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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: September 30, 2021

OR

☐			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						114,674,962			shares outstanding as of November 1, 2021

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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 September 30, 2021 (Unaudited) and December 31, 2020						2
			Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)						3
			Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)						4
			Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)						5
			Consolidated Statements of Cash Flows for the Nine Months Ended September 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						24
			Note 6. Residential Loans						34
			Note 7. Business Purpose Loans						38
			Note 8. Multifamily Loans						42
			Note 9. Real Estate Securities						42
			Note 10. Other Investments						48
			Note 11. Derivative Financial Instruments						50
			Note 12. Other Assets and Liabilities						52
			Note 13. Short-Term Debt						54
			Note 14. Asset-Backed Securities Issued						56
			Note 15. Long-Term Debt						59
			Note 16. Commitments and Contingencies						60
			Note 17. Equity						63
			Note 18. Equity Compensation Plans						66
			Note 19. Mortgage Banking Activities, Net						67
			Note 20. Other Income						68
			Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses						69
			Note 22. Taxes						70
			Note 23. Segment Information						70
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations						75
Item 3.			Quantitative and Qualitative Disclosures About Market Risk						106
Item 4.			Controls and Procedures						106
PART II —			OTHER INFORMATION
Item 1.			Legal Proceedings						107
Item 1A.			Risk Factors						107
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds						107
Item 3.			Defaults Upon Senior Securities						107
Item 4.			Mine Safety Disclosures (Not Applicable)						107
Item 5.			Other Information						108
Item 6.			Exhibits						109
Signatures									110

i

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, except Share Data) (Unaudited)						September 30, 2021						December 31, 2020
ASSETS (1)
Residential loans, held-for-sale, at fair value						$	1,495,079					$	176,641
Residential loans, held-for-investment, at fair value						4,721,389						4,072,410
Business purpose loans, held-for-sale, at fair value						466,346						245,394
Business purpose loans, held-for-investment, at fair value						4,227,209						3,890,959
Multifamily loans, held-for-investment, at fair value						482,791						492,221
Real estate securities, at fair value						353,286						344,125
Other investments						422,366						348,175
Cash and cash equivalents						556,989						461,260
Restricted cash						88,717						83,190
Intangible assets						45,246						56,865
Derivative assets						51,103						53,238
Other assets						162,193						130,588
Total Assets						$	13,072,714					$	10,355,066
LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net						$	1,750,941					$	522,609
Derivative liabilities						10,972						16,072
Accrued expenses and other liabilities						251,576						179,340
Asset-backed securities issued (includes $7,756,101 and $6,900,362 at fair value), net						8,183,825						7,100,661
Long-term debt, net						1,499,577						1,425,485
Total liabilities						11,696,891						9,244,167
Commitments and Contingencies (see Note 16)
Equity
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 114,661,762 and 112,090,006 issued and outstanding						1,147						1,121
Additional paid-in capital						2,312,272						2,264,874
Accumulated other comprehensive income (loss)						1,923						(4,221)
Cumulative earnings						1,272,845						997,277
Cumulative distributions to stockholders						(2,212,364)						(2,148,152)
Total equity						1,375,823						1,110,899
Total Liabilities and Equity						$	13,072,714					$	10,355,066

——————

(1)Our consolidated balance sheets include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations of these VIEs and liabilities of consolidated VIEs for which creditors do not have recourse to Redwood Trust, Inc. or its affiliates. At September 30, 2021 and December 31, 2020, assets of consolidated VIEs totaled $9,358,317 and $8,141,069, respectively. At September 30, 2021 and December 31, 2020, liabilities of consolidated VIEs totaled $8,391,761 and $7,348,713, respectively. See Note 4 for further discussion.

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

2

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REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(In Thousands, except Share Data)						Three Months Ended September 30,												Nine Months Ended September 30,
(Unaudited)						2021						2020						2021						2020
Interest Income
Residential loans						$	53,993					$	44,921					$	146,081					$	179,331
Business purpose loans						67,129						55,637						201,640						161,710
Multifamily loans						4,846						4,918						14,492						49,960
Real estate securities						14,242						10,135						33,184						38,471
Other interest income						5,512						6,371						17,325						20,537
Total interest income						145,722						121,982						412,722						450,009
Interest Expense
Short-term debt						(11,826)						(5,145)						(30,794)						(45,119)
Asset-backed securities issued						(73,732)						(66,514)						(222,712)						(232,316)
Long-term debt						(18,196)						(28,752)						(60,865)						(72,313)
Total interest expense						(103,754)						(100,411)						(314,371)						(349,748)
Net Interest Income						41,968						21,571						98,351						100,261
Non-interest Income (Loss)
Mortgage banking activities, net						63,163						59,395						200,189						24,511
Investment fair value changes, net						26,077						107,047						120,644						(611,557)
Other income, net						2,388						(114)						8,357						3,979
Realized gains, net						6,703						602						17,803						30,419
Total non-interest income (loss), net						98,331						166,930						346,993						(552,648)
General and administrative expenses						(47,692)						(27,630)						(131,837)						(84,832)
Loan acquisition costs						(4,621)						(2,158)						(11,928)						(7,716)
Other expenses						(4,023)						(7,788)						(12,104)						(104,286)
Net Income (Loss) before (Provision for) Benefit from Income Taxes						83,963						150,925						289,475						(649,221)
Benefit from (provision for) income taxes						4,323						(9,113)						(13,907)						13,079
Net Income (Loss)						$	88,286					$	141,812					$	275,568					$	(636,142)
Basic earnings (loss) per common share						$	0.75					$	1.21					$	2.36					$	(5.60)
Diluted earnings (loss) per common share						$	0.65					$	1.02					$	2.03					$	(5.60)
Basic weighted average shares outstanding						112,995,847						113,403,102						112,754,691						113,952,308
Diluted weighted average shares outstanding						141,855,471						141,969,977						141,575,385						113,952,308

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

3

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REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)						Three Months Ended September 30,												Nine Months Ended September 30,
(Unaudited)						2021						2020						2021						2020
Net Income (Loss)						$	88,286					$	141,812					$	275,568					$	(636,142)
Other comprehensive income (loss):
Net unrealized (loss) gain on available-for-sale securities						(2,658)						8,236						19,552						(19,890)
Reclassification of unrealized (gain) loss on available-for-sale securities to net income						(6,200)						(445)						(16,495)						(11,525)
Net unrealized loss on interest rate agreements						—						—						—						(32,806)
Reclassification of unrealized loss on interest rate agreements to net income						1,041						1,040						3,087						2,148
Total other comprehensive (loss) income						(7,817)						8,831						6,144						(62,073)
Total Comprehensive Income (Loss)						$	80,469					$	150,643					$	281,712					$	(698,215)

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

4

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REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended September 30, 2021

(In Thousands, except Share Data)						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Income						Cumulative  Earnings						Cumulative Distributions to Stockholders						Total
(Unaudited)						Shares						Amount
June 30, 2021						113,052,780						$	1,131					$	2,287,412					$	9,740					$	1,184,559					$	(2,187,700)					$	1,295,142
Net income						—						—						—						—						88,286						—						88,286
Other comprehensive loss						—						—						—						(7,817)						—						—						(7,817)
Issuance of common stock						1,585,709						16						19,810						—						—						—						19,826
Employee stock purchase and incentive plans						23,273						—						153						—						—						—						153
Non-cash equity award compensation						—						—						4,897						—						—						—						4,897
Common dividends declared ($0.21 per share)						—						—						—						—						—						(24,664)						(24,664)
September 30, 2021						114,661,762						$	1,147					$	2,312,272					$	1,923					$	1,272,845					$	(2,212,364)					$	1,375,823

For the Nine Months Ended September 30, 2021

(In Thousands, except Share Data)						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss)						Cumulative  Earnings						Cumulative Distributions to Stockholders						Total
(Unaudited)						Shares						Amount
December 31, 2020						112,090,006						$	1,121					$	2,264,874					$	(4,221)					$	997,277					$	(2,148,152)					$	1,110,899
Net income						—						—						—						—						275,568						—						275,568
Other comprehensive income						—						—						—						6,144						—						—						6,144
Issuance of common stock						2,391,777						24						33,176						—						—						—						33,200
Employee stock purchase and incentive plans						179,979						2						(536)						—						—						—						(534)
Non-cash equity award compensation						—						—						14,758						—						—						—						14,758
Common dividends declared ($0.55 per share)						—						—						—						—						—						(64,212)						(64,212)
September 30, 2021						114,661,762						$	1,147					$	2,312,272					$	1,923					$	1,272,845					$	(2,212,364)					$	1,375,823

For the Three Months Ended September 30, 2020

(In Thousands, except Share Data)						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss)						Cumulative  Earnings						Cumulative Distributions to Stockholders						Total
(Unaudited)						Shares						Amount
June 30, 2020						114,940,197						$	1,149					$	2,279,625					$	(29,391)					$	801,170					$	(2,115,977)					$	936,576
Net income						—						—						—						—						141,812						—						141,812
Other comprehensive income						—						—						—						8,831						—						—						8,831
Employee stock purchase and incentive plans						11,460						—						9						—						—						—						9
Non-cash equity award compensation						—						—						3,906						—						—						—						3,906
Share repurchases						(3,047,335)						(30)						(21,629)						—						—						—						(21,659)
Common dividends declared ($0.14 per share)						—						—						—						—						—						(16,011)						(16,011)
September 30, 2020						111,904,322						$	1,119					$	2,261,911					$	(20,560)					$	942,982					$	(2,131,988)					$	1,053,464

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REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Nine Months Ended September 30, 2020

(In Thousands, except Share Data)						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss)						Cumulative  Earnings						Cumulative Distributions to Stockholders						Total
(Unaudited)						Shares						Amount
December 31, 2019						114,353,036						$	1,144					$	2,269,617					$	41,513					$	1,579,124					$	(2,064,167)					$	1,827,231
Net loss						—						—						—						—						(636,142)						—						(636,142)
Other comprehensive loss						—						—						—						(62,073)						—						—						(62,073)
Issuance of common stock						350,088						3						5,544						—						—						—						5,547
Employee stock purchase and incentive plans						248,533						2						(2,767)						—						—						—						(2,765)
Non-cash equity award compensation						—						—						11,146						—						—						—						11,146
Share repurchases						(3,047,335)						(30)						(21,629)						—						—						—						(21,659)
Common dividends declared ($0.585 per share)						—						—						—						—						—						(67,821)						(67,821)
September 30, 2020						111,904,322						$	1,119					$	2,261,911					$	(20,560)					$	942,982					$	(2,131,988)					$	1,053,464

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

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

(In Thousands) (Unaudited)						Nine Months Ended September 30,
						2021						2020
Cash Flows From Operating Activities:
Net income (loss)						$	275,568					$	(636,142)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net						300						6,213
Depreciation and amortization of non-financial assets						12,674						13,166
Originations of held-for-sale loans						(960,419)						(654,820)
Purchases of held-for-sale loans						(9,902,028)						(2,893,246)
Proceeds from sales of held-for-sale loans						6,948,264						3,224,526
Principal payments on held-for-sale loans						49,619						53,677
Net settlements of derivatives						27,412						(187,130)
Non-cash equity award compensation expense						14,758						11,146
Goodwill impairment expense						—						88,675
Market valuation adjustments						(292,056)						606,764
Realized gains, net						(17,803)						(30,419)
Net change in:
Accrued interest receivable and other assets						(9,680)						304,147
Accrued interest payable and accrued expenses and other liabilities						73,120						(82,489)
Net cash used in operating activities						(3,780,271)						(175,932)
Cash Flows From Investing Activities:
Originations of loan investments						(557,327)						(327,494)
Purchases of loan investments						(35,713)						—
Proceeds from sales of loan investments						9,484						1,574,160
Principal payments on loan investments						1,950,151						1,652,418
Purchases of real estate securities						(29,342)						(106,422)
Sales of securities held in consolidated securitization trusts						8,197						142,990
Proceeds from sales of real estate securities						37,500						634,709
Principal payments on real estate securities						46,904						19,446
Purchases of servicer advance investments						—						(179,419)
Principal repayments from servicer advance investments						58,248						83,124
Purchases of home equity investment contracts						(109,174)						(986)
Other investing activities, net						(15,915)						22,019
Net cash provided by investing activities						1,363,013						3,514,545
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt						9,847,178						3,981,572
Repayments on short-term debt						(8,443,664)						(5,828,972)
Proceeds from issuance of asset-backed securities						2,822,785						1,343,845
Repayments on asset-backed securities issued						(1,549,766)						(1,037,546)
Proceeds from borrowings on long-term debt						948,674						1,251,850
Repayments on long-term debt						(1,055,475)						(2,640,007)
Net settlements of derivatives						—						(84,336)
Net proceeds from issuance of common stock						20,248						5,791
Net payments on repurchase of common stock						—						(21,659)
Taxes paid on equity award distributions						(957)						(3,009)
Dividends paid						(64,212)						(67,821)
Other financing activities, net						(6,297)						(4,876)
Net cash provided by (used in) financing activities						2,518,514						(3,105,168)
Net increase in cash, cash equivalents and restricted cash						101,256						233,445
Cash, cash equivalents and restricted cash at beginning of period (1)						544,450						290,833
Cash, cash equivalents and restricted cash at end of period (1)						$	645,706					$	524,278

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

(In Thousands) (Unaudited)						Nine Months Ended September 30,
						2021						2020
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest						$	298,507					$	364,875
Taxes						28,092						218
Supplemental Noncash Information:
Real estate securities retained from loan securitizations						$	9,375					$	46,560
Retention of mortgage servicing rights from loan securitizations and sales						7,065						—
Deconsolidation of multifamily loans held in securitization trusts						—						(3,849,779)
Deconsolidation of multifamily ABS						—						(3,706,789)
Transfers from loans held-for-sale to loans held-for-investment						3,005,041						770,754
Transfers from loans held-for-investment to loans held-for-sale						44,922						—
Transfers from residential loans to real estate owned						21,655						12,547
Transfers from long-term debt to short-term debt						93,150						—
Right-of-use asset obtained in exchange for operating lease liability						1,135						5,362
Reduction in operating lease liability due to lease modification						—						1,466
Issuance of common stock for 5 Arches acquisition						13,375						3,375

(1)    Cash, cash equivalents, and restricted cash at September 30, 2021 includes cash and cash equivalents of $557 million and restricted cash of $89 million, and at December 31, 2020 includes cash and cash equivalents of $461 million and restricted cash of $83 million.

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

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 generally not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our 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 September 30, 2021 and December 31, 2020, and for the three and nine months ended September 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 September 30, 2021 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2021 should not be construed as indicative of the results to be expected for the full year.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 2. Basis of Presentation - (continued)

Principles of Consolidation

In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities issued prior to 2012 ("Legacy Sequoia"), certain entities formed during and after 2012 in connection with the securitization of Redwood Select prime loans and Redwood Choice expanded-prime loans ("Sequoia"), entities formed in connection with the securitization of CoreVest single-family rental and bridge loans ("CAFL"), and beginning in the third quarter of 2021, an entity ("Point HEI") formed in connection with the securitization of home equity investment contracts ("HEIs"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations in which we have invested. Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have purchased or retained, although for certain entities we are exposed to financial risks associated with our role as a sponsor or co-sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.

For financial reporting purposes, the underlying loans owned at the consolidated Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment at fair value, the underlying loans at the consolidated Freddie Mac K-Series entity are shown under Multifamily loans held-for-investment at fair value, the underlying single-family rental and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment at fair value, and the underlying HEIs at the consolidated Point HEI entity are shown under Other investments at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income (loss), we recorded interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as fair value changes, other income and expenses associated with these entities' activities. See Note 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.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 2. Basis of Presentation - (continued)

In connection with the acquisitions of 5 Arches and CoreVest in 2019, we identified and recorded finite-lived intangible assets totaling $25 million and $57 million, respectively. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at September 30, 2021.

Table 2.1 – Intangible Assets – Activity

						Intangible Assets at Acquisition						Accumulated Amortization at September 30, 2021						Carrying Value at September 30, 2021						Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network						$	45,300					$	(12,672)					$	32,628					7
Broker network						18,100						(9,352)						8,748						5
Non-compete agreements						9,500						(6,806)						2,694						3
Tradenames						4,000						(2,861)						1,139						3
Developed technology						1,800						(1,763)						37						2
Loan administration fees on existing loan assets						2,600						(2,600)						—						1
Total						$	81,300					$	(36,054)					$	45,246					6

All of our intangible assets are amortized on a straight-line basis. For both of the nine months ended September 30, 2021 and 2020, we recorded intangible asset amortization expense of $12 million. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year

(In Thousands)																		September 30, 2021
2021 (3 months)																		$	3,685
2022																		12,800
2023																		10,091
2024																		7,073
2025 and thereafter																		11,597
Total Future Intangible Asset Amortization																		$	45,246

On a quarterly basis, we evaluate our finite-lived intangible assets for impairment indicators and additionally evaluate the useful lives of our intangible assets to determine if revisions to the remaining periods of amortization are warranted. We reviewed our finite-lived intangible assets and determined that the estimated lives were appropriate and that there were no indicators of impairment at September 30, 2021.

A liability resulting from the contingent consideration arrangement with 5 Arches was initially recorded in 2019 at its acquisition-date fair value as part of total consideration for the acquisition of 5 Arches. During the first quarter of 2021, we distributed 806,068 shares of Redwood common stock and paid $1 million in cash in full settlement of the remaining deferred consideration associated with this acquisition.

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

Included in Note 3 to the Consolidated Financial Statements of our 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 nine months ended September 30, 2021.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

Other Investments

Strategic Investments

We have made and may make additional strategic investments in companies through our RWT Horizons venture investment strategy or at a corporate level. These investments can take the form of equity or debt and often have conversion features. Depending on the terms of the investments, we may account for these investments under the fair value option or as non-marketable equity securities under the equity method of accounting or the measurement alternative (to the extent they do not have a “readily determinable fair value,” or are not traded in a verifiable public market or are restricted for sale in the public market by a restricted stock legend or otherwise).

Investments accounted for under the fair value option are carried at fair value with periodic changes in value recorded through Investment fair value changes on our consolidated statements of income (loss). For non-marketable securities, we utilize the equity method of accounting when we are able to exert significant influence over but do not control the activities of the investee. Under the equity method of accounting, we generally elect to record our share of earnings or losses from equity method investments on a one-quarter lag and we assess our investments for impairment whenever events or changes in circumstances indicate that the carrying amount of our investment might not be recoverable. Income from equity method investments is recorded in Other income, net on our consolidated statements of income (loss). Under the measurement alternative, the carrying value of our investment is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Adjustments are determined primarily based on a market approach as of the transaction date and are recorded as a component of Other income, net on our consolidated statements of income (loss).

Recent Accounting Pronouncements

Newly Adopted Accounting Standards Updates ("ASUs")

In August 2021, the FASB issued ASU 2021-06, "Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update)." This new guidance aligns certain SEC paragraphs in the codification with new SEC rules issued in May 2020 related to changes to the disclosure requirements for acquired and disposed businesses. We adopted this guidance upon issuance in the third quarter of 2021, which did not have a material impact on our consolidated financial statements.

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.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." This new guidance clarifies the interaction of the accounting for 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.

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 September 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.

13

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

The table below presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at September 30, 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
September 30, 2021 (In Thousands)																								Financial Instruments						Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements						$	33,628					$	—					$	33,628					$	(74)					$	(32,408)					$	1,146
TBAs						8,213						—						8,213						(4,278)						(3,117)						818
Total Assets						$	41,841					$	—					$	41,841					$	(4,352)					$	(35,525)					$	1,964
Liabilities (2)
Interest rate agreements						$	(74)					$	—					$	(74)					$	74					$	—					$	—
TBAs						(7,599)						—						(7,599)						4,278						3,321						—
Futures						(749)						—						(749)						—						749						—
Loan warehouse debt						(1,335,464)						—						(1,335,464)						1,335,464						—						—
Security repurchase agreements						(79,766)						—						(79,766)						79,766						—						—
Total Liabilities						$	(1,423,652)					$	—					$	(1,423,652)					$	1,419,582					$	4,070					$	—

14

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 ("Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet") by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty (which may, in certain circumstances, be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.

(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.

15

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

Analysis of Consolidated VIEs

At September 30, 2021, we consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, Freddie Mac K-Series, and Point HEI securitization entities that we determined were VIEs and for which we determined we were the primary beneficiary. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not owned by and are not legal obligations of ours. Our exposure to these entities is primarily through the financial interests we have retained, although for certain securitizations, we are exposed to financial risks associated with our role as a sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.

We also consolidate 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 September 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 non-controlling interest. Additionally, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing.

During the third quarter of 2021, we consolidated a Point securitization entity formed to invest in Point HEIs that we determined was a VIE and for which we determined we were the primary beneficiary. At September 30, 2021, we owned a portion of the subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 12 for additional information on non-controlling interests in the entity. We consolidate the Point securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood.

16

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

For certain of our consolidated VIEs, we have elected to account for the assets and liabilities of these entities as collateralized financing entities ("CFE"). A CFE is a variable interest entity that holds financial assets and issues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets or fair value of the financial liabilities. The net equity in an entity effectively represents the fair value of the beneficial interests we own in the entity. The following table presents a summary of the assets and liabilities of these VIEs.

Table 4.1 – Assets and Liabilities of Consolidated VIEs Accounted for as Collateralized Financing Entities

September 30, 2021						Legacy Sequoia						Sequoia						CAFL SFR						Freddie Mac SLST						Freddie Mac K-Series						Servicing Investment						Point HEI						Total Consolidated CFE VIEs
(Dollars in Thousands)
Residential loans, held-for-investment						$	242,234					$	2,479,750					$	—					$	1,999,405					$	—					$	—					$	—					$	4,721,389
Business purpose loans, held-for-investment						—						—						3,402,410						—						—						—						—						3,402,410
Multifamily loans, held-for-investment						—						—						—						—						482,791						—						—						482,791
Other investments						—						—						—						—						—						187,880						167,442						355,322
Cash and cash equivalents						—						—						—						—						—						12,977						—						12,977
Restricted cash						148						—						—						—						—						19,872						5,033						25,053
Accrued interest receivable						232						7,869						13,451						6,068						1,321						1,068						—						30,009
Other assets						275						—						13,172						1,958						—						6,283						50						21,738
Total Assets						$	242,889					$	2,487,619					$	3,429,033					$	2,007,431					$	484,112					$	228,080					$	172,525					$	9,051,689
Short-term debt						$	—					$	—					$	—					$	—					$	—					$	151,910					$	—					$	151,910
Accrued interest payable						108						5,918						10,691						4,279						1,195						97						—						22,288
Accrued expenses and other liabilities						—						—						224						—						—						15,835						16,740						32,799
Asset-backed securities issued						239,447						2,243,299						3,126,405						1,550,111						451,402						—						145,437						7,756,101
Total Liabilities						$	239,555					$	2,249,217					$	3,137,320					$	1,554,390					$	452,597					$	167,842					$	162,177					$	7,963,098
Fair value of our investments						$	3,062					$	236,451					$	287,813					$	451,252					$	31,389					$	60,238					$	10,348					$	1,080,553
Number of VIEs						20						13						15						3						1						3						1						56

17

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

December 31, 2020						Legacy Sequoia						Sequoia						CAFL SFR						Freddie Mac SLST						Freddie Mac K-Series						Servicing Investment						Point HEI						Total Consolidated CFE VIEs
(Dollars in Thousands)
Residential loans, held-for-investment						$	285,935					$	1,565,322					$	—					$	2,221,153					$	—					$	—					$	—					$	4,072,410
Business purpose loans, held-for-investment						—						—						3,249,194						—						—						—						—						3,249,194
Multifamily loans, held-for-investment						—						—						—						—						492,221						—						—						492,221
Other investments						—						—						—						—						—						251,773						—						251,773
Cash and cash equivalents						—						—						—						—						—						11,579						—						11,579
Restricted cash						148						—						—						—						—						23,220						—						23,368
Accrued interest receivable						305						6,802						13,055						6,754						1,337						2,334						—						30,587
Other assets						638						—						2,930						646						—						5,723						—						9,937
Total Assets						$	287,026					$	1,572,124					$	3,265,179					$	2,228,553					$	493,558					$	294,629					$	—					$	8,141,069
Short-term debt						$	—					$	—					$	—					$	—					$	—					$	208,375					$	—					$	208,375
Accrued interest payable						141						4,697						10,278						4,846						1,177						135						—						21,274
Accrued expenses and other liabilities						—						50						—						—						—						18,353						—						18,403
Asset-backed securities issued						282,326						1,347,357						3,013,093						1,793,620						463,966						—						—						6,900,362
Total Liabilities						$	282,467					$	1,352,104					$	3,023,371					$	1,798,466					$	465,143					$	226,863					$	—					$	7,148,414
Fair value of our investments						$	4,559					$	220,020					$	241,808					$	430,087					$	28,415					$	67,766					$	—					$	992,655
Number of VIEs						20						10						14						2						1						3						—						50

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

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

						Three Months Ended September 30, 2021
						Legacy Sequoia						Sequoia						CAFL SFR						Freddie Mac SLST						Freddie Mac K-Series						Servicing Investment						Point HEI						Total Consolidated CFE VIEs
(Dollars in Thousands)
Interest income						$	1,042					$	18,867					$	48,723					$	18,707					$	4,846					$	3,905					$	—					$	96,090
Interest expense						(641)						(15,368)						(37,415)						(13,303)						(4,460)						(1,018)						—						(72,205)
Net interest income						401						3,499						11,308						5,404						386						2,887						—						23,885
Non-interest income
Investment fair value changes, net						(247)						3,314						2,943						13,849						554						(2,080)						47						18,380
Other income						—						—						10						—						—						—						—						10
Total non-interest income, net						(247)						3,314						2,953						13,849						554						(2,080)						47						18,390
General and administrative expenses						—						—						—						—						—						(60)						—						(60)
Other expenses						—						—						—						—						—						(149)						—						(149)
Income from Consolidated VIEs						$	154					$	6,813					$	14,261					$	19,253					$	940					$	598					$	47					$	42,066

18

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

						Nine Months Ended September 30, 2021
						Legacy Sequoia						Sequoia						CAFL SFR						Freddie Mac SLST						Freddie Mac K-Series						Servicing Investment						Point HEI						Total Consolidated CFE VIEs
(Dollars in Thousands)
Interest income						$	3,559					$	48,842					$	152,445					$	58,372					$	14,492					$	12,168					$	—					$	289,878
Interest expense						(2,271)						(38,848)						(118,469)						(41,698)						(13,294)						(3,414)						—						(217,994)
Net interest income						1,288						9,994						33,976						16,674						1,198						8,754						—						71,884
Non-interest income
Investment fair value changes, net						(1,162)						13,118						6,354						54,282						11,330						(5,646)						47						78,323
Other income						—						—						10						—						—						—						—						10
Total non-interest income, net						(1,162)						13,118						6,364						54,282						11,330						(5,646)						47						78,333
General and administrative expenses						—						—						—						—						—						(150)						—						(150)
Other expenses						—						—						—						—						—						(591)						—						(591)
Income from Consolidated VIEs						$	126					$	23,112					$	40,340					$	70,956					$	12,528					$	2,367					$	47					$	149,476

						Three Months Ended September 30, 2020
						Legacy Sequoia						Sequoia						CAFL SFR						Freddie Mac SLST						Freddie Mac K-Series						Servicing Investment						Point HEI						Total Consolidated CFE VIEs
(Dollars in Thousands)
Interest income						$	1,795					$	20,919					$	36,181					$	21,696					$	4,918					$	4,403					$	—					$	89,912
Interest expense						(1,059)						(17,828)						(26,383)						(15,473)						(4,426)						(1,587)						—						(66,756)
Net interest income						736						3,091						9,798						6,223						492						2,816						—						23,156
Non-interest income
Investment fair value changes, net						(81)						7,851						9,692						82,214						2,166						(422)						—						101,420
Total non-interest income, net						(81)						7,851						9,692						82,214						2,166						(422)						—						101,420
General and administrative expenses						—						—						—						—						—						(41)						—						(41)
Other expenses						—						—						—						—						—						(471)						—						(471)
Income from Consolidated VIEs						$	655					$	10,942					$	19,490					$	88,437					$	2,658					$	1,882					$	—					$	124,064

						Nine Months Ended September 30, 2020
						Legacy Sequoia						Sequoia						CAFL SFR						Freddie Mac SLST						Freddie Mac K-Series						Servicing Investment						Point HEI						Total Consolidated CFE VIEs
(Dollars in Thousands)
Interest income						$	7,674					$	68,566					$	99,169					$	64,869					$	49,960					$	13,026					$	—					$	303,264
Interest expense						(5,099)						(58,455)						(72,768)						(47,495)						(47,154)						(4,961)						—						(235,932)
Net interest income						2,575						10,111						26,401						17,374						2,806						8,065						—						67,332
Non-interest income
Investment fair value changes, net						(702)						(22,065)						(41,841)						(33,081)						(82,744)						(9,015)						—						(189,448)
Total non-interest income, net						(702)						(22,065)						(41,841)						(33,081)						(82,744)						(9,015)						—						(189,448)
General and administrative expenses						—						—						—						—						—						(784)						—						(784)
Other expenses						—						—						—						—						—						346						—						346
Income (Loss) from Consolidated VIEs						$	1,873					$	(11,954)					$	(15,440)					$	(15,707)					$	(79,938)					$	(1,388)					$	—					$	(122,554)

19

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

In addition to our consolidated VIEs for which we made the CFE election, we consolidate additional VIEs for which we did not make the CFE election, and elected to account for the ABS issued by these entities at amortized cost. These include our CAFL Bridge securitization, Freddie Mac SLST re-securitization, and Servicing Investment entities.

We consolidate the assets and liabilities of certain Sequoia, CAFL and Point HEI securitization entities, as we did not meet the GAAP sale criteria at the time we transferred financial assets to these entities. Our involvement in consolidated Sequoia, CAFL and Point HEI entities continues in the following ways: (i) we continue to hold subordinate investments in each entity, and for certain entities, more senior investments; (ii) we maintain certain discretionary rights associated with our sponsorship of, or our subordinate investments in, each entity including rights to direct loss mitigation activities; and (iii) we continue to hold a right to call the assets of certain entities (once they have been paid down below a specified threshold) at a price equal to, or in excess of, the current outstanding principal amount of the entity’s asset-backed securities issued. These factors have resulted in our continuing to consolidate the assets and liabilities of these Sequoia, CAFL and Point HEI entities in accordance with GAAP.

We consolidate the assets and liabilities of certain Freddie Mac K-Series and SLST securitization trusts resulting from our investment in subordinate securities issued by these trusts, and in the case of certain CAFL securitizations, resulting from securities acquired through our acquisition of CoreVest. Additionally, we consolidate the assets and liabilities of Servicing Investment entities from our investment in servicer advance investments and excess MSRs. In each case, we maintain certain discretionary rights associated with the ownership of these investments that we determined reflected a controlling financial interest, as we have both the power to direct the activities that most significantly impact the economic performance of the VIEs and the right to receive benefits of and the obligation to absorb losses from the VIEs that could potentially be significant to the VIEs.

During the three months ended September 30, 2021, we did not call any of our consolidated CAFL entities. During the nine months ended September 30, 2021, we called 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 50 Sequoia securitization entities sponsored by us that are still outstanding as of September 30, 2021, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and 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 September 30, 2021, we called two of our unconsolidated Sequoia entities, and purchased $66 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $6 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). During the nine months ended September 30, 2021, we called six of our unconsolidated Sequoia entities, and purchased $167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $15 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). At September 30, 2021, we held $151 million of loans for sale at fair value that were acquired following the calls.

20

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

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

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

The following table summarizes the cash flows during the three and nine months ended September 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 September 30,												Nine Months Ended September 30,
(In Thousands)						2021						2020						2021						2020
Proceeds from new transfers						$	—					$	—					$	1,266,063					$	1,610,761
MSR fees received						1,095						2,280						4,038						7,445
Funding of compensating interest, net						54						4						(116)						(293)
Cash flows received on retained securities						16,724						5,873						42,117						19,242

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

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

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

Prepayment rates

N/A

N/A

N/A

N/A

Discount rates

N/A

N/A

N/A

N/A

Credit loss assumptions

N/A

N/A

N/A

N/A

												Nine Months Ended September 30, 2021																		Nine Months Ended September 30, 2020
At Date of Securitization												Senior IO Securities						Subordinate Securities												Senior IO Securities						Subordinate Securities
Prepayment rates												11		%				11 %												41		%				13		%
Discount rates												15 %						6 %												16		%				6		%
Credit loss assumptions												0.23 %						0.23 %												0.21		%				0.22		%

21

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents additional information at September 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)						September 30, 2021						December 31, 2020
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading						$	18,380					$	20,982
Subordinate securities, classified as AFS						128,874						136,475
Mortgage servicing rights						6,068						8,413
Maximum loss exposure (1)						$	153,322					$	165,870
Assets transferred:
Principal balance of loans outstanding						$	5,542,244					$	7,728,432
Principal balance of loans 30+ days delinquent						32,422						138,029

(1)Maximum loss exposure from our involvement with unconsolidated VIEs pertains to the carrying value of our securities and MSRs retained from these VIEs and represents estimated losses that would be incurred under severe, hypothetical circumstances, such as if the value of our interests and any associated collateral declines to zero. This does not include, for example, any potential exposure to representation and warranty claims associated with our initial transfer of loans into a securitization.

The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at September 30, 2021 and December 31, 2020.

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

September 30, 2021						MSRs						Senior Securities (1)						Subordinate Securities
(Dollars in Thousands)
Fair value at September 30, 2021						$	6,068					$	18,380					$	128,874
Expected life (in years) (2)						2						4						8
Prepayment speed assumption (annual CPR) (2)						36 %						25		%				32 %
Decrease in fair value from:
10% adverse change						$	502					$	1,173					$	57
25% adverse change						1,173						2,789						141
Discount rate assumption (2)						12 %						18		%				3.8 %
Decrease in fair value from:
100 basis point increase						$	134					$	417					$	9,353
200 basis point increase						261						812						17,829
Credit loss assumption (2)						N/A						0.34		%				0.34		%
Decrease in fair value from:
10% higher losses						N/A						$	—					$	2,190
25% higher losses						N/A						—						5,473

22

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 $18 million and $17 million of interest-only securities at September 30, 2021 and December 31, 2020, respectively.

(2)Expected life, prepayment speed assumption, discount rate assumption, and credit loss assumption presented in the tables above represent weighted averages.

Analysis of Unconsolidated Third-Party VIEs

Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at September 30, 2021 and December 31, 2020, grouped by asset type.

Table 4.8 – Third-Party Sponsored VIE Summary

(In Thousands)						September 30, 2021						December 31, 2020
Mortgage-Backed Securities
Senior						$	4,114					$	11,131
Mezzanine						—						2,014
Subordinate						201,918						173,523
Total Mortgage-Backed Securities						206,032						186,668
Excess MSR						11,368						14,133
Total Investments in Third-Party Sponsored VIEs						$	217,400					$	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.

23

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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.

24

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at September 30, 2021 and December 31, 2020.

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

						September 30, 2021												December 31, 2020
						Carrying Value						Fair Value						Carrying Value						Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value						$	1,495,044					$	1,495,044					$	176,604					$	176,604
Residential loans, held-for-investment						4,721,389						4,721,389						4,072,410						4,072,410
Business purpose loans, held-for-sale						466,346						466,346						245,394						245,394
Business purpose loans, held-for-investment						4,227,209						4,227,209						3,890,959						3,890,959
Multifamily loans						482,791						482,791						492,221						492,221
Real estate securities						353,286						353,286						344,125						344,125
Servicer advance investments (1)						170,062						170,062						231,489						231,489
MSRs (1)						12,389						12,389						8,815						8,815
Excess MSRs (1)						29,185						29,185						34,418						34,418
HEIs (1)						167,856						167,856						42,440						42,440
Other investments (2)						17,574						17,574						18,847						18,847
Cash and cash equivalents						556,989						556,989						461,260						461,260
Restricted cash						88,717						88,717						83,190						83,190
Derivative assets						51,103						51,103						53,238						53,238
REO (3)						18,863						21,657						8,413						9,229
Margin receivable (3)						16,503						16,503						4,758						4,758
FHLBC stock (3)						10						10						5,000						5,000
Pledged collateral (3)						—						—						1,177						1,177
Liabilities
Short-term debt						$	1,750,941					$	1,750,941					$	522,609					$	522,609
Margin payable (4)						48,298						48,298						—						—
Guarantee obligation (4)						7,902						5,263						10,039						7,843
Point HEI non-controlling interest						16,722						16,722						—						—
Derivative liabilities						10,972						10,972						16,072						16,072
ABS issued, net
Fair value						7,756,101						7,756,101						6,900,362						6,900,362
Amortized cost						427,724						428,059						200,299						204,892
Other long-term debt, net (5)						847,889						848,929						774,726						783,570
Convertible notes, net (5)						512,979						539,067						511,085						499,865
Trust preferred securities and subordinated notes, net (5)						138,709						94,163						138,674						80,910

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

(2)Comprised of financial instruments included in Other investments on our consolidated balance sheets.

(3)These assets are included in Other assets on our consolidated balance sheets.

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

(5)These liabilities are included in Long-term debt, net on our consolidated balance sheets.

25

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

During the three and nine months ended September 30, 2021, we elected the fair value option for $11 million and $37 million of securities, respectively, $3.17 billion and $9.75 billion of residential loans (principal balance), respectively, $637 million and $1.55 billion of business purpose loans (principal balance), respectively, $5 million and $9 million of MSRs, respectively, and $11 million and $15 million of other financial instruments, respectively. Additionally, during the three months ended September 30, 2021, we elected the fair value option for $122 million of HEIs. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we intend to sell to third parties or transfer to securitizations, for business purpose bridge loans, HEIs, 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.

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

September 30, 2021						Carrying Value						Fair Value Measurements Using
(In Thousands)												Level 1						Level 2						Level 3
Assets
Residential loans						$	6,216,433					$	—					$	—					$	6,216,433
Business purpose loans						4,693,555						—						—						4,693,555
Multifamily loans						482,791						—						—						482,791
Real estate securities						353,286						—						—						353,286
Servicer advance investments						170,062						—						—						170,062
MSRs						12,389						—						—						12,389
Excess MSRs						29,185						—						—						29,185
HEIs						167,856						—						—						167,856
Other investments						17,574						—						—						17,574
Derivative assets						51,103						8,213						33,628						9,262
Liabilities
Non-controlling interest in consolidated Point HEI entity						$	16,722					$	—					$	—					$	16,722
Derivative liabilities						10,972						8,348						74						2,550
ABS issued						7,756,101						—						—						7,756,101

26

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

December 31, 2020						Carrying Value						Fair Value Measurements Using
(In Thousands)												Level 1						Level 2						Level 3
Assets
Residential loans						$	4,249,014					$	—					$	—					$	4,249,014
Business purpose loans						4,136,353						—						—						4,136,353
Multifamily loans						492,221						—						—						492,221
Real estate securities						344,125						—						—						344,125
Servicer advance investments						231,489						—						—						231,489
MSRs						8,815						—						—						8,815
Excess MSRs						34,418						—						—						34,418
HEIs						42,440						—						—						42,440
Other investments						18,847						—						—						18,847
Derivative assets						53,238						18,260						19,951						15,027
Pledged collateral						1,177						1,177						—						—
FHLBC stock						5,000						—						5,000						—
Liabilities
Derivative liabilities						$	16,072					$	15,495					$	—					$	577
ABS issued						6,900,362						—						—						6,900,362

27

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 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						Excess MSRs						HEIs						Other
(In Thousands)
Beginning balance -    December 31, 2020						$	4,249,014					$	4,136,353					$	492,221					$	125,667					$	218,458					$	231,489					$	34,418					$	42,440					$	27,662
Acquisitions						9,926,335						38,176						—						37,117						1,600						—						—						122,373						14,615
Originations						—						1,515,262						—						—						—						—						—						—						—
Sales						(6,958,669)						(9,484)						—						(32,704)						(4,785)						—						—						—						—
Principal paydowns						(1,051,390)						(942,096)						(5,685)						(1,783)						(45,120)						(58,248)						—						(10,220)						(9,224)
Gains (losses) in net income (loss), net						53,549						(25,658)						(3,745)						24,713						26,998						(3,179)						(5,233)						13,263						(2,974)
Unrealized losses in OCI, net						—						—						—						—						3,125						—						—						—						—
Other settlements, net (1)						(2,406)						(18,998)						—						—						—						—						—						—						(116)
Ending balance -    September 30, 2021						$	6,216,433					$	4,693,555					$	482,791					$	153,010					$	200,276					$	170,062					$	29,185					$	167,856					$	29,963

															Liabilities
																																										Derivatives (2)						Point HEI Non-Controlling Interest						ABS Issued
(In Thousands)
Beginning balance - December 31, 2020																																										$	14,450					$	—					$	6,900,362
Acquisitions																																										—						16,639						2,552,785
Principal paydowns																																										—						—						(1,500,357)
Gains (losses) in net income (loss), net																																										17,806						83						(196,689)
Other settlements, net (1)																																										(25,544)						—						—
Ending balance - September 30, 2021																																										$	6,712					$	16,722					$	7,756,101

(1)    Other settlements, net for residential and business purpose loans represents the transfer of loans to REO, and for derivatives, the settlement of forward sale commitments and the transfer of the fair value of loan purchase or interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental loans.

(2)    For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments and interest rate lock commitments, are presented on a net basis.

28

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

The following table presents the portion of gains or losses included in our consolidated statements of income (loss) that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at September 30, 2021 and 2020. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 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 September 30, 2021 and 2020 Included in Net Income

						Included in Net Income
						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2021						2020						2021						2020
Assets
Residential loans at Redwood						$	6,553					$	(107)					$	9,371					$	(865)
Business purpose loans						18,810						21,155						19,829						17,901
Net investments in consolidated Sequoia entities (1)						2,885						7,700						11,779						(22,802)
Net investments in consolidated Freddie Mac SLST entities (1)						13,781						82,209						54,006						(33,087)
Net investments in consolidated Freddie Mac K-Series entity (1)						555						2,165						11,330						(11,014)
Net investments in consolidated CAFL SFR entities (1)						2,943						9,673						5,500						(41,048)
Net investment in consolidated Point HEI entity (1)						47						—						129						—
Trading securities						1,547						(3,549)						3,824						(80,358)
Servicer advance investments						(2,079)						25						(3,179)						(6,172)
MSRs						(235)						(2,376)						(49)						(16,798)
Excess MSRs						(803)						(1,127)						(5,233)						(7,650)
HEIs at Redwood						(41)						2,384						21						(4,286)
Loan purchase and interest rate lock commitments						9,021						10,791						9,261						10,773
Liabilities
Non-controlling interest in consolidated Point HEI entity						$	(83)					$	—					$	(83)					$	—
Loan purchase commitments						(2,570)						420						(2,550)						(1,334)

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

29

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

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

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

																														Gain (Loss) for
September 30, 2021						Carrying Value						Fair Value Measurements Using																		Three Months Ended						Nine Months Ended
(In Thousands)												Level 1						Level 2						Level 3						September 30, 2021						September 30, 2021
Assets
REO						$	622					$	—					$	—					$	622					$	(1)					$	(4)

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and nine months ended September 30, 2021 and 2020.

30

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

Table 5.6 – Market Valuation Gains and Losses, Net

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2021						2020						2021						2020
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value						$	9,045					$	(478)					$	57,145					$	(15,972)
Residential loan purchase commitments						18,817						13,067						18,351						35,123
Single-family rental loans held-for-sale, at fair value						19,205						43,191						54,675						55,868
Single-family rental loan interest rate lock commitments						(744)						—						—						341
Bridge loans						3,433						938						6,702						(4,256)
Trading securities (1)						32						—						(342)						—
Risk management derivatives, net						3,539						(99)						38,117						(52,931)
Total mortgage banking activities, net (2)						$	53,327					$	56,619					$	174,648					$	18,173
Investment Fair Value Changes, Net
Residential loans at Redwood						$	816					$	218					$	2,423					$	(93,314)
Single-family rental loans held-for-investment						—						—						—						(20,806)
Bridge loans held-for-investment						900						6,812						4,142						(10,016)
Trading securities						1,546						(3,600)						25,067						(224,679)
Servicer advance investments						(2,079)						26						(3,179)						(6,172)
Excess MSRs						(803)						(1,127)						(5,233)						(7,650)
Net investments in Legacy Sequoia entities (3)						(247)						(81)						(1,162)						(702)
Net investments in Sequoia entities (3)						3,314						7,851						13,118						(22,065)
Net investments in Freddie Mac SLST entities (3)						13,849						82,214						54,282						(33,081)
Net investment in Freddie Mac K-Series entity (3)						554						2,166						11,330						(82,744)
Net investments in CAFL entities (3)						2,943						9,673						6,354						(41,048)
Net investment in Point HEI entity (3)						47						—						47						—
HEIs at Redwood						5,622						2,384						13,017						(4,286)
Other investments						(385)						67						50						(4,825)
Risk management derivatives, net						—						—						—						(59,142)
Credit recoveries (losses) on AFS securities						—						444						388						(1,027)
Total investment fair value changes, net						$	26,077					$	107,047					$	120,644					$	(611,557)
Other Income
MSRs						$	(989)					$	(4,783)					$	(3,236)					$	(27,346)
Risk management derivatives, net						—						—						—						13,966
Total other income (4)						$	(989)					$	(4,783)					$	(3,236)					$	(13,380)
Total Market Valuation Gains (Losses), Net						$	78,415					$	158,883					$	292,056					$	(606,764)

(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the mark-to-market risks associated with our residential mortgage banking operations.

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

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

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

31

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

At September 30, 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

September 30, 2021						Fair Value												Input Values
(Dollars in Thousands, except Input Values)												Unobservable Input						Range															Weighted Average(1)
Assets
Residential loans, at fair value:
Jumbo fixed-rate loans						$	624,477					Prepayment rate (annual CPR)						20			-			20			%						20			%
												Whole loan spread to TBA price						$	3.00		-			$	3.00								$	3.00
												Whole loan spread to swap rate						202			-			202			bps						202			bps
Jumbo loans committed to sell						870,568						Whole loan committed sales price						$	101.90		-			$	103.32								$	102.46
Loans held by Legacy Sequoia (2)						242,234						Liability price												N/A									N/A
Loans held by Sequoia (2)						2,479,750						Liability price												N/A									N/A
Loans held by Freddie Mac SLST (2)						1,999,405						Liability price												N/A									N/A
Business purpose loans:
Single-family rental loans						466,346						Senior credit spread						65			-			65			bps						65			bps
												Subordinate credit spread						110			-			1,523			bps						401			bps
												Senior credit support						35			-			35			%						35			%
												IO discount rate						9			-			9			%						9			%
												Prepayment rate (annual CPR)						3			-			3			%						3			%
												Non-securitizable loan dollar price						$	76		-			$	111								$	101
Single-family rental loans held by CAFL (2)						3,402,410						Liability price												N/A									N/A
Bridge loans						824,799						Discount rate						4			-			15			%						6			%
Multifamily loans held by Freddie Mac K-Series (2)						482,791						Liability price												N/A									N/A
Trading and AFS securities						353,286						Discount rate						2			-			38			%						7			%
												Prepayment rate (annual CPR)						8			-			58			%						27			%
												Default rate						—			-			25			%						4			%
												Loss severity						—			-			50			%						24			%
												CRT dollar price						$	96		-			$	116								$	104
Servicer advance investments						170,062						Discount rate						2			-			3			%						2			%
												Prepayment rate (annual CPR)						20			-			30			%						21			%
												Expected remaining life (3)						5			-			5			years						5			years
												Mortgage servicing income						2			-			11			bps						9			bps
MSRs						12,389						Discount rate						12			-			15			%						13			%
												Prepayment rate (annual CPR)						6			-			80			%						28			%
												Per loan annual cost to service						$	95		-			$	95								$	95
Excess MSRs						29,185						Discount rate						13			-			16			%						15			%
												Prepayment rate (annual CPR)						21			-			30			%						25			%
												Excess mortgage servicing income						8			-			17			bps						11			bps

32

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

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

September 30, 2021						Fair Value												Input Values
(Dollars in Thousands, except Input Values)												Unobservable Input						Range															Weighted Average (1)
Assets (continued)
HEIs at Redwood						$	414					Dollar Price						$	92		-			$	124								$	105
HEIs held by Point HEI entity						167,442						Liability price												N/A									N/A
REO						622						Loss severity						11			-			40			%						22			%
Residential loan purchase commitments, net						6,712						Committed sales price						$	102.11		-			$	102.77								$	102.54
												Pull-through rate						4			-			100			%						71			%
												Whole loan spread to TBA price						$	3.00		-			$	3.00								$	3.00
												Whole loan spread to swap rate						185			-			202			bps						201			bps
												Prepayment rate (annual CPR)						20			-			20			%						20			%
Liabilities
ABS issued (2):
At consolidated Sequoia entities						2,482,746						Discount rate						1			-			18			%						3			%
												Prepayment rate (annual CPR)						7			-			55			%						33			%
												Default rate						—			-			36			%						2			%
												Loss severity						25			-			50			%						32			%
At consolidated CAFL SFR entities (4)						3,126,405						Discount rate						1			-			13			%						3			%
												Prepayment rate (annual CPR)						3			-			3			%						3			%
												Default rate						2			-			18			%						9			%
												Loss severity						30			-			30			%						30			%
At consolidated Freddie Mac SLST entities						1,550,111						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)						451,402						Discount rate						1			-			8			%						2			%
At consolidated Point HEI entity (4)						145,437						Discount rate						3			-			15			%						4			%
												Prepayment rate (annual CPR)						20			-			20			%						20			%
												Default rate						6			-			6			%						6			%
												Loss severity						25			-			25			%						25			%
												Home price appreciation						3			-			4			%						3			%

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

(2)The fair value of the loans and HEIs held by consolidated entities was based on the fair value of the ABS issued by these entities and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At September 30, 2021, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and Point HEI entities was $240 million, $288 million, $451 million, $31 million, and $10 million, respectively.

(3)Represents the estimated average duration of outstanding servicer advances at a given point in time (not taking into account new advances made with respect to the pool).

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

33

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

Determination of Fair Value

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.

In addition to the Level 3 financial instruments included in Table 5.7 above, certain of our Other investments (comprised of strategic investments in early-stage start-up companies) are Level 3 financial instruments that we account for under the fair value option. These investments generally take the form of equity or debt with conversion features and do not have readily determinable fair values. We generally value these assets based on our original investment price until there is an observable price change in an orderly transaction for the identical or similar investment of the same issuer.

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 September 30, 2021 and December 31, 2020.

Table 6.1 – Classifications and Carrying Values of Residential Loans

September 30, 2021												Legacy												Freddie Mac
(In Thousands)						Redwood						Sequoia						Sequoia						SLST						Total
Held-for-sale at fair value						$	1,495,079					$	—					$	—					$	—					$	1,495,079
Held-for-investment at fair value						—						242,234						2,479,750						1,999,405						4,721,389
Total Residential Loans						$	1,495,079					$	242,234					$	2,479,750					$	1,999,405					$	6,216,468

December 31, 2020												Legacy												Freddie Mac
(In Thousands)						Redwood						Sequoia						Sequoia						SLST						Total
Held-for-sale at fair value						$	176,641					$	—					$	—					$	—					$	176,641
Held-for-investment at fair value						—						285,935						1,565,322						2,221,153						4,072,410
Total Residential Loans						$	176,641					$	285,935					$	1,565,322					$	2,221,153					$	4,249,051

At September 30, 2021, we owned mortgage servicing rights associated with $1.40 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.

34

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2021 and December 31, 2020.

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

(Dollars in Thousands)						September 30, 2021						December 31, 2020
Number of loans						1,958						198
Unpaid principal balance						$	1,464,767					$	172,748
Fair value of loans						$	1,495,079					$	176,641
Market value of loans pledged as collateral under short-term borrowing agreements						$	1,478,424					$	156,355
Delinquency information
Number of loans with 90+ day delinquencies						4						1
Unpaid principal balance of loans with 90+ day delinquencies						$	3,159					$	1,882
Fair value of loans with 90+ day delinquencies						$	2,490					$	1,223
Number of loans in foreclosure						—						—

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

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

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2021						2020						2021						2020
Principal balance of loans acquired						$	3,167,186					$	172,162					$	9,747,867					$	2,859,813
Principal balance of loans sold						2,360,862						87,868						6,787,490						4,750,615
Principal balance of loans transferred to HFI						448,878						—						1,623,000						274,048
Net market valuation gains (losses) recorded (1)						9,861						(478)						59,568						(15,972)

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

35

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2021 and December 31, 2020.

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

September 30, 2021												Legacy												Freddie Mac
(Dollars in Thousands)												Sequoia						Sequoia						SLST
Number of loans												1,653						3,022						12,444
Unpaid principal balance												$	278,815					$	2,447,402					$	2,022,724
Fair value of loans												$	242,234					$	2,479,750					$	1,999,405
Delinquency information
Number of loans with 90+ day delinquencies (1)												40						30						1,168
Unpaid principal balance of loans with 90+ day delinquencies												$	14,038					$	24,438					$	209,913
Fair value of loans with 90+ day delinquencies (2)												N/A						N/A						N/A
Number of loans in foreclosure												18						4						305
Unpaid principal balance of loans in foreclosure												$	4,416					$	2,863					$	52,319

December 31, 2020												Legacy												Freddie Mac
(Dollars in Thousands)												Sequoia						Sequoia						SLST
Number of loans												1,908						2,177						13,605
Unpaid principal balance												$	333,474					$	1,550,454					$	2,247,771
Fair value of loans												$	285,935					$	1,565,322					$	2,221,153
Delinquency information
Number of loans with 90+ day delinquencies (1)												52						94						2,110
Unpaid principal balance of loans with 90+ day delinquencies												$	17,285					$	74,742					$	389,245
Fair value of loans with 90+ day delinquencies (2)												N/A						N/A						N/A
Number of loans in foreclosure												21						3						245
Unpaid principal balance of loans in foreclosure												$	4,939					$	2,251					$	38,610

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

(2)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.

36

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine months ended September 30, 2021 and 2020.

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

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2021						2020						2021						2020
Fair value of loans transferred from HFS to HFI						$	—					$	—					$	—					$	13,258
Fair value of loans transferred from HFI to HFS						—						—						—						1,870,986
Net market valuation gains (losses) recorded (1)						—						218						—						(93,314)

(1)Subsequent to the transfer of these loans to our investment portfolio, net market valuation gains (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 nine months ended September 30, 2021 and 2020.

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

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

Sequoia

SLST

Sequoia

Sequoia

SLST

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

N/A

$

464,189

N/A

N/A

$

—

N/A

Net market valuation gains (losses) recorded (2)

(2,580)

(11,663)

(13,836)

21,938

(5,175)

159,687

Nine Months Ended September 30, 2021

Nine Months Ended September 30, 2020

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

Sequoia

SLST

Sequoia

Sequoia

SLST

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

N/A

$

1,669,683

N/A

N/A

$

270,506

N/A

Net market valuation gains (losses) recorded (2)

9,896

(27,076)

5,177

(38,996)

(21,727)

15,254

(1)Represents the transfer of loans from held-for-sale to held-for-investment associated with Sequoia securitizations.

(2)For loans held at our consolidated Legacy Sequoia, Sequoia, and Freddie Mac SLST entities, market value changes are based on the estimated fair value of the associated ABS issued, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2.

37

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans

We originate and invest in business purpose loans, including single-family rental ("SFR") loans and bridge loans. The following table summarizes the classifications and carrying values of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, 2021 and December 31, 2020.

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans

September 30, 2021						Single-Family Rental												Bridge
(In Thousands)						Redwood						CAFL						Redwood						CAFL						Total
Held-for-sale at fair value						$	466,346					—						$	—					$	—					$	466,346
Held-for-investment at fair value						—						3,402,410						548,445						276,354						4,227,209
Total Business Purpose Loans						$	466,346					$	3,402,410					$	548,445					$	276,354					$	4,693,555

December 31, 2020						Single-Family Rental												Bridge
(In Thousands)						Redwood						CAFL						Redwood						CAFL						Total
Held-for-sale at fair value						$	245,394					$	—					$	—					$	—					$	245,394
Held-for-investment at fair value						—						3,249,194						641,765						—						3,890,959
Total Business Purpose Loans						$	245,394					$	3,249,194					$	641,765					$	—					$	4,136,353

Single-Family Rental Loans

Nearly all of the outstanding single-family rental loans at September 30, 2021 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years, with less than 1% with original maturities of 30 years.

Bridge Loans

The outstanding bridge loans held-for-investment at September 30, 2021 were first-lien, interest-only loans with original maturities of six to 24 months and were comprised of 69% one-month LIBOR-indexed adjustable-rate loans and 31% fixed-rate loans.

At September 30, 2021, we had a $426 million commitment to fund bridge loans. See Note 16 for additional information on this commitment.

38

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans - (continued)

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

Table 7.2 – Activity of Business Purpose Loans at Redwood

						Three Months Ended   September 30, 2021												Three Months Ended   September 30, 2020
(In Thousands)						SFR at Redwood						Bridge at Redwood						SFR at Redwood						Bridge at Redwood
Principal balance of loans originated						$	392,620					$	208,938					$	195,744					$	65,517
Principal balance of loans acquired						2,463						35,713						—						—
Principal balance of loans sold to third parties						—						253						7,695						1,567
Fair value of loans transferred from HFS to HFI (1)						332,670						276,354						326,405						N/A
Fair value of loans transferred from HFI to HFS (2)						—						N/A						—						N/A
Mortgage banking activities income (loss) recorded (3)						19,205						3,691						43,191						29
Investment fair value changes recorded (4)						—						900						—						6,812

						Nine Months Ended   September 30, 2021												Nine Months Ended   September 30, 2020
(In Thousands)						SFR at Redwood						Bridge at Redwood						SFR at Redwood						Bridge at Redwood
Principal balance of loans originated						$	957,935					$	557,327					$	631,749					$	351,353
Principal balance of loans acquired						2,463						35,713						—						—
Principal balance of loans sold to third parties						—						9,484						33,843						23,860
Fair value of loans transferred from HFS to HFI (1)						799,375						276,354						925,437						N/A
Fair value of loans transferred from HFI to HFS (2)						44,922						N/A						—						N/A
Mortgage banking activities income (loss) recorded (3)						54,675						5,212						54,731						(3,412)
Investment fair value changes recorded (4)						—						4,142						(20,806)						(10,016)

(1)Represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL securitizations.

(2)Represents the transfer of single-family rental loans from held-for-investment to held-for-sale associated with the call of a consolidated CAFL securitization during the second quarter of 2021.

(3)Represents net market valuation changes from the time a loan is originated to when it is sold or transferred to our investment portfolio. Additionally, for the three and nine months ended September 30, 2021, we recorded loan origination fee income of $9 million and $22 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss). For the three and nine months ended September 30, 2020, we recorded loan origination fee income of $3 million and $13 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).

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

39

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loans Held-for-Investment at CAFL

    We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying single-family rental loans and bridge loans owned by these entities. During the nine months ended September 30, 2021, we transferred three 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 business purpose loans held-for-investment at CAFL during the three and nine months ended September 30, 2021 and 2020.

Table 7.3 – Activity of Business Purpose Loans Held-for-Investment at CAFL

						Three Months Ended   September 30, 2021												Three Months Ended   September 30, 2020
(In Thousands)						SFR at CAFL						Bridge at CAFL						SFR at CAFL						Bridge at CAFL
Net market valuation gains (losses) recorded (1)						$	(34,803)					$	—					$	88,271					$	—

						Nine Months Ended   September 30, 2021												Nine Months Ended   September 30, 2020
(In Thousands)						SFR at CAFL						Bridge at CAFL						SFR at CAFL						Bridge at CAFL
Net market valuation gains (losses) recorded (1)						$	(96,934)					$	—					$	(14,319)					$	—

(1)For loans held at our consolidated CAFL entities, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2.

REO

See Note 12 for detail on BPL loans transferred to REO during 2021.

40

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loan Characteristics

The following tables summarize the characteristics of the business purpose loans owned at Redwood and at consolidated CAFL entities at September 30, 2021 and December 31, 2020.

Table 7.4 – Characteristics of Business Purpose Loans

September 30, 2021						SFR at Redwood						SFR at CAFL						Bridge at Redwood						Bridge at CAFL
(Dollars in Thousands)
Number of loans						123						1,157						1,092						1,589
Unpaid principal balance						$	451,295					$	3,207,118					$	550,711					$	272,243
Fair value of loans						$	466,346					$	3,402,411					$	548,445					$	276,354
Weighted average coupon						4.57		%				5.27		%				7.48		%				7.19		%
Weighted average remaining loan term (years)						7						6						1						1
Market value of loans pledged as collateral under short-term debt facilities						$	127,930					N/A						$	126,725					N/A
Market value of loans pledged as collateral under long-term debt facilities						$	298,014					N/A						$	373,597					N/A
Delinquency information
Number of loans with 90+ day delinquencies (1)						7						15						35						—
Unpaid principal balance of loans with 90+ day delinquencies						$	5,067					$	39,423					$	30,132					$	—
Fair value of loans with 90+ day delinquencies (2)						$	2,664					N/A						$	26,525					$	—
Number of loans in foreclosure						6						10						34						—
Unpaid principal balance of loans in foreclosure						$	4,978					$	22,004					$	26,177					$	—
Fair value of loans in foreclosure (2)						$	2,619					N/A						$	22,570					$	—

December 31, 2020						SFR at Redwood						SFR at CAFL						Bridge at Redwood						Bridge at CAFL
(Dollars in Thousands)
Number of loans						65						1,094						1,725						—
Unpaid principal balance						$	234,475					$	3,017,137					$	649,532					$	—
Fair value of loans						$	245,394					$	3,249,194					$	641,765					$	—
Weighted average coupon						4.84		%				5.44		%				8.09		%				—		%
Weighted average remaining loan term (years)						8						5						1						—
Market value of loans pledged as collateral under short-term debt facilities						$	34,098					N/A						$	92,931					N/A
Market value of loans pledged as collateral under long-term debt facilities						$	154,774					N/A						$	544,151					N/A
Delinquency information
Number of loans with 90+ day delinquencies (1)						10						22						31						—
Unpaid principal balance of loans with 90+ day delinquencies						$	7,127					$	61,440					$	39,415					$	—
Fair value of loans with 90+ day delinquencies (2)						$	6,143					N/A						$	33,605					$	—
Number of loans in foreclosure						—						10						25						—
Unpaid principal balance of loans in foreclosure						$	—					$	24,745					$	38,552					$	—
Fair value of loans in foreclosure (2)						$	—					N/A						$	33,066					$	—

(1)The number of loans greater than 90 days delinquent includes loans in foreclosure.

(2)The fair value of the loans held by consolidated entities was based on the fair value of the ABS issued by these entities, including securities we own, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 8. Multifamily Loans

We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of the multifamily loans consolidated at Redwood at September 30, 2021 and December 31, 2020.

Table 8.1 – Characteristics of Multifamily Loans

(Dollars in Thousands)						September 30, 2021						December 31, 2020
Number of loans						28						28
Unpaid principal balance						$	457,123					$	462,808
Fair value of loans						$	482,791					$	492,221
Weighted average coupon						4.25		%				4.25		%
Weighted average remaining loan term (years)						4						5
Delinquency information
Number of loans with 90+ day delinquencies						—						—
Number of loans in foreclosure						—						—

The outstanding multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at September 30, 2021 were first-lien, fixed-rate loans that were originated in 2015. The following table provides the activity of multifamily loans held-for-investment during the three and nine months ended September 30, 2021 and 2020.

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

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2021						2020						2021						2020
Net market valuation gains (losses) recorded (1)						$	(487)					$	2,340					$	(3,745)					$	(61,500)

(1)Net market valuation gains (losses) on multifamily loans held-for-investment are recorded through Investment fair value changes, net on our consolidated statements of income (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 September 30, 2021 and December 31, 2020.

Table 9.1 – Fair Values of Real Estate Securities by Type

(In Thousands)						September 30, 2021						December 31, 2020
Trading						$	153,010					$	125,667
Available-for-sale						200,276						218,458
Total Real Estate Securities						$	353,286					$	344,125

Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. 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.

42

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2021 and December 31, 2020.

Table 9.2 – Fair Value of Trading Securities by Position

(In Thousands)						September 30, 2021						December 31, 2020
Senior
Interest-only securities (1)						$	22,494					$	28,464
Total Senior						22,494						28,464
Mezzanine
Sequoia securities						—						3,649
Total Mezzanine						—						3,649
Subordinate
RPL securities						64,845						47,448
Multifamily securities						11,298						5,592
Other third-party residential securities						54,373						40,514
Total Subordinate						130,516						93,554
Total Trading Securities						$	153,010					$	125,667

(1)Includes $15 million and $13 million of Sequoia certificated mortgage servicing rights at September 30, 2021 and December 31, 2020, respectively.

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

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position

(In Thousands)						September 30, 2021						December 31, 2020
Senior (1)						$	—					$	—
Mezzanine						—						3,577
Subordinate						216,771						242,278
Total Trading Securities						$	216,771					$	245,855

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

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

Table 9.4 – Trading Securities Activity

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2021						2020						2021						2020
Principal balance of securities acquired						$	10,750					$	11,000					$	28,380					$	77,721
Principal balance of securities sold						750						15,903						53,561						720,517
Net market valuation gains (losses) recorded (1)						1,578						(3,600)						24,725						(224,679)

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

43

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2021 and December 31, 2020.

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

(In Thousands)						September 30, 2021						December 31, 2020
Mezzanine
Other third-party residential securities						$	—					$	2,014
Total Mezzanine						—						2,014
Subordinate
Sequoia securities						128,874						136,475
Multifamily securities						31,320						43,663
Other third-party residential securities						40,082						36,306
Total Subordinate						200,276						216,444
Total AFS Securities						$	200,276					$	218,458

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

Table 9.6 – Available-for-Sale Securities Activity

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2021						2020						2021						2020
Fair value of securities acquired						$	—					$	25,483					$	1,600					$	56,664
Fair value of securities sold						—						—						4,785						55,193

We often purchase AFS securities at a discount to their outstanding principal balances. To the extent we purchase an AFS security that has a likelihood of incurring a loss, we do not amortize into income the portion of the purchase discount that we do not expect to collect due to the inherent credit risk of the security. We may also expense a portion of our investment in the security to the extent we believe that principal losses will exceed the purchase discount. We designate any amount of unpaid principal balance that we do not expect to receive and thus do not expect to earn or recover as a credit reserve on the security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method.

At September 30, 2021, we had $28 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.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2021 and December 31, 2020.

Table 9.7 – Carrying Value of AFS Securities

September 30, 2021
(In Thousands)												Mezzanine						Subordinate						Total
Principal balance												$	—					$	238,459					$	238,459
Credit reserve												—						(29,448)						(29,448)
Unamortized discount, net												—						(88,108)						(88,108)
Amortized cost												—						120,903						120,903
Gross unrealized gains												—						79,406						79,406
Gross unrealized losses												—						(33)						(33)
CECL allowance												—						—						—
Carrying Value												$	—					$	200,276					$	200,276

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 nine months ended September 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   September 30, 2021												Nine Months Ended   September 30, 2021
						Credit Reserve						Unamortized Discount, Net						Credit Reserve						Unamortized Discount, Net
(In Thousands)
Beginning balance						$	40,349					$	90,216					$	44,967					$	95,718
Amortization of net discount						—						(6,437)						—						(9,620)
Realized credit losses						(184)						—						(433)						—
Acquisitions						—						—						2,825						1,208
Sales, calls, other						(320)						(6,068)						(1,312)						(15,797)
Transfers to (release of) credit reserves, net						(10,397)						10,397						(16,599)						16,599
Ending Balance						$	29,448					$	88,108					$	29,448					$	88,108

45

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 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)
September 30, 2021						$	—					$	—					$	—					$	1,600					$	(33)					$	1,567
December 31, 2020						9,129						(1,047)						7,920						—						—						—

At September 30, 2021, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 84 AFS securities, of which one was 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 $33 thousand at September 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 September 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 September 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 September 30, 2021.

Table 9.10 – Significant Credit Quality Indicators

September 30, 2021

Subordinate Securities

Default rate

N/A

Loss severity

N/A

46

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine months ended September 30, 2021.

Table 9.11 – Rollforward of Allowance for Credit Losses

						Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
(In Thousands)
Beginning balance allowance for credit losses						$	—					$	388
Additions to allowance for credit losses on securities for which credit losses were not previously recorded						—						—
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period						—						(388)
Allowance on purchased financial assets with credit deterioration						—						—
Reduction to allowance for securities sold during the period						—						—
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell						—						—
Write-offs charged against allowance						—						—
Recoveries of amounts previously written off						—						—
Ending balance of allowance for credit losses						$	—					$	—

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income (loss). The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and nine months ended September 30, 2021 and 2020.

Table 9.12 – Gross Realized Gains and Losses on AFS Securities

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2021						2020						2021						2020
Gross realized gains - sales						$	—					$	—					$	1,507					$	8,779
Gross realized gains - calls						6,389						—						15,484						—
Gross realized losses - sales						—						—						—						(4,144)
Total Realized Gains on Sales and Calls of AFS Securities, net						$	6,389					$	—					$	16,991					$	4,635

During the three months ended September 30, 2021, we called two of our unconsolidated Sequoia entities, and purchased $66 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $6 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). During the nine months ended September 30, 2021, we called six of our unconsolidated Sequoia entities, and purchased $167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $15 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss).

47

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 10. Other Investments

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

Table 10.1 – Components of Other Investments

(In Thousands)						September 30, 2021						December 31, 2020
Servicer advance investments						$	170,062					$	231,489
HEIs						167,856						42,440
Strategic investments						31,108						4,449
Excess MSRs						29,185						34,418
Mortgage servicing rights						12,389						8,815
Other						11,766						26,564
Total Other Investments						$	422,366					$	348,175

Servicer advance investments

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

At September 30, 2021, our servicer advance investments had a carrying value of $170 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of $7.53 billion. The outstanding servicer advance receivables associated with this investment were $159 million at September 30, 2021, which were financed with short-term non-recourse securitization debt (see Note 13 for additional detail on this debt). The servicer advance receivables were comprised of the following types of advances at September 30, 2021 and December 31, 2020.

Table 10.2 – Components of Servicer Advance Receivables

(In Thousands)						September 30, 2021						December 31, 2020
Principal and interest advances						$	77,116					$	110,923
Escrow advances (taxes and insurance advances)						62,117						79,279
Corporate advances						20,175						27,454
Total Servicer Advance Receivables						$	159,408					$	217,656

We account for our servicer advance investments at fair value and during the three and nine months ended September 30, 2021, we recorded $2 million and $7 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $2 million and $3 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded $3 million and $8 million of interest income, respectively, through Other interest income, and recorded a net market valuation gain of less than $0.1 million and a net market valuation loss of $6 million, respectively, through Investment fair value changes, net in our consolidated statements of income (loss).

48

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 10. Other Investments - (continued)

HEIs

In 2019, we entered into a flow purchase agreement to acquire home equity investment contracts from Point Digital. At September 30, 2021, we had acquired $47 million of HEIs under this flow purchase agreement. We account for these investments under the fair value option and during the three and nine months ended September 30, 2021, we recorded net market valuation gains of $6 million and $13 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded a net market valuation gain of $2 million and a net market valuation loss of $4 million, respectively, related to these assets through Investment fair value changes, net on our consolidated statements of income (loss).

During the three months ended September 30, 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased $122 million of additional HEIs from other contributors to the securitization, then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS (See Note 4 for further discussion on the Point securitization entity and Note 14 for further discussion on ABS issued). We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity. The other contributors to the securitization own subordinate certificates in the entity that were valued at $17 million at September 30, 2021 and are carried on our balance sheet as non-controlling interests within the Accrued expenses and other liabilities line item of our consolidated balance sheets.

We consolidate the Point HEI securitization entity in accordance with GAAP and have elected to account for it under the CFE election. During the three months ended September 30, 2021, we recorded net market valuation gains of less than $0.1 million related to our net investment in the Point HEI entity through Investment fair value changes, net on our consolidated statements of income (loss).

During three months ended September 30, 2021, we amended our flow purchase agreement with Point Digital and committed to purchase additional HEIs. See Note 16 for additional detail on this commitment.

Strategic Investments

Strategic investments represent investments we have made in companies through our RWT Horizons venture investment strategy or at a corporate level. At September 30, 2021, we had made 11 investments in companies through RWT Horizons and two corporate investments, including our investment in Churchill Finance. See Note 3 for additional detail on how we account for our strategic investments.

Excess MSRs

In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three and nine months ended September 30, 2021, we recognized $3 million and $9 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1 million and $5 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recognized $3 million and $9 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1 million and $8 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss).

Mortgage Servicing Rights

We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The 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 the three and nine months ended September 30, 2021, we retained $5 million and $9 million of MSRs, respectively, from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

49

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 10. Other Investments - (continued)

At September 30, 2021 and December 31, 2020, our MSRs had a fair value of $12 million and $9 million, respectively, and were associated with loans with an aggregate principal balance of $2.29 billion and $2.59 billion, respectively. During the three and nine months ended September 30, 2021, including net market valuation gains and losses on our MSRs and related risk management derivatives, we recorded net income of $0.3 million and $1 million, respectively, through Other income on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded net losses of $2 million and $6 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 September 30, 2021 and December 31, 2020.

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

						September 30, 2021												December 31, 2020
						Fair Value						Notional Amount						Fair Value						Notional Amount
(In Thousands)
Assets - Risk Management Derivatives
Interest rate swaps						$	3,213					$	293,200					$	224					$	42,000
TBAs						8,213						2,205,000						18,260						3,520,000
Swaptions						30,415						1,335,000						19,727						1,585,000
Assets - Other Derivatives
Loan purchase and interest rate lock commitments						9,262						1,687,314						15,027						2,617,254
Total Assets						$	51,103					$	5,520,514					$	53,238					$	7,764,254
Liabilities - Risk Management Derivatives
Interest rate swaps						$	(74)					$	40,500					$	—					$	—
TBAs						(7,599)						2,190,000						(15,495)						3,105,000
Interest rate futures						(749)						133,200						—						—
Liabilities - Other Derivatives
Loan purchase commitments						(2,550)						1,084,579						(577)						477,153
Total Liabilities						$	(10,972)					$	3,448,279					$	(16,072)					$	3,582,153
Total Derivative Financial Instruments, Net						$	40,131					$	8,968,793					$	37,166					$	11,346,407

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At September 30, 2021, we were party to swaps and swaptions with an aggregate notional amount of $1.67 billion, TBA agreements with an aggregate notional amount of $4.40 billion, and interest rate futures contracts with an aggregate notional amount of $133 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.

During the three and nine months ended September 30, 2021, risk management derivatives had net market valuation gains of $4 million and $38 million, respectively. During the three and nine months ended September 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).

50

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 11. Derivative Financial Instruments - (continued)

Loan Purchase and Interest Rate Lock Commitments

LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. For both the three and nine months ended September 30, 2021, LPCs and IRLCs had net market valuation gains of $18 million that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). For the three and nine months ended September 30, 2020, LPCs and IRLCs had net market valuation gains of $13 million and $35 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss).

Derivatives Designated as Cash Flow Hedges

To manage the variability in interest expense related to 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 $77 million and $81 million at September 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 September 30, 2021, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

For both the three and nine months ended September 30, 2021, we did not have any derivatives designated as cash flow hedges. For the three and nine months ended September 30, 2020, changes in the values of designated cash flow hedges were zero and negative $33 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity.

The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three and nine months ended September 30, 2021 and 2020.

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

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2021						2020						2021						2020
Net interest expense on cash flows hedges						$	—					$	—					$	—					$	(860)
Realized net losses reclassified from other comprehensive income						(1,041)						(1,040)						(3,086)						(2,148)
Total Interest Expense						$	(1,041)					$	(1,040)					$	(3,086)					$	(3,008)

Derivative Counterparty Credit Risk

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

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

51

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 12. Other Assets and Liabilities

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

Table 12.1 – Components of Other Assets

(In Thousands)						September 30, 2021						December 31, 2020
Accrued interest receivable						$	41,997					$	39,445
Investment receivable						32,420						43,176
Deferred tax asset						20,153						871
REO						18,863						8,413
Margin receivable						16,503						4,758
Operating lease right-of-use assets						13,659						15,012
Fixed assets and leasehold improvements (1)						9,344						4,203
Pledged collateral						—						1,177
Other						9,254						13,533
Total Other Assets						$	162,193					$	130,588

(1)Fixed assets and leasehold improvements had a basis of $17 million and accumulated depreciation of $7 million at September 30, 2021.

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

Table 12.2 – Components of Accrued Expenses and Other Liabilities

(In Thousands)						September 30, 2021						December 31, 2020
Accrued compensation						$	64,354					$	24,393
Margin payable						48,298						14,728
Accrued interest payable						34,545						34,858
Payable to non-controlling interests (1)						31,781						16,941
Operating lease liabilities						15,771						16,687
Accrued income taxes payable						11,336						5,614
Residential loan and MSR repurchase reserve						9,003						8,631
Guarantee obligations						7,902						10,039
Accrued operating expenses						4,068						5,509
Bridge loan holdbacks						3,784						5,708
Deferred consideration						—						14,579
Other						20,734						21,653
Total Accrued Expenses and Other Liabilities						$	251,576					$	179,340

(1)Includes $11 million and $17 million of payables to non-controlling interest holders in our consolidated Servicing Investment and Point HEI entities, respectively, as September 30, 2021. Includes $17 million payable to a non-controlling interest holder in our consolidated Servicing Investment entities at December 31, 2020.

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.

52

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 SFR entities during the nine months ended September 30, 2021.

Table 12.3 – REO Activity

						Nine Months Ended September 30, 2021
(In Thousands)						Bridge(1)						Legacy Sequoia						Freddie Mac SLST						CAFL SFR						Total
Balance at beginning of period						$	4,600					$	638					$	646					$	2,529					$	8,413
Transfers to REO						7,074						65						2,591						11,924						21,654
Liquidations (2)						(7,387)						(607)						(1,555)						(1,990)						(11,539)
Changes in fair value, net						536						178						276						(655)						335
Balance at End of Period						$	4,823					$	274					$	1,958					$	11,808					$	18,863

(1)Includes activity of bridge loans at Redwood and at consolidated CAFL bridge entity.

(2)For the nine months ended September 30, 2021, REO liquidations resulted in $0.3 million of 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 SFR entities at September 30, 2021 and December 31, 2020.

Table 12.4 – REO Assets

Number of REO assets						Bridge						Legacy Sequoia						Freddie Mac SLST						CAFL SFR						Total
At September 30, 2021						5						2						20						2						29
At December 31, 2020						3						3						9						2						17

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

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 13. Short-Term Debt

We enter into repurchase agreements ("repo"), loan warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At September 30, 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 September 30, 2021 and December 31, 2020.

Table 13.1 – Short-Term Debt

						September 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						7						$	1,335,464					$	2,700,000					1.89		%				11/2021-8/2022						156
Business purpose loan warehouse						2						183,800						350,000						3.39		%				3/2022-7/2022						201
Real estate securities repo						3						79,766						—						1.23		%				10/2021-12/2021						34
Total Short-Term Debt Facilities						12						1,599,030
Servicer advance financing						1						151,911						260,000						1.89		%				11/2021						61
Total Short-Term Debt												$	1,750,941

						December 31, 2020
(Dollars in Thousands)						Number of Facilities						Outstanding Balance						Limit						Weighted Average Interest Rate (1)						Maturity						Weighted Average Days Until Maturity
Facilities
Residential loan warehouse						4						$	137,269					$	1,300,000					2.45		%				1/2021-11/2021						268
Business purpose loan warehouse						2						99,190						500,000						3.37		%				5/2022-6/2022						521
Real estate securities repo						3						77,775						—						2.24		%				1/2021-3/2021						36
Total Short-Term Debt Facilities						9						314,234
Servicer advance financing						1						208,375						335,000						1.95		%				11/2021						334
Total Short-Term Debt												$	522,609

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

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2021 and December 31, 2020.

Table 13.2 – Collateral for Short-Term Debt

(In Thousands)						September 30, 2021						December 31, 2020
Collateral Type
Held-for-sale residential loans						$	1,478,424					$	156,355
Business purpose loans						254,655						127,029
Real estate securities
On balance sheet						14,367						23,193
Sequoia securitizations (1)						62,075						63,105
Freddie Mac K-Series securitization (1)						31,388						28,255
Total real estate securities owned						107,830						114,553
Restricted cash and other assets						1,709						315
Total Collateral for Short-Term Debt Facilities						1,842,618						398,252
Cash						12,975						9,978
Restricted cash						19,872						23,220
Servicer advances						159,408						217,656
Total Collateral for Servicer Advance Financing						192,255						250,854
Total Collateral for Short-Term Debt						$	2,034,873					$	649,106

(1)Represents securities we have retained from consolidated securitization entities. For GAAP purposes, we consolidate the loans and non-recourse ABS debt issued from these securitizations.

For the three and nine months ended September 30, 2021, the average balances of our short-term debt facilities were $1.98 billion and $1.61 billion, respectively. At September 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 September 30, 2021, the accrued interest payable balance on this financing was $0.1 million and the unamortized capitalized commitment costs were $0.1 million.

We also maintain a $10 million committed line of credit with a financial institution that is secured by certain mortgage-backed securities with a fair market value of $2 million at September 30, 2021. At both September 30, 2021 and December 31, 2020, we had no outstanding borrowings on this facility.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 13. Short-Term Debt - (continued)

Remaining Maturities of Short-Term Debt

The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt at September 30, 2021.

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

						September 30, 2021
(In Thousands)						Within 30 days						31 to 90 days						Over 90 days						Total
Collateral Type
Held-for-sale residential loans						$	—					$	278,663					$	1,056,801					$	1,335,464
Business purpose loans						—						—						183,800						183,800
Real estate securities						43,800						35,966						—						79,766
Total Secured Short-Term Debt						43,800						314,629						1,240,601						1,599,030
Servicer advance financing						—						151,911						—						151,911
Total Short-Term Debt						$	43,800					$	466,540					$	1,240,601					$	1,750,941

Note 14. Asset-Backed Securities Issued

ABS issued represents securities issued by non-recourse securitization entities we consolidate under GAAP. The majority of our ABS issued is carried at fair value under the CFE election (see Note 4 for additional detail) with the remainder carried at amortized cost. The carrying values of ABS issued by our consolidated securitization entities at September 30, 2021 and December 31, 2020, along with other selected information, are summarized in the following table.

Table 14.1 – Asset-Backed Securities Issued

September 30, 2021						Legacy Sequoia						Sequoia						CAFL (1)						Freddie Mac SLST (2)						Freddie Mac K-Series						Point HEI						Total
(Dollars in Thousands)
Certificates with principal balance						$	273,957					$	2,199,488					$	3,134,946					$	1,630,252					$	420,654					$	145,320					$	7,804,617
Interest-only certificates						739						21,003						189,946						19,787						10,885						—						242,360
Market valuation adjustments						(35,249)						22,808						68,684						60,625						19,863						117						136,848
ABS Issued, Net						$	239,447					$	2,243,299					$	3,393,576					$	1,710,664					$	451,402					$	145,437					$	8,183,825
Range of weighted average interest rates, by series(3)						0.49% to 1.45%						2.34% to 5.07%						2.34% to 5.21%						3.50% to 4.75%						3.41		%				3.27		%
Stated maturities(3)						2024 - 2036						2047 - 2051						2021 - 2031						2028 - 2059						2025						2052
Number of series						20						13						16						3						1						1

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

December 31, 2020						Legacy Sequoia						Sequoia						CAFL						Freddie Mac SLST (2)						Freddie Mac K-Series						Point HEI						Total
(Dollars in Thousands)
Certificates with principal balance						$	329,039					$	1,309,957					$	2,716,425					$	1,866,145					$	416,339					$	—					$	6,637,905
Interest-only certificates						1,092						4,591						162,934						23,335						13,026						—						204,978
Market valuation adjustments						(47,805)						32,809						133,734						104,439						34,601						—						257,778
ABS Issued, Net						$	282,326					$	1,347,357					$	3,013,093					$	1,993,919					$	463,966					$	—					$	7,100,661
Range of weighted average interest rates, by series(3)						0.35% to 1.55%						2.25% to 5.04%						2.68% to 5.42%						3.50% to 4.75%						3.39		%				—		%
Stated maturities(3)						2024 - 2036						2047 - 2050						2021 - 2031						2028 - 2059						2025						—
Number of series						20						10						14						3						1						—

(1)Includes $270 million (principal balance) of ABS issued by a CAFL bridge securitization trust sponsored by Redwood and accounted for at amortized cost at September 30, 2021.

(2)Includes $163 million and $205 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at September 30, 2021 and December 31, 2020, respectively.

(3)Certain ABS issued by CAFL, Freddie Mac SLST, and Point HEI entities is subject to early redemption and interest rate step-ups as described below.

During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest bridge loans (presented within CAFL in table 14.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $270 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2021, the principal balance of the ABS issued was $270 million, and the debt discount and deferred issuance costs were $3 million, for a net carrying value of $267 million. The weighted average stated coupon of the ABS issued was 2.34% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in March 2024, and beginning in March 2025 the interest rate on the ABS issued increases by 2% through final maturity in March 2029. The ABS issued by this securitization were backed by assets including $276 million of bridge loans and $28 million of restricted cash at September 30, 2021. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024).

During the third quarter of 2021, we consolidated the assets and liabilities of the Point HEI entity formed in connection with the securitization of HEIs, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $146 million (principal balance) of ABS issued to third parties and retained a portion of the remaining beneficial ownership interest in the trust. We elected to account for the entity under the CFE election and account for the ABS issued at fair value, with the entire change in fair value of the ABS issued (including accrued interest) recorded through Investment fair value changes, net on our consolidated statements of income (loss). The ABS issued by the Point HEI entity are subject to an optional redemption in September 2023, and beginning in September 2024 the interest rate on the ABS issued increases by 2% through final maturity in 2052.

During the third quarter of 2020, we transferred all of the subordinate securities we owned from two consolidated re-performing loan securitization VIEs sponsored by Freddie Mac SLST to a re-securitization trust, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $210 million (principal balance) of ABS issued to third parties and retained 100% of the remaining beneficial ownership interest in the trust through ownership of a subordinate security issued by the trust. The ABS was issued at a discount and we have elected to account for the ABS issued at amortized cost. At September 30, 2021, the principal balance of the ABS issued was $163 million, and the debt discount and deferred issuance costs were $3 million, for a carrying value of $161 million. The stated coupon of the ABS issued was 4.75% at issuance and the final stated maturity occurs in July 2059. The ABS issued is subject to an optional redemption in July 2022 and in July 2023 the ABS interest rate steps up to 7.75%.

57

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

The actual maturity of each class of ABS issued is primarily determined by the rate of principal prepayments on the assets of the issuing entity. Each series is also subject to redemption prior to the stated maturity according to the terms of the respective governing documents of each ABS issuing entity. As a result, the actual maturity of ABS issued may occur earlier than its stated maturity. At September 30, 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 September 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)						September 30, 2021						December 31, 2020
Legacy Sequoia						$	107					$	141
Sequoia						5,918						4,697
CAFL						10,760						10,122
Freddie Mac SLST (1)						4,925						5,656
Freddie Mac K-Series						1,195						1,177
Total Accrued Interest Payable on ABS Issued						$	22,905					$	21,793

(1)Includes accrued interest payable on ABS issued by a re-securitization trust sponsored by Redwood.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2021.

Table 15.1 – Long-Term Debt

						September 30, 2021
(Dollars in Thousands)						Borrowings						Unamortized Deferred Issuance Costs / Discount						Net Carrying Value						Limit						Weighted Average Interest Rate (1)						Final Maturity
Facilities
Recourse Subordinate Securities Financing
Sequoia						$	147,182					$	(417)					$	146,765					N/A						4.21		%				9/2024
CAFL
Facility A						102,370						(429)						101,941						N/A						4.21		%				2/2025
Facility B						95,011						(439)						94,572						N/A						4.75		%				6/2026
Non-Recourse BPL Financing
Facility C						105,961						(320)						105,641						250,000						L + 3.00%						N/A
Recourse BPL Financing
Facility D						168,228						—						168,228						450,000						L + 3.10%						6/2023
Facility E						230,883						(141)						230,742						250,000						L + 3.00%						9/2023
Total Long-Term Debt Facilities						849,635						(1,746)						847,889
Convertible notes
4.75% convertible senior notes						198,629						(2,098)						196,531						N/A						4.75		%				8/2023
5.625% convertible senior notes						150,200						(2,262)						147,938						N/A						5.625		%				7/2024
5.75% exchangeable senior notes						172,092						(3,582)						168,510						N/A						5.75		%				10/2025
Trust preferred securities and subordinated notes						139,500						(791)						138,709						N/A						L + 2.25%						7/2037
Total Long-Term Debt						$	1,510,056					$	(10,479)					$	1,499,577

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

Recourse Subordinate Securities Financing

In the third quarter of 2021, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations. The financing is guaranteed by Redwood, with an interest rate of approximately 4.75% through June 2024. The financing facility may be terminated, at our option, in June 2023, and has a final maturity in June 2026, provided that the interest rate on amounts outstanding under the facility increases between June 2024 and June 2026. See "Facility B" above for details on borrowings and securities pledged as collateral under this facility at September 30, 2021.

Non-Recourse BPL Financing Facilities

In the third quarter of 2021, we reclassified one of our non-recourse facilities from long-term to short-term debt as the maturity of this facility was less than one year at September 30, 2021.

59

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 15. Long-Term Debt - (continued)

In the second quarter of 2021, we repaid one of our non-recourse BPL financing facilities that had a balance of $242 million at March 31, 2021, and entered into a new non-recourse facility to finance business purpose bridge loans with a total borrowing capacity of $250 million (see details for "Facility C" above).

Recourse BPL Financing Facilities

In the second quarter of 2021, we reclassified one of our recourse facilities with a borrowing capacity of $450 million from short-term to long-term debt as we amended the terms of this facility, including an extension of its maturity (see details for "Facility D" above).

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

Table 15.2 – Collateral for Long-Term Debt

(In Thousands)						September 30, 2021						December 31, 2020
Collateral Type
Bridge loans						$	373,597					$	544,151
Single-family rental loans						298,014						154,774
Real estate securities
Sequoia securitizations (1)						246,892						249,446
CAFL securitizations (1)						256,976						114,044
Total real estate securities owned						503,868						363,490
Other BPL investments						—						21,414
Restricted cash						—						1,100
Total Collateral for Long-Term Debt						$	1,175,479					$	1,084,929

(1)Represents securities we have retained from consolidated securitization entities. For 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 September 30, 2021 and December 31, 2020.

Table 15.3 – Accrued Interest Payable on Long-Term Debt

(In Thousands)						September 30, 2021						December 31, 2020
Long-term debt facilities						$	900					$	1,799
Convertible notes
4.75% convertible senior notes						1,206						3,564
5.625% convertible senior notes						1,784						3,896
5.75% exchangeable senior notes						4,948						2,474
Trust preferred securities and subordinated notes						572						669
Total Accrued Interest Payable on Long-Term Debt						$	9,410					$	12,402

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

Note 16. Commitments and Contingencies

Lease Commitments

At September 30, 2021, we were obligated under seven non-cancelable operating leases with expiration dates through 2031 for $18 million of cumulative lease payments. Our operating lease expense was $3 million for both nine-month periods ended September 30, 2021 and 2020.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

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

Table 16.1 – Future Lease Commitments by Year

(In Thousands)						September 30, 2021
2021 (3 months)						$	928
2022						3,714
2023						3,235
2024						2,411
2025						1,983
2026 and thereafter						6,128
Total Lease Commitments						18,399
Less: Imputed interest						(2,628)
Operating Lease Liabilities						$	15,771

During the nine months ended September 30, 2021, we did not enter into any new office leases. During the nine months ended September 30, 2021, we increased our operating lease right-of-use assets and liabilities by $1 million as the result of an amendment to one of our existing leases. At September 30, 2021, our operating lease liabilities were $16 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $14 million, which were a component of Other assets.

We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the date of adoption. At September 30, 2021, the weighted-average remaining lease term and weighted-average discount rate for our leases was 7 years and 4.9%, respectively.

Commitment to Fund Bridge Loans

As of September 30, 2021, we had commitments to fund up to $426 million of additional advances on existing bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At September 30, 2021, we carried a $1 million contingent liability related to these commitments to fund construction advances. During the three and nine months ended September 30, 2021, we recorded a net market valuation loss of $0.3 million and a net market valuation gain of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss). During the three and nine months ended September 30, 2020, we recorded a net market valuation gain of $1 million and a net market valuation loss of $1 million, respectively, related to this liability through Mortgage banking activities, net on our consolidated statements of income (loss).

Commitment to Fund Partnerships

In 2018, we invested in 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.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

Commitment to Acquire HEIs

In the third quarter of 2021, we amended an existing flow purchase agreement with Point Digital to acquire HEIs that Point Digital originates with homeowners. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by a deed of trust or a mortgage. Our investments in HEIs allow us to share in both home price appreciation and depreciation of the associated property. At September 30, 2021, we had an outstanding commitment to fund up to $125 million under this agreement.

Loss Contingencies — Risk-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 September 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 September 30, 2021, we had incurred less than $0.1 million of losses under these arrangements. For the three and nine months ended September 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 and $0.1 million, respectively. For the three and nine months ended September 30, 2020, other income related to these arrangements was $1 million and $3 million, respectively, and net market valuation losses related to these investments were $0.3 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 September 30, 2021, the loans had an unpaid principal balance of $618 million and a weighted average FICO score of 756 (at origination) and LTV ratio of 74% (at origination). At September 30, 2021, $21 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 September 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 us. At September 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 September 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.

During the nine months ended September 30, 2021 and 2020, we received three and eight repurchase requests, respectively, and repurchased one and zero loans, respectively. During the nine months ended September 30, 2021 and 2020, we recorded repurchase provisions of $0.6 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).

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 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 September 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 nine months ended September 30, 2021 and 2020.

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

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

(In Thousands)

Available-for-Sale Securities

Interest Rate Agreements Accounted for as Cash Flow Hedges

Available-for-Sale Securities

Interest Rate Agreements Accounted for as Cash Flow Hedges

Balance at beginning of period

$

88,251

$

(