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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, 2023

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
10% Series A Fixed-Rate Reset Cumulative Redeemable Preferred Stock, par value $0.01 per share			RWT PRA			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						118,636,302			shares outstanding as of November 6, 2023

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REDWOOD TRUST, INC.

2023 FORM 10-Q REPORT

TABLE OF CONTENTS

 

									Page
PART I —			FINANCIAL INFORMATION
Item 1.			Financial Statements						2
			Consolidated Balance Sheets at September 30, 2023 (Unaudited) and December 31, 2022						2
			Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)						3
			Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)						4
			Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited)						5
			Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (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						12
			Note 4. Principles of Consolidation						15
			Note 5. Fair Value of Financial Instruments						22
			Note 6. Residential Loans						31
			Note 7. Business Purpose Loans						34
			Note 8. Consolidated Agency Multifamily Loans						38
			Note 9. Real Estate Securities						39
			Note 10. Home Equity Investments (HEI)						44
			Note 11. Other Investments						45
			Note 12. Derivative Financial Instruments						47
			Note 13. Other Assets and Liabilities						48
			Note 14. Short-Term Debt						51
			Note 15. Asset-Backed Securities Issued						54
			Note 16. Long-Term Debt						57
			Note 17. Commitments and Contingencies						60
			Note 18. Equity						63
			Note 19. Equity Compensation Plans						66
			Note 20. Mortgage Banking Activities, Net						68
			Note 21. Other Income, Net						69
			Note 22. Operating Expenses						70
			Note 23. Taxes						72
			Note 24. Segment Information						73
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations						78
Item 3.			Quantitative and Qualitative Disclosures About Market Risk						112
Item 4.			Controls and Procedures						112
PART II —			OTHER INFORMATION
Item 1.			Legal Proceedings						113
Item 1A.			Risk Factors						113
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds						113
Item 3.			Defaults Upon Senior Securities						113
Item 4.			Mine Safety Disclosures (Not Applicable)						113
Item 5.			Other Information						113
Item 6.			Exhibits						114
Signatures									116

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, 2023						December 31, 2022
ASSETS (1)
Residential loans, held-for-sale, at fair value						$	610,946					$	780,781
Residential loans, held-for-investment, at fair value						5,236,391						4,832,407
Business purpose loans, held-for-sale, at fair value						102,777						364,073
Business purpose loans, held-for-investment, at fair value						5,146,553						4,968,513
Consolidated Agency multifamily loans, at fair value						420,554						424,551
Real estate securities, at fair value						129,445						240,475
Home equity investments, at fair value						431,272						403,462
Other investments						340,361						390,938
Cash and cash equivalents						203,622						258,894
Restricted cash						56,101						70,470
Goodwill						23,373						23,373
Intangible assets						31,570						40,892
Derivative assets						37,686						20,830
Other assets						250,487						211,240
Total Assets						$	13,021,138					$	13,030,899
LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net						$	1,476,654					$	2,029,679
Derivative liabilities						8,781						16,855
Accrued expenses and other liabilities						208,294						180,203
Asset-backed securities issued (includes $7,910,345 and $7,424,132 at fair value), net						8,392,050						7,986,752
Long-term debt, net						1,829,560						1,733,425
Total liabilities						11,915,339						11,946,914
Commitments and Contingencies (see Note 17)
Equity
Preferred stock, par value $0.01 per share, 2,800,000 shares authorized; 2,800,000 and zero issued and outstanding						66,923						—
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 118,503,762 and 113,484,675 issued and outstanding						1,185						1,135
Additional paid-in capital						2,395,247						2,349,845
Accumulated other comprehensive loss						(64,738)						(68,868)
Cumulative earnings						1,125,126						1,153,370
Cumulative distributions to stockholders						(2,417,944)						(2,351,497)
Total equity						1,105,799						1,083,985
Total Liabilities and Equity						$	13,021,138					$	13,030,899

——————

(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, 2023 and December 31, 2022, assets of consolidated VIEs totaled $9,639,117 and $9,257,291, respectively. At September 30, 2023 and December 31, 2022, liabilities of consolidated VIEs totaled $8,635,696 and $8,270,276, 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)						2023						2022						2023						2022
Interest Income
Residential loans						$	62,512					$	61,002					$	177,137					$	191,252
Business purpose loans						93,020						95,197						288,580						270,430
Consolidated Agency multifamily loans						4,677						4,762						13,992						14,247
Real estate securities						5,111						6,989						17,762						30,772
Other interest income						11,754						9,712						37,100						27,816
Total interest income						177,074						177,662						534,571						534,517
Interest Expense
Short-term debt						(27,323)						(23,944)						(87,862)						(49,093)
Asset-backed securities issued						(91,323)						(90,910)						(268,881)						(285,464)
Long-term debt						(38,077)						(27,873)						(104,944)						(71,435)
Total interest expense						(156,723)						(142,727)						(461,687)						(405,992)
Net Interest Income						20,351						34,935						72,884						128,525
Non-Interest (Loss) Income
Mortgage banking activities, net						19,440						16,535						52,663						2,833
Investment fair value changes, net						(31,430)						(57,697)						(36,153)						(151,789)
Other income, net						2,346						4,027						11,060						17,016
Realized gains, net						50						—						1,104						2,581
Total non-interest (loss) income, net						(9,594)						(37,135)						28,674						(129,359)
General and administrative expenses						(29,697)						(38,244)						(96,057)						(101,719)
Portfolio management costs						(3,661)						(1,863)						(10,271)						(5,208)
Loan acquisition costs						(1,880)						(2,426)						(4,613)						(10,371)
Other expenses						(4,633)						(4,261)						(13,292)						(11,814)
Net Loss before (Provision for) Benefit from Income Taxes						(29,114)						(48,994)						(22,675)						(129,946)
(Provision for) benefit from income taxes						(1,696)						(1,417)						(642)						10,484
Net Loss						$	(30,810)					$	(50,411)					$	(23,317)					$	(119,462)
Dividends on preferred stock						(1,750)						—						(4,927)						—
Net Loss related to common stockholders						$	(32,560)					$	(50,411)					$	(28,244)					$	(119,462)
Net loss related to common stockholders - Basic						$	(0.29)					$	(0.44)					$	(0.27)					$	(1.04)
Net loss related to common stockholders - Diluted						$	(0.29)					$	(0.44)					$	(0.27)					$	(1.04)
Basic weighted average common shares outstanding						115,465,977						116,087,890						114,381,548						118,530,172
Diluted weighted average common shares outstanding						115,465,977						116,087,890						114,381,548						118,530,172

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

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REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In Thousands)						Three Months Ended September 30,												Nine Months Ended September 30,
(Unaudited)						2023						2022						2023						2022
Net (Loss) Income						$	(30,810)					$	(50,411)					$	(23,317)					$	(119,462)
Other comprehensive income (loss):
Net unrealized (loss) gain on available-for-sale securities						(3,921)						(8,731)						398						(60,013)
Reclassification of unrealized loss on available-for-sale securities to net income (loss)						234						544						645						918
Reclassification of unrealized loss on interest rate agreements to net income (loss)						1,040						1,040						3,087						3,087
Total other comprehensive (loss) income						(2,647)						(7,147)						4,130						(56,008)
Comprehensive (Loss) Income						$	(33,457)					$	(57,558)					$	(19,187)					$	(175,470)
Dividends on preferred stock						$	(1,750)					$	—					$	(4,927)					$	—
Comprehensive Loss Related to Common Stockholders						$	(35,207)					$	(57,558)					$	(24,114)					$	(175,470)

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

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REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended September 30, 2023

(In Thousands, except Share Data)						Preferred Stock						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive (Loss)						Cumulative  Earnings						Cumulative Distributions to Stockholders						Total
(Unaudited)												Shares						Par Value
June 30, 2023						$	66,923					114,177,992						$	1,142					$	2,358,675					$	(62,091)					$	1,157,686					$	(2,398,197)					$	1,124,138
Net (loss)						—						—						—						—						—						(30,810)						—						(30,810)
Other comprehensive (loss)						—						—						—						—						(2,647)						—						—						(2,647)
Issuance of common stock												4,244,580						42						33,286						—						—						—						33,328
Employee stock purchase and incentive plans						—						81,190						1						(124)						—						—						—						(123)
Non-cash equity award compensation						—						—						—						3,410						—						—						—						3,410
Preferred dividends declared ($0.625 per share)						—						—						—						—						—						(1,750)						—						(1,750)
Common dividends declared ($0.16 per share)(1)						—						—						—						—						—						—						(19,747)						(19,747)
September 30, 2023						$	66,923					118,503,762						$	1,185					$	2,395,247					$	(64,738)					$	1,125,126					$	(2,417,944)					$	1,105,799

For the Nine Months Ended September 30, 2023

(In Thousands, except Share Data)						Preferred Stock						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive (Loss)						Cumulative  Earnings						Cumulative Distributions to Stockholders						Total
(Unaudited)												Shares						Par Value
December 31, 2022						$	—					113,484,675						$	1,135					$	2,349,845					$	(68,868)					$	1,153,370					$	(2,351,497)					$	1,083,985
Net (loss)						—						—						—						—						—						(23,317)						—						(23,317)
Other comprehensive income						—						—						—						—						4,130						—						—						4,130
Issuance of common stock						—						4,244,580						42						33,286						—						—						—						33,328
Employee stock purchase and incentive plans						—						774,507						8						(2,836)						—						—						—						(2,828)
Non-cash equity award compensation						—						—						—						14,952						—						—						—						14,952
Issuance of preferred stock						66,923						—						—						—						—						—						—						66,923
Preferred dividends declared ($1.85417 per share)						—						—						—						—						—						(4,927)						—						(4,927)
Common dividends declared ($0.55 per share)(1)						—						—						—						—						—						—						(66,447)						(66,447)
September 30, 2023						$	66,923					118,503,762						$	1,185					$	2,395,247					$	(64,738)					$	1,125,126					$	(2,417,944)					$	1,105,799

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For the Three Months Ended September 30, 2022

(In Thousands, except Share Data)						Preferred Stock						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive (Loss)						Cumulative  Earnings						Cumulative Distributions to Stockholders						Total
(Unaudited)												Shares						Par Value
June 30, 2022						—						116,753,174						$	1,168					$	2,363,709					$	(57,788)					$	1,247,839					$	(2,296,837)					$	1,258,091
Net (loss)						—						—						—						—						—						(50,411)						—						(50,411)
Other comprehensive (loss)						—						—						—						—						(7,147)						—						—						(7,147)
Employee stock purchase and incentive plans						—						38,698						—						34						—						—						—						34
Non-cash equity award compensation						—						—						—						5,068						—						—						—						5,068
Share repurchases												(3,448,858)						(35)						(23,659)						—						—						—						(23,694)
Common dividends declared ($0.23 per share)(1)						—						—						—						—						—						—						(27,699)						(27,699)
September 30, 2022						—						113,343,014						$	1,133					$	2,345,152					$	(64,935)					$	1,197,428					$	(2,324,536)					$	1,154,242

For the Nine Months Ended September 30, 2022

(In Thousands, except Share Data)						Preferred Stock						Common Stock												Additional Paid-In Capital						Accumulated Other Comprehensive Income (Loss)						Cumulative  Earnings						Cumulative Distributions to Stockholders						Total
(Unaudited)												Shares						Amount
December 31, 2021						—						114,892,309						$	1,149					$	2,316,799					$	(8,927)					$	1,316,890					$	(2,239,824)					$	1,386,087
Net (loss)						—						—						—						—						—						(119,462)						—						(119,462)
Other comprehensive (loss)						—						—						—						—						(56,008)						—						—						(56,008)
Issuance of common stock						—						5,232,869						52						67,424						—						—						—						67,476
Employee stock purchase and incentive plans						—						346,727						3						(1,151)						—						—						—						(1,148)
Non-cash equity award compensation						—						—						—						18,505						—						—						—						18,505
Share repurchases												(7,128,891)						(71)						(56,425)						—						—						—						(56,496)
Common dividends declared (0.69 per share)(1)						—						—						—						—						—						—						(84,712)						(84,712)
September 30, 2022						—						113,343,014						$	1,133					$	2,345,152					$	(64,935)					$	1,197,428					$	(2,324,536)					$	1,154,242

(1)    Includes dividends and dividend equivalents declared on common stock and stock-based compensation awards

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,
						2023						2022
Cash Flows From Operating Activities:
Net income (loss)						$	(23,317)					$	(119,462)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of premiums, discounts, and debt issuance costs, net						14,137						2,041
Depreciation and amortization of non-financial assets						11,082						12,115
Originations of held-for-sale loans						(577,098)						(913,477)
Purchases of held-for-sale loans						(1,051,236)						(3,734,972)
Proceeds from sales of held-for-sale loans						692,392						4,110,949
Principal payments on held-for-sale loans						45,326						160,985
Net settlements of derivatives						(5,023)						158,868
Non-cash equity award compensation expense						14,952						18,505
Market valuation adjustments						(1,275)						183,487
Realized (gains) losses, net						(1,104)						(2,581)
Net change in:
Other assets						14,687						56,156
Accrued expenses and other liabilities						(984)						(62,046)
Net cash used in operating activities						(867,461)						(129,432)
Cash Flows From Investing Activities:
Originations of loan investments						(674,500)						(1,377,714)
Purchases of loan investments						—						(22,006)
Proceeds from sales of loans						5,351						—
Principal payments on loan investments						1,126,609						1,666,514
Purchases of real estate securities						(9,855)						(15,006)
Proceeds from sales of real estate securities						138,111						27,471
Principal payments on real estate securities						950						26,584
Repayments from servicer advance investments, net						55,828						65,772
Acquisition of Riverbend, net of cash acquired						—						(40,636)
Purchases of HEI						(25,626)						(176,439)
Repayments on HEI						26,153						35,187
Other investing activities, net						(3,787)						(20,768)
Net cash provided by investing activities						639,234						168,959
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt						1,956,373						4,149,726
Repayments on short-term debt						(2,393,313)						(5,192,165)
Proceeds from issuance of asset-backed securities						1,240,121						1,420,289
Repayments on asset-backed securities issued						(657,638)						(1,288,294)
Proceeds from borrowings on long-term debt						442,039						1,678,805
Deferred long-term debt issuance costs paid						(1,640)						(17,925)
Repayments on long-term debt						(451,253)						(873,820)
Payments on repurchase of common stock						—						(56,496)
Taxes paid on equity award distributions						(3,288)						(1,571)
Net proceeds from issuance of common stock						33,788						67,899
Net proceeds from issuance of preferred stock						66,923						—
Dividends paid on common stock						(66,447)						(84,712)
Dividends paid on preferred stock						(3,449)						—
Other financing activities, net						(3,630)						(3,659)
Net cash provided by (used in) financing activities						158,586						(201,923)
Net decrease in cash, cash equivalents and restricted cash						(69,641)						(162,396)
Cash, cash equivalents and restricted cash at beginning of period (1)						329,364						531,484
Cash, cash equivalents and restricted cash at end of period (1)						$	259,723					$	369,088

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

(In Thousands) (Unaudited)						Nine Months Ended September 30,
						2023						2022
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest						$	436,879					$	378,691
Taxes (refunded) paid						(1,034)						3,894
Supplemental Noncash Information:
Dividends declared but not paid on preferred stock						1,478						—
Retention of mortgage servicing rights from loan securitizations and sales						—						4,543
Transfers from loans held-for-sale to loans held-for-investment						2,009,030						2,643,027
Transfers from residential loans to real estate owned						53,906						4,033
Operating lease right-of-use assets obtained in exchange for operating lease liabilities						337						—
Reduction in operating lease liabilities due to lease modification						274						—
Transfers from short-term debt to long-term debt						325,173						—
Transfers from long-term debt to short-term debt						427,021						908,627

`

(1)    Cash, cash equivalents, and restricted cash includes cash and cash equivalents of $204 million and restricted cash of $56 million at September 30, 2023, and includes cash and cash equivalents of $297 million and restricted cash of $72 million at September 30, 2022.

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, 2023

(Unaudited)

Note 1. Organization

Redwood Trust, Inc., together with its subsidiaries, is a specialty finance company focused on several distinct areas of housing credit, with a mission to help make quality housing, whether rented or owned, accessible to all American households. 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 well 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 securities. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential and business purpose housing credit assets. 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 Mortgage Banking, Business Purpose Mortgage Banking, and Investment Portfolio.

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 portfolio.

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 Trust, Inc. 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. For a full description of our business, see Part I, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2022.

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at September 30, 2023 and December 31, 2022, and for the three and nine months ended September 30, 2023 and 2022. 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, 2022. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial condition of the Company at September 30, 2023 and results of operations for all periods presented. The results of operations for the three and nine months ended September 30, 2023 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, 2023

(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 BPL term and bridge loans ("CAFL") and an entity formed in connection with the securitization of home equity investment contracts ("HEI"). 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 Legacy Sequoia, 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 Consolidated Agency multifamily loans, at fair value, the underlying BPL term and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment, at fair value, and the underlying HEI at the consolidated HEI securitization entity are shown under Home equity 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, we record 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 15 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, valuation allowances, 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.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 2. Basis of Presentation - (continued)

Acquisitions

On July 1, 2022, we acquired Riverbend Funding LLC ("Riverbend"), a private mortgage lender for residential transitional and commercial real estate investors. Refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding this acquisition, including purchase price allocations. Additionally, in 2019 we acquired 5 Arches and CoreVest, an originator and portfolio manager of business purpose residential loans. In connection with these acquisitions, we identified and recorded finite-lived intangible assets totaling $95 million. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at September 30, 2023.

Table 2.1 – Intangible Assets – Activity

						Intangible Assets at Acquisition						Accumulated Amortization at September 30, 2023						Carrying Value at September 30, 2023						Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network						$	56,300					$	(27,580)					$	28,720					7
Broker network						18,100						(16,592)						1,508						5
Non-compete agreements						11,400						(10,292)						1,108						3
Tradenames						4,400						(4,166)						234						3
Developed technology						1,800						(1,800)						—						2
Loan administration fees on existing loan assets						2,600						(2,600)						—						1
Total						$	94,600					$	(63,030)					$	31,570					6

All of our intangible assets are amortized on a straight-line basis. For the nine months ended September 30, 2023, we recorded intangible asset amortization expense of $9 million. For the nine months ended September 30, 2022, we recorded intangible asset amortization expense of $11 million. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year

(In Thousands)																								September 30, 2023
2023 (3 months)																								$	3,109
2024																								9,412
2025																								8,426
2026																								6,694
2027																								1,571
2028 and thereafter																								2,358
Total Future Intangible Asset Amortization																								$	31,570

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, 2023.

We recorded total goodwill of $23 million during the three months ended September 30, 2022 as a result of the total consideration exceeding the fair value of the net assets acquired from Riverbend. For reporting purposes, we included the intangible assets and goodwill from the Riverbend acquisition within our Business Purpose Mortgage Banking segment. There were no changes to the balance of goodwill during the nine months ended September 30, 2023.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 2. Basis of Presentation - (continued)

The potential liability resulting from the contingent consideration arrangement with Riverbend was recorded at its acquisition-date fair value of zero as part of the total consideration for the acquisition of Riverbend. At September 30, 2023, the estimated fair value of this contingent liability was zero on our consolidated balance sheets. Our contingent consideration liability is recorded at fair value and periodic changes in the estimated fair value are recorded through Other expenses on our consolidated statements of income. During the nine months ended September 30, 2023, we did not record any contingent consideration income or expense related to our acquisition of Riverbend. See Note 17 for additional information on our contingent consideration liability.

The following unaudited pro forma financial information presents Net interest income, Non-interest income, and Net income of Redwood, as if the acquisition of Riverbend occurred as of January 1, 2022. These pro forma amounts have been adjusted to include the amortization of intangible assets for all periods. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated financial results of operations that would have been reported if the acquisition had been completed as of January 1, 2022 and should not be taken as indicative of our future consolidated results of operations.

Table 2.3 – Unaudited Pro Forma Financial Information

												Three Months Ended September 30, 2022						Nine Months Ended September 30, 2022
(In Thousands)
Supplementary pro forma information:
Net interest income												$	34,935					$	132,475
Non-interest (loss) income												(37,135)						(121,614)
Net (loss) income												(50,411)						(117,090)

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, 2022 is a summary of our significant accounting policies.

Recent Accounting Pronouncements

Newly Adopted Accounting Standard Updates ("ASUs")

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the current expected credit loss ("CECL") model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross writeoffs for financing receivables and net investment in leases by year of origination in the vintage disclosures. This new guidance was effective for fiscal years beginning after December 31, 2022. We adopted this guidance in the first quarter of 2023, 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, 2023

(Unaudited)

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

In March 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (Topic 815), Fair Value Hedging - Portfolio Layer Method," which will expand companies' abilities to hedge the benchmark interest rate risk of portfolios of financial assets (or beneficial interests) in a fair value hedge. The ASU expands the use of the portfolio layer method (previously referred to as the last-of-layer method) to allow multiple hedges of a single closed portfolio of assets using spot starting, forward starting, and amortizing-notional swaps. The ASU also permits both prepayable and non-prepayable financial assets to be included in the closed portfolio of assets hedged in a portfolio layer hedge. The ASU further requires that basis adjustments not be allocated to individual assets for active portfolio layer method hedges, but rather be maintained on the closed portfolio of assets as a whole. This new guidance was effective for fiscal years beginning after December 31, 2022. We adopted this guidance in the first quarter of 2023, which did not have a material impact on our consolidated financial statements.

In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848." This new guidance defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. Through September 30, 2023, we had not elected to apply the optional expedients and exceptions to any of our existing contracts, hedging relationships, or other transactions.

At September 30, 2023, we had no remaining LIBOR-indexed financial assets or liabilities. Our bridge loans and trust preferred securities that were previously indexed to LIBOR at June 30, 2023, were transitioned to SOFR indexes in the third quarter of 2023.

Other Recent Accounting Pronouncements Pending Adoption

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring its fair value and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the accounting and disclosure requirements of ASU 2022-03 and we plan to adopt this new guidance by the required date. We do not anticipate that this update will have a material impact on our financial statements.

In August 2023, the FASB issued ASU 2023-05, "Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement." ASU 2023-05 requires a joint venture, upon formation, to initially measure its assets and liabilities at fair value. This generally aligns the treatment to be consistent with the guidance for business combinations. Joint venture entities that are private companies may elect to include customer-related intangible assets and non-competition agreements within goodwill and not as separate intangible assets. This new guidance is effective for all joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. Joint ventures formed prior to the adoption date may elect to apply the new guidance retrospectively back to their original formation date. We are evaluating the accounting and disclosure requirements of ASU 2023-05 and we plan to adopt this new guidance by the required date. We do not anticipate that this update will have a material impact on our financial statements.

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 elect to 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, 2023

(Unaudited)

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

The following table 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, 2023 and December 31, 2022.

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, 2023 (In Thousands)																								Financial Instruments						Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements						$	13,819					$	—					$	13,819					$	—					$	(9,428)					$	4,391
TBAs						16,613						—						16,613						(1,169)						(14,032)						1,412
Futures						2,187						—						2,187						(199)						(146)						1,842
Total Assets						$	32,619					$	—					$	32,619					$	(1,368)					$	(23,606)					$	7,645
Liabilities (2)
TBAs						$	(5,495)					$	—					$	(5,495)					$	1,169					$	4,326					$	—
Futures						(199)						—						(199)						199						—						—
Loan warehouse debt						(325,880)						—						(325,880)						325,880						—						—
Total Liabilities						$	(331,574)					$	—					$	(331,574)					$	327,248					$	4,326					$	—

						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, 2022 (In Thousands)																								Financial Instruments						Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements						$	14,625					$	—					$	14,625					$	—					$	(5,944)					$	8,681
TBAs						1,893						—						1,893						(1,873)						—						20
Futures						3,976						—						3,976						(57)						—						3,919
Total Assets						$	20,494					$	—					$	20,494					$	(1,930)					$	(5,944)					$	12,620
Liabilities (2)
TBAs						$	(16,784)					$	—					$	(16,784)					$	1,873					$	4,518					$	(10,393)
Futures						(57)						—						(57)						57						—						—
Loan warehouse debt						(224,695)						—						(224,695)						224,695						—						—
Total Liabilities						$	(241,536)					$	—					$	(241,536)					$	226,625					$	4,518					$	(10,393)

(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, we have pledged excess cash collateral or financial assets to a counterparty (which, in certain circumstances, may 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, these excess amounts are excluded from the table; they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.

(2)Interest rate agreements, TBAs and futures are components of derivative instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by certain residential and business purpose loans, is a component of Short-term debt and Long-term debt on our consolidated balance sheets.

14

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

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

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, our transactions generally 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.

Analysis of Consolidated VIEs

At September 30, 2023, we consolidated Legacy Sequoia, Sequoia, CAFL, Freddie Mac SLST, Freddie Mac K-Series, and 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, 2023, we held an 80% ownership interest in, and were responsible for the management of, each such entity. See Note 11 for a further description of these entities and the investments they hold and Note 13 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 14 for additional information on the servicer advance financing.

During 2021, we consolidated an HEI securitization entity formed to invest in HEI that we determined was a VIE and for which we determined we were the primary beneficiary. At September 30, 2023 and December 31, 2022, 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 13 for additional information on non-controlling interests in the entity. We consolidate the HEI 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.

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 accounted for under the CFE election effectively represents the fair value of the beneficial interests we own in the entity.

15

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

In addition to our consolidated VIEs for which we made the CFE election, we consolidate certain 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 securitizations, Freddie Mac SLST re-securitization, and Servicing Investment entities. In January 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS issued.

The following table presents a summary of the assets and liabilities of our consolidated VIEs.     

Table 4.1 – Assets and Liabilities of Consolidated VIEs

September 30, 2023						Legacy Sequoia						Sequoia						CAFL(1)						Freddie Mac SLST(1)						Freddie Mac K-Series						Servicing Investment						HEI						Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment						$	150,152					$	3,774,090					$	—					$	1,312,149					$	—					$	—					$	—					$	5,236,391
Business purpose loans, held-for-investment						—						—						3,494,669						—						—						—						—						3,494,669
Consolidated Agency multifamily loans						—						—						—						—						420,554						—						—						420,554
Home equity investments						—						—						—						—						—						—						129,150						129,150
Other investments						—						—						—						—						—						252,650						—						252,650
Cash and cash equivalents						—						—						—						—						—						15,198						—						15,198
Restricted cash						67						76						24,127						—						—						—						4,015						28,285
Accrued interest receivable						333						15,263						19,267						4,900						1,275						2,232						—						43,270
Other assets						—						—						8,062						2,865						—						7,973						50						18,950
Total Assets						$	150,552					$	3,789,429					$	3,546,125					$	1,319,914					$	421,829					$	278,053					$	133,215					$	9,639,117
Short-term debt						$	—					$	—					$	—					$	—					$	—					$	154,128					$	—					$	154,128
Accrued interest payable						310						12,695						11,181						3,398						1,150						385						—						29,119
Accrued expenses and other liabilities						(106)						80						2,736						—						—						32,062						25,627						60,399
Asset-backed securities issued						149,202						3,568,505						3,134,929						1,058,991						387,650						—						92,773						8,392,050
Total Liabilities						$	149,406					$	3,581,280					$	3,148,846					$	1,062,389					$	388,800					$	186,575					$	118,400					$	8,635,696
Value of our investments in VIEs(1)						$	950					$	205,581					$	394,184					$	256,023					$	32,904					$	91,478					$	14,815					$	995,935
Number of VIEs						20						20						20						2						1						3						1						67

16

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

December 31, 2022						Legacy Sequoia						Sequoia						CAFL(1)						Freddie Mac SLST(1)						Freddie Mac K-Series						Servicing Investment						HEI						Total Consolidated VIEs
(Dollars in Thousands)
Residential loans, held-for-investment						$	184,932					$	3,190,417					$	—					$	1,457,058					$	—					$	—					$	—					$	4,832,407
Business purpose loans, held-for-investment						—						—						3,461,367						—						—						—						—						3,461,367
Consolidated Agency multifamily loans						—						—						—						—						424,551						—						—						424,551
Home equity investments						—						—						—						—						—						—						132,627						132,627
Other investments						—						—						—						—						—						301,213						—						301,213
Cash and cash equivalents						—						—						710						—						—						12,765						—						13,475
Restricted cash						69						73						26,296						—						—						—						3,424						29,862
Accrued interest receivable						284						11,227						18,102						5,144						1,293						342						—						36,392
Other assets						637						—						14,265						2,898						—						7,547						50						25,397
Total Assets						$	185,922					$	3,201,717					$	3,520,740					$	1,465,100					$	425,844					$	321,867					$	136,101					$	9,257,291
Short-term debt						$	—					$	—					$	—					$	—					$	—					$	206,510					$	—					$	206,510
Accrued interest payable						282						8,880						10,918						3,561						1,167						492						—						25,300
Accrued expenses and other liabilities						—						81						4,559						—						—						24,745						22,329						51,714
Asset-backed securities issued						184,191						2,971,109						3,115,807						1,222,150						392,785						—						100,710						7,986,752
Total Liabilities						$	184,473					$	2,980,070					$	3,131,284					$	1,225,711					$	393,952					$	231,747					$	123,039					$	8,270,276
Value of our investments in VIEs(1)						$	1,285					$	219,299					$	385,927					$	237,807					$	31,767					$	90,120					$	13,062					$	979,267
Number of VIEs						20						17						19						3						1						3						1						64

(1)Value of our investments in VIEs, as presented in this table, represents the fair value of our economic interests in the consolidated VIEs that we account for under the CFE election. CAFL includes BPL term loan securitizations we account for under the CFE election and two BPL bridge loan securitizations for which we did not make the CFE election. As of September 30, 2023 and December 31, 2022, the fair value of our interests in the CAFL Term securitizations were $316 million and $304 million, respectively, and the remaining values were associated with our interests in the CAFL Bridge securitizations, for which the ABS issued is carried at amortized historical cost. At December 31, 2022, Freddie Mac SLST includes securitizations we account for under the CFE election and also includes ABS issued in relation to a re-securitization of the securities we own in the consolidated Freddie Mac SLST VIEs, that we account for at amortized historical cost. In January 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS issued. As of September 30, 2023 and December 31, 2022, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election was $256 million and $323 million, respectively, with the difference reflected in the December 31, 2022 table above due to ABS issued and carried at amortized historical cost.

17

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following tables present income (loss) from these VIEs for the three and nine months ended September 30, 2023 and 2022.

Table 4.2 – Income (Loss) from Consolidated VIEs

						Three Months Ended September 30, 2023
						Legacy Sequoia						Sequoia						CAFL						Freddie Mac SLST						Freddie Mac K-Series						Servicing Investment						HEI						Total Consolidated VIEs
(Dollars in Thousands)
Interest income						$	2,596					$	40,180					$	52,940					$	15,065					$	4,677					$	8,069					$	—					$	123,527
Interest expense						(2,487)						(35,810)						(38,273)						(10,523)						(4,290)						(3,410)						—						(94,793)
Net interest income						109						4,370						14,667						4,542						387						4,659						—						28,734
Non-interest income
Investment fair value changes, net						(215)						(4,966)						(6,562)						(32,388)						390						3,059						968						(39,714)
Other income						—						—						377						—						—						—						—						377
Total non-interest income, net						(215)						(4,966)						(6,185)						(32,388)						390						3,059						968						(39,337)
General and administrative expenses						—						—						—						—						—						(89)						—						(89)
Other expenses						—						—						—						—						—						(1,526)						—						(1,526)
Income (loss) from Consolidated VIEs						$	(106)					$	(596)					$	8,482					$	(27,846)					$	777					$	6,103					$	968					$	(12,218)

						Nine Months Ended September 30, 2023
						Legacy Sequoia						Sequoia						CAFL						Freddie Mac SLST						Freddie Mac K-Series						Servicing Investment						HEI						Total Consolidated VIEs
(Dollars in Thousands)
Interest income						$	7,879					$	112,302					$	161,960					$	45,831					$	13,993					$	23,794					$	—					$	365,759
Interest expense						(7,650)						(99,859)						(116,360)						(32,392)						(12,842)						(11,054)						—						(280,157)
Net interest income						229						12,443						45,600						13,439						1,151						12,740						—						85,602
Non-interest income
Investment fair value changes, net						(319)						(1,596)						(4,643)						(40,017)						1,138						7,265						1,846						(36,326)
Other income						—						—						761						—						—						—						—						761
Total non-interest income, net						(319)						(1,596)						(3,882)						(40,017)						1,138						7,265						1,846						(35,565)
General and administrative expenses						—						—						—						—						—						(82)						—						(82)
Other expenses						—						—						—						—						—						(4,007)						—						(4,007)
Income (loss) from Consolidated VIEs						$	(90)					$	10,847					$	41,718					$	(26,578)					$	2,289					$	15,916					$	1,846					$	45,948

18

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

						Three Months Ended September 30, 2022
						Legacy Sequoia						Sequoia						CAFL						Freddie Mac SLST						Freddie Mac K-Series						Servicing Investment						HEI						Total Consolidated VIEs
(Dollars in Thousands)
Interest income						$	1,475					$	31,587					$	61,439					$	16,098					$	4,762					$	7,800					$	—					$	123,161
Interest expense						(1,486)						(27,541)						(44,804)						(12,829)						(4,377)						(2,606)						—						(93,643)
Net interest income						(11)						4,046						16,635						3,269						385						5,194						—						29,518
Non-interest income
Investment fair value changes, net						(328)						(10,936)						(4,527)						(41,892)						316						(3,286)						(584)						(61,237)
Other income						—						—						286						—						—						—						—						286
Total non-interest income, net						(328)						(10,936)						(4,241)						(41,892)						316						(3,286)						(584)						(60,951)
General and administrative expenses						—						—						—						—						—						(55)						—						(55)
Other expenses						—						—						—						—						—						(372)						—						(372)
Income (loss) from Consolidated VIEs						$	(339)					$	(6,890)					$	12,394					$	(38,623)					$	701					$	1,481					$	(584)					$	(31,860)

						Nine Months Ended September 30, 2022
						Legacy Sequoia						Sequoia						CAFL						Freddie Mac SLST						Freddie Mac K-Series						Servicing Investment						HEI						Total Consolidated VIEs
(Dollars in Thousands)
Interest income						$	3,595					$	95,608					$	195,381					$	49,851					$	14,247					$	23,287					$	—					$	381,969
Interest expense						(3,154)						(84,041)						(145,207)						(40,286)						(13,099)						(6,110)						—						(291,897)
Net interest income						441						11,567						50,174						9,565						1,148						17,177						—						90,072
Non-interest income
Investment fair value changes, net						(1,378)						(20,644)						(23,972)						(74,796)						390						(11,259)						4,028						(127,631)
Other income						—						—						631						—						—						—						—						631
Total non-interest income, net						(1,378)						(20,644)						(23,341)						(74,796)						390						(11,259)						4,028						(127,000)
General and administrative expenses						—						—						—						—						—						(130)						—						(130)
Other expenses						—						—						—						—						—						(1,158)						—						(1,158)
Income (loss) from Consolidated VIEs						$	(937)					$	(9,077)					$	26,833					$	(65,231)					$	1,538					$	4,630					$	4,028					$	(38,216)

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

19

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

Analysis of Unconsolidated VIEs with Continuing Involvement

Since 2012, we have transferred residential loans to 46 Sequoia securitization entities sponsored by us that are still outstanding as of September 30, 2023, 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.

The following table summarizes the cash flows during the three and nine months ended September 30, 2023 and 2022 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

Table 4.3 – Cash Flows Related to Unconsolidated VIEs Sponsored by Redwood

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
MSR fees received						$	664					$	737					$	2,020					$	2,365
Funding of compensating interest, net						(1)						(11)						(3)						(41)
Cash flows received on retained securities						3,254						3,096						8,938						20,380

The following table presents additional information at September 30, 2023 and December 31, 2022, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.4 – Unconsolidated VIEs Sponsored by Redwood

(In Thousands)						September 30, 2023						December 31, 2022
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading						$	32,772					$	28,722
Subordinate securities, classified as AFS						73,160						74,367
Mortgage servicing rights						11,562						11,589
Maximum loss exposure (1)						$	117,494					$	114,678
Assets transferred:
Principal balance of loans outstanding						$	3,830,002					$	4,052,922
Principal balance of loans 30+ days delinquent						18,498						27,739

(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.

20

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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, 2023 and December 31, 2022.

Table 4.5 – Key Assumptions and Sensitivity Analysis for Assets Retained from Unconsolidated VIEs Sponsored by Redwood

September 30, 2023						MSRs						Senior Securities (1)						Subordinate Securities
(Dollars in Thousands)
Fair value at September 30, 2023						$	11,562					$	32,772					$	73,160
Expected life (in years) (2)						8						10						15
Prepayment speed assumption (annual CPR) (2)						6		%				5		%				8		%
Decrease in fair value from:
10% adverse change						$	207					$	589					$	458
25% adverse change						513						1,400						1,086
Discount rate assumption (2)						13		%				14		%				9		%
Decrease in fair value from:
100 basis point increase						$	405					$	1,547					$	6,878
200 basis point increase						827						2,782						12,831
Credit loss assumption (2)						N/A						0.03		%				0.03		%
Decrease in fair value from:
10% higher losses						N/A						N/A						$	31
25% higher losses						N/A						N/A						80

December 31, 2022						MSRs						Senior Securities (1)						Subordinate Securities
(Dollars in Thousands)
Fair value at December 31, 2022						$	11,589					$	28,722					$	74,367
Expected life (in years) (2)						7						7						16
Prepayment speed assumption (annual CPR) (2)						8		%				10		%				8		%
Decrease in fair value from:
10% adverse change						$	311					$	970					$	386
25% adverse change						779						2,344						907
Discount rate assumption (2)						11		%				12		%				9		%
Decrease in fair value from:
100 basis point increase						$	430					$	980					$	7,198
200 basis point increase						832						1,894						13,394
Credit loss assumption (2)						N/A						0.03		%				0.03		%
Decrease in fair value from:
10% higher losses						N/A						N/A						$	31
25% higher losses						N/A						N/A						76

(1)Senior securities included $33 million and $29 million of interest-only securities at September 30, 2023 and December 31, 2022, respectively.

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

21

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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, 2023 and December 31, 2022, grouped by asset type.

Table 4.6 – Third-Party Sponsored VIE Summary

(In Thousands)						September 30, 2023						December 31, 2022
Mortgage-Backed Securities
Senior						$	8,397					$	145
Subordinate						15,116						137,241
Total Mortgage-Backed Securities						23,513						137,386
Excess MSR						5,590						7,082
Total Investments in Third-Party Sponsored VIEs						$	29,103					$	144,468

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.

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.

22

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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, 2023 and December 31, 2022.

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

						September 30, 2023												December 31, 2022
						Carrying Value						Fair Value						Carrying Value						Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale, at fair value						$	610,918					$	610,918					$	780,781					$	780,781
Residential loans, held-for-investment, at fair value						5,236,391						5,236,391						4,832,407						4,832,407
Business purpose loans, held-for-sale, at fair value						102,777						102,777						364,073						364,073
Business purpose loans, held-for-investment, at fair value						5,146,553						5,146,553						4,968,513						4,968,513
Consolidated Agency multifamily loans, at fair value						420,554						420,554						424,551						424,551
Real estate securities, at fair value						129,445						129,445						240,475						240,475
HEI						431,272						431,272						403,462						403,462
Servicer advance investments (1)						219,813						219,813						269,259						269,259
MSRs (1)						26,033						26,033						25,421						25,421
Excess MSRs (1)						38,427						38,427						39,035						39,035
Other investments (1)						5,583						5,583						6,155						6,155
Cash and cash equivalents						203,622						203,622						258,894						258,894
Restricted cash						56,101						56,101						70,470						70,470
Derivative assets						37,686						37,686						20,830						20,830
Margin receivable (2)						10,536						10,536						13,802						13,802
Liabilities
Short-term debt (3)						$	1,329,017					$	1,327,134					$	1,853,664					$	1,853,664
Margin payable (4)						25,210						25,210						5,944						5,944
Guarantee obligations (4)						5,913						3,734						6,344						4,738
HEI securitization non-controlling interest						25,627						25,627						22,329						22,329
Derivative liabilities						8,781						8,781						16,855						16,855
ABS issued, net
at fair value						7,910,345						7,910,345						7,424,132						7,424,132
at amortized cost						481,705						454,973						562,620						524,768
Other long-term debt, net (5)						1,320,733						1,315,014						1,077,200						1,069,946
Convertible notes, net (5)						517,662						489,828						693,473						638,049
Trust preferred securities and subordinated notes, net (5)						138,802						97,650						138,767						83,700

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

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

(3)Short-term debt excludes short-term convertible notes, which are included below under "Convertible notes, net."

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

(5)These liabilities are primarily included in Long-term debt, net on our consolidated balance sheets. Convertible notes, net also includes convertible notes classified as Short-term debt. See Note 14 for more information on Short-term debt.

During the three and nine months ended September 30, 2023, we elected the fair value option for zero and $8 million of securities, respectively, $858 million and $1.1 billion (principal balance) of residential loans, respectively, and $411 million and $1.26 billion (principal balance) of business purpose loans, respectively. Additionally, during the three and nine months ended September 30, 2023, we elected the fair value option for $0.1 million and $26 million of HEI, respectively. For the three and nine months ended September 30, 2023, we elected the fair value option for zero and $1 million, respectively, of Other investments. 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, as well as for certain securities we purchase, including IO securities, HEI and certain equity investments.

23

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

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

The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at September 30, 2023 and December 31, 2022, 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, 2023						Carrying Value						Fair Value Measurements Using
(In Thousands)												Level 1						Level 2						Level 3
Assets
Residential loans						$	5,847,309					$	—					$	—					$	5,847,309
Business purpose loans						5,249,330						—						—						5,249,330
Consolidated Agency multifamily loans						420,554						—						—						420,554
Real estate securities						129,445						—						—						129,445
HEI						431,272						—						—						431,272
Servicer advance investments						219,813						—						—						219,813
MSRs						26,033						—						—						26,033
Excess MSRs						38,427						—						—						38,427
Other investments						5,583						—						—						5,583
Derivative assets						37,686						18,800						13,819						5,067
Liabilities
HEI securitization non-controlling interest						$	25,627					$	—					$	—					$	25,627
Derivative liabilities						8,781						5,694						—						3,087
ABS issued						7,910,345						—						—						7,910,345

December 31, 2022						Carrying Value						Fair Value Measurements Using
(In Thousands)												Level 1						Level 2						Level 3
Assets
Residential loans						$	5,613,157					$	—					$	—					$	5,613,157
Business purpose loans						5,332,586						—						—						5,332,586
Consolidated Agency multifamily loans						424,551						—						—						424,551
Real estate securities						240,475						—						—						240,475
HEI						403,462						—						—						403,462
Servicer advance investments						269,259						—						—						269,259
MSRs						25,421						—						—						25,421
Excess MSRs						39,035						—						—						39,035
Other investments						6,155						—						—						6,155
Derivative assets						20,830						5,869						14,625						336
Liabilities
HEI securitization non-controlling interest						$	22,329					$	—					$	—					$	22,329
Derivative liabilities						16,855						16,841						—						14
ABS issued						7,424,132						—						—						7,424,132

24

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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, 2023.

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

						Assets
						Residential Loans						Business Purpose Loans						Consolidated Agency Multifamily Loans						Trading Securities						AFS Securities						HEI						Servicer Advance Investments						Excess MSRs						MSRs and Other Investments
(In Thousands)
Beginning balance -    December 31, 2022						$	5,613,157					$	5,332,586					$	424,552					$	108,329					$	132,146					$	403,462					$	269,259					$	39,035					$	31,576
Acquisitions						1,050,444						—						—						7,883						1,979						25,626						—						—						500
Originations						—						1,255,680						—						—						—						—						—						—						—
Sales						(226,646)						(471,336)						—						(82,270)						(54,339)						—						—						—						(272)
Principal paydowns						(363,128)						(802,610)						(6,198)						(324)						(632)						(26,153)						(55,828)						—						(114)
Gains (losses) in net income, net						(224,162)						(17,809)						2,200						14,423						946						28,337						6,382						(608)						426
Unrealized losses in OCI, net						—						—						—						—						1,304						—						—						—						—
Other settlements, net (1)						(2,356)						(47,181)						—						—						—						—						—						—						(500)
Ending balance -   September 30, 2023						$	5,847,309					$	5,249,330					$	420,554					$	48,041					$	81,404					$	431,272					$	219,813					$	38,427					$	31,616

									Liabilities
						Derivatives (2)						HEI Securitization Non-Controlling Interest						ABS Issued
(In Thousands)
Beginning balance - December 31, 2022						$	322					$	22,329					$	7,424,132
Acquisitions						—						—						1,240,120
Principal paydowns						—						—						(571,883)
Gains (losses) in net income, net						10,086						3,298						(182,023)
Other settlements, net (1)						(8,428)						—						—
Ending balance - September 30, 2023						$	1,980					$	25,627					$	7,910,346

(1)     Other settlements, net: for residential and business purpose loans, represents the transfer of loans to REO; for derivatives, represents the transfer of the fair value of loan purchase and interest rate lock commitments at the time loans are acquired to the basis of residential and business purpose loans; and for MSRs and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.

(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.

25

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

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

The following table presents the portion of fair value gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at September 30, 2023 and 2022. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 2023 and 2022 are not included in this presentation.

Table 5.4 – Portion of Net Fair Value Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at September 30, 2023 and 2022 Included in Net Income

						Included in Net Income (loss)
						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
Assets
Residential loans at Redwood						$	(3,963)					$	(28,762)					$	(4,404)					$	(42,952)
Business purpose loans at Redwood and CAFL Bridge						(15,646)						(10,967)						(25,876)						(39,019)
Net investments in consolidated Sequoia entities (1)						(4,471)						(11,264)						(1,952)						(22,467)
Net investments in consolidated Freddie Mac SLST entities (1)						(32,397)						(41,969)						(40,398)						(75,043)
Net investments in consolidated Freddie Mac K-Series entities (1)						390						316						1,138						390
Net investments in consolidated CAFL Term entities (1)						(3,800)						(6,585)						(1,903)						(24,365)
Net investment in consolidated HEI securitization entity (1)						2,700						(1,652)						5,145						11,348
Trading securities						4,408						(12,668)						5,795						(34,104)
Available-for-sale securities						66						—						(32)						—
HEI at Redwood						8,705						(4,903)						19,592						(2,272)
Servicer advance investments						4,069						(3,905)						6,383						(10,218)
MSRs						160						1,653						1,425						9,118
Excess MSRs						(1,450)						(351)						(608)						(3,779)
Loan purchase and interest rate lock commitments						5,061						723						5,067						744
Liabilities
Non-controlling interest in consolidated HEI entity						$	(1,732)					$	1,068					$	(3,298)					$	(7,320)
Loan purchase commitments						(3,087)						(212)						(3,087)						(212)

(1)    Represents the portion of net fair value gains or losses included in our consolidated statements of income related to securitized loans, securitized HEI, and the associated ABS issued at our consolidated securitization entities held at September 30, 2023 and 2022, which, netted together, represent the change in value of our investments at the consolidated VIEs accounted for under the CFE election, excluding REO.

The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, 2023. 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, 2023.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 2023

																														Gain (Loss) for
September 30, 2023						Carrying Value						Fair Value Measurements Using																		Three Months Ended						Nine Months Ended
(In Thousands)												Level 1						Level 2						Level 3						September 30, 2023						September 30, 2023
Assets
Strategic investments						$	6,750					$	—					$	—					$	6,750					$	100					$	(2,550)
REO						423						—						—						423						(65)						(65)

26

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

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

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and nine months ended September 30, 2023 and 2022.

Table 5.6 – Market Valuation Gains and Losses, Net

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
Mortgage Banking Activities, Net
Residential loans held-for-sale						$	(8,683)					$	(20,060)					$	(2,774)					$	(71,776)
Residential loan purchase commitments						5,864						(2,716)						8,045						(53,236)
BPL term loans held-for-sale						1,600						(19,325)						13,214						(83,827)
BPL term loan interest rate lock commitments						—						19						—						(666)
BPL bridge loans						1,438						(9)						4,808						2,242
Trading securities (1)						(482)						148						2,188						4,249
Risk management derivatives, net						15,591						48,363						11,802						164,137
Total mortgage banking activities, net (2)						$	15,328					$	6,420					$	37,283					$	(38,877)
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood (called Sequoia loans)						$	—					$	(6,614)					$	183					$	(18,876)
BPL term loans held-for-sale						—						—						(14,430)						—
BPL bridge loans held-for-investment						(16,899)						2,482						(22,867)						(9,220)
Trading securities						5,738						(12,668)						12,271						(34,268)
Servicer advance investments						4,069						(3,905)						6,382						(10,217)
Excess MSRs						(1,450)						(351)						(608)						(3,779)
Net investments in Legacy Sequoia entities (3)						(215)						(328)						(319)						(1,378)
Net investments in Sequoia entities (3)						(4,256)						(10,936)						(886)						(20,644)
Net investments in Freddie Mac SLST entities (3)						(32,388)						(41,892)						(40,017)						(74,796)
Net investment in Freddie Mac K-Series entity (3)						390						316						1,138						390
Net investments in CAFL Term entities (3)						(3,800)						(6,585)						(1,903)						(24,365)
Net investments in HEI securitization entities (3)						968						(584)						1,846						4,028
HEI at Redwood						9,290						(4,774)						21,598						(1,986)
Other investments						(414)						1,445						(4,208)						12,028
Risk management derivatives, net						7,471						27,241						6,446						33,609
Credit losses on AFS securities, net						66						(544)						(33)						(2,315)
Other						—						—						(746)						—
Total investment fair value changes, net						$	(31,430)					$	(57,697)					$	(36,153)					$	(151,789)
Other Income
MSRs						$	(209)					$	1,236					$	612					$	8,031
Other						(7)						(852)						(467)						(852)
Total other income (4)						$	(216)					$	384					$	145					$	7,179
Total Market Valuation Gains (Losses), Net						$	(16,318)					$	(50,893)					$	1,275					$	(183,487)

27

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

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

Footnotes to Table 5.6

(1)Represents fair value changes on trading securities that are being used along with risk management derivatives to manage the 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, and other expenses that are components of Mortgage banking activities, net presented on our consolidated statements of income, as these amounts do not represent market valuation changes.

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

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

At September 30, 2023, 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, 2022.

28

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

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

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, 2023						Fair Value												Input Values
(Dollars in Thousands, except Input Values)												Unobservable Input						Range															Weighted Average(1)
Assets
Residential loans, at fair value:
Jumbo loans						$	540,782					Senior credit spread to TBA price(2)						$	1.63					$	2.63								$	1.71
												Subordinate credit spread(2)						275						1020			bps						438			bps
												Senior credit support(2)						7						7			%						7			%
												IO discount rate(2)						10						10			%						10			%
												Prepayment rate (annual CPR)(2)						15						15			%						15			%
Jumbo loans committed to sell						70,136						Whole loan committed sales price						$	98		-			$	101								$	98
Loans held by Legacy Sequoia (3)						150,152						Liability price												N/A									N/A
Loans held by Sequoia (3)						3,774,090						Liability price												N/A									N/A
Loans held by Freddie Mac SLST (3)						1,312,149						Liability price												N/A									N/A
Business purpose loans:
BPL term loans						72,149						Senior credit spread(2)						185			-			185			bps						185			bps
												Subordinate credit spread(2)						325			-			818			bps						468			bps
												Senior credit support(2)						35			-			35			%						35			%
												IO discount rate(2)						8			-			9			%						8			%
												Prepayment rate (annual CPR)(2)						—			-			3			%						3			%
												Dollar price of non-performing loans						$	60		-			$	100								$	61
BPL term loans held by CAFL (3)						2,969,217						Liability price												N/A									N/A
BPL bridge loans						2,207,964						Whole loan discount rate						6			-			12			%						9			%
												Whole loan spread						520			-			520			bps						520			bps
												Dollar price of non-performing loans						$48			-			$	100								$	91
Multifamily loans held by Freddie Mac K-Series (3)						420,554						Liability price												N/A									N/A
Trading and AFS securities						129,445						Discount rate						6			-			18			%						11			%
												Prepayment rate (annual CPR)						4			-			65			%						10			%
												Default rate						—			-			14			%						0.1			%
												Loss severity						—			-			50			%						22			%
HEI						302,122						Discount rate						10			-			11			%						10			%
												Prepayment rate (annual CPR)						1			-			20			%						15			%
												Home price appreciation (depreciation)						(1)			-			3			%						3			%
HEI held by HEI securitization entity(3)						129,150						Liability price												N/A									N/A
Servicer advance investments						219,813						Discount rate						3			-			5			%						4			%
												Prepayment rate (annual CPR)						11			-			30			%						14			%
												Expected remaining life (4)						6			-			6			yrs						6			yrs
												Mortgage servicing income						—			-			18			bps						4			bps

29

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

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

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

September 30, 2023						Fair Value												Input Values
(Dollars in Thousands, except Input Values)												Unobservable Input						Range															Weighted Average (1)
Assets (continued)
MSRs						$	26,033					Discount rate						12			-			73			%						13			%
												Prepayment rate (annual CPR)						3			-			21			%						6			%
												Per loan annual cost to service						$	93		-			$	93								$	93
Excess MSRs						38,427						Discount rate						13			-			19			%						18			%
												Prepayment rate (annual CPR)						10			-			100			%						17			%
												Excess mortgage servicing amount						8			-			20			bps						11			bps
Residential loan purchase commitments, net						1,980						Senior credit spread to TBA price(2)						$	1.63					$	2.63								$	1.71
												Subordinate credit spread(2)						275			-			1020			bps						438			bps
												Senior credit support(2)						7			-			7			%						7			%
												IO discount rate(2)						10			-			10			%						10			%
												Prepayment rate (annual CPR)(2)						15			-			15			%						15			%
												Pull-through rate						22			-			100			%						68			%
												Committed sales price						$	102		-			$	103								$	102
Liabilities
ABS issued (3):
At consolidated Sequoia entities						3,717,707						Discount rate						4			-			19			%						8			%
												Prepayment rate (annual CPR)						3			-			25			%						8			%
												Default rate						—			-			16			%						1			%
												Loss severity						25			-			50			%						31			%
At consolidated CAFL Term entities						2,653,224						Discount rate						6			-			12			%						7			%
												Prepayment rate (annual CPR)						—			-			3			%						0.1			%
												Default rate						5			-			14			%						7			%
												Loss severity						30			-			40			%						30			%
At consolidated Freddie Mac SLST entities						1,058,991						Discount rate						6			-			16			%						7			%
												Prepayment rate (annual CPR)						6			-			6			%						6			%
												Default rate						12			-			14			%						13			%
												Loss severity						25			-			25			%						25			%
At consolidated Freddie Mac K-Series entities (3)						387,650						Discount rate						3			-			10			%						6			%
At consolidated HEI entities						92,773						Discount rate						10			-			16			%						11			%
												Prepayment rate (annual CPR)						20			-			20			%						20			%
												Home price appreciation (depreciation)						(1)			-			3			%						3			%

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

(2)Values represent pricing inputs used in securitization pricing model. Credit spreads represent spreads to applicable swap rates unless specified otherwise.

(3)The fair value of the loans and HEI held by consolidated entities is 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, 2023, the fair value of securities we owned at the consolidated Sequoia, CAFL SFR, Freddie Mac SLST, Freddie Mac K-Series, and HEI securitization entities was $206 million, $316 million, $256 million, $33 million, and $15 million, respectively.

(4)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).

30

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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 in isolation — such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions — 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, 2022 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.

Certain of our Other investments (inclusive of strategic investments in early-stage 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 initially record these investments at cost and adjust their fair value based on observable price changes, such as follow-on capital raises or secondary sales, and will also evaluate impacts to valuation from changing market conditions and underlying business performance. As of September 30, 2023, the carrying value of these investments was $6 million.

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, 2023 and December 31, 2022.

Table 6.1 – Classifications and Carrying Values of Residential Loans

September 30, 2023												Legacy												Freddie Mac
(In Thousands)						Redwood						Sequoia						Sequoia						SLST						Total
Held-for-sale at fair value						$	610,946					$	—					$	—					$	—					$	610,946
Held-for-investment at fair value						—						150,152						3,774,090						1,312,149						5,236,391
Total Residential Loans						$	610,946					$	150,152					$	3,774,090					$	1,312,149					$	5,847,337

December 31, 2022												Legacy												Freddie Mac
(In Thousands)						Redwood						Sequoia						Sequoia						SLST						Total
Held-for-sale at fair value						$	780,781					$	—					$	—					$	—					$	780,781
Held-for-investment at fair value						—						184,932						3,190,417						1,457,058						4,832,407
Total Residential Loans						$	780,781					$	184,932					$	3,190,417					$	1,457,058					$	5,613,188

At September 30, 2023, we owned mortgage servicing rights associated with $653 million (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.

31

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Sale

The following table summarizes the characteristics of residential loans held-for-sale at September 30, 2023 and December 31, 2022.

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

(Dollars in Thousands)						September 30, 2023						December 31, 2022
Number of loans						665						994
Unpaid principal balance						$	658,540					$	822,063
Fair value of loans						$	610,946					$	780,781
Market value of loans pledged as collateral under short-term borrowing agreements						$	608,649					$	775,545
Weighted average coupon						5.43		%				5.12		%
Delinquency information
Number of loans with 90+ day delinquencies						—						1
Unpaid principal balance of loans with 90+ day delinquencies						$	—					$	208
Fair value of loans with 90+ day delinquencies						$	—					$	170
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, 2023 and 2022.

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

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
Principal balance of loans acquired (1)						$	857,974					$	336,698					$	1,092,992					$	3,597,339
Principal balance of loans sold						53,743						662,302						235,821						3,727,993
Principal balance of loans transferred to HFI						337,752						—						995,047						687,192
Net market valuation gains (losses) recorded (2)						(8,683)						(26,674)						(2,590)						(90,652)

(1)For the nine months ended September 30, 2022, includes $102 million, of loans acquired through calls of three seasoned Sequoia securitizations.

(2)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.

32

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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, 2023 and December 31, 2022.

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

September 30, 2023												Legacy												Freddie Mac
(Dollars in Thousands)												Sequoia						Sequoia						SLST
Number of loans												1,098						5,460						10,448
Unpaid principal balance												$	164,904					$	4,624,113					$	1,641,178
Fair value of loans (2)												$	150,152					$	3,774,090					$	1,312,149
Weighted average coupon												6.35		%				3.73		%				4.50		%
Delinquency information
Number of loans with 90+ day delinquencies (1)												24						9						818
Unpaid principal balance of loans with 90+ day delinquencies (1)												$	5,460					$	7,599					$	139,349
Fair value of loans with 90+ day delinquencies												N/A						N/A						N/A
Number of loans in foreclosure												14						6						317
Unpaid principal balance of loans in foreclosure												$	2,742					$	4,842					$	52,918

December 31, 2022												Legacy												Freddie Mac
(Dollars in Thousands)												Sequoia						Sequoia						SLST
Number of loans												1,304						4,624						10,882
Unpaid principal balance												$	204,404					$	3,847,091					$	1,719,236
Fair value of loans (2)												$	184,932					$	3,190,417					$	1,457,058
Weighted average coupon												4.51		%				3.25		%				4.50		%
Delinquency information
Number of loans with 90+ day delinquencies (1)												30						10						1,211
Unpaid principal balance of loans with 90+ day delinquencies (1)												$	6,824					$	7,799					$	209,397
Fair value of loans with 90+ day delinquencies												N/A						N/A						N/A
Number of loans in foreclosure												11						5						427
Unpaid principal balance of loans in foreclosure												$	1,166					$	4,654					$	72,440

(1)For loans held at consolidated entities, the number and UPB of loans 90-or-more 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. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2.

33

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 6. Residential Loans - (continued)

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, including securities we own, pursuant to collateralized financing entity guidelines, and are recorded in Investment fair value changes, net on our consolidated statements of income. The following table provides the activity of residential loans held-for-investment at consolidated entities during the three and nine months ended September 30, 2023 and 2022.

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

Three Months Ended September 30, 2023

Three Months Ended September 30, 2022

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

$

337,752

N/A

N/A

$

—

N/A

Net market valuation gains (losses) recorded

(2,242)

(175,011)

(51,046)

5,182

(202,825)

(104,040)

Nine Months Ended September 30, 2023

Nine Months Ended September 30, 2022

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

$

995,047

N/A

N/A

$

684,491

N/A

Net market valuation gains (losses) recorded

4,014

(166,909)

(62,756)

12,286

(685,042)

(224,543)

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

REO

See Note 13 for detail on residential loan REO activity during 2023.

Note 7. Business Purpose Loans

We originate and invest in business purpose loans, including term 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, 2023 and December 31, 2022.

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans

September 30, 2023						BPL Term												BPL Bridge
(In Thousands)						Redwood						CAFL						Redwood						CAFL						Total
Held-for-sale at fair value						$	72,149					—						$	30,628					$	—					$	102,777
Held-for-investment at fair value						—						2,969,217						1,651,883						525,453						5,146,553
Total Business Purpose Loans						$	72,149					$	2,969,217					$	1,682,511					$	525,453					$	5,249,330

December 31, 2022						BPL Term												BPL Bridge
(In Thousands)						Redwood						CAFL						Redwood						CAFL						Total
Held-for-sale at fair value						$	358,791					$	—					$	5,282					$	—					$	364,073
Held-for-investment at fair value						—						2,944,984						1,507,146						516,383						4,968,513
Total Business Purpose Loans						$	358,791					$	2,944,984					$	1,512,428					$	516,383					$	5,332,586

34

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 7. Business Purpose Loans - (continued)

All of the outstanding BPL term loans at September 30, 2023 were first-lien, fixed-rate loans with original maturities of three, five, seven, or ten years.

The outstanding BPL bridge loans held-for-investment at September 30, 2023 were first-lien, interest-only loans with original maturities of six to 36 months and were comprised of 78% one-month SOFR-indexed adjustable-rate loans, and 22% fixed-rate loans (in each case based on unpaid principal balance).

At September 30, 2023, we had $623 million in commitments to fund BPL bridge loans. See Note 17 for additional information on these commitments.

The following table provides the activity of business purpose loans at Redwood during the three and nine months ended September 30, 2023 and 2022.

Table 7.2 – Activity of Business Purpose Loans at Redwood

						Three Months Ended   September 30, 2023												Three Months Ended   September 30, 2022
(In Thousands)						BPL Term at Redwood						BPL Bridge at Redwood						BPL Term at Redwood						BPL Bridge at Redwood
Principal balance of loans originated						$	105,777					$	303,284					$	99,281					$	470,425
Principal balance of loans acquired						—						1,820						—						59,977
Principal balance of loans sold to third parties						27,436						34,061						37,202						48,279
Fair value of loans transferred (1)						(278,751)						(116,679)						266,181						(77,362)
Mortgage banking activities income (loss) recorded (3)						1,600						1,438						(19,325)						(110)
Investment fair value changes recorded (4)						—						(16,899)						—						(679)

						Nine Months Ended September 30, 2023												Nine Months Ended September 30, 2022
(In Thousands)						BPL Term at Redwood						BPL Bridge at Redwood						BPL Term at Redwood						BPL Bridge at Redwood
Principal balance of loans originated						$	408,477					$	828,149					$	865,253					$	1,424,604
Principal balance of loans acquired						—						19,054						100,349						81,983
Principal balance of loans sold to third parties						425,542						65,868						368,704						48,279
Fair value of loans transferred (1)(2)						(278,751)						(337,657)						561,218						(465,966)
Mortgage banking activities income (loss) recorded (3)						13,214						4,808						(83,827)						1,129
Investment fair value changes recorded (2)(4)						(14,430)						(22,867)						—						(6,747)

(1)For BPL term at Redwood, represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL term securitizations. For BPL bridge at Redwood, represents the transfer of BPL bridge loans from "Bridge at Redwood" to "Bridge at CAFL" resulting from their inclusion in an existing bridge loan securitization with a replenishment feature.

(2)During the nine months ended September 30, 2023, we substituted a pool of held-for-sale term loans at Redwood for a non-performing held-for-investment term loan at a consolidated CAFL securitization, each with unpaid principal balances of approximately $28 million. The negative investment fair value changes recorded for BPL Term at Redwood during the nine months ended September 30, 2023 were attributable to this substitution, with an equal and offsetting positive fair value change recorded for BPL Term at CAFL (related to the retained bond we own in the associated consolidated CAFL securitization).

(3)Represents loan origination fee income and net market valuation changes from the time a loan is originated to when it is sold or transferred to our investment portfolio and, for bridge loans, when transferred into a securitization. See Table 20.1 for additional detail on Mortgage banking activities income (loss).

(4)For BPL Bridge at Redwood, represents net market valuation changes for loans classified as held-for-investment and associated interest-only strip liabilities.

35

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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 BPL term loans and bridge loans owned by these entities. For loans held at our consolidated CAFL Term 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, and are recorded through Investment fair value changes, net on our consolidated statements of income. The net impact to our income statement associated with our economic investments in these securitization entities is presented in Table 4.2. We did not elect to account for the CAFL Bridge securitizations under the CFE guidelines.

REO

See Note 13 for detail on business purpose loan REO activity during 2023.

The following table provides the activity of business purpose loans held-for-investment at CAFL during the three and nine months ended September 30, 2023 and 2022.

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

						Three Months Ended   September 30, 2023												Three Months Ended   September 30, 2022
(In Thousands)						BPL Term at CAFL						BPL Bridge at CAFL						BPL Term at CAFL						BPL Bridge at CAFL
Net market valuation gains (losses) recorded(1)						$	(1,360)					$	(2,560)					$	(108,980)					$	1,906
Transfers						278,751						116,679						—						—

						Nine Months Ended   September 30, 2023												Nine Months Ended   September 30, 2022
(In Thousands)						BPL Term at CAFL						BPL Bridge at CAFL						BPL Term at CAFL						BPL Bridge at CAFL
Net market valuation gains (losses) recorded(1)						$	(1,961)					$	(1,960)					$	(419,182)					$	50
Transfers						278,751						337,657						—						—

(1)Net market valuation gains (losses) on business purpose loans held-for-investment at CAFL are recorded through Investment fair value changes, net on our consolidated statements of income. For loans held at our consolidated CAFL term 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 investment in these securitization entities is presented in Table 4.2.

36

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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, 2023 and December 31, 2022.

Table 7.4 – Characteristics of Business Purpose Loans

September 30, 2023						BPL Term at Redwood						BPL Term at CAFL(1)						BPL Bridge at Redwood						BPL Bridge at CAFL
(Dollars in Thousands)
Number of loans						45						1,093						1,853						1,344
Unpaid principal balance						$	83,300					$	3,283,186					$	1,704,418					$	521,214
Fair value of loans						$	72,149					$	2,969,217					$	1,682,511					$	525,453
Weighted average coupon						6.98		%				5.35		%				10.46		%				10.79		%
Weighted average remaining loan term (years)						8						5						1						1
Market value of loans pledged as collateral under short-term debt facilities						$	789					N/A						$	91,561					N/A
Market value of loans pledged as collateral under long-term debt facilities						$	46,915					N/A						$	1,497,589					N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)						2						43						45						56
Unpaid principal balance of loans with 90+ day delinquencies(2)						$	27,836					$	102,676					$	80,924					$	7,656
Fair value of loans with 90+ day delinquencies						$	16,822					N/A						$	71,277					$	7,656
Number of loans in foreclosure						2						6						42						49
Unpaid principal balance of loans in foreclosure						$	27,836					$	4,557					$	56,272					$	4,424
Fair value of loans in foreclosure						$	16,822					N/A						$	49,886					$	4,424

December 31, 2022						BPL Term at Redwood						BPL Term at CAFL(1)						BPL Bridge at Redwood						BPL Bridge at CAFL
(Dollars in Thousands)
Number of loans						91						1,131						1,601						1,875
Unpaid principal balance						$	389,846					$	3,263,421					$	1,518,427					$	514,666
Fair value of loans						$	358,791					$	2,944,984					$	1,512,428					$	516,383
Weighted average coupon						5.98		%				5.22		%				9.61		%				9.67		%
Weighted average remaining loan term (years)						10						6						2						1
Market value of loans pledged as collateral under short-term debt facilities						$	291,406					N/A						$	579,666					N/A
Market value of loans pledged as collateral under long-term debt facilities						$	66,567					N/A						$	897,782					N/A
Delinquency information
Number of loans with 90+ day delinquencies (2)						1						16						49						48
Unpaid principal balance of loans with 90+ day delinquencies(2)						$	536					$	37,072					$	34,264					$	7,328
Fair value of loans with 90+ day delinquencies						$	536					N/A						$	29,663					$	7,438
Number of loans in foreclosure						1						9						48						48
Unpaid principal balance of loans in foreclosure						$	536					$	13,686					$	34,039					$	7,328
Fair value of loans in foreclosure						$	536					N/A						$	29,438					$	7,438

37

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Footnotes to Table 7.4

(1)The fair value of the loans held by consolidated CAFL 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 CFEs. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2. Based on this methodology, we value the loans in each consolidated securitization on a pool basis and do not calculate separate fair values for loans that are 90+ days delinquent or in foreclosure.

(2)The number and UPB of loans 90-or-more days delinquent includes all loans in foreclosure.

At September 30, 2023, in addition to bridge loans that were 90 or more days delinquent, BPL bridge loans with a UPB of $216 million and a fair value of $203 million were on non-accrual status. Included in these amounts were bridge loans with $174 million of UPB that were modified during the third quarter of 2023 with first contractual payments under these modifications due in November 2023.

Note 8. Consolidated Agency 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, 2023 and December 31, 2022.

Table 8.1 – Characteristics of Consolidated Agency Multifamily Loans

(Dollars in Thousands)						September 30, 2023						December 31, 2022
Number of loans						28						28
Unpaid principal balance						$	440,996					$	447,193
Fair value of loans						$	420,554					$	424,551
Weighted average coupon						4.25		%				4.25		%
Weighted average remaining loan term (years)						2						3
Delinquency information
Number of loans with 90+ day delinquencies						—						—
Number of loans in foreclosure						—						—

The outstanding Consolidated Agency multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at September 30, 2023 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, 2023 and 2022.

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

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
Net market valuation gains (losses) recorded (1)						$	2,512					$	(13,691)					$	2,200					$	(40,120)

(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. 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.

38

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

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, 2023 and December 31, 2022.

Table 9.1 – Fair Values of Real Estate Securities by Type

(In Thousands)						September 30, 2023						December 31, 2022
Trading						$	48,041					$	108,329
Available-for-sale						81,404						132,146
Total Real Estate Securities						$	129,445					$	240,475

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.

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, 2023 and December 31, 2022.

Table 9.2 – Fair Value of Trading Securities by Position

(In Thousands)						September 30, 2023						December 31, 2022
Senior
Interest-only securities (1)						$	41,169					$	28,867
Total Senior						41,169						28,867
Subordinate
RPL securities						—						29,002
Multifamily securities						5,239						5,027
Other third-party residential securities						1,633						45,433
Total Subordinate						6,872						79,462
Total Trading Securities						$	48,041					$	108,329

(1)Includes $29 million and $26 million of Sequoia certificated mortgage servicing rights at September 30, 2023 and December 31, 2022, respectively.

The following table presents the unpaid principal balance of trading securities by position and collateral type at September 30, 2023 and December 31, 2022.

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position

(In Thousands)						September 30, 2023						December 31, 2022
Senior (1)						$	—					$	—
Subordinate						19,354						215,592
Total Trading Securities						$	19,354					$	215,592

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

39

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table provides the activity of trading securities during the three and nine months ended September 30, 2023 and 2022.

Table 9.4 – Trading Securities Activity

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
Fair value of securities acquired						$	—					$	—					$	7,883					$	5,006
Fair value of securities sold						27,183						4,142						82,270						27,471
Net market valuation gains (losses) recorded (1)						5,967						(12,521)						14,423						(30,019)

(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.

AFS Securities

The following table presents the fair value of our available-for-sale ("AFS") securities by position and collateral type at September 30, 2023 and December 31, 2022.

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

(In Thousands)						September 30, 2023						December 31, 2022
Subordinate
Sequoia securities						$	73,160					$	74,367
Multifamily securities						4,448						7,647
Other third-party residential securities						3,796						50,132
Total Subordinate						81,404						132,146
Total AFS Securities						$	81,404					$	132,146

The following table provides the activity of available-for-sale securities during the three and nine months ended September 30, 2023 and 2022.

Table 9.6 – Available-for-Sale Securities Activity

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
Fair value of securities acquired						$	—					$	—					$	1,979					$	10,000
Fair value of securities sold						12,590						—						55,842						—
Principal balance of securities called						—						—						—						14,486
Net unrealized gains (losses) on AFS securities (1)						(3,921)						(8,731)						398						(60,013)

(1)Net unrealized gains (losses) on AFS securities are recorded on our consolidated balance sheets through Accumulated other comprehensive loss.

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

40

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 9. Real Estate Securities - (continued)

At September 30, 2023, we had $4 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.

The following table presents the components of carrying value (which equals fair value) of AFS securities at September 30, 2023 and December 31, 2022.

Table 9.7 – Carrying Value of AFS Securities

(In Thousands)																								September 30, 2023						December 31, 2022
Principal balance																								$	149,991					$	221,933
Credit reserve																								(23,890)						(28,739)
Unamortized discount, net																								(46,603)						(61,650)
Amortized cost																								79,498						131,544
Gross unrealized gains																								13,463						16,269
Gross unrealized losses																								(8,984)						(13,127)
CECL allowance																								(2,573)						(2,540)
Carrying Value																								$	81,404					$	132,146

The following table presents the changes for the three and nine months ended September 30, 2023, 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, 2023												Nine Months Ended   September 30, 2023
						Credit Reserve						Unamortized Discount, Net						Credit Reserve						Unamortized Discount, Net
(In Thousands)
Beginning balance						$	25,615					$	46,948					$	28,739					$	61,650
Amortization of net discount						—						(296)						—						(946)
Realized credit recoveries (losses), net						101						—						106						—
Acquisitions						—						—						1,106						754
Sales, calls, other						(1,207)						(668)						(5,331)						(15,585)
Transfers to (release of) credit reserves, net						(619)						619						(730)						730
Ending Balance						$	23,890					$	46,603					$	23,890					$	46,603

AFS Securities with Unrealized Losses

The following table presents the total carrying value (fair value) and unrealized losses of residential AFS securities that were in a gross unrealized loss position at September 30, 2023 and December 31, 2022.

Table 9.9 – AFS Securities in Gross Unrealized Loss Position by Holding Periods

						Less Than 12 Consecutive Months												12 Consecutive Months or Longer
						Fair Value						Unrealized Losses												Fair Value						Unrealized Losses
(In Thousands)
September 30, 2023						$	9,459					$	(585)											$	28,630					$	(8,399)
December 31, 2022						72,679						(12,940)												1,414						(186)

41

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 9. Real Estate Securities - (continued)

At September 30, 2023, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 66 AFS securities, of which 29 were in an unrealized loss position and 23 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2022, our consolidated balance sheet included 79 AFS securities, of which 38 were in an unrealized loss position and one was 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 $9 million at September 30, 2023. 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, 2023, 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, 2023, our current expected credit loss ("CECL") allowance related to our AFS securities was $2.6 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, 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, 2023.

Table 9.10 – Significant Credit Quality Indicators

September 30, 2023

Subordinate Securities

Default rate

0.8%

Loss severity

20%

42

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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, 2023.

Table 9.11 – Rollforward of Allowance for Credit Losses

						Three Months Ended September 30, 2023						Nine Months Ended September 30, 2023
(In Thousands)
Beginning balance allowance for credit losses						$	2,639					$	2,540
Additions to allowance for credit losses on securities for which credit losses were not previously recorded						48						278
Additional increases (or decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period						17						63
Reduction to allowance for securities sold during the period						(131)						(308)
Ending balance of allowance for credit losses						$	2,573					$	2,573

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. 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, 2023 and 2022.

Table 9.12 – Gross Realized Gains and Losses on AFS Securities

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
Gross realized gains - sales						$	103					$	—					$	3,917					$	—
Gross realized gains - calls						—						—						—						1,914
Gross realized losses - sales						(77)						—						(2,415)						—
Gross realized losses - calls						—						—						—						—
Total Realized Gains on Sales and Calls of AFS Securities, net						$	26					$	—					$	1,502					$	1,914

43

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 10. Home Equity Investments (HEI)

From time to time, we may purchase home equity investment contracts from third party originators under flow purchase agreements. Additionally, in the third quarter of 2023, we began to originate HEI. 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 recording a security instrument (e.g., deed of trust) with respect to the property. Our investments in HEI expose us to both home price appreciation and depreciation of the associated property.

The following table presents our home equity investments at September 30, 2023 and December 31, 2022.

Table 10.1 – Home Equity Investments

(In Thousands)						September 30, 2023						December 31, 2022
HEI at Redwood						$	302,122					$	270,835
HEI held at consolidated HEI securitization entity						129,150						132,627
Total Home Equity Investments						$	431,272					$	403,462

We consolidate the HEI securitization entity in accordance with GAAP and have elected to account for it under the CFE election. As such, market valuation changes for the securitized HEI are based on the estimated fair value of the associated ABS issued by the entity, including the securities we own in the entity.

The following table details our HEI activity during the three and nine months ended September 30, 2023 and 2022.

Table 10.2 – Activity of HEI

						Three Months Ended September 30, 2023												Three Months Ended September 30, 2022
(In Thousands)						HEI at Redwood						Securitized HEI						HEI at Redwood						Securitized HEI
Fair value of HEI purchased and originated						$	113					$	—					$	79,050					$	—
Net market valuation gains (losses) recorded (1)						9,290						4,212						(4,774)						(724)

						Nine Months Ended   September 30, 2023												Nine Months Ended   September 30, 2022
(In Thousands)						HEI at Redwood						Securitized HEI						HEI at Redwood						Securitized HEI
Fair value of HEI purchased and originated						$	25,626					$	—					$	176,439					$	—
Net market valuation gains (losses) recorded (1)						21,598						8,418						(1,986)						8,587

(1)We account for HEI at Redwood under the fair value option and record net market valuation changes through Investment fair value changes, net on our Consolidated statements of income. We account for Securitized HEI under the CFE election and net market valuation gains (losses) for these investments are recorded through Investment fair value changes, net on our Consolidated statements of income. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2.

44

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 10. Home Equity Investments (HEI) - (continued)

The following tables summarizes the characteristics of our HEI at September 30, 2023 and December 31, 2022.

Table 10.3 – HEI Characteristics

						September 30, 2023												December 31, 2022
(Dollars in Thousands)						HEI at Redwood						Securitized HEI						HEI at Redwood						Securitized HEI
Number of HEI contracts						2,644						929						2,599						1,007
Average initial amount of contract						$	103					$	95					$	101					$	94

Note 11. Other Investments

Other investments at September 30, 2023 and December 31, 2022 are summarized in the following table.

Table 11.1 – Components of Other Investments

(In Thousands)						September 30, 2023						December 31, 2022
Servicer advance investments						$	219,813					$	269,259
Strategic investments						55,854						56,518
Excess MSRs						38,427						39,035
Mortgage servicing rights						26,033						25,421
Other						234						705
Total Other Investments						$	340,361					$	390,938

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 portfolios of legacy residential mortgage-backed securitizations serviced by the co-investor. Refer to Note 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding the transactions.

At September 30, 2023, our servicer advance investments had a carrying value of $220 million and were associated with specified pools of residential mortgage loans with an unpaid principal balance of $10.45 billion. The outstanding servicer advance receivables associated with these investments were $185 million at September 30, 2023, which were financed with short-term non-recourse securitization debt. See Note 14 for additional detail on this debt. The servicer advance receivables were comprised of the following types of advances at September 30, 2023 and December 31, 2022.

Table 11.2 – Components of Servicer Advance Receivables

(In Thousands)						September 30, 2023						December 31, 2022
Principal and interest advances						$	65,365					$	81,447
Escrow advances (taxes and insurance advances)						86,980						123,541
Corporate advances						32,191						35,377
Total Servicer Advance Receivables						$	184,536					$	240,365

45

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 11. Other Investments - (continued)

We account for our servicer advance investments at fair value and during the three and nine months ended September 30, 2023, we recorded $5 million and $16 million, respectively, of interest income, through Other interest income, and recorded a net market valuation gain of $4 million and a gain of $6 million, respectively, through Investment fair value changes, net in our consolidated statements of income.

Strategic Investments

Strategic investments represent investments we made in companies either through our RWT Horizons venture investment platform or separately at a corporate level. At September 30, 2023, we had made a total of 35 investments in companies through RWT Horizons with a total carrying value of $23 million, as well as seven corporate-level investments. For the three and nine months ended September 30, 2023, we recognized a net mark-to-market valuation gain of $0.1 million and a loss of $3 million, respectively, on our strategic investments. During the three and nine months ended September 30, 2022, we recognized a net mark-to-market valuation gain of $1 million and $11 million, respectively, on our strategic investments. Market valuation changes on our strategic investments are recorded in Investment fair value changes, net on our consolidated statements of income.

During the three and nine months ended September 30, 2023, we recorded losses from our strategic investments of $2 million and $3 million, respectively, in Other income, net on our consolidated statements of income. During the three and nine months ended September 30, 2022, we recorded losses from our strategic investments of $0.3 million and $0.4 million, respectively, in Other income, net on our consolidated statements of income.

In the second quarter of 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary. During the three months ended September 30, 2023, we sold $29 million of BPL bridge loans to the joint venture and at September 30, 2023, the carrying value of our investment in the joint venture was $1.6 million. We account for our investment in the joint venture under the equity method of accounting as we have a 20% non-controlling interest, but are deemed to be able to exert significant influence over the affairs of the joint venture. We adjust the carrying value of our equity method investment for our share of earnings or losses, dividends or return of capital on a quarterly basis.

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, 2023, we recognized $3 million and $11 million, respectively, of interest income through Other interest income and for both the three and nine months ended September 30, 2023, we recorded net market valuation losses of $1 million through Investment fair value changes, net on our consolidated statements of income.

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. For both the three and nine months ended September 30, 2023, we retained zero MSRs from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

At September 30, 2023 and December 31, 2022, our MSRs had a fair value of $26 million and $25 million, respectively, and were associated with loans with an aggregate principal balance of $2.07 billion and $2.19 billion, respectively. During the three and nine months ended September 30, 2023, including net market valuation gains and losses on our MSRs, we recorded net income related to our MSRs of $2 million and $6 million, respectively, through Other income on our consolidated statements of income.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 12. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at September 30, 2023 and December 31, 2022.

Table 12.1 – Fair Value and Notional Amount of Derivative Financial Instruments

						September 30, 2023												December 31, 2022
						Fair Value						Notional Amount						Fair Value						Notional Amount
(In Thousands)
Assets - Risk Management Derivatives
Interest rate swaps						$	13,819					$	190,000					$	14,625					$	285,000
TBAs						16,613						1,560,000						1,893						220,000
Interest rate futures						2,187						136,200						3,976						350,600
Assets - Other Derivatives
Loan purchase and interest rate lock commitments						5,067						288,637						336						8,166
Total Assets						$	37,686					$	2,174,837					$	20,830					$	863,766
Liabilities - Risk Management Derivatives
TBAs						$	(5,495)					$	425,000					$	(16,784)					$	845,000
Interest rate futures						(199)						67,700						(57)						60,000
Liabilities - Other Derivatives
Loan purchase and interest rate lock commitments						(3,087)						606,170						(14)						3,532
Total Liabilities						$	(8,781)					$	1,098,870					$	(16,855)					$	908,532
Total Derivative Financial Instruments, Net						$	28,905					$	3,273,707					$	3,975					$	1,772,298

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, 2023, we were party to swaps and swaptions with an aggregate notional amount of $190 million, TBA agreements with an aggregate notional amount of $2 billion, and interest rate futures contracts with an aggregate notional amount of $204 million. At December 31, 2022, we were party to swaps and swaptions with an aggregate notional amount of $285 million, futures with an aggregate notional amount of $411 million and TBA agreements with an aggregate notional amount of $1.07 billion.

For the three and nine months ended September 30, 2023, risk management derivatives had net market valuation gains of $23 million and gains of $18 million, respectively. For the three and nine months ended September 30, 2022, risk management derivatives had net market valuation gains of $76 million and gains of $198 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net and Investment fair value changes, net on our consolidated statements of income.

Loan Purchase and Interest Rate Lock Commitments

Loan purchase commitments ("LPCs") and interest rate lock commitments ("IRLCs") that qualify as derivatives are recorded at their estimated fair values. For the three and nine months ended September 30, 2023, LPCs and IRLCs had net market valuation gains of $6 million and gains of $8 million, respectively, which were recorded in Mortgage banking activities, net on our consolidated statements of income. For the three and nine months ended September 30, 2022, LPCs and IRLCs had net market valuation losses of $3 million and losses of $54 million, respectively, which were recorded in Mortgage banking activities, net on our consolidated statements of income.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 12. Derivative Financial Instruments - (continued)

Derivatives Designated as Cash Flow Hedges

For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive loss was $69 million and $72 million at September 30, 2023 and December 31, 2022, respectively. We are amortizing this loss into interest expense over the remaining term of our trust preferred securities and subordinated notes. For each of the three and nine months ended September 30, 2023 and 2022, we reclassified $1 million and $3 million, respectively, of realized net losses from Accumulated other comprehensive loss into Interest expense. As of September 30, 2023, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At September 30, 2023, we assessed this risk as remote and did not record an associated specific valuation adjustment. At September 30, 2023, we were in compliance with our derivative counterparty ISDA agreements.

Note 13. Other Assets and Liabilities

Other assets at September 30, 2023 and December 31, 2022 are summarized in the following table.

Table 13.1 – Components of Other Assets

(In Thousands)						September 30, 2023						December 31, 2022
Accrued interest receivable						$	60,762					$	60,893
REO						54,123						6,455
Deferred tax asset						41,931						41,931
Investment receivable						36,816						36,623
Operating lease right-of-use assets						13,367						16,177
Margin receivable						10,536						13,802
Fixed assets and leasehold improvements (1)						8,453						12,616
Income tax receivables						1,654						3,399
Other						22,845						19,344
Total Other Assets						$	250,487					$	211,240

(1)Fixed assets and leasehold improvements had a basis of $17 million and accumulated depreciation of $9 million at September 30, 2023.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 13. Other Assets and Liabilities - (continued)

Accrued expenses and other liabilities at September 30, 2023 and December 31, 2022 are summarized in the following table.

Table 13.2 – Components of Accrued Expenses and Other Liabilities

(In Thousands)						September 30, 2023						December 31, 2022
Accrued interest payable						$	51,849					$	46,612
Payable to noncontrolling interests						48,496						44,859
Margin payable						25,210						5,944
Accrued compensation						23,249						30,929
Operating lease liabilities						15,630						18,563
Unsettled trades						6,110						—
Accrued operating expenses						6,063						5,740
Guarantee obligations						5,913						6,344
Residential loan and MSR repurchase reserve						4,611						7,051
Current accounts payable						4,588						4,234
Bridge loan holdbacks						1,973						3,301
Preferred stock dividends payable						1,478						—
Other						13,124						6,626
Total Accrued Expenses and Other Liabilities						$	208,294					$	180,203

Investment Receivable

Investment receivable primarily consists of amounts receivable from third-party servicers related to principal and interest receivable from business purpose loans and fees receivable from servicer advance investments.

Margin Receivable and Payable

Margin receivable and payable resulted from margin calls between us and our counterparties under derivatives, master repurchase agreements, and warehouse facilities, whereby we or the counterparty posted collateral. We met all margin calls due through September 30, 2023.

Operating Lease Right-of-Use Assets and Operating Lease Liabilities

See Note 17 for additional information on leases.

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, 2023.

Table 13.3 – REO Activity

						Nine Months Ended September 30, 2023
(In Thousands)						BPL Bridge						Legacy Sequoia						Freddie Mac SLST						BPL Term at CAFL						Total
Balance at beginning of period						$	3,012					$	544					$	2,899					$	—					$	6,455
Transfers to REO						48,864						18						2,340						2,684						53,906
Liquidations (1)						(2,310)						(562)						(2,754)						—						(5,626)
Changes in fair value, net						(992)						—						380						—						(612)
Balance at End of Period						$	48,574					$	—					$	2,865					$	2,684					$	54,123

(1)For the nine months ended September 30, 2023, REO liquidations resulted in $0.6 million of realized losses, which were recorded in Investment fair value changes, net on our consolidated statements of income.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 13. Other Assets and Liabilities - (continued)

The following table provides detail on the numbers of REO assets at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL entities at September 30, 2023 and December 31, 2022.

Table 13.4 – REO Assets

Number of REO assets						Redwood Bridge						Legacy Sequoia						Freddie Mac SLST						BPL Term at CAFL						Total
At September 30, 2023						9						—						25						1						35
At December 31, 2022						2						2						24						—						28

Legal and Repurchase Reserves

See Note 17 for additional information on legal and repurchase reserves.

Payable to Non-Controlling Interests

In 2018, Redwood and a third-party co-investor, through two partnership entities consolidated by Redwood, purchased servicer advances and excess MSRs related to a portfolio of residential mortgage loans serviced by the co-investor (see Note 4 and Note 11 for additional information on the partnership entities and associated investments). We account for the co-investor’s interests in the entities as liabilities, and at September 30, 2023, the carrying value of their interests was $23 million, representing their current economic interest in the entities. Earnings from the partnership entities are allocated to the co-investors on a proportional basis and during the three and nine months ended September 30, 2023, we allocated $2 million and $4 million, respectively, of income to the co-investors, recorded in Other expenses on our consolidated statements of income.

In 2021, Redwood and a third-party investor co-sponsored the transfer and securitization of HEI through the HEI securitization entity and other third-party investors retained subordinate securities issued by the securitization entity alongside Redwood. See Note 10 for a further discussion of the HEI securitization. We account for the co-investors' interests in the HEI securitization entity as a liability, and at September 30, 2023, the carrying value of their interests was $26 million, representing the fair value of their economic interests in the HEI entity. During the three and nine months ended September 30, 2023, the investors' share of earnings (loss), net from their retained interests was $2 million and $3 million, respectively, recorded through Investment fair value changes, net on our consolidated statements of income.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 14. 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, 2023, 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, 2023 and December 31, 2022.

Table 14.1 – Short-Term Debt

						September 30, 2023
(Dollars in Thousands)						Number of Facilities						Outstanding Balance						Limit						Weighted Average Interest Rate (1)						Maturity (2)						Weighted Average Days Until Maturity
Facilities
Residential loan warehouse						4						$	548,334					$	1,050,000					7.28		%				10/2023-5/2024						132
Business purpose loan warehouse						2						70,424						455,000						8.12		%				5/2024-6/2024						259
Real estate securities repo						5						237,835						—						6.99		%				10/2023-1/2024						54
Residential MSR warehouse						1						48,470						50,000						8.57		%				10/2023						30
HEI warehouse						1						126,803						150,000						9.92		%				8/2024						306
Total Short-Term Debt Facilities						13						1,031,866
Servicer advance financing						1						154,127						240,000						7.67		%				11/2023						32
Subordinate securities financing						1						126,506						—						5.71		%				9/2024						358
Promissory notes						N/A						16,518						—						6.94		%				N/A						N/A
Convertible notes, net						N/A						147,637						—						5.63		%				7/2024						289
Total Short-Term Debt												$	1,476,654

						December 31, 2022
(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						$	703,406					$	2,550,000					6.16		%				3/2023 - 12/2023						267
Business purpose loan warehouse						4						680,100						1,650,000						6.93		%				3/2023 - 9/2023						179
Real estate securities repo						7						124,909						—						5.22		%				1/2023 - 3/2023						27
HEI warehouse						1						111,681						150,000						8.54		%				11/2023						306
Total Short-Term Debt Facilities						19						1,620,096
Servicer advance financing						1						206,510						290,000						6.67		%				11/2023						305
Promissory notes						N/A						27,058						—						6.64		%				N/A						N/A
Convertible notes, net						N/A						176,015						—						4.75		%				8/2023						227
Total Short-Term Debt												$	2,029,679

(1)Borrowings under our facilities generally are uncommitted and charged interest based on a specified margin over SOFR.

(2)Promissory notes payable on demand to lender with 90-day notice.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 14. 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, 2023 and December 31, 2022.

Table 14.2 – Collateral for Short-Term Debt

(In Thousands)						September 30, 2023						December 31, 2022
Collateral Type
Held-for-sale residential loans						$	608,649					$	775,545
MSRs (1)						79,809						—
Business purpose loans						92,350						871,072
HEI						229,625						191,278
Real estate securities
On balance sheet						4,448						72,133
Sequoia securitizations (2)						51,542						74,170
Freddie Mac SLST securitizations (2)						214,443						—
Freddie Mac K-Series securitization (2)						32,904						31,767
CAFL securitizations (2)						32,317						—
Total real estate securities owned						335,654						178,070
Restricted cash and other assets						4,128						1,097
Total Collateral for Short-Term Debt Facilities						1,350,215						2,017,062
Cash						15,162						12,713
Subordinate securities financing						169,565						—
Servicer advances						219,813						269,259
Total Collateral for Short-Term Debt						$	1,754,755					$	2,299,034

(1)Includes certificated mortgage servicing rights classified as securities on our consolidated balance sheets.

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

For the three and nine months ended September 30, 2023, the average balance of our short-term debt facilities was $1.02 billion and $1.14 billion, respectively. At September 30, 2023 and December 31, 2022, accrued interest payable on our short-term debt facilities was $5 million.

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.

In 2019, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable (i.e., not subject to margin calls based solely on the lender's determination, in its discretion, of the market value of the underlying collateral that is non-delinquent) recourse debt financing of certain Sequoia securities as well as securities retained from our consolidated Sequoia securitizations ("Subordinate securities financing" in Table 14.1 above). The financing is fully and unconditionally guaranteed by Redwood, and had an interest rate of approximately 4.21% through September 2022, which increased to 5.71% from October 2022 through September 2023, and will increase to 7.21% from October 2023 through September 2024. The financing facility has a final maturity in September 2024. During the three months ended September 30, 2023, we reclassified this facility from long-term to short-term debt as the maturity date on this facility is within one year.

In connection with our acquisition of Riverbend, we assumed promissory notes that are payable on demand with a 90-day notice from the lender or which may be repaid by us with a 90-day notice. These unsecured, non-marginable, recourse notes were issued in three separate series with fixed interest rates between 6% and 8%.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 14. Short-Term Debt - (continued)

During the three and nine months ended September 30, 2023, we repurchased $2 million and $66 million, respectively, of convertible debt due in 2023 and 2024, and recorded a $0.02 million gain and a $0.2 million gain on extinguishment, respectively. At September 30, 2023 the outstanding principal balance of our convertible debt due in July 2024 was $148 million.

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, 2023.

Table 14.3 – Short-Term Debt by Collateral Type and Remaining Maturities

						September 30, 2023
(In Thousands)						Within 30 days						31 to 90 days						Over 90 days						Total
Collateral Type
Held-for-sale residential loans						$	46,844					$	314,269					$	187,221					$	548,334
Business purpose loans						—						—						70,424						70,424
Real estate securities						38,786						182,275						143,280						364,341
MSRs						48,470						—						—						48,470
HEI						—						—						126,803						126,803
Servicer advances						—						154,127						—						154,127
Total Secured Short-Term Debt Facilities						134,100						650,671						527,728						1,312,499
Promissory notes (unsecured)						—						16,518						—						16,518
Convertible notes, net (unsecured)						—						—						147,637						147,637
Total Short-Term Debt						$	134,100					$	667,189					$	675,365					$	1,476,654

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 15. 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, 2023 and December 31, 2022, along with other selected information, are summarized in the following table.

Table 15.1 – Asset-Backed Securities Issued

						September 30, 2023
						Legacy Sequoia						Sequoia						CAFL (1)						Freddie Mac SLST						Freddie Mac K-Series						HEI						Total
(Dollars in Thousands)
Certificates with principal balance						$	159,990					$	4,384,081					$	3,330,287					$	1,165,093					$	404,528					$	100,753					$	9,544,732
Interest-only certificates						127						50,992						105,883						13,905						5,300						—						176,207
Market valuation adjustments						(10,915)						(866,568)						(301,241)						(120,007)						(22,178)						(7,980)						(1,328,889)
ABS Issued, Net						$	149,202					$	3,568,505					$	3,134,929					$	1,058,991					$	387,650					$	92,773					$	8,392,050
Range of weighted average interest rates, by series(3)						3.73% to 7.26%						2.67% to 6.01%						2.34% to 6.18%						3.50%						3.41		%				3.83		%
Stated maturities(3)						2024-2036						2047-2053						2027-2033						2028-2029						2025						2052
Number of series						20						20						20						2						1						1

						December 31, 2022
						Legacy Sequoia						Sequoia						CAFL(1)						Freddie Mac SLST (2)						Freddie Mac K-Series						HEI						Total
(Dollars in Thousands)
Certificates with principal balance						$	200,047					$	3,595,715					$	3,322,250					$	1,306,652					$	410,725					$	108,962					$	8,944,351
Interest-only certificates						180						57,871						124,928						15,328						7,379						—						205,686
Market valuation adjustments						(16,036)						(682,477)						(331,371)						(99,830)						(25,319)						(8,252)						(1,163,285)
ABS Issued, Net						$	184,191					$	2,971,109					$	3,115,807					$	1,222,150					$	392,785					$	100,710					$	7,986,752
Range of weighted average interest rates, by series(3)						2.69% to 5.19%						2.57% to 6.13%						2.34% to 5.92%						3.50% to 4.75%						3.41		%				3.78		%
Stated maturities(3)						2024 - 2036						2047-2052						2027-2032						2028-2059						2025						2052
Number of series						20						17						19						3						1						1

(1)Includes $485 million (principal balance) of ABS issued by two CAFL bridge securitization trusts sponsored by Redwood and accounted for at amortized cost at both September 30, 2023 and December 31, 2022.

(2)Includes $86 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at December 31, 2022.

(3)Certain ABS issued by CAFL and HEI securitization entities are subject to early redemption and interest rate step-ups as described below.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 15. Asset-Backed Securities Issued - (continued)

During the second quarter of 2022, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest BPL bridge loans (presented within CAFL in Table 15.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $215 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, 2023, the principal balance of the ABS issued was $215 million, and the unamortized debt discount and deferred issuance costs were $3 million in total, for a net carrying value of $212 million. The weighted average stated coupon of the ABS issued was 4.32% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in May 2024, and beginning in June 2025, the interest rate on the ABS issued increases by 2% through final maturity in May 2029. The ABS issued by this securitization were collateralized by $237 million of BPL bridge loans and $17 million of restricted cash and other assets at September 30, 2023. The securitization is structured with $250 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 24 months of the transaction (through May 2024), unless an amortization event occurs prior to the expiration of the 24-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest BPL bridge loans (presented within CAFL in table 15.1 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, 2023, the principal balance of the ABS issued was $270 million, and the unamortized debt discount and deferred issuance costs were $1 million, for a net carrying value of $269 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 $288 million of BPL bridge loans and $29 million of restricted cash and other assets at September 30, 2023. 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), unless an amortization event occurs prior to the expiration of the 30-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

During the third quarter of 2021, we consolidated the assets and liabilities of an HEI entity formed in connection with the securitization of HEI, 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. The ABS issued by the HEI securitization 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. During the first quarter of 2023, we called the Freddie Mac SLST re-securitization and paid off the associated outstanding ABS.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 15. 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 the stated maturity. At September 30, 2023, 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, 2023 and December 31, 2022. Interest due on consolidated ABS issued is payable monthly.

Table 15.2 – Accrued Interest Payable on Asset-Backed Securities Issued

(In Thousands)						September 30, 2023						December 31, 2022
Legacy Sequoia						$	310					$	282
Sequoia						12,695						8,880
CAFL						11,181						10,918
Freddie Mac SLST (1)						3,398						3,561
Freddie Mac K-Series						1,150						1,167
Total Accrued Interest Payable on ABS Issued						$	28,734					$	24,808

(1)Includes accrued interest payable on ABS issued by a re-securitization trust sponsored by Redwood at December 31, 2022.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 16. Long-Term Debt

The tables below summarize our long-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rates, and the maturity information at September 30, 2023 and December 31, 2022.

Table 16.1 – Long-Term Debt

						September 30, 2023
(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
Facility B						$	101,247					$	—					$	101,247					N/A						5.71		%				2/2025
Facility C						60,657						—						60,657						N/A						4.75		%				6/2026
Non-Recourse BPL Financing
Facility D						486,099						(596)						485,503						$	750,000					SOFR + 2.89%						N/A
Facility E						225,865						(844)						225,021						335,000						SOFR + 3.25%						12/2025
Recourse BPL Financing
Facility F						21,293						(9)						21,284						500,000						SOFR + 2.35%-2.60%						9/2025
Facility H						234,014						—						234,014						450,000						SOFR + 2.40%-2.60%						7/2025
Facility I						193,007						—						193,007						450,000						SOFR + 2.25%-2.77%						3/2025
Total Long-Term Debt Facilities						1,322,182						(1,449)						1,320,733
Convertible notes
5.75% exchangeable senior notes						162,092						(1,793)						160,299						N/A						5.75		%				10/2025
7.75% convertible senior notes						215,000						(5,274)						209,726						N/A						7.75		%				6/2027
Trust preferred securities and subordinated notes						139,500						(698)						138,802						N/A						SOFR + 2.51%						7/2037
Total Long-Term Debt						$	1,838,774					$	(9,214)					$	1,829,560

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 16. Long-Term Debt - (continued)

						December 31, 2022
(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
Facility A						$	130,408					$	—					$	130,408					N/A						5.71		%				9/2024
Facility B						101,706						(50)						101,656						N/A						4.21		%				2/2025
Facility C						68,995						(125)						68,870						N/A						4.75		%				6/2026
Non-Recourse BPL Financing
Facility D						404,622						(667)						403,955						$	750,000					SOFR + 2.87%						N/A
Facility E						308,933						(838)						308,095						335,000						SOFR + 3.25%						12/2025
Recourse BPL Financing
Facility F						64,689						(473)						64,216						500,000						SOFR + 2.25%-2.50%						9/2024
Total Long-Term Debt Facilities						1,079,353						(2,153)						1,077,200
Convertible notes
5.625% convertible senior notes						150,200						(1,282)						148,918						N/A						5.625		%				7/2024
5.75% exchangeable senior notes						162,092						(2,410)						159,682						N/A						5.75		%				10/2025
7.75% convertible senior notes						215,000						(6,142)						208,858						N/A						7.75		%				6/2027
Trust preferred securities and subordinated notes						139,500						(733)						138,767						N/A						L + 2.25%						7/2037
Total Long-Term Debt						$	1,746,145					$	(12,720)					$	1,733,425

(1)Variable rate borrowings are based on 1- or 3-month LIBOR ("L" in the table above) or SOFR, plus an applicable spread. As a result of legislation that was passed in the state of New York, our trust preferred securities and subordinated notes converted to SOFR upon the cessation of LIBOR in 2023.

During the three months ended September 30, 2023, we reclassified Facility H and Facility I in Table 16.1 above from short-term debt to long-term debt as the maturity dates for these facilities were extended to July 2025 and March 2025, respectively. Additionally, during the three months ended September 30, 2023, we reclassified the 5.625% convertible senior notes presented in Table 16.1 above at December 31, 2022, to short-term debt, as the maturity of these notes was less than one year at September 30, 2023.

Refer to Note 16 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for a full description of our long-term debt.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 16. Long-Term Debt - (continued)

The following table below presents the value of loans, securities, and other assets pledged as collateral under our long-term debt at September 30, 2023 and December 31, 2022.

Table 16.2 – Collateral for Long-Term Debt

(In Thousands)						September 30, 2023						December 31, 2022
Collateral Type
BPL bridge loans						$	1,497,589					$	897,782
BPL term loans						46,915						66,567
Real estate securities
Sequoia securitizations (1)						—						178,439
CAFL securitizations (1)						231,473						237,068
Total Collateral for Long-Term Debt						$	1,775,977					$	1,379,856

(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, 2023 and December 31, 2022.

Table 16.3 – Accrued Interest Payable on Long-Term Debt

(In Thousands)						September 30, 2023						December 31, 2022
Long-term debt facilities						$	5,535					$	3,364
Convertible notes
5.625% exchangeable senior notes						—						3,896
5.75% exchangeable senior notes						4,659						2,332
7.75% convertible senior notes						4,906						741
Trust preferred securities and subordinated notes						1,924						1,633
Total Accrued Interest Payable on Long-Term Debt						$	17,024					$	11,966

Recourse Subordinate Securities Financing Facilities

In the first quarter of 2020, a subsidiary of Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations (Facility B in Table 16.1 above). The financing is fully and unconditionally guaranteed by Redwood, and had an interest rate of approximately 4.21% through February 2023, which increased to 5.71% from March 2023 through February 2024, and will increase to 7.21% from March 2024 through February 2025. The financing facility may be terminated at our option and has a final maturity in February 2025.

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 (Facility C in Table 16.1 above). The financing is guaranteed by Redwood, with an interest rate of approximately 4.75% through June 2024, increasing to 6.25% from July 2024 through June 2025, and to 7.75% from July 2025 to June 2026. The financing facility may be terminated at our option and has a final maturity in June 2026.

During the three months ended September 30, 2023, we reclassified a recourse subordinate securities financing facility (Facility A in Table 16.1 above at December 31, 2022) to short-term debt as the maturity of this facility was less than a year at September 30, 2023. See Note 14 for a further description of this facility.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 17. Commitments and Contingencies

Lease Commitments

At September 30, 2023, we were obligated under ten non-cancelable operating leases with expiration dates through 2031 for $18 million of cumulative lease payments. For both the nine-month periods ended September 30, 2023 and 2022 our operating lease expense was $4 million.

The following table presents our future lease commitments at September 30, 2023.

Table 17.1 – Future Lease Commitments by Year

(In Thousands)						September 30, 2023
2023 (3 months)						$	1,253
2024						4,554
2025						3,629
2026						3,520
2027						2,588
2028 and thereafter						1,991
Total Lease Commitments						17,535
Less: Imputed interest						(1,905)
Operating Lease Liabilities						$	15,630

During the nine months ended September 30, 2023, we entered into one new office lease. At September 30, 2023, 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 $13 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 lease commencement date. At September 30, 2023, the weighted-average remaining lease term and weighted-average discount rate for our leases was 4 years and 5.2%, respectively.

Commitment to Fund BPL Bridge Loans

As of September 30, 2023, we had commitments to fund up to $623 million of additional advances on existing BPL 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, 2023, we carried a $1 million contingent liability related to these commitments to fund construction advances. During the three and nine months ended September 30, 2023, we recorded a net market valuation loss of $0.4 million and gain of $0.3 million, respectively, related to this liability through Mortgage banking activities and Investment of fair value changes, net on our consolidated statements of income.

Commitment to Fund Partnerships

In 2018, we invested in two partnerships created to acquire and manage certain mortgage servicing related assets. See Note 11 for additional detail on these investments. In connection with these investments, 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, 2023

(Unaudited)

Note 17. Commitments and Contingencies - (continued)

Commitments to Fund Strategic Investments

In the first quarter of 2022, we entered into a $25 million commitment to an investment fund with the mission of providing quality workforce housing opportunities in several California urban communities, including the San Francisco Bay Area. At September 30, 2023, we had funded $15 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.

In 2021, we entered into a commitment to fund a $5 million RWT Horizons investment. At September 30, 2023, we had funded $2 million of this commitment. This investment is included in Other investments on our consolidated balance sheets.

Commitment to Fund Oaktree Joint Venture

In the second quarter of 2023, we established a joint venture with a global investment manager to invest in BPL bridge loans originated by our CoreVest subsidiary. In accordance with the terms of the joint venture, we have committed to sell certain BPL bridge loans we originate into the joint venture that meet specified criteria at contractually pre-established prices. Additionally, we have committed to contribute up to $50 million to the joint venture to fund the joint venture's purchase of BPL bridge loans. At September 30, 2023, we had contributed $1 million of capital to the joint venture.

Riverbend Contingent Consideration

As part of the consideration for our acquisition of Riverbend, we may make earnout payments payable in cash, based on generating specified revenues over a threshold amount during the two-year period ending July 1, 2024, up to a maximum potential amount payable of $25.3 million. These contingent earnout payments are classified as a contingent consideration liability on our consolidated balance sheets and carried at fair value. At September 30, 2023, our estimated fair value of this contingent liability was zero.

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, 2023, 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, 2023, we had incurred less than $100 thousand of cumulative losses under these arrangements. For the three and nine months ended September 30, 2023, other income related to these arrangements was $0.2 million and $0.5 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, 2023, the loans had an unpaid principal balance of $406 million, a weighted average FICO score of 761 (at origination), and LTV ratio of 74% (at origination). At September 30, 2023, $7 million of the loans were 90 or more days delinquent, of which three loans with an unpaid principal balance of $1 million were in foreclosure. At September 30, 2023, the carrying value of our guarantee obligation was $6 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, 2023 and December 31, 2022, assets of such SPEs totaled $28 million and $30 million, respectively, and at both September 30, 2023 and December 31, 2022 liabilities of such SPEs totaled $6 million.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 17. Commitments and Contingencies - (continued)

Loss Contingencies — Repurchase Reserves

We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to loans we have sold. 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.

At September 30, 2023 and December 31, 2022, our repurchase reserve associated with our residential loans and MSRs was $5 million and $6 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. During the nine months ended September 30, 2023 and 2022, we received one and seven repurchase request(s), respectively, and repurchased five and one loan(s), respectively. During the nine months ended September 30, 2023 and 2022, we recorded reversals of repurchase provision expenses of $1 million and $4 million, respectively, in Mortgage banking activities, net, on our consolidated statements of income.

At September 30, 2023 and December 31, 2022, our repurchase reserve associated with business purpose loans sold to third-parties was zero and $1 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. During the nine months ended September 30, 2023 and 2022, we received six and zero repurchase requests, respectively, for business purpose loans sold to third parties, and repurchased twelve and zero business purpose loans, respectively, that had been sold to third parties. No repurchase provision was recorded during the first nine months of 2023 and, at September 30, 2023, one open repurchase request was outstanding for business purpose loans sold to third parties.

Loss Contingencies — Litigation, Claims and Demands

There is no significant update regarding the litigation matters described in Note 17 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Loss Contingencies - Litigation, Claims and Demands.” At September 30, 2023, 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, 2022 were $2 million.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 18. Equity

The following table provides a summary of changes to Accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2023 and 2022.

Table 18.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component

						Three Months Ended September 30, 2023												Three Months Ended September 30, 2022
(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						$	8,165					$	(70,256)					$	16,595					$	(74,383)
Other comprehensive loss before reclassifications						(3,921)						—						(8,731)						—
Amounts reclassified from other accumulated comprehensive income (loss)						234						1,040						544						1,040
Net current-period other comprehensive income (loss)						(3,687)						1,040						(8,187)						1,040
Balance at End of Period						$	4,478					$	(69,216)					$	8,408					$	(73,343)

						Nine Months Ended September 30, 2023												Nine Months Ended September 30, 2022
(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						$	3,435					$	(72,303)					$	67,503					$	(76,430)
Other comprehensive income (loss) before reclassifications						398						—						(60,013)						—
Amounts reclassified from other accumulated comprehensive income (loss)						645						3,087						918						3,087
Net current-period other comprehensive income (loss)						1,043						3,087						(59,095)						3,087
Balance at End of Period						$	4,478					$	(69,216)					$	8,408					$	(73,343)

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 18. Equity - (continued)

The following table provides a summary of reclassifications out of Accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022.

Table 18.2 – Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

												Amount Reclassified From Accumulated Other Comprehensive (Loss)
						Affected Line Item in the						Three Months Ended September 30,
(In Thousands)						Income Statement						2023						2022
Net Realized Loss on AFS Securities
(Decrease) increase in allowance for credit losses on AFS securities						Investment fair value changes, net						$	(66)					$	544
Loss on sale of AFS securities						Realized gains, net						300						—
												$	234					$	544
Net Realized Loss on Interest Rate   Agreements Designated as Cash Flow Hedges
Amortization of deferred loss						Interest expense						$	1,040					$	1,040
												$	1,040					$	1,040

												Amount Reclassified From Accumulated Other Comprehensive (Loss)
						Affected Line Item in the						Nine Months Ended September 30,
(In Thousands)						Income Statement						2023						2022
Net Realized (Gain) Loss on AFS Securities
Increase in allowance for credit losses on AFS securities						Investment fair value changes, net						$	33					$	2,315
Loss (gain) on sale of AFS securities						Realized gains, net						612						(1,397)
												$	645					$	918
Net Realized Loss on Interest Rate   Agreements Designated as Cash Flow Hedges
Amortization of deferred loss						Interest expense						$	3,087					$	3,087
												$	3,087					$	3,087

Issuance of Common Stock

We have an established program to sell common stock from time to time in at-the-market ("ATM") offerings. During the three and nine months ended September 30, 2023, we issued 4,243,982 shares of common stock for proceeds of $33 million under this program. At September 30, 2023, the share issuance capacity under this program was $141 million.

Issuance of Preferred Stock

In January 2023, Redwood issued 2,800,000 shares of 10.00% Series A Fixed-Rate Reset Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") for gross proceeds of $70 million and net proceeds of approximately $67 million after deducting the underwriting discount and other estimated expenses. The Series A Preferred Stock will pay quarterly cumulative cash dividends beginning April 15, 2023 to January 15, 2028 at a fixed annual rate of 10%, based on the stated liquidation preference of $25.00 per share, in arrears, when authorized by Redwood's Board of Directors and declared by the Company. Starting April 15, 2028, the annual dividend rate will reset to the five-year U.S. Treasury Rate plus a spread of 6.278%. The Series A Preferred Stock ranks senior to Redwood's common stock with respect to rights to the payment of dividends and the distribution of assets upon any liquidation,

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 18. Equity - (continued)

dissolution or winding up of the Company. During the three and nine months ended September 30, 2023, the Company declared preferred stock dividends of $0.625 and $1.85417 per share, respectively. At September 30, 2023, preferred dividends payable totaling $1 million for the third quarter 2023 dividend were included in Accrued expenses and other liabilities and were payable on October 16, 2023 to stockholders of record on September 30, 2023.

Direct Stock Purchase and Dividend Reinvestment Plan

During the nine months ended September 30, 2023, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At September 30, 2023, approximately 6 million shares remained outstanding for future offerings under this plan.

Earnings per Common Share

The following table provides the basic and diluted earnings per common share computations for the three and nine months ended September 30, 2023 and 2022.

Table 18.3 – Basic and Diluted Earnings (Loss) per Common Share

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands, except Share Data)						2023						2022						2023						2022
Basic Loss per Common Share:
Net loss related to common stockholders						$	(32,560)					$	(50,411)					$	(28,244)					$	(119,462)
Less: Dividends and undistributed earnings allocated to participating securities						(792)						(1,158)						(3,072)						(3,445)
Net loss related to to common stockholders						$	(33,352)					$	(51,569)					$	(31,316)					$	(122,907)
Basic weighted average common shares outstanding						115,465,977						116,087,890						114,381,548						118,530,172
Basic Loss per Common Share						$	(0.29)					$	(0.44)					$	(0.27)					$	(1.04)
Diluted Loss per Common Share:
Net loss related to common stockholders						$	(32,560)					$	(50,411)					$	(28,244)					$	(119,462)
Less: Dividends and undistributed earnings allocated to participating securities						(792)						(1,158)						(3,072)						(3,445)
Add back: Interest expense on convertible notes for the period, net of tax						—						—						—						—
Net loss related to common stockholders						$	(33,352)					$	(51,569)					$	(31,316)					$	(122,907)
Weighted average common shares outstanding						115,465,977						116,087,890						114,381,548						118,530,172
Net effect of dilutive equity awards						—						—						—						—
Net effect of assumed convertible notes conversion to common shares						—						—						—						—
Diluted weighted average common shares outstanding						115,465,977						116,087,890						114,381,548						118,530,172
Diluted Loss per Common Share						$	(0.29)					$	(0.44)					$	(0.27)					$	(1.04)

We included participating securities, which are certain equity awards that have non-forfeitable dividend participation rights, in the calculations of basic and diluted earnings per common share as we determined that the two-class method was more dilutive than the alternative treasury stock method for these shares. Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included that may differ in certain circumstances.

During the three and nine months ended September 30, 2023 and 2022, none of our convertible notes were determined to be dilutive and were not included in the calculation of diluted EPS under the "if-converted" method. Under this method, the periodic interest expense (net of applicable taxes) for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted) are included in the denominator.

65

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 18. Equity - (continued)

For the three and nine months ended September 30, 2023, 40,763,478 and 43,910,345 of common shares, respectively, related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and nine months ended September 30, 2022, 49,137,808 and 37,307,705 of common shares, respectively, related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three and nine months ended September 30, 2023, the number of outstanding equity awards that were antidilutive totaled 24,539 and 81,267, respectively. For the three and nine months ended September 30, 2022, the number of outstanding equity awards that were antidilutive totaled 249,178 and 268,737, respectively.

Stock Repurchases

In July 2022, our Board of Directors approved an authorization for the repurchase of up to $125 million of our common stock, and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization has no expiration date and does not obligate us to acquire any specific number of shares or securities. During the three months ended September 30, 2023, we did not repurchase any shares of our common stock under this program. At September 30, 2023, $101 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

Note 19. Equity Compensation Plans

During the second quarter of 2023, Redwood shareholders approved an additional 9,650,000 shares of common stock for grant under our Incentive Plan. At September 30, 2023 and December 31, 2022, 12,268,074 and 2,896,604 shares of common stock, respectively, were available for grant under our Incentive Plan. The unamortized compensation cost of awards issued under the Incentive Plan, which are settled by delivery of shares of common stock, and purchases under the Employee Stock Purchase Plan, totaled $30 million at September 30, 2023, as shown in the following table.

Table 19.1 – Activities of Equity Compensation Costs by Award Type

																		Nine Months Ended September 30, 2023
(In Thousands)																		Restricted Stock Units						Deferred Stock Units						Performance Stock Units						Employee Stock Purchase Plan						Total
Unrecognized compensation cost at beginning of period																		$	5,068					$	19,849					$	15,271					$	—					$	40,188
Equity grants																		2,092						6,865						—						422						9,379
Performance-based valuation adjustment																		—						—						(3,205)						—						(3,205)
Equity grant forfeitures																		(1,088)						(719)						—						—						(1,807)
Equity compensation expense																		(2,411)						(8,911)						(2,895)						(318)						(14,535)
Unrecognized Compensation Cost at End of Period																		$	3,661					$	17,084					$	9,171					$	104					$	30,020

At September 30, 2023, the weighted average amortization period remaining for all of our equity awards was less than two years.

Restricted Stock Units ("RSUs")

At September 30, 2023 and December 31, 2022, there were 585,284 and 806,119 RSUs outstanding, respectively. During the nine months ended September 30, 2023, there were 263,590 RSUs granted, 354,813 RSUs distributed, and 129,612 RSUs forfeited. Unvested RSUs at September 30, 2023 vest through 2027.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 19. Equity Compensation Plans - (continued)

Deferred Stock Units (“DSUs”)

At September 30, 2023 and December 31, 2022, there were 4,896,376 and 4,831,338 DSUs outstanding, respectively, of which 2,700,517 and 2,495,787, respectively, had vested. During the nine months ended September 30, 2023, there were 936,206 DSUs granted, 821,046 DSUs distributed, and 50,122 DSUs forfeited. Unvested DSUs at September 30, 2023 vest through 2027.

Performance Stock Units (“PSUs”)

At September 30, 2023 and December 31, 2022, the target number of PSUs that were unvested was 2,078,171 and 2,354,002, respectively. Vesting for PSUs generally occurs three years from their respective grant dates based on various total shareholder return performance calculations, as discussed in Note 19 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.

For 275,831 target PSU awards that were granted in December 2019, the performance vesting period ended on January 1, 2023. These 2019 PSU awards failed to reach a threshold level under their performance-based vesting criteria and resulted in the vesting of no shares of our common stock underlying these PSUs. During the nine months ended September 30, 2023, for PSUs granted in 2021 and 2020, we adjusted the cumulative expected amortization expense down by $3 million to reflect our revised vesting estimate regarding the vesting of these awards in relation to the book value TSR performance condition for the second-year vesting tranche of the 2021 PSU grant and the third-year vesting tranche of the 2020 PSU grant.

Employee Stock Purchase Plan ("ESPP")

The ESPP allows a maximum of 850,000 shares of common stock to be purchased in aggregate for all employees. As of September 30, 2023 and December 31, 2022, 739,404 and 657,777 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at September 30, 2023.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 20. Mortgage Banking Activities, Net

The following table presents the components of Mortgage banking activities, net, recorded in our consolidated statements of income for the three and nine months ended September 30, 2023 and 2022.

Table 20.1 – Mortgage Banking Activities

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
Residential Mortgage Banking Activities, Net
Changes in fair value of:
Residential loans, at fair value (1)						$	(2,819)					$	(22,776)					$	5,272					$	(125,012)
Trading securities (2)						(482)						148						2,188						4,249
Risk management derivatives (3)						12,158						24,319						10,508						107,573
Other income, net (4)						107						467						1,422						5,496
Total residential mortgage banking activities, net						8,964						2,158						19,390						(7,694)
Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:
BPL term loans, at fair value (1)						1,600						(19,306)						13,214						(84,493)
BPL bridge loans, at fair value						1,438						(9)						4,808						2,242
Risk management derivatives (3)						3,434						24,044						1,295						56,564
Other income, net (5)						4,004						9,648						13,956						36,214
Total business purpose mortgage banking activities, net						10,476						14,377						33,273						10,527
Mortgage Banking Activities, Net						$	19,440					$	16,535					$	52,663					$	2,833

(1)For residential loans, includes changes in fair value for associated loan purchase commitments. For BPL term loans, includes changes in fair value for associated interest rate lock commitments.

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

(3)Represents market valuation changes of derivatives that were used to manage risks associated with our mortgage banking operations.

(4)Amounts in this line item include other fee income from loan acquisitions and provisions for repurchases, presented net.

(5)Amounts in this line item include other fee income from loan originations.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 21. Other Income, Net

The following table presents the components of Other income recorded in our consolidated statements of income for the three and nine months ended September 30, 2023 and 2022.

Table 21.1 – Other Income, Net

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
MSR income, net (1)						$	1,747					$	2,890					$	6,173					$	12,569
Bridge loan fees (2)						1,895						1,489						6,757						3,952
Other (3)						(1,296)						(352)						(1,870)						495
Other Income, Net						$	2,346					$	4,027					$	11,060					$	17,016

(1)Includes servicing fees and fair value changes for MSRs and related hedges, net.

(2)Includes asset management fees, extension fees, default interest and other fees.

(3)Includes earnings (losses) from equity method investments.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 22. Components of Operating Expenses

Components of our general and administrative expenses, loan acquisition costs, and other expenses for the three and nine months ended September 30, 2023 and 2022 are presented in the following table.

Table 22.1 – Components of Operating Expenses

						Three Months Ended September 30,												Nine Months Ended September 30,
(In Thousands)						2023						2022						2023						2022
General and Administrative Expenses
Fixed compensation expense (1)						$	12,579					$	18,626					$	40,724					$	45,364
Annual variable compensation expense						3,383						3,521						10,575						8,689
Long-term incentive award expense (1) (2)						5,013						4,998						19,192						16,190
Systems and consulting						3,108						3,909						9,074						10,796
Office costs						2,131						2,381						6,460						6,489
Accounting and legal						1,307						1,775						3,402						5,026
Corporate costs						959						928						2,845						2,792
Other						1,217						2,106						3,785						6,373
Total General and Administrative Expenses						29,697						38,244						96,057						101,719
Portfolio Management Costs						3,661						1,863						10,271						5,208
Loan Acquisition Costs						1,880						2,426						4,613						10,371
Other Expenses
Amortization of purchase-related intangible assets						3,107						3,891						9,321						10,731
Other						1,526						370						3,971						1,083
Total Other Expenses						4,633						4,261						13,292						11,814
Total Operating Expenses						$	39,871					$	46,794					$	124,233					$	129,112

(1)Includes $2 million of severance and transition-related expenses for the nine months ended September 30, 2023.

(2)For the three months ended September 30, 2023 and 2022, long-term incentive award expense included $3 million and $5 million of expense, respectively, for awards settleable in shares of our common stock, and $2 million and $0.1 million of expense, respectively, for awards settleable in cash. For the nine months ended September 30, 2023 and 2022, long-term incentive award expense included $14 million and $15 million, respectively, of expense for awards settleable in shares of our common stock, and $5 million and $1 million of expense, respectively, for awards settleable in cash.

Long-Term Cash-Based Awards

During the three and nine months ended September 30, 2023, there were $1 million of long-term cash-based retention awards granted to employees. Cash-based retention awards were granted to certain executive and non-executive employees between 2020 and 2023 that vest over one- to three-year periods, and are subject to continued employment through the vesting periods through 2025. At September 30, 2023, the liability associated with these awards was $1 million and the unamortized compensation cost of long-term cash-based awards was $2 million.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 22. Components of Operating Expenses - (continued)

Cash Settled Deferred Stock Units

During the nine months ended September 30, 2023, there were no cash-settled deferred stock units granted to employees. Cash-settled deferred stock units that were granted in 2020, 2021 and 2022, each vest over four-year periods and are subject to continued employment through the vesting periods through 2026. At September 30, 2023, the liability associated with these awards was $3 million, and the unamortized compensation cost was $4 million. The unamortized compensation cost is adjusted for changes in the value of our common stock at the end of each reporting period. These awards are classified as liabilities in Accrued expenses and other liabilities on our consolidated balance sheets, and are being amortized over their respective vesting periods on a straight-line basis, adjusted for changes in the value of our common stock at the end of each reporting period.

Refer to Note 22 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.

Cash Settled Performance Stock Units

During the nine months ended September 30, 2023, $6 million of cash-settled performance stock units ("csPSUs") were granted to certain executive and non-executive employees which vest over approximately three years through January 1, 2026. The target number of csPSUs that were granted totaled 663,499 units based on a per unit grant-date fair value of $9.75. The equivalent number of underlying shares of common stock that vest and that the recipient becomes entitled to receive at the time of vesting will generally range from 0% to 250% of the target number of csPSUs granted, with the target number of csPSUs granted being adjusted to reflect the value of any dividends declared on our common stock during the vesting period. Upon vesting, the recipient will receive the settlement of the vested shares in cash based on the closing market price of our common stock on the final vesting date. These awards are classified as liabilities in Accrued expenses and other liabilities on our consolidated balance sheets, and are being amortized over their respective vesting periods on a straight-line basis, adjusted for changes in the value of the csPSUs at the end of each reporting period. At September 30, 2023, the liability associated with these awards was $1 million, and unamortized compensation cost of the csPSUs was $5 million.

The grant date fair value of these csPSUs of $9.75 per unit was determined through Monte-Carlo simulations using the following assumptions: the common stock closing price at the grant date for Redwood and each member of the comparator group, the average closing price of the common stock price for the 60 trading days beginning January 1, 2023 for Redwood and each member of the comparator group, and the range of performance-based vesting based on absolute TSR over three years from the grant date. For this csPSU grant, an implied volatility assumption of 71% (based on historical volatility), a risk-free rate of 4.23% (the three-year Treasury rate on the grant date), and a 0% dividend yield (the mathematical equivalent to reinvesting the dividends over the three-year performance period as is consistent with the terms of the PSUs) were used.

With respect to the csPSU awards granted during the nine months ended September 30, 2023:

•First, vesting would range from 0% - 250% of two-thirds of the Target csPSUs granted based on the level of book value total shareholder return ("bvTSR") attained over the three-year vesting period, with 100% of this two-thirds of the Target csPSUs vesting if three-year bvTSR is 25%. bvTSR is defined as the percentage by which our book value "per share price" has increased or decreased as of the last day of the three-year vesting period relative to the first day of such vesting period, adjusted to reflect the reinvestment of all dividends declared and/or paid on our common stock.

•Second, vesting would range from 0% - 250% of one-third of the Target csPSUs granted based on Redwood’s relative total shareholder return (“rTSR”) against a comparator group of companies measured over the three-year vesting period, with 100% of this one-third of the Target csPSUs vesting if three-year rTSR corresponds to 55th percentile rTSR.

•Third, if the aggregate vesting level after steps one and two is greater than 100% of the Target csPSUs, but the Company's absolute total shareholder return ("TSR") is negative over the three-year performance period, vesting would be capped at 100% of Target csPSUs. TSR is defined as the percentage by which our common stock “per share price” has increased or decreased as of the last day of the three-year vesting period relative to the first day of such vesting period, adjusted to reflect the reinvestment of all dividends declared and/or paid on our common stock.

Refer to Note 22 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for additional information regarding long-term cash-based awards and cash-settled deferred stock units.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 23. Taxes

We believe that we have met all requirements for qualification as a REIT for federal income tax purposes. To qualify as a REIT, the Company must distribute at least 90% of its annual REIT taxable income and meet certain other requirements that relate to, among other things, the assets it holds, the income it generates, and the composition of its stockholders. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the requirements for qualification as a REIT and the requirements for statutory relief, we would be subject to federal corporate income tax on our taxable income and we would not be able to elect to be taxed as a REIT for four years thereafter. Such an outcome could have a material adverse impact on our consolidated financial statements.

For the nine months ended September 30, 2023 and 2022, we recognized a provision for income taxes of $1 million and a benefit from income taxes of $10 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at September 30, 2023 and 2022.

Table 23.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate

						September 30, 2023						September 30, 2022
Federal statutory rate						21.0		%				21.0		%
State taxes, net of Federal tax effect, as applicable						(1.0)		%				0.5		%
Differences in taxable (loss) income from GAAP income						(0.6)		%				—		%
Change in valuation allowance						—		%				—		%
REIT GAAP income or loss not subject to federal income tax						(22.2)		%				(13.4)		%
Effective Tax Rate						(2.8)		%				8.1		%

We assessed our tax positions for all open tax years (i.e., Federal, 2019 to 2023, and State, 2018 to 2023) at September 30, 2023 and December 31, 2022, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 24. Segment Information

Redwood operates in three segments: Residential Mortgage Banking, Business Purpose Mortgage Banking and Investment Portfolio. The accounting policies of the reportable segments are the same as those described in Note 3 — Summary of Significant Accounting Policies. For a full description of our segments, see Part I, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2022.

Segment contribution represents the measure of profit that management uses to assess the performance of our business segments and make resource allocation and operating decisions. Certain corporate expenses not directly assigned or allocated to one of our three segments, as well as activity from certain consolidated Sequoia entities, are included in the Corporate/Other column as reconciling items to our consolidated financial statements. These unallocated corporate expenses primarily include interest expense from our convertible notes and trust preferred securities, indirect general and administrative expenses and other expense.

The following tables present financial information by segment for the three and nine months ended September 30, 2023 and 2022.

Table 24.1 – Business Segment Financial Information

						Three Months Ended September 30, 2023
(In Thousands)						Residential Mortgage Banking						Business Purpose Mortgage Banking						Investment Portfolio						Corporate/ Other						Total
Interest income						$	6,063					$	4,618					$	162,251					$	4,142					$	177,074
Interest expense						(4,826)						(3,888)						(131,303)						(16,706)						(156,723)
Net interest income (expense)						1,237						730						30,948						(12,564)						20,351
Non-interest income (loss)
Mortgage banking activities, net						8,964						10,476						—						—						19,440
Investment fair value changes, net						—						—						(31,315)						(115)						(31,430)
Other income, net						—						1,278						2,622						(1,554)						2,346
Realized gains, net						—						—						26						24						50
Total non-interest income (loss), net						8,964						11,754						(28,667)						(1,645)						(9,594)
General and administrative expenses						(4,521)						(9,402)						(1,340)						(14,434)						(29,697)
Portfolio management costs						—						—						(3,636)						(25)						(3,661)
Loan acquisition costs						(395)						(1,485)						—						—						(1,880)
Other expenses						—						(3,108)						(1,525)						—						(4,633)
(Provision for) Benefit from income taxes						(813)						318						(1,457)						256						(1,696)
Segment Contribution						$	4,472					$	(1,193)					$	(5,677)					$	(28,412)
Net (Loss)																														$	(30,810)
Non-cash amortization (expense), net						$	(266)					$	(3,294)					$	(1,687)					$	(2,099)					$	(7,346)

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 24. Segment Information - (continued)

						Nine Months Ended September 30, 2023
(In Thousands)						Residential Mortgage Banking						Business Purpose Mortgage Banking						Investment Portfolio						Corporate/ Other						Total
Interest income						$	14,007					$	13,509					$	492,514					$	14,541					$	534,571
Interest expense						(13,392)						(11,599)						(384,610)						(52,086)						(461,687)
Net interest income (expense)						615						1,910						107,904						(37,545)						72,884
Non-interest income (loss)
Mortgage banking activities, net						19,390						33,273						—						—						52,663
Investment fair value changes, net						1,076						—						(34,166)						(3,063)						(36,153)
Other income, net						—						4,762						8,803						(2,505)						11,060
Realized gains, net						—						—						858						246						1,104
Total non-interest income (loss), net						20,466						38,035						(24,505)						(5,322)						28,674
General and administrative expenses						(13,065)						(34,718)						(3,990)						(44,284)						(96,057)
Portfolio management costs						—						—						(10,233)						(38)						(10,271)
Loan acquisition costs						(719)						(3,894)						—						—						(4,613)
Other expenses						—						(9,323)						(3,969)						—						(13,292)
(Provision for) Benefit from income taxes						(887)						2,427						(3,135)						953						(642)
Segment Contribution						$	6,410					$	(5,563)					$	62,072					$	(86,236)
Net (Loss)																														$	(23,317)
Non-cash amortization (expense), net						$	(813)					$	(10,291)					$	(6,167)					$	(6,292)					$	(23,563)

						Three Months Ended September 30, 2022
(In Thousands)						Residential Mortgage Banking						Business Purpose Mortgage Banking						Investment Portfolio						Corporate/ Other						Total
Interest income						$	9,882					$	9,082					$	156,882					$	1,816					$	177,662
Interest expense						(8,083)						(5,971)						(111,876)						(16,797)						(142,727)
Net interest income (expense)						1,799						3,111						45,006						(14,981)						34,935
Non-interest income (loss)
Mortgage banking activities, net						2,158						14,377						—						—						16,535
Investment fair value changes, net						—						—						(61,780)						4,083						(57,697)
Other income, net						—						399						3,906						(278)						4,027
Realized gains, net						—						—						—						—						—
Total non-interest income (loss), net						2,158						14,776						(57,874)						3,805						(37,135)
General and administrative expenses						(5,735)						(18,535)						(1,639)						(12,335)						(38,244)
Portfolio management costs						—						—						(1,863)						—						(1,863)
Loan acquisition costs						(550)						(1,876)						—						—						(2,426)
Other expenses						—						(3,891)						(370)						—						(4,261)
Benefit from income taxes						1,688						2,559						(5,664)						—						(1,417)
Segment Contribution						$	(640)					$	(3,856)					$	(22,404)					$	(23,511)
Net (Loss)																														$	(50,411)
Non-cash amortization (expense), net						$	(185)					$	(3,609)					$	(3,658)					$	(2,843)					$	(10,295)

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 24. Segment Information - (continued)

						Nine Months Ended September 30, 2022
(In Thousands)						Residential Mortgage Banking						Business Purpose Mortgage Banking						Investment Portfolio						Corporate/ Other						Total
Interest income						$	36,048					$	22,509					$	471,932					$	4,028					$	534,517
Interest expense						(23,316)						(12,797)						(331,047)						(38,832)						(405,992)
Net interest income (expense)						12,732						9,712						140,885						(34,804)						128,525
Non-interest income (loss)
Mortgage banking activities, net						(7,694)						10,527						—						—						2,833
Investment fair value changes, net						—						—						(165,297)						13,508						(151,789)
Other income, net						—						2,028						15,423						(435)						17,016
Realized gains, net						—						—						2,581						—						2,581
Total non-interest income (loss), net						(7,694)						12,555						(147,293)						13,073						(129,359)
General and administrative expenses						(17,918)						(40,076)						(4,468)						(39,257)						(101,719)
Portfolio management costs						—						—						(5,208)						—						(5,208)
Loan acquisition costs						(2,848)						(7,523)						—						—						(10,371)
Other expenses						74						(10,731)						(1,157)						—						(11,814)
Benefit from (provision for) income taxes						8,283						9,009						(6,808)						—						10,484
Segment Contribution						$	(7,371)					$	(27,054)					$	(24,049)					$	(60,988)
Net (Loss)																														$	(119,462)
Non-cash amortization (expense), net						$	(699)					$	(11,563)					$	4,385					$	(6,428)					$	(14,305)

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 24. Segment Information - (continued)

The following table presents the components of Corporate/Other for the three and nine months ended September 30, 2023 and 2022.

Table 24.2 – Components of Corporate/Other

						Three Months Ended September 30,
						2023																		2022
(In Thousands)						Legacy Consolidated VIEs (1)						Other						Total						Legacy Consolidated VIEs (1)						Other						Total
Interest income						$	2,596					$	1,546					$	4,142					$	1,473					$	343					$	1,816
Interest expense						(2,487)						(14,219)						(16,706)						(1,486)						(15,311)						(16,797)
Net interest income (expense)						109						(12,673)						(12,564)						(13)						(14,968)						(14,981)
Non-interest income (loss)
Investment fair value changes, net						(215)						100						(115)						(329)						4,412						4,083
Other income, net						—						(1,554)						(1,554)						—						(278)						(278)
Realized gains, net						—						24						24						—						—						—
Total non-interest income (loss), net						(215)						(1,430)						(1,645)						(329)						4,134						3,805
General and administrative expenses						—						(14,434)						(14,434)						—						(12,335)						(12,335)
Portfolio management costs						—						(25)						(25)						—						—						—
Benefit from income taxes						—						256						256						—						—						—
Total						$	(106)					$	(28,306)					$	(28,412)					$	(342)					$	(23,169)					$	(23,511)

						Nine Months Ended September 30,
						2023																		2022
(In Thousands)						Legacy Consolidated VIEs(1)						Other						Total						Legacy Consolidated VIEs(1)						Other						Total
Interest income						$	7,879					$	6,662					$	14,541					$	3,593					$	435					$	4,028
Interest expense						(7,650)						(44,436)						(52,086)						(3,154)						(35,678)						(38,832)
Net interest income (expense)						229						(37,774)						(37,545)						439						(35,243)						(34,804)
Non-interest income (loss)
Investment fair value changes, net						(319)						(2,744)						(3,063)						(1,379)						14,887						13,508
Other income, net						—						(2,505)						(2,505)						—						(435)						(435)
Realized gains, net						—						246						246						—						—						—
Total non-interest income, net						(319)						(5,003)						(5,322)						(1,379)						14,452						13,073
General and administrative expenses						—						(44,284)						(44,284)						—						(39,257)						(39,257)
Portfolio management costs						—						(38)						(38)						—						—						—
Benefit from income taxes						—						953						953						—						—						—
Total						$	(90)					$	(86,146)					$	(86,236)					$	(940)					$	(60,048)					$	(60,988)

(1)     Legacy consolidated VIEs represent Legacy Sequoia entities that are consolidated for GAAP financial reporting purposes. See Note 4 for further discussion on VIEs.    

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REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(Unaudited)

Note 24. Segment Information - (continued)

The following table presents supplemental information by segment at September 30, 2023 and December 31, 2022.

Table 24.3 – Supplemental Segment Information

(In Thousands)						Residential Mortgage Banking						Business Purpose Mortgage Banking												Investment Portfolio						Corporate/ Other						Total
September 30, 2023
Residential loans						$	610,946					$	—											$	5,086,239					$	150,152					$	5,847,337
Business purpose loans						—						102,777												5,146,553						—						5,249,330
Consolidated Agency multifamily loans						—						—												420,554						—						420,554
Real estate securities						9,054						—												120,391						—						129,445
Home equity investments						—						—												431,159						113						431,272
Other investments						—						—												284,507						55,854						340,361
Goodwill						—						23,373												—						—						23,373
Intangible assets						—						31,570												—						—						31,570
Total assets						659,520						197,974												11,701,939						461,705						13,021,138
December 31, 2022
Residential loans						$	628,160					$	—											$	4,800,096					$	184,932					$	5,613,188
Business purpose loans						—						364,073												4,968,513						—						5,332,586
Consolidated Agency multifamily loans						—						—												424,551						—						424,551
Real estate securities						—						—												240,475						—						240,475
Home equity investments						—						—												403,462						—						403,462
Other investments						—						—												334,420						56,518						390,938
Goodwill						—						23,373												—						—						23,373
Intangible assets						—						40,892												—						—						40,892
Total assets						660,916						487,159												11,303,991						578,833						13,030,899

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five main sections:

•    Overview

•    Results of Operations

–Consolidated Results of Operations

–Results of Operations by Segment

–Income Taxes

•    Liquidity and Capital Resources

•    Critical Accounting Estimates

•    Market and Other Risks

Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part II, Item 8, Financial Statements and Supplementary Data in our most recent Annual Report on Form 10-K, as well as the sections entitled “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as other cautionary statements and risks described elsewhere in this report and our most recent Annual Report on Form 10-K. The discussion in this MD&A contains forward-looking statements that involve substantial risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, such as those discussed in the Cautionary Statement below.

References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires. Financial information concerning our business is set forth in this MD&A and our consolidated financial statements and notes thereto, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Our website can be found at www.redwoodtrust.com. We make available, free of charge through the investor relations section of our website, access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). We also make available, free of charge, access to our charters for our Audit Committee, Compensation Committee, and Governance and Nominating Committee, our Corporate Governance Standards, and our Code of Ethics governing our directors, officers, and employees. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any executive officer or director of Redwood. In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, and may include disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time. The information on our website is not part of this Quarterly Report on Form 10-Q.

Our Investor Relations Department can be contacted at One Belvedere Place, Suite 300, Mill Valley, CA 94941, Attn: Investor Relations, telephone (866) 269-4976.

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Our Business

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 well 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 securities. Our aggregation, origination and investment activities have evolved to incorporate a diverse mix of residential and business purpose housing credit assets. 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 Mortgage Banking, Business Purpose Mortgage Banking, and Investment Portfolio. For a full description of our segments, see Part 1, Item 1—Business in our Annual Report on Form 10-K for the year ended December 31, 2022.

Cautionary Statement

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “believe,” “intend,” “seek,” “plan” and similar expressions or their negative forms, or by references to strategy, plans, opportunities, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, under the caption “Risk Factors.” Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected may be described from time to time in reports we file with the SEC, including reports on Forms 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Statements regarding the following subjects, among others, are forward-looking by their nature: (i) statements we make regarding Redwood's business strategy and strategic focus, including statements relating to our overall market position, strategy and long-term prospects (including trends driving the flow of capital in the housing finance market, our strategic initiatives designed to capitalize on those trends, our ability to attract capital to finance those initiatives, our approach to raising capital, and our ability to pay dividends in the future); (ii) statements related to our financial outlook and expectations for 2023 and future years, including statements regarding the economic impacts of inflation, monetary policy, volatility and potential regulatory changes in the banking sector, and shifting sources of liquidity in the residential mortgage market; (iii) statements regarding our progress in developing private capital partnerships that we expect to enhance our liquidity, operating and distribution capabilities going forward; (iv) statements related to our investment portfolio, including that there remains potential upside in our portfolio through market discount, and that at September 30, 2023, our securities portfolio had approximately $3.26 per share of net discount to par, our expectations to continue de-emphasizing third-party investments and reducing our exposure to this portion of our investment portfolio to optimize overall returns, and our expectations regarding our ability to finance, renew or extend financing for, and expand financing capacity for, our securities, bridge loan, and HEI investments; (v) statements related to opportunities we see for our residential and BPL platforms, our positioning to capture market share, and opportunities to help scale and institutionalize HEI; (vi) statements relating to acquiring residential mortgage loans in the future that we have identified for purchase or plan to purchase, including the amount of such loans that we identified for purchase during the third quarter of 2023 and at September 30, 2023, expected fallout and the corresponding volume of residential mortgage loans expected to be available for purchase, total net jumbo loan exposure at September 30, 2023, and residential mortgage loans subject to forward sale commitments; (vii) statements we make regarding future dividends, including with respect to our regular quarterly dividends in 2023; and (viii) statements regarding our expectations and estimates relating to the characterization for income tax purposes of our dividend distributions, our expectations and estimates relating to tax accounting, tax liabilities and tax savings, and GAAP tax provisions, and our estimates of REIT taxable income and TRS taxable income.

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Important factors, among others, that may affect our actual results include:

•general economic trends and the performance of the housing, real estate, mortgage finance, and broader financial markets;

•changing benchmark interest rates, and the Federal Reserve’s actions and statements regarding monetary policy;

•the impact of the COVID-19 pandemic;

•federal and state legislative and regulatory developments and the actions of governmental authorities and entities;

•our ability to compete successfully;

•our ability to adapt our business model and strategies to changing circumstances;

•strategic business and capital deployment decisions we make;

•our use of financial leverage;

•our exposure to a breach of our cybersecurity or data security;

•our exposure to credit risk and the timing of credit losses within our portfolio;

•the concentration of the credit risks we are exposed to, including due to the structure of assets we hold, the geographical concentration of real estate underlying assets we own, and our exposure to environmental and climate-related risks;

•the efficacy and expense of our efforts to manage or hedge credit risk, interest rate risk, and other financial and operational risks;

•changes in credit ratings on assets we own and changes in the rating agencies’ credit rating methodologies;

•changes in mortgage prepayment rates;

•changes in interest rates;

•our ability to redeploy our available capital into new investments;

•interest rate volatility, changes in credit spreads, and changes in liquidity in the market for real estate securities and loans;

•our ability to finance the acquisition of real estate-related assets with short-term debt;

•changes in the values of assets we own;

•the ability of counterparties to satisfy their obligations to us;

•our exposure to the discontinuation of LIBOR;

•our exposure to liquidity risk, risks associated with the use of leverage, and market risks;

•changes in the demand from investors for residential and business purpose mortgages and investments, and our ability to distribute residential and business purpose mortgages through our whole-loan distribution channel;

•our involvement in securitization transactions, the profitability of those transactions, and the risks we are exposed to in engaging in securitization transactions;

•exposure to claims and litigation, including litigation arising from our involvement in loan origination and securitization transactions;

•whether we have sufficient liquid assets to meet short-term needs;

•our ability to successfully retain or attract key personnel;

•changes in our investment, financing, and hedging strategies and new risks we may be exposed to if we expand our business activities;

•our exposure to a disruption of our technology infrastructure and systems;

•the impact on our reputation that could result from our actions or omissions or from those of others;

•our failure to maintain appropriate internal controls over financial reporting and disclosure controls and procedures;

•the impact of changes to U.S. federal income tax laws on the U.S. housing market, mortgage finance markets, and our business;

•our failure to comply with applicable laws and regulation, including our ability to obtain or maintain the governmental licenses;

•our ability to maintain our status as a REIT for tax purposes;

•limitations imposed on our business due to our REIT status and our status as exempt from registration under the Investment Company Act of 1940;

•our common stock may experience price declines, volatility, and poor liquidity, and we may reduce our dividends in a variety of circumstances;

•decisions about raising, managing, and distributing capital;

•our exposure to broad market fluctuations; and

•other factors not presently identified.

This Quarterly Report on Form 10-Q may contain statistics and other data that in some cases have been obtained from or compiled from information made available by servicers and other third-party service providers.

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OVERVIEW

Business Update

Following the release by the Board of Governors of the Federal Reserve of proposed risk-based capital rules for the U.S. banking system early in the third quarter of 2023, we expected that while the final rules would likely evolve, bank management teams would follow early adoption, driving a fundamental shift in how financial assets are funded. Three months later, those expectations appear to have been validated thus far and our operating businesses continue to make forward progress, largely ahead of plan. This progress has been concurrent with the emergence of fresh demand for our organically created assets from pockets of capital complementary to our traditional distribution channels.

Our relationships with banks have deepened in the last few months as banking business models are reconciled with a future of higher capital requirements and more expensive interest rate risk management. And banks' response to these forthcoming regulatory changes reflects the urgency of the moment. Since March, our Residential team has engaged with depositories from coast to coast, securing and onboarding new partners. We now have active relationships with 185 active loan sellers, including over 70 banks, many of which have commenced lock activity with us in recent weeks. This includes a group of the nation’s largest regional banks and large financial institutions, a significant number with assets greater than $200 billion and extensive mortgage origination footprints. As we always have, Redwood offers these partners the ability to sustain operating activities without diluting the overall customer relationship.

Our total Residential Mortgage Banking lock volume for the third quarter of 2023 was $1.6 billion, up 189% from the second quarter of 2023 despite significantly higher mortgage rates and an overall decline in residential mortgage loan originations. Our purchase volume was $814 million, up 344% from the second quarter of 2023. Bank sellers accounted for 50% of our total quarterly purchase activity, up from just 10% in the second quarter of 2023 and a de minimis amount in the first quarter of 2023. Of note, bulk pool activity was a key driver of third quarter purchase volume, much of it seasoned loans acquired at a significant discount to par. Notwithstanding the persistent rise in interest rates, we continue to evaluate bulk pools of residential mortgage loans coming to market, more evidence of the transition in process for many banks seeking to balance pressures on capital, liquidity and net interest margin.

Headwinds to near-term growth, including mortgage rates at 20-year highs and very low overall transaction activity in housing, have us focused on leading indicators over the intermediate term as we position our Residential Mortgage Banking business to further scale volume when market conditions begin to turn more favorable. Those indicators include the quality of new loan seller relationships and a deeper "wallet share" with existing loan sellers. While many of our competitors have scaled back from the prime jumbo mortgage business, we completed our third Sequoia securitization of 2023 in the third quarter, followed closely by our fourth Sequoia securitization early in the fourth quarter. Both transactions generated strong margins and were distributed to a broad base of investors. In a market that is defined by so much volatility, we managed to execute these transactions within our target gain on sale range. Consistent with the momentum we see for the business, we nearly doubled our capital allocation to Residential Mortgage Banking in the third quarter and expect that allocation to grow further in 2024.

Our business-purpose lending (“BPL”) business is beginning to observe broader changes in the market as well. Borrowers that have historically sought funding from banks are now covered regularly in our pipeline discussions, and while the overall credit environment calls for continued caution and selectivity, demand from capital partners remains strong for well-underwritten BPL loans to high quality sponsors. While this transition is moving more slowly than in our Residential business, the early indicators are unmistakable. We have been engaged in dialogue with several banks on partnership opportunities that would allow us to access their existing pipelines with the objective of achieving mutually beneficial outcomes. With a life-cycle lending platform that offers both bridge and stabilized term financing, we are well-positioned to capture incremental market share that will continue shifting to private lenders. Our capital markets expertise allowed us to complete an accretive term loan securitization and bulk whole loan sale in the third quarter.

The BPL sector overall continues to manage through macro crosswinds that have impacted sponsor sentiment and reduced transaction volumes across the industry. Our team has been proactively working with borrowers in advance of loan maturities to assess project plans and ensure management towards successful completions. While 90+ day delinquencies across our bridge and term portfolios declined slightly to 4.0% at September 30, 2023, we continue to manage through instances of borrower/sponsor stress, particularly in our bridge portfolio, where certain sponsors have required loan modifications or an infusion of fresh equity from existing or new sponsorship. Though bridge lending continues to be one of our strongest drivers of net interest income, the lumpiness of the portfolio and intermittent nature of workout and modification activity has contributed to recent volatility in our quarterly GAAP earnings.

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Overall, we funded $411 million of BPL loans in the third quarter, a slight increase from second quarter of 2023 volumes. Within Bridge, our build-for-rent (“BFR”) aggregation product has seen increased demand from borrowers and carries a favorable risk profile given the turnkey nature of the homes being financed. Origination of loans secured by multifamily properties continues to be light as more limited capital flows into these types of projects. While we expect volumes for our fixed-rate term loans to remain influenced by benchmark interest rates, our bridge portfolio remains a source for refinances into term loans.

In the third quarter, we formally launched Aspire, our internal home equity investment (“HEI”) platform. After years of investing in and financing HEI, this development was a natural next step in the progression of our support for this nascent but growing sector. Since 2019, Redwood has been a participant in the HEI market, purchasing approximately $350 million in assets, co-sponsoring the first-ever securitization backed entirely by HEI, and subsequently procuring a dedicated financing facility for the asset class. With our track record of supporting housing accessibility, we believe we have a unique opportunity to help scale and institutionalize HEI in a way that will benefit consumers. We believe the opportunity to help homeowners access the equity in their homes remains the largest addressable market in housing finance. Through Aspire, we can now directly serve this market by offering HEI to customers of our nationwide correspondent network of loan officers, a significant advantage over more traditional, high-cost marketing campaigns.

As we think more holistically about the overall Redwood enterprise and the significant market opportunities we see ahead, evolving our capital structure and procuring long-term private capital partnerships will be a top priority. We continue to observe a secular transition occurring in our markets, with the roles of banks, private credit institutions, and specialty finance companies such as Redwood rapidly evolving. In particular, regulatory crosscurrents are redefining the most efficient holders of real estate-related assets, as well as those who finance and service them. As evidenced by our previously announced Oaktree BPL bridge joint venture, the value proposition that platforms like ours offer institutional private credit investors has become more visible over the past several years. These types of investors include pension funds, life insurance companies, sovereign wealth funds, and others who have accretive capital and a strong demand for our loan products but lack the origination or sourcing capabilities that our platform possesses. Recently, we have engaged with a handful of large private credit investors who are deeply familiar with our company and track record who have shown interest in forging strategic partnerships that we believe could be beneficial to our shareholders.

In keeping with these trends, our long-term strategic focus will be to position our mortgage banking businesses to meet this market opportunity, with ample working capital and access to a deep set of products. Our investment strategy will evolve in kind, with a continued focus on deployment alongside capital partners, in lieu of traditional direct investing. As we did in the third quarter, we also expect to continue de-emphasizing third-party investments and further reduce our exposure to this lower-yielding portion of our investment portfolio to further optimize overall returns.

As we progress towards year-end, we are already starting to see a diminution of market activity consistent with a year ago when market participants, from homebuyers to bond investors, took stock of a volatile environment and decided to save investment capital for the year ahead. If anything, the market is in a more challenging position today than it was then, factoring in the possibility of a U.S government shutdown, along with a geopolitical backdrop that has deteriorated significantly. The additional volatility from geopolitical events will likely continue to pressure our near-term GAAP results, particularly the market valuations of our investment portfolio assets. And while the resiliency of the U.S. economy has surprised even the most ardent optimists, the prospect of an interest rate-driven recession in 2024 still remains a likelihood, in our view. As such, we will continue to prioritize liquidity and exercise caution as we work to ensure our franchise is positioned for the opportunity we see ahead.

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Third Quarter Key Financial Results and Metrics

The following table presents key financial metrics for the three and nine months ended September 30, 2023.

Table 1 – Key Financial Results and Metrics

						Three Months Ended						Nine Months Ended
(In Thousands, except per Share Data)						September 30, 2023						September 30, 2023
Net income (loss) per diluted common share						$	(0.29)					$	(0.27)
Annualized GAAP return on common stockholders' equity						(12.3)		%				(3.5)		%
Dividends per share						$	0.16					$	0.55
Book value per share						$	8.77					$	8.77
Economic return on book value (1)						(3.6)%						(2.4)%

(1)Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share during the period. It does not represent an annualized figure.

Third Quarter Operational Highlights

Residential Mortgage Banking

•Locked $1.6 billion(1) of jumbo loans, up from $567 million in the second quarter 2023, and purchased $815 million of jumbo loans, up from $184 million in the second quarter 2023

◦50% of purchase volume in the third quarter 2023 was from depository institutions, up from 10% in the second quarter 2023

◦Achieved gross margins of 80bps during the quarter, within our historical 75bps to 100bps range

•Significantly grew jumbo loan seller network, including over 50 new or re-established relationships with depository institutions

•Distributed $391 million of jumbo loans through securitization ($338 million) and whole loan sales ($54 million)

•Increased capital allocated to Residential Mortgage Banking segment to $150 million at September 30, 2023, from $80 million at June 30, 2023

Business Purpose Mortgage Banking

•Funded $411 million of business purpose lending ("BPL") loans in the third quarter 2023 (74% Bridge and 26% Term), up from $406 million in the second quarter 2023

•Distributed $340 million of BPL loans through securitization ($278 million) and whole loan sales ($62 million)

•Began selling BPL bridge loans into previously announced joint venture ("JV") with Oaktree Capital Management, L.P. ("Oaktree") and established new dedicated financing line for the JV

Investment Portfolio

•Deployed approximately $70 million of capital into internally sourced investments, while generating incremental capital from sales of non-strategic third-party assets

•RPL and jumbo securities saw continued declines in 90 day+ delinquencies to 8.6% and 0.9%, respectively; 90 day+ delinquencies for our combined CAFL securities and bridge loan portfolio declined to 4.0%, aided in part by successful loss mitigation resolutions completed during the quarter, and accompanied by an increase in loans transferred to REO(2)

Financing Highlights

•Unrestricted cash and cash equivalents of $204 million at September 30, 2023

•Successfully renewed two maturing loan warehouse financing facilities with key counterparties

•Maintained $2.2 billion of excess financing capacity across warehouse facilities at September 30, 2023

Footnotes to Business Highlights

_________________________________________________________________________________________________________

1.Lock volume does not account for potential fallout from pipeline that typically occurs through the lending process.

2.Calculated as BPL loans in our consolidated CAFL securitizations, bridge loans held for investment, and bridge and term loans held-for-sale with a delinquent payment greater than 90 days divided by the total notional balance of consolidated CAFL securitizations, bridge loans held for investment, and bridge and term loans held for sale.

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RESULTS OF OPERATIONS

Within this Results of Operations section, we provide commentary that compares results year-over-year for 2023 and 2022. Most tables include a "change" column that shows the amount by which the results from 2023 are greater or less than the results from the respective period in 2022. Unless otherwise specified, references in this section to increases or decreases during the "three-month periods" refer to the change in results for the third quarter of 2023, compared to the third quarter of 2022, and increases or decreases during the "nine-month periods" refer to the change in results for the first nine months of 2023, compared to the first nine months of 2022.

Consolidated Results of Operations

The following table presents the components of our net income for the three and nine months ended September 30, 2023 and 2022.

Table 2 – Net Income (Loss)

						Three Months Ended September 30,																					Nine Months Ended September 30,
(In Thousands, except per Share Data)						2023						2022						Change									2023						2022						Change
Net Interest Income						$	20,351					$	34,935					$	(14,584)								$	72,884					$	128,525					$	(55,641)
Non-interest Income (Loss)
Mortgage banking activities, net						19,440						16,535						2,905									52,663						2,833						49,830
Investment fair value changes, net						(31,430)						(57,697)						26,267									(36,153)						(151,789)						115,636
Other income, net						2,346						4,027						(1,681)									11,060						17,016						(5,956)
Realized gains, net						50						—						50									1,104						2,581						(1,477)
Total non-interest income (loss), net						(9,594)						(37,135)						27,541									28,674						(129,359)						158,033
General and administrative expenses						(29,697)						(38,244)						8,547									(96,057)						(101,719)						5,662
Portfolio management costs						(3,661)						(1,863)						(1,798)									(10,271)						(5,208)						(5,063)
Loan acquisition costs						(1,880)						(2,426)						546									(4,613)						(10,371)						5,758
Other expenses						(4,633)						(4,261)						(372)									(13,292)						(11,814)						(1,478)
Net Income (Loss) Before Income Taxes						(29,114)						(48,994)						19,880									(22,675)						(129,946)						107,271
(Provision for) benefit from income taxes						(1,696)						(1,417)						(279)									(642)						10,484						(11,126)
Net Income (Loss)						(30,810)						(50,411)						19,601									(23,317)						(119,462)						96,145
Other comprehensive income (loss), net						(2,647)						(7,147)						4,500									4,130						(56,008)						60,138
Preferred dividends						(1,750)						—						(1,750)									(4,927)						—						(4,927)
Total Comprehensive Loss Related to Common Stockholders						$	(35,207)					$	(57,558)					$	22,351								$	(24,114)					$	(175,470)					$	151,356

Net Interest Income

Net interest income from our investment portfolio decreased by $14 million and $33 million during the three and nine-month periods, respectively, contributing to the majority of the overall declines in 2023. During the three and nine months ended September 30, 2023, $10 million and $16 million, respectively, of interest income was either reversed (from prior periods) or not recognized (for current periods) for our BPL bridge loans on non-accrual status. Additionally, the benefit of higher average asset balances in 2023 from continued deployment into internally-generated assets during the prior twelve months was more than offset by lower yield maintenance income on our BPL term securities, lower accretion income on our AFS securities, and higher financing costs in 2023. Yield maintenance income decreased $3 million and $13 million during the three- and nine-month periods, respectively, as the sharp rise in interest rates throughout 2022 and 2023 diminished incentives for borrowers to refinance. Accretion income on AFS securities decreased $1 million and $10 million during the three- and nine-month periods, respectively, as rising interest rates slowed prepayment speeds and changed our expected timing of calls of our available-for-sale securities, which reduced accretion income after the first quarter of 2022. Additionally, steady deployment of capital into HEI throughout the last 18 months, which does not generate net interest income but is partially financed with debt, resulted in a $4 million and $10 million increase in interest expense during the three- and nine-month periods, respectively.

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Net interest income from Residential and Business Purpose Mortgage Banking operations decreased by $1 million and $2 million, respectively, during the three-month periods, and decreased by $12 million and $8 million, respectively, during the nine-month periods. These declines were the result of lower average balances of loan inventory and higher financing costs given the rise in benchmark interest rates during the past 12 months. Volume in the residential business was intentionally reduced during 2022 and into the first quarter of 2023, driving the inventory of loans from over $1 billion at March 31, 2022 to $27 million at March 31, 2023. Given improving market conditions and new opportunities, we increased our residential loan acquisitions and inventory in the second and third quarters of 2023, and see opportunities to further grow acquisitions in the coming quarters in our residential mortgage banking business.

Corporate net interest expense decreased $2 million and increased $3 million during the three and nine-month periods, respectively. In both periods, interest expense increased for our trust preferred securities, which are variable rate and were impacted by higher benchmark interest rates over the past twelve months. For the three-month periods, this increase was more than offset by a decline in interest expense related to our convertible debt, as we repurchased some of our outstanding convertible debt over the past twelve months and repaid one series of our convertible debt that matured in August 2023. Additionally, we earned higher interest income on our cash and cash equivalents during 2023 for both periods, resulting from higher interest rates earned on these balances.

We use a balanced combination of fixed and floating rate debt to finance our fixed and floating rate investments. However, over the past year, continued increases in benchmark interest rates and borrowing spreads negatively impacted our net interest income. Further increases in the federal funds rate or widening of borrowing spreads could result in lower net interest income. Additionally, to the extent interest rates remain elevated or increase further, certain fixed-rate term borrowings that mature in the coming quarters could have to be refinanced at higher interest rates, which could cause a reduction in net interest income. To the extent we add incremental leverage to our investment portfolio, particularly for non-interest earnings assets such as HEI, net interest income could temporarily decrease until proceeds from those financings are redeployed into other investments.

Additional detail on net interest income is provided in the “Net Interest Income” section that follows.

Mortgage Banking Activities, Net

Income from Residential Mortgage Banking activities increased $7 million and $27 million during the three and nine-month periods, respectively. Income from Business Purpose Mortgage Banking operations decreased $4 million and increased $23 million, during the three and nine-month periods respectively. For both mortgage banking businesses, while volumes were much higher during the first nine months of 2022 as compared to the same period in 2023, margins were negative for the first nine months of 2022 overall, as rapidly rising interest rates and widening spreads impacted valuations of our loan inventory.

For the residential business, volumes began to ramp up in the second quarter of 2023 and increased significantly into the third quarter and, as margins improved, production was profitable for these periods. While margins in the second quarter of 2023 increased well above 150 basis points, they normalized within their historical range of 75 to 100 basis points in the third quarter.

At the BPL business, higher margins from improving execution on term securitizations and sales during 2023 drove the improvement in mortgage banking income during the three and nine-month periods, as term spreads tightened more significantly in the first quarter, then stabilized in the second and third quarters of 2023. The benefit from higher margins was partially offset by lower funding volumes in 2023, particularly for the nine-month periods, as rising interest rates decreased demand for loans. Going forward, we expect higher benchmark interest rates will continue to pressure origination volumes, while we continue to see opportunities to refinance our bridge borrowers with term products.

A more detailed analysis of the changes in this line item is included in the “Results of Operations by Segment” section that follows.

Investment Fair Value Changes, Net

Investment fair value changes, net, is primarily comprised of the change in fair values of our portfolio investments accounted for under the fair value option and their associated interest rate hedges. During the three and nine months ended September 30, 2023, negative investment fair value changes were primarily driven by reductions in the value of our investments in reperforming loan securities (our investments in consolidated Freddie Mac SLST entities), which were negatively impacted primarily by rising interest rates, as well as reductions in the fair value of our overall BPL bridge loan portfolio, including certain non-performing and modified BPL bridge loans, and for the nine months ended September 30, 2023, losses on certain delinquent term loans. The negative fair value changes were partially offset by fair value increases for HEI, servicing investments, IO securities and interest rate hedges, which benefited from rising benchmark interest rates and home price appreciation. Fundamental performance of our residential assets within our Investment Portfolio continues to be driven by strong employment data, embedded equity protection associated with loan seasoning and borrowers motivated to stay current on their low-coupon mortgages.

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During the three and nine months ended September 30, 2022, negative investment fair value changes reflected extreme levels of credit spread widening across many of our longer-duration, fixed-rate investments (re-performing loan securities, residential securities and called loans), partially offset by fair value increases in our IO securities and interest rate hedges, which benefited from rising benchmark interest rates.

Additional detail on our investment fair value changes during 2023 is included in the “Results of Operations by Segment” section that follows as well as Table 5.6 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Other Income

The decrease in other income for the three and nine-month periods primarily resulted from $1 million and $6 million, respectively, of lower income on our MSR investments. MSR income was nominally impacted by fair value changes in 2023 given the MSR's reduced sensitivity to rising interest rates during that period, while MSRs benefited significantly in 2022 as the sharp rise in interest rates caused a slowdown in prepayment speeds and was more impactful to valuations.

Additional detail on our other income is presented in Table 21.1 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Realized Gains, Net

During the nine months ended September 30, 2023, we realized $2 million of gains from the sale of $54 million of AFS securities, which was partially offset by $0.4 million of net losses on early extinguishment of debt, primarily associated with the early extinguishment of securitization debt financing our reperforming loan securities, as well as from the repurchase of $66 million of our convertible debt. During the three and nine months ended September 30, 2022, we realized gains of zero and $3 million, respectively, primarily resulting from securities that were called.

General and Administrative Expenses

Beginning in the fourth quarter of 2022, we implemented firm-wide initiatives to rationalize headcount and reduce non-compensation costs, resulting in a net headcount reduction of 28% during the last twelve months and reductions to fixed compensation expense of $6 million and $5 million, respectively, for the three and nine-month periods ended September 30, 2023. Additionally, non-compensation expenses were reduced by $2 million and $6 million, respectively, for the three- and nine-month periods ended September 30, 2023. During the nine-month periods, these decreases in expenses were partially offset by higher expenses for annual variable compensation and long-term incentive award expenses.

Additional detail on our General and administrative expenses is presented in Table 22.1 of our Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Portfolio Management Costs

The increase in portfolio management costs for the three and nine-month periods resulted from growth in our investment portfolio over the past twelve months. These costs are primarily associated with the management of our BPL bridge loans and also include loan sub-servicing costs.

Loan Acquisition Costs

The decreases in loan acquisition costs for our mortgage banking operations for the three and nine-month periods resulted primarily from lower loan origination and acquisition volumes in our mortgage banking businesses in the 2023 periods, compared to the same periods of 2022.

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries ("TRS"), which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. The tax provision for the three and nine months ended September 30, 2023 reflect GAAP income earned at our TRS during those periods, resulting primarily from improved mortgage banking results. The tax benefit for the nine months ended September 30, 2022 was primarily the result of GAAP losses from our mortgage banking operations at our TRS during that period.

For additional detail on income taxes, see the “Taxable Income and Tax Provision” section that follows.

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Other Comprehensive Income (Loss), Net

Other comprehensive loss for the three months ended September 30, 2023 resulted from unrealized losses on our available-for-sale securities, primarily resulting from rising interest rates. For the nine-months ended September 30, 2023, these losses were more than offset by cumulative gains on our available for sale securities, as well as the reclassification of unrealized loss on interest rate agreements into net income (loss). Other comprehensive income for three and nine-months ended September 30, 2022 was primarily related to negative fair value changes on our available-for-sale securities, due to spread widening.

Preferred Dividends

We issued preferred stock in January 2023 and began to declare and pay dividends on that stock in the first quarter of 2023.

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Net Interest Income

The following table presents the components of net interest income for the three and nine months ended September 30, 2023 and 2022.

Table 3 – Net Interest Income

						Three Months Ended September 30,
						2023																		2022
(Dollars in Thousands)						Interest Income/ (Expense)						Average    Balance (1)						Yield						Interest Income/ (Expense)						Average    Balance (1)						Yield
Interest Income
Residential loans, held-for-sale						$	4,673					$	295,050					6.3		%				$	11,844					$	984,365					4.8		%
Residential loans - HFI at Legacy Sequoia (2)						2,594						154,710						6.7		%				1,473						199,264						3.0		%
Residential loans - HFI at Sequoia (2)						40,180						3,742,871						4.3		%				31,587						3,468,730						3.6		%
Residential loans - HFI at Freddie Mac SLST (2)						15,065						1,370,770						4.4		%				16,098						1,600,215						4.0		%
BPL loans - HFS						4,546						296,131						6.1		%				9,070						535,017						6.8		%
BPL loans - HFI						35,534						1,673,626						8.5		%				24,688						1,257,222						7.9		%
BPL term loans - HFI at CAFL (2)						40,564						2,780,552						5.8		%				50,959						2,960,614						6.9		%
BPL bridge loans - HFI at CAFL (2)						12,376						499,674						9.9		%				10,480						529,993						7.9		%
Multifamily loans - HFI at Freddie Mac K-Series (2)						4,677						419,867						4.5		%				4,762						439,966						4.3		%
Trading securities(3)						3,276						50,826						25.8		%				3,924						131,626						11.9		%
Available-for-sale securities						1,835						84,796						8.7		%				3,065						136,203						9.0		%
Other interest income						11,754						962,736						4.9		%				9,712						898,111						4.3		%
Total interest income						177,074						12,331,609						5.7		%				177,662						13,141,326						5.4		%
Interest Expense
Short-term debt facilities						(20,915)						1,021,941						(8.2)		%				(19,436)						1,561,146						(5.0)		%
Short-term debt - servicer advance financing						(3,410)						159,993						(8.5)		%				(2,606)						225,002						(4.6)		%
Promissory notes						(308)						17,865						(6.9)		%				(572)						33,302						(6.9)		%
Short-term debt - convertible notes, net						(2,690)						181,663						(5.9)		%				(1,330)						100,895						(5.3)		%
ABS issued - Legacy Sequoia (2)						(2,487)						153,588						(6.5)		%				(1,486)						198,166						(3.0)		%
ABS issued - Sequoia (2)						(35,810)						3,613,898						(4.0)		%				(27,541)						3,233,716						(3.4)		%
ABS issued - Freddie Mac SLST (2)						(10,523)						1,084,889						(3.9)		%				(12,829)						1,325,930						(3.9)		%
ABS issued - Freddie Mac K-Series (2)						(4,290)						387,263						(4.4)		%				(4,377)						408,164						(4.3)		%
ABS issued - CAFL Term (2)						(32,964)						2,500,163						(5.3)		%				(39,401)						2,599,746						(6.1)		%
ABS issued - CAFL Bridge (2)						(5,249)						481,246						(4.4)		%				(5,276)						475,805						(4.4)		%
Long-term debt facilities						(26,855)						1,342,870						(8.0)		%				(14,464)						1,148,700						(5.0)		%
Long-term debt - corporate						(11,222)						531,376						(8.4)		%				(13,409)						761,712						(7.0)		%
Total interest expense						(156,723)						11,476,755						(5.5)		%				(142,727)						12,072,284						(4.7)		%
Net Interest Income						$	20,351																	$	34,935

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						Nine Months Ended September 30,
						2023																		2022
(Dollars in Thousands)						Interest Income/ (Expense)						Average    Balance (1)						Yield						Interest Income/ (Expense)						Average    Balance (1)						Yield
Interest Income
Residential loans, held-for-sale						$	11,133					$	246,699					6.0		%				$	42,201					$	1,406,219					4.0		%
Residential loans - HFI at Legacy Sequoia (2)						7,871						163,340						6.4		%				3,592						211,707						2.3		%
Residential loans - HFI at Sequoia (2)						112,302						3,644,384						4.1		%				95,608						3,732,108						3.4		%
Residential loans - HFI at Freddie Mac SLST (2)						45,831						1,418,494						4.3		%				49,851						1,717,544						3.9		%
BPL loans - HFS						12,392						273,526						6.0		%				22,823						536,366						5.7		%
BPL loans - HFI						114,229						1,619,863						9.4		%				52,226						1,003,673						6.9		%
BPL term loans - HFI at CAFL (2)						124,453						2,846,211						5.8		%				173,630						3,070,972						7.5		%
BPL bridge loans - HFI at CAFL (2)						37,506						500,348						10.0		%				21,751						412,766						7.0		%
Multifamily loans - HFI at Freddie Mac K-Series (2)						13,992						422,563						4.4		%				14,247						451,757						4.2		%
Trading securities(3)						10,371						82,486						16.8		%				13,520						151,898						11.9		%
Available-for-sale securities						7,391						110,729						8.9		%				17,252						137,134						16.8		%
Other interest income						37,100						1,050,244						4.7		%				27,816						917,975						4.0		%
Total interest income						534,571						12,378,887						5.8		%				534,517						13,750,119						5.2		%
Interest Expense
Short-term debt facilities						(69,302)						1,144,228						(8.1)		%				(41,081)						1,628,316						(3.4)		%
Short-term debt - servicer advance financing						(11,054)						185,048						(8.0)		%				(6,110)						241,582						(3.4)		%
Promissory notes						(1,042)						20,484						(6.8)		%				(572)						11,223						(6.8)		%
Short-term debt - convertible notes, net						(6,464)						155,618						(5.5)		%				(1,330)						34,001						(5.2)		%
ABS issued - Legacy Sequoia (2)						(7,650)						162,348						(6.3)		%				(3,154)						209,931						(2.0)		%
ABS issued - Sequoia (2)						(99,859)						3,448,545						(3.9)		%				(84,041)						3,491,194						(3.2)		%
ABS issued - Freddie Mac SLST (2)						(32,392)						1,122,024						(3.8)		%				(40,287)						1,424,032						(3.8)		%
ABS issued - Freddie Mac K-Series (2)						(12,842)						390,307						(4.4)		%				(13,099)						419,954						(4.2)		%
ABS issued - CAFL Term (2)						(100,324)						2,540,276						(5.3)		%				(134,244)						2,734,937