 30, 2021 and 2020.

Table 6.5 – Activity of Residential Loans Held-for-Investment at Redwood


	Three Months Ended June 30,				Six Months Ended June 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)	—		104		—		(93,532)

(1)Subsequent to the transfer of these loans to our investment portfolio, net market valuation gains (losses) on residential loans held-for-investment at Redwood are recorded through Investment fair value changes, net on our consolidated statements of income (loss).

The following table provides the activity of residential loans held-for-investment at consolidated entities during the three and six months ended June 30, 2021 and 2020.

Table 6.6 – Activity of Residential Loans Held-for-Investment at Consolidated Entities

Three Months Ended June 30, 2021

Three Months Ended June 30, 2020

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

Fair value of loans transferred from HFS to HFI (1)

N/A

1,205,494

N/A

270,506

N/A

Net market valuation gains (losses) recorded (1)

4,863

(12,835)

22,579

8,081

93,932

48,587

Six Months Ended June 30, 2021

Six Months Ended June 30, 2020

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

Fair value of loans transferred from HFS to HFI (1)

N/A

1,205,494

N/A

270,506

N/A

Net market valuation gains (losses) recorded (1)

12,476

(15,413)

19,014

(60,933)

(16,553)

(144,433)

(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

June 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 June 30, 2021 and December 31, 2020.

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans


June 30, 2021	Single-Family Rental				Residential
(In Thousands)	Redwood		CAFL		Bridge		Total
Held-for-sale at fair value	$	418,442	—		$	—	$	418,442
Held-for-investment at fair value	—		3,263,878		726,569		3,990,447
Total Business Purpose Loans	$	418,442	$	3,263,878	$	726,569	$	4,408,889


December 31, 2020	Single-Family Rental				Residential
(In Thousands)	Redwood		CAFL		Bridge		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

The following table provides the activity of business purpose loans at Redwood during the three and six months ended June 30, 2021 and 2020.

Table 7.2 – Activity of Business Purpose Loans at Redwood


	Three Months Ended June 30, 2021				Three Months Ended June 30, 2020
(In Thousands)	SFR at Redwood		Bridge		SFR at Redwood		Bridge
Principal balance of loans originated	$	312,217	$	215,160	$	175,876	$	58,468
Principal balance of loans sold to third parties	—		354		—		1,558
Fair value of loans transferred from HFS to HFI (1)	297,301		N/A		220,923		N/A
Fair value of loans transferred from HFI to HFS (2)	44,922		—		—		—
Mortgage banking activities income (loss) recorded (3)	25,222		978		1,210		(3,277)
Investment fair value changes recorded (4)	—		(62)		2,222		21,774

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 7. Business Purpose Loans - (continued)


	Six Months Ended June 30, 2021				Six Months Ended June 30, 2020
(In Thousands)	SFR at Redwood		Bridge		SFR at Redwood		Bridge
Principal balance of loans originated	$	565,315	$	348,389	$	436,005	$	285,836
Principal balance of loans sold to third parties	—		9,231		26,148		22,293
Fair value of loans transferred from HFS to HFI (1)	466,705		N/A		599,032		N/A
Fair value of loans transferred from HFI to HFS (2)	44,922		—		—		—
Mortgage banking activities income (loss) recorded (3)	35,470		1,521		11,540		(3,441)
Investment fair value changes recorded (4)	—		3,242		(20,806)		(16,828)

(1)Represents the transfer of single-family rental 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 changes from the time a loan is originated to when it is sold or transferred to our investment portfolio. Additionally, for the three and six months ended June 30, 2021, we recorded loan origination fee income of $7 million and $13 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss). For the three and six months ended June 30, 2020, we recorded loan origination fee income of $2 million and $11 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).

(4)Represents net market valuation changes for loans classified as held-for-investment.

Bridge Loans Held-for-Investment

The outstanding bridge loans held-for-investment at June 30, 2021 were first lien, interest-only loans with original maturities of six to 24 months and were comprised of 63% one-month LIBOR-indexed adjustable-rate loans and 37% fixed-rate loans. During the six months ended June 30, 2021, we transferred four loans with a fair value of $2 million to REO, which is included in Other assets on our consolidated balance sheets. At June 30, 2021, we had a $374 million commitment to fund bridge loans. See Note 16 for additional information on this commitment.

Single-Family Rental 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 owned by these entities. The outstanding single-family rental loans held-for-investment at CAFL at June 30, 2021 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years. During the six months ended June 30, 2021, we transferred two CAFL loans with a fair value of $12 million to REO, which is included in Other assets on our consolidated balance sheets. The following table provides the activity of single-family rental loans held-for-investment at CAFL during the three and six months ended June 30, 2021 and 2020.

Table 7.3 – Activity of Single-Family Rental Loans Held-for-Investment at CAFL


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Net market valuation gains (losses) recorded (1)	$	(1,230)	$	169,327	$	(62,132)	$	(102,590)

(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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 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 June 30, 2021 and December 31, 2020.

Table 7.4 – Characteristics of Business Purpose Loans


June 30, 2021	Single-Family Rental at Redwood			Single-Family Rental at CAFL			Bridge
(Dollars in Thousands)
Number of loans	112			1,121			2,471
Unpaid principal balance	$	399,900		$	3,060,949		$	729,149
Fair value of loans	$	418,442		$	3,263,878		$	726,569
Weighted average coupon	4.84		%	5.34		%	7.63		%
Weighted average remaining loan term (years)	7			5			1
Market value of loans pledged as collateral under short-term debt facilities	$	122,277		N/A			$	127,133
Market value of loans pledged as collateral under long-term debt facilities	$	246,903		N/A			$	555,791

Delinquency information
Number of loans with 90+ day delinquencies (1)	9			21			40
Unpaid principal balance of loans with 90+ day delinquencies	$	6,586		$	59,841		$	35,018
Fair value of loans with 90+ day delinquencies (2)	$	5,369		N/A			$	31,512
Number of loans in foreclosure	7			10			43
Unpaid principal balance of loans in foreclosure	$	5,976		$	24,212		$	32,611
Fair value of loans in foreclosure (2)	$	4,798		N/A			$	28,963


December 31, 2020	Single-Family Rental at Redwood			Single-Family Rental at CAFL			Bridge
(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
Market value of loans pledged as collateral under long-term debt facilities	$	154,774		N/A			$	544,151

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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 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 June 30, 2021 and December 31, 2020.

Table 8.1 – Characteristics of Multifamily Loans


(Dollars in Thousands)	June 30, 2021			December 31, 2020
Number of loans	28			28
Unpaid principal balance	$	459,002		$	462,808
Fair value of loans	$	485,157		$	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 June 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 six months ended June 30, 2021 and 2020.

Table 8.2 – Activity of Multifamily Loans Held-for-Investment


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Net market valuation gains (losses) recorded (1)	$	(2,528)	$	18,591	$	(3,258)	$	(63,840)

(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 (loss). For loans held at our consolidated Freddie Mac K-Series entity, 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 investment in these securitization entities is presented in Table 4.2.

Note 9. Real Estate Securities

We invest in real estate 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 June 30, 2021 and December 31, 2020.

Table 9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	June 30, 2021		December 31, 2020
Trading	$	142,425	$	125,667
Available-for-sale	212,461		218,458
Total Real Estate Securities	$	354,886	$	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. Mezzanine securities are interests that are generally subordinate to senior securities in their rights to receive cash flows, and have subordinate securities below them that are first to absorb losses. Subordinate securities are all interests below mezzanine. Exclusive of our re-performing loan securities, nearly all of our residential securities are supported by collateral that was designated as prime at the time of issuance.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

Trading Securities

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-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 June 30, 2021 and December 31, 2020.

Table 9.2 – Fair Value of Trading Securities by Position


(In Thousands)	June 30, 2021		December 31, 2020
Senior
Interest-only securities (1)	$	25,267	$	28,464


Total Senior	25,267		28,464
Mezzanine
Sequoia securities	—		3,649


Total Mezzanine	—		3,649
Subordinate
RPL securities	60,887		47,448
Multifamily securities	8,266		5,592
Other third-party residential securities	48,005		40,514
Total Subordinate	117,158		93,554
Total Trading Securities	$	142,425	$	125,667

(1)Includes $17 million and $13 million of Sequoia certificated mortgage servicing rights at June 30, 2021 and December 31, 2020, respectively.

The following table presents the unpaid principal balance of trading securities by position and collateral type at June 30, 2021 and December 31, 2020.

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position


(In Thousands)	June 30, 2021		December 31, 2020
Senior (1)	$	—	$	—
Mezzanine	—		3,577
Subordinate	208,381		242,278
Total Trading Securities	$	208,381	$	245,855

(1)Our senior trading securities include interest-only securities, for which there is no principal balance.

The following table provides the activity of trading securities during the three and six months ended June 30, 2021 and 2020.

Table 9.4 – Trading Securities Activity


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Principal balance of securities acquired	$	1,750	$	10,250	$	17,630	$	66,721
Principal balance of securities sold	18,068		85,747		52,811		704,614
Net market valuation gains (losses) recorded (1)	1,798		42,246		23,147		(221,079)

(1)Net market valuation gains (losses) on trading securities are recorded through Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 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 June 30, 2021 and December 31, 2020.

Table 9.5 – Fair Value of Available-for-Sale Securities by Position


(In Thousands)	June 30, 2021		December 31, 2020



Mezzanine


Other third-party residential securities	$	—	$	2,014
Total Mezzanine	—		2,014
Subordinate
Sequoia securities	140,321		136,475
Multifamily securities	34,213		43,663
Other third-party residential securities	37,927		36,306
Total Subordinate	212,461		216,444
Total AFS Securities	$	212,461	$	218,458

The following table provides the activity of available-for-sale securities during the three and six months ended June 30, 2021 and 2020.

Table 9.6 – Available-for-Sale Securities Activity


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Fair value of securities acquired	$	522	$	—	$	1,600	$	31,181
Fair value of securities sold	2,585		8,736		4,785		55,193
Net realized gains recorded	1,307		783		1,507		4,635

During the three months ended June 30, 2021, we called three of our unconsolidated Sequoia entities, and purchased $83 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $7 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 six months ended June 30, 2021, we called four of our unconsolidated Sequoia entities, and purchased $101 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $9 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss).

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 June 30, 2021, we had $31 million of AFS securities with contractual maturities less than five years, $4 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table presents the components of carrying value (which equals fair value) of AFS securities at June 30, 2021 and December 31, 2020.

Table 9.7 – Carrying Value of AFS Securities


June 30, 2021
(In Thousands)	Mezzanine		Subordinate		Total
Principal balance	$	—	$	254,784	$	254,784
Credit reserve	—		(40,349)		(40,349)
Unamortized discount, net	—		(90,216)		(90,216)
Amortized cost	—		124,219		124,219
Gross unrealized gains	—		88,321		88,321
Gross unrealized losses	—		(79)		(79)
CECL allowance	—		—		—
Carrying Value	$	—	$	212,461	$	212,461


December 31, 2020
(In Thousands)	Mezzanine		Subordinate		Total
Principal balance	$	2,000	$	281,284	$	283,284
Credit reserve	—		(44,967)		(44,967)
Unamortized discount, net	—		(95,718)		(95,718)
Amortized cost	2,000		140,599		142,599
Gross unrealized gains	14		77,280		77,294
Gross unrealized losses	—		(1,047)		(1,047)
CECL allowance	—		(388)		(388)
Carrying Value	$	2,014	$	216,444	$	218,458

The following table presents the changes for the three and six months ended June 30, 2021, in unamortized discount and designated credit reserves on residential AFS securities.

Table 9.8 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities


	Three Months Ended June 30, 2021				Six Months Ended June 30, 2021
	Credit Reserve		Unamortized Discount, Net		Credit Reserve		Unamortized Discount, Net
(In Thousands)
Beginning balance	$	44,947	$	94,188	$	44,967	$	95,718
Amortization of net discount	—		(1,569)		—		(3,183)
Realized credit losses	(112)		—		(249)		—
Acquisitions	890		368		2,825		1,208
Sales, calls, other	(718)		(7,429)		(992)		(9,729)

Transfers to (release of) credit reserves, net	(4,658)		4,658		(6,202)		6,202
Ending Balance	$	40,349	$	90,216	$	40,349	$	90,216

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 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 June 30, 2021 and December 31, 2020.

Table 9.9 – Components of Fair Value of 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)
June 30, 2021	$	—	$	—	$	—	$	3,600	$	(79)	$	3,521
December 31, 2020	9,129		(1,047)		7,920		—		—		—

At June 30, 2021, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 88 AFS securities, of which two were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2020, our consolidated balance sheet included 96 AFS securities, of which five were in an unrealized loss position and zero were in a continuous unrealized loss position for 12 consecutive months or longer.

Evaluating AFS Securities for Credit Losses

Gross unrealized losses on our AFS securities were $0.1 million at June 30, 2021. We evaluate all securities in an unrealized loss position to determine if the impairment is credit-related (resulting in an allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At June 30, 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 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.

At June 30, 2021, our current expected credit loss ("CECL") allowance related to our AFS securities was zero. AFS securities for which an 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 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 security credit losses.

The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at June 30, 2021.

Table 9.10 – Significant Credit Quality Indicators

June 30, 2021

Subordinate Securities

Default rate

0.35%

Loss severity

18%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table details the activity related to the allowance for credit losses for AFS securities for the three and six months ended June 30, 2021.

Table 9.11 – Rollforward of Allowance for Credit Losses


	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021
(In Thousands)
Beginning balance allowance for credit losses	$	13	$	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	(13)		(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 (loss). The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and six months ended June 30, 2021 and 2020.

Table 9.12 – Gross Realized Gains and Losses on AFS Securities


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Gross realized gains - sales	$	1,307	$	1,074	$	1,507	$	8,779
Gross realized gains - calls	6,687		—		9,095		—
Gross realized losses - sales	—		(291)		—		(4,144)

Total Realized Gains on Sales and Calls of AFS Securities, net	$	7,994	$	783	$	10,602	$	4,635

Note 10. Other Investments

Other investments at June 30, 2021 and December 31, 2020 are summarized in the following table.

Table 10.1 – Components of Other Investments


(In Thousands)	June 30, 2021		December 31, 2020
Servicer advance investments	$	184,551	$	231,489
Shared home appreciation options	44,319		42,440
Excess MSRs	29,988		34,418
Mortgage servicing rights	8,721		8,815

Other	41,153		31,013
Total Other Investments	$	308,732	$	348,175

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 10. Other Investments - (continued)

Servicer advance investments

We and a third-party co-investor, through two 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 June 30, 2021, we had funded $94 million of total capital to the SA Buyers (see Note 16 for additional detail).

At June 30, 2021, our servicer advance investments had a carrying value of $185 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of $8.03 billion. The outstanding servicer advance receivables associated with this investment were $172 million at June 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 June 30, 2021 and December 31, 2020.

Table 10.2 – Components of Servicer Advance Receivables


(In Thousands)	June 30, 2021		December 31, 2020
Principal and interest advances	$	80,741	$	110,923
Escrow advances (taxes and insurance advances)	68,534		79,279
Corporate advances	22,543		27,454
Total Servicer Advance Receivables	$	171,818	$	217,656

We account for our servicer advance investments at fair value and during the three and six months ended June 30, 2021, we recorded $2 million and $5 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1 million for both periods through Investment fair value changes, net in our consolidated statements of income (loss). During the three and six months ended June 30, 2020, we recorded $3 million and $6 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $0.1 million and $6 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss).

Shared Home Appreciation Options

In 2019, we entered into a flow purchase agreement to acquire shared home appreciation options. At June 30, 2021, we had acquired $47 million of shared home appreciation options under this flow purchase agreement. We account for these investments under the fair value option and during the three and six months ended June 30, 2021, we recorded net market valuation gains of $2 million and $7 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2020, we recorded a net market valuation gain of $1 million and a net market valuation loss of $7 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss).

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 six months ended June 30, 2021, we recognized $3 million and $6 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $2 million and $4 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2020, we recognized $3 million and $6 million of interest income, respectively, through Other interest income, and recorded a net market valuation gain of $3 million and a net market valuation loss of $7 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 10. Other Investments - (continued)

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 majority of our investments in MSRs were made through the retention of servicing rights associated with the residential jumbo mortgage loans that we acquired and subsequently sold to third parties. During both the three and six months ended June 30, 2021, we retained $2 million of MSRs from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

At June 30, 2021 and December 31, 2020, our MSRs had a fair value of $9 million and $9 million, respectively, and were associated with loans with an aggregate principal balance of $1.97 billion and $2.59 billion, respectively. During the three and six months ended June 30, 2021, including net market valuation gains and losses on our MSRs and related risk management derivatives, we recorded a net loss of less than $0.1 million and net income of $1 million, respectively, through Other income on our consolidated statements of income (loss). During the three and six months ended June 30, 2020, we recorded net losses of $1 million and $3 million, respectively, through Other income on our consolidated statements of income (loss).

Note 11. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at June 30, 2021 and December 31, 2020.

Table 11.1 – Fair Value and Notional Amount of Derivative Financial Instruments


	June 30, 2021				December 31, 2020
	Fair Value		Notional Amount		Fair Value		Notional Amount
(In Thousands)


Assets - Risk Management Derivatives
Interest rate swaps	$	264	$	133,000	$	224	$	42,000
TBAs	2,064		730,000		18,260		3,520,000
Interest rate futures	304		81,500		—		—
Swaptions	17,482		2,100,000		19,727		1,585,000

Assets - Other Derivatives
Loan purchase and interest rate lock commitments	14,191		2,332,511		15,027		2,617,254

Total Assets	$	34,305	$	5,377,011	$	53,238	$	7,764,254



Liabilities - Risk Management Derivatives
Interest rate swaps	$	(957)	$	87,500	$	—	$	—
TBAs	(1,367)		730,000		(15,495)		3,105,000
Interest rate futures	(194)		140,000		—		—
Liabilities - Other Derivatives
Loan purchase commitments	(722)		164,971		(577)		477,153

Total Liabilities	$	(3,240)	$	1,122,471	$	(16,072)	$	3,582,153
Total Derivative Financial Instruments, Net	$	31,065	$	6,499,482	$	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 June 30, 2021, we were party to swaps and swaptions with an aggregate notional amount of $2.32 billion, TBA agreements with an aggregate notional amount of $1.46 billion, and interest rate futures contracts with an aggregate notional amount of $222 million. At December 31, 2020, we were party to swaps and swaptions with an aggregate notional amount of $1.63 billion and TBA agreements with an aggregate notional amount of $6.63 billion.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 11. Derivative Financial Instruments - (continued)

During the three and six months ended June 30, 2021, risk management derivatives had a net market valuation loss of $58 million and a net market valuation gain of $35 million, respectively. During the three and six months ended June 30, 2020, risk management derivatives had net market valuation losses of zero and $98 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net, and Other income on our consolidated statements of income (loss).

Loan Purchase and Interest Rate Lock Commitments

LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. For the three and six months ended June 30, 2021, LPCs and IRLCs had net market valuation gains of $53 million and $0.3 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). For the three and six months ended June 30, 2020, LPCs and IRLCs had net market valuation gains of $1 million and $22 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 a portion of our long-term debt that is included in our consolidated balance sheets for financial reporting purposes, we designated certain interest rate swaps as cash flow hedges.

During the first quarter of 2020, we terminated and settled all of our outstanding derivatives that had been designated as cash flow hedges for our long-term debt, with a payment of $84 million. For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $79 million and $81 million at June 30, 2021 and December 31, 2020, respectively. We are amortizing this loss into interest expense over the remaining term of the debt they were originally hedging. As of June 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 six months ended June 30, 2021, we did not have any derivatives designated as cash flow hedges. For the three and six months ended June 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 six months ended June 30, 2021 and 2020.

Table 11.2 – Impact on Interest Expense of Interest Rate Agreements Accounted for as Cash Flow Hedges


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Net interest expense on cash flows hedges	$	—	$	—	$	—	$	(860)

Realized net losses reclassified from other comprehensive income	(1,028)		(1,029)		(2,046)		(1,108)
Total Interest Expense	$	(1,028)	$	(1,029)	$	(2,046)	$	(1,968)

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At June 30, 2021, we assessed this risk as remote and did not record an associated specific valuation adjustment.

At June 30, 2021, we were in compliance with our derivative counterparty ISDA agreements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 12. Other Assets and Liabilities

Other assets at June 30, 2021 and December 31, 2020 are summarized in the following table.

Table 12.1 – Components of Other Assets


(In Thousands)	June 30, 2021		December 31, 2020
Accrued interest receivable	$	41,366	$	39,445
Investment receivable	38,281		43,176
REO	15,489		8,413
Operating lease right-of-use assets	14,370		15,012
Margin receivable	10,269		4,758
Fixed assets and leasehold improvements (1)	7,202		4,203


Pledged collateral	—		1,177



Other	9,455		14,404
Total Other Assets	$	136,432	$	130,588

(1)Fixed assets and leasehold improvements had a basis of $14 million and accumulated depreciation of $7 million at June 30, 2021.

Accrued expenses and other liabilities at June 30, 2021 and December 31, 2020 are summarized in the following table.

Table 12.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	June 30, 2021		December 31, 2020
Accrued compensation	$	42,737	$	24,393
Accrued interest payable	35,615		34,858
Margin payable	19,503		14,728
Operating lease liabilities	15,997		16,687

Payable to minority partner	15,414		16,941
Unsettled trades	13,952		—
Residential loan and MSR repurchase reserve	8,709		8,631
Guarantee obligations	8,446		10,039

Accrued income taxes payable	5,395		5,614
Bridge loan holdbacks	5,394		5,708


Accrued operating expenses	4,938		5,509

Deferred consideration	—		14,579
Other	15,605		21,653
Total Accrued Expenses and Other Liabilities	$	191,705	$	179,340

Deferred Consideration

The deferred consideration presented in the 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

June 30, 2021

(Unaudited)

Note 12. Other Assets and Liabilities - (continued)

REO

The following table summarizes the activity and carrying values of REO assets held at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL entities during the six months ended June 30, 2021.

Table 12.3 – REO Activity


	Six Months Ended June 30, 2021
(In Thousands)	Redwood Bridge		Legacy Sequoia		Freddie Mac SLST		CAFL		Total
Balance at beginning of period	$	4,600	$	638	$	646	$	2,529	$	8,413
Transfers to REO	2,289		65		1,548		11,924		15,826
Liquidations (1)	(5,972)		(39)		(766)		(1,949)		(8,726)
Changes in fair value, net	428		(5)		208		(655)		(24)
Balance at End of Period	$	1,345	$	659	$	1,636	$	11,849	$	15,489

(1)For the six months ended June 30, 2021, REO liquidations resulted in less than $0.1 million of realized losses, which were recorded in Investment fair value changes, net on our consolidated statements of income (loss).

The following table provides the detail of REO assets at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL entities at June 30, 2021 and December 31, 2020.

Table 12.4 – REO Assets


Number of REO assets	Redwood Bridge	Legacy Sequoia	Freddie Mac SLST	CAFL	Total
At June 30, 2021	3	3	18	2	26
At December 31, 2020	3	3	9	2	17

Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for additional descriptions of our other assets and liabilities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 13. Short-Term Debt

We enter into repurchase agreements, bank warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At June 30, 2021, we had outstanding agreements with several counterparties and we were in compliance with all of the related covenants.

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 June 30, 2021 and December 31, 2020.

Table 13.1 – Short-Term Debt


	June 30, 2021
(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity
Facilities
Residential loan warehouse	6	$	1,049,144	$	2,350,000	1.87	%	8/2021-3/2022	211

Business purpose loan warehouse	2	191,288		355,497		2.99	%	3/2022-5/2022	260
Real estate securities repo	3	80,938		—		1.53	%	7/2021-9/2021	35

Total Short-Term Debt Facilities	11	1,321,370
Servicer advance financing	1	163,629		260,000		1.89	%	11/2021	153

Total Short-Term Debt		$	1,484,999


	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

(1)Borrowings under our facilities are generally uncommitted and charged interest based on a specified margin over the 1- or 3-month LIBOR.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 13. Short-Term Debt - (continued)

The following table below presents the value of loans, securities, and other assets pledged as collateral under our short-term debt at June 30, 2021 and December 31, 2020.

Table 13.2 – Collateral for Short-Term Debt


(In Thousands)	June 30, 2021		December 31, 2020
Collateral Type
Held-for-sale residential loans	$	1,152,267	$	156,355
Business purpose loans	249,410		127,029
Real estate securities
On balance sheet	16,435		23,193
Sequoia securitizations (1)	62,387		63,105

Freddie Mac K-Series securitization (1)	30,834		28,255

Total real estate securities owned	109,656		114,553
Restricted cash and other assets	1,709		315
Total Collateral for Short-Term Debt Facilities	1,513,042		398,252
Cash	12,442		9,978
Restricted cash	19,028		23,220
Servicer advances	171,818		217,656
Total Collateral for Servicer Advance Financing	203,288		250,854
Total Collateral for Short-Term Debt	$	1,716,330	$	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 six months ended June 30, 2021, the average balances of our short-term debt facilities were $1.85 billion and $1.42 billion, respectively. At June 30, 2021 and December 31, 2020, accrued interest payable on our short-term debt facilities was $2 million and $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 June 30, 2021, the accrued interest payable balance on this financing was $0.1 million and the unamortized capitalized commitment costs were $0.4 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 $2 million at June 30, 2021. At both June 30, 2021 and December 31, 2020, we had no outstanding borrowings on this facility.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 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 at June 30, 2021.

Table 13.3 – Short-Term Debt by Collateral Type and Remaining Maturities


	June 30, 2021
(In Thousands)	Within 30 days		31 to 90 days		Over 90 days		Total
Collateral Type
Held-for-sale residential loans	$	—	$	119,462	$	929,682	$	1,049,144
Business purpose loans	—		—		191,288		191,288
Real estate securities	44,527		36,411		—		80,938
Total Secured Short-Term Debt	44,527		155,873		1,120,970		1,321,370
Servicer advance financing	—		—		163,629		163,629

Total Short-Term Debt	$	44,527	$	155,873	$	1,284,599	$	1,484,999

Note 14. Asset-Backed Securities Issued

The carrying values of ABS issued by our consolidated securitization entities at June 30, 2021 and December 31, 2020, along with other selected information, are summarized in the following table.

Table 14.1 – Asset-Backed Securities Issued


June 30, 2021	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST (1)		Freddie Mac K-Series			Total
(Dollars in Thousands)
Certificates with principal balance	$	291,083	$	1,946,901	$	2,746,648	$	1,718,754	$	422,534		$	7,125,920
Interest-only certificates	788		15,282		167,460		21,455		11,627			216,612
Market valuation adjustments	(33,660)		28,365		93,488		86,109		20,163			194,465


ABS Issued, Net	$	258,211	$	1,990,548	$	3,007,596	$	1,826,318	$	454,324		$	7,536,997
Range of weighted average interest rates, by series	0.49% to 1.46%		2.31% to 5.10%		2.62% to 5.20%		3.50% to 4.75%		3.41		%
Stated maturities	2024 - 2036		2047 - 2051		2021 - 2031		2028 - 2059		2025
Number of series	20		12		14		3		1


December 31, 2020	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST (1)		Freddie Mac K-Series			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	0.35% to 1.55%		2.25% to 5.04%		2.68% to 5.42%		3.50% to 4.75%		3.39		%
Stated maturities	2024 - 2036		2047 - 2050		2021 - 2031		2028 - 2059		2025
Number of series	20		10		14		3		1

(1)Includes $179 million and $205 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at June 30, 2021 and December 31, 2020, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 14. Asset-Backed Securities Issued - (continued)

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 June 30, 2021, the principal balance of the ABS issued was $179 million, and the debt discount and deferred issuance costs were $3 million, for a carrying value of $176 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 optional redemption and interest rate step-ups prior to the stated maturity according to the terms of the respective governing agreements.

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 June 30, 2021, the majority of the ABS issued and outstanding had contractual maturities beyond five years. See Note 4 for detail on the carrying value components of the collateral for ABS issued and outstanding. The following table summarizes the accrued interest payable on ABS issued at June 30, 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)	June 30, 2021		December 31, 2020
Legacy Sequoia	$	123	$	141
Sequoia	5,521		4,697
CAFL	10,183		10,122
Freddie Mac SLST (1)	5,200		5,656
Freddie Mac K-Series	1,200		1,177
Total Accrued Interest Payable on ABS Issued	$	22,227	$	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

June 30, 2021

(Unaudited)

Note 15. Long-Term Debt

The table below summarizes our long-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at June 30, 2021.

Table 15.1 – Long-Term Debt


	June 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	$	160,102	$	(521)	$	159,581	N/A	4.21	%	9/2024
CAFL	102,424		(505)		101,919		N/A	4.21	%	2/2025
Non-Recourse BPL Financing
Facility A	45,582		(444)		45,138		45,582	L + 3.85%		7/2022
Facility B	57,616		(199)		57,417		250,000	L + 3.00%		N/A
Recourse BPL Financing
Facility C	269,100		—		269,100		450,000	L + 3.40%		6/2023
Facility D	200,275		(158)		200,117		250,000	L + 3.00%		9/2023
Total Long-Term Debt Facilities	835,099		(1,827)		833,272
Convertible notes
4.75% convertible senior notes	198,629		(2,356)		196,273		N/A	4.75	%	8/2023
5.625% convertible senior notes	150,200		(2,450)		147,750		N/A	5.625	%	7/2024
5.75% exchangeable senior notes	172,092		(3,776)		168,316		N/A	5.75	%	10/2025
Trust preferred securities and subordinated notes	139,500		(803)		138,697		N/A	L + 2.25%		7/2037
Total Long-Term Debt	$	1,495,520	$	(11,212)	$	1,484,308

(1)Variable rate borrowings are based on 1- or 3-month LIBOR ("L" in the table above) plus an applicable spread.

Non-Recourse BPL Financing Facilities

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 B" 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 C" above).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 15. Long-Term Debt - (continued)

The following table below presents the value of loans, securities, and other assets pledged as collateral under our long-term debt at June 30, 2021 and December 31, 2020.

Table 15.2 – Collateral for Long-Term Debt


(In Thousands)	June 30, 2021		December 31, 2020
Collateral Type
Bridge loans	$	555,791	$	544,151
Single-family rental loans	246,903		154,774
Real estate securities
Sequoia securitizations (1)	256,910		249,446
CAFL securitizations (1)	112,207		114,044
Total real estate securities owned	369,117		363,490
Other BPL investments	—		21,414
Restricted cash	—		1,100
Total Collateral for Long-Term Debt	$	1,171,811	$	1,084,929

(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.

The following table summarizes the accrued interest payable on long-term debt at June 30, 2021 and December 31, 2020.

Table 15.3 – Accrued Interest Payable on Long-Term Debt


(In Thousands)	June 30, 2021		December 31, 2020
Long-term debt facilities	$	704	$	1,799
Convertible notes
4.75% convertible senior notes	3,564		3,564
5.625% convertible senior notes	3,896		3,896
5.75% exchangeable senior notes	2,474		2,474
Trust preferred securities and subordinated notes	585		669
Total Accrued Interest Payable on Long-Term Debt	$	11,223	$	12,402

Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for a full description of our long-term debt.

Note 16. Commitments and Contingencies

Lease Commitments

At June 30, 2021, we were obligated under seven non-cancelable operating leases with expiration dates through 2031 for $19 million of cumulative lease payments. Our operating lease expense was $2 million for both six-month periods ended June 30, 2021 and 2020.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

The following table presents our future lease commitments at June 30, 2021.

Table 16.1 – Future Lease Commitments by Year


(In Thousands)	June 30, 2021
2021 (6 months)	$	1,854
2022	3,714
2023	3,235
2024	2,411
2025	1,983
2026 and thereafter	6,128
Total Lease Commitments	19,325
Less: Imputed interest	(3,328)
Operating Lease Liabilities	$	15,997

During the six months ended June 30, 2021, we did not enter into any office leases. During the three months ended June 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 June 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 June 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 June 30, 2021, we had commitments to fund up to $374 million of additional advances on existing bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the customer and other terms regarding advances that must be met before we fund the commitment. At June 30, 2021, we carried a $0.3 million contingent liability related to these commitments to fund construction advances. We may also advance funds related to loans sold under a separate loan sale agreement that are generally repaid immediately by the loan purchaser and do not generally expose us to loss. The outstanding commitments related to these loans that we may temporarily fund totaled approximately $0.3 million at June 30, 2021. During the three and six months ended June 30, 2021, we recorded net market valuation gains of $1 million and $2 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss). During the three and six months ended June 30, 2020, we recorded a net market valuation gain of $2 million and a net market valuation loss of $2 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 two 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

June 30, 2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

Loss Contingencies — Risk-Sharing

During 2015 and 2016, we sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our risk-sharing arrangements with the Agencies. At June 30, 2021, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was partially 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 June 30, 2021, we had not incurred any losses under these arrangements. For the three and six months ended June 30, 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 for both periods. For the three and six months ended June 30, 2020, 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 $0.2 million and $1 million, respectively.

All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at June 30, 2021, the loans had an unpaid principal balance of $702 million and a weighted average FICO score of 756 (at origination) and LTV ratio of 75% (at origination). At June 30, 2021, $29 million of the loans were 90 days or more delinquent, of which one of these loans with an unpaid principal balance of $0.2 million was in foreclosure. At June 30, 2021, the carrying value of our guarantee obligation was $8 million and included $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-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. At June 30, 2021 and December 31, 2020, assets of such SPEs totaled $34 million and $46 million, respectively, and liabilities of such SPEs totaled $8 million and $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 June 30, 2021 and December 31, 2020, our repurchase reserve associated with our residential loans and MSRs was $9 million and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets.

We received one and five repurchase requests during the six months ended June 30, 2021 and 2020, respectively, and repurchased one and zero loans, respectively. During the six months ended June 30, 2021 and 2020, we recorded repurchase provisions of $0.3 million and $4 million, respectively, that were recorded in Mortgage banking activities, net; Investment fair value changes, net; and Other income on our consolidated statements of income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

Loss Contingencies — Litigation, Claims and Demands

There is no significant update regarding the litigation matters described in Note 16 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Loss Contingencies - Litigation.” At June 30, 2021, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described in our Annual Report on Form 10-K for the year ended December 31, 2020 was $2 million. At June 30, 2021, the aggregate amount of our 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 either resolved or adequately accrued for any unresolved Residential Loan Seller Demands and that there are no other Residential Loan Seller Demands that are reasonably possible to result in a material loss.

Note 17. Equity

The following table provides a summary of changes to accumulated other comprehensive income by component for the three and six months ended June 30, 2021 and 2020.

Table 17.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component


	Three Months Ended June 30, 2021				Three Months Ended June 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	$	84,527	$	(79,539)	$	(1,865)	$	(83,666)
Other comprehensive income before reclassifications	11,224		—		52,393		—
Amounts reclassified from other accumulated comprehensive income	(7,500)		1,028		2,718		1,029
Net current-period other comprehensive income	3,724		1,028		55,111		1,029
Balance at End of Period	$	88,251	$	(78,511)	$	53,246	$	(82,637)


	Six Months Ended June 30, 2021				Six Months Ended June 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	$	76,336	$	(80,557)	$	92,452	$	(50,939)
Other comprehensive income (loss) before reclassifications	22,210		—		(28,126)		(32,806)
Amounts reclassified from other accumulated comprehensive income (loss)	(10,295)		2,046		(11,080)		1,108
Net current-period other comprehensive income (loss)	11,915		2,046		(39,206)		(31,698)
Balance at End of Period	$	88,251	$	(78,511)	$	53,246	$	(82,637)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 17. Equity - (continued)

The following table provides a summary of reclassifications out of accumulated other comprehensive income for the three and six months ended June 30, 2021 and 2020.

Table 17.2 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)



		Amount Reclassified From Accumulated Other Comprehensive Income
	Affected Line Item in the	Three Months Ended June 30,
(In Thousands)	Income Statement	2021		2020
Net Realized (Gain) Loss on AFS Securities
Decrease in allowance for credit losses on AFS securities	Investment fair value changes, net	$	(13)	$	(54)
Gain on sale of AFS securities	Realized gains, net	(7,487)		2,772

		$	(7,500)	$	2,718
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Interest expense	$	1,028	$	1,029
		$	1,028	$	1,029



		Amount Reclassified From Accumulated Other Comprehensive Income
	Affected Line Item in the	Six Months Ended June 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)	$	1,471
Gain on sale of AFS securities	Realized gains, net	(9,907)		(12,551)

		$	(10,295)	$	(11,080)
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Interest expense	$	2,046	$	1,108
		$	2,046	$	1,108

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, with $110 million of remaining capacity available at June 30, 2021. During the six months ended June 30, 2021, we did not issue any shares under this program.

Direct Stock Purchase and Dividend Reinvestment Plan

During both the six months ended June 30, 2021 and 2020, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 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 six months ended June 30, 2021 and 2020.

Table 17.3 – Basic and Diluted Earnings (Loss) per Common Share


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands, except Share Data)	2021		2020		2021		2020
Basic Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood	$	90,025	$	165,444	$	187,282	$	(777,954)
Less: Dividends and undistributed earnings allocated to participating securities	(3,149)		(4,528)		(6,458)		(1,011)
Net income (loss) allocated to common shareholders	$	86,876	$	160,916	$	180,824	$	(778,965)
Basic weighted average common shares outstanding	112,921,070		114,383,289		112,337,984		114,229,928
Basic Earnings (Loss) per Common Share	$	0.77	$	1.41	$	1.61	$	(6.82)
Diluted Earnings (Loss) per Common Share:
Net income (loss) attributable to Redwood	$	90,025	$	165,444	$	187,282	$	(777,954)
Less: Dividends and undistributed earnings allocated to participating securities	(2,869)		(3,116)		(5,829)		(1,011)
Adjust for interest expense and gain on extinguishment of convertible notes for the period, net of tax	6,990		(15,835)		13,971		—
Net income (loss) allocated to common shareholders	$	94,146	$	146,493	$	195,424	$	(778,965)
Weighted average common shares outstanding	112,921,070		114,383,289		112,337,984		114,229,928
Net effect of dilutive equity awards	273,139		—		234,353		—
Net effect of assumed convertible notes conversion to common shares	28,566,875		32,715,790		28,566,875		—
Diluted weighted average common shares outstanding	141,761,084		147,099,079		141,139,212		114,229,928
Diluted Earnings (Loss) per Common Share	$	0.66	$	1.00	$	1.38	$	(6.82)

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 six months ended June 30, 2021, 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 six months ended June 30, 2020, 34.1 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 six months ended June 30, 2021, the number of outstanding equity awards that were antidilutive totaled 18,645 and 17,053, respectively. For the three and six months ended June 30, 2020, the number of outstanding equity awards that were antidilutive totaled 11,561 and 16,405, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 17. Equity - (continued)

Stock Repurchases

In February 2018, our Board of Directors approved an authorization for the repurchase of our common stock, increasing the total amount authorized for repurchases of common stock to $100 million, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization increased the previous share repurchase authorization 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 six months ended June 30, 2021, we did not repurchase any shares. At June 30, 2021, $78 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

Note 18. Equity Compensation Plans

At June 30, 2021 and December 31, 2020, 7,443,250 and 7,957,891 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 $27 million at June 30, 2021, as shown in the following table.

Table 18.1 – Activities of Equity Compensation Costs by Award Type


	Six Months Ended June 30, 2021
(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	$	564	$	3,540	$	17,766	$	5,794	$	—	$	27,664
Equity grants	—		2,370		3,141		—		259		5,770
Performance-based valuation adjustment	—		—		—		1,072		—		1,072
Equity grant forfeitures	(2)		(610)		(550)		—		—		(1,162)
Equity compensation expense	(271)		(752)		(3,629)		(1,355)		(130)		(6,137)
Unrecognized Compensation Cost at End of Period	$	291	$	4,548	$	16,728	$	5,511	$	129	$	27,207

At June 30, 2021, the weighted average amortization period remaining for all of our equity awards was one year.

Restricted Stock Awards ("RSAs")

At June 30, 2021 and December 31, 2020, there were 29,693 and 78,998 shares, respectively, of RSAs outstanding. Restrictions on these shares lapse through 2022. During the six months ended June 30, 2021, there were no RSAs granted, restrictions on 49,305 RSAs lapsed and those shares were distributed, and no RSAs were forfeited.

Restricted Stock Units ("RSUs")

At June 30, 2021 and December 31, 2020, there were 453,811 and 282,424 shares, respectively, of RSUs outstanding. Restrictions on these shares lapse through 2025. During the six months ended June 30, 2021, there were 272,261 RSUs granted, 62,494 RSUs distributed, and 38,380 RSUs forfeited.

Deferred Stock Units (“DSUs”)

At June 30, 2021 and December 31, 2020, there were 3,081,201 and 2,805,144 DSUs, respectively, outstanding of which 1,437,464 and 1,206,125, respectively, had vested. During the six months ended June 30, 2021, there were 463,213 DSUs granted, 155,995 DSUs distributed, and 31,161 DSUs forfeited. Unvested DSUs at June 30, 2021 vest through 2025.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

(Unaudited)

Note 18. Equity Compensation Plans - (continued)

Performance Stock Units (“PSUs”)

At June 30, 2021 and December 31, 2020, the target number of PSUs that were unvested was 955,710 and 978,735, respectively. Vesting for all PSUs will generally occur at the end of three years from their grant date 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, 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 850,000 shares of common stock to be purchased in aggregate for all employees. As of June 30, 2021 and December 31, 2020, 523,991 and 489,886 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at June 30, 2021.

Note 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 six months ended June 30, 2021 and 2020.

Table 19.1 – Mortgage Banking Activities


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2021		2020		2021		2020
Residential Mortgage Banking Activities, Net
Changes in fair value of:
Residential loans, at fair value (1)	$	76,907	$	(1,393)	$	47,634	$	6,562
Trading securities (2)	(1,095)		—		(374)		—
Risk management derivatives (3)	(55,740)		—		33,224		(31,294)
Other income (expense), net (4)	1,193		(6,612)		2,216		(6,354)
Total residential mortgage banking activities, net	21,265		(8,005)		82,700		(31,086)

Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:
Single-family rental loans, at fair value (1)	25,966		1,210		36,214		13,018
Risk management derivatives (3)	(2,504)		—		1,354		(21,538)
Bridge loans, at fair value	2,225		(1,260)		3,269		(5,194)
Other income, net (5)	7,467		2,073		13,489		9,916
Total business purpose mortgage banking activities, net	33,154		2,023		54,326		(3,798)
Mortgage Banking Activities, Net	$