rwt-20220331

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: March 31, 2022


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

For the Transition Period from _______________ to _______________.

Commission File Number 1-13759

REDWOOD TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)


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


One Belvedere Place,	Suite 300
Mill Valley,	California	94941
(Address of Principal Executive Offices)		(Zip Code)

(415) 389-7373

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	RWT	New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Common Stock, $0.01 par value per share						120,295,309			shares outstanding as of May 3, 2022

REDWOOD TRUST, INC.

2022 FORM 10-Q REPORT

TABLE OF CONTENTS


		Page
PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at March 31 , 202 2 (Unaudited) and December 31, 2021	2
	Consolidated Statements of Income for the Three Months Ended March 31 , 202 2 and 202 1 (Unaudited)	3
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31 , 202 2 and 202 1 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31 , 202 2 and 202 1 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 202 1 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	8
	Note 1. Organization	8
	Note 2. Basis of Presentation	8
	Note 3. Summary of Significant Accounting Policies	10
	Note 4. Principles of Consolidation	14
	Note 5. Fair Value of Financial Instruments	22
	Note 6. Residential Loans	32
	Note 7. Business Purpose Loans	35
	Note 8. Multifamily Loans	38
	Note 9. Real Estate Securities	39
	Note 10. Other Investments	44
	Note 11. Derivative Financial Instruments	46
	Note 12. Other Assets and Liabilities	47
	Note 13. Short-Term Debt	49
	Note 14. Asset-Backed Securities Issued	51
	Note 15. Long-Term Debt	54
	Note 16. Commitments and Contingencies	57
	Note 17. Equity	59
	Note 18. Equity Compensation Plans	62
	Note 19. Mortgage Banking Activities, Net	63
	Note 20. Other Income	64
	Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	65
	Note 22. Taxes	66
	Note 23. Segment Information	66
	Note 24. Subsequent Events	70
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	71
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	99
Item 4.	Controls and Procedures	99

PART II —	OTHER INFORMATION
Item 1.	Legal Proceedings	100
Item 1A.	Risk Factors	100
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	100
Item 3.	Defaults Upon Senior Securities	100
Item 4.	Mine Safety Disclosures (Not Applicable)	100
Item 5.	Other Information	100
Item 6.	Exhibits	101
Signatures		102

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(In Thousands, except Share Data) (Unaudited)	March 31, 2022		December 31, 2021
ASSETS (1)
Residential loans, held-for-sale, at fair value	$	1,347,069	$	1,845,282
Residential loans, held-for-investment, at fair value	5,870,068		5,747,150
Business purpose loans, held-for-sale, at fair value	505,889		358,309
Business purpose loans, held-for-investment, at fair value	4,248,889		4,432,680
Multifamily loans, held-for-investment, at fair value	451,804		473,514
Real estate securities, at fair value	358,882		377,411
Other investments	635,581		641,969
Cash and cash equivalents	409,272		450,485
Restricted cash	73,549		80,999
Intangible assets	38,027		41,561
Derivative assets	112,060		26,467
Other assets	202,202		231,117
Total Assets	$	14,253,292	$	14,706,944

LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net	$	1,647,246	$	2,177,362

Derivative liabilities	80,260		3,317
Accrued expenses and other liabilities	244,450		245,788

Asset-backed securities issued (includes $8,475,868 and $8,843,147 at fair value), net	8,872,366		9,253,557
Long-term debt, net	1,963,704		1,640,833
Total liabilities	12,808,026		13,320,857
Commitments and Contingencies (see Note 16)
Equity
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 120,289,243 and 114,892,309 issued and outstanding	1,203		1,149
Additional paid-in capital	2,391,344		2,316,799
Accumulated other comprehensive loss	(26,474)		(8,927)
Cumulative earnings	1,347,805		1,316,890
Cumulative distributions to stockholders	(2,268,612)		(2,239,824)
Total equity	1,445,266		1,386,087
Total Liabilities and Equity	$	14,253,292	$	14,706,944

——————

(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 March 31, 2022 and December 31, 2021, assets of consolidated VIEs totaled $10,250,802 and $10,661,081, respectively. At March 31, 2022 and December 31, 2021, liabilities of consolidated VIEs totaled $9,202,156 and $9,619,347, respectively. See Note 4 for further discussion.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME


(In Thousands, except Share Data)	Three Months Ended March 31,
(Unaudited)	2022		2021
Interest Income
Residential loans	$	65,203	$	43,655
Business purpose loans	94,299		64,188
Multifamily loans	4,753		4,786
Real estate securities	15,955		9,663
Other interest income	9,190		6,013
Total interest income	189,400		128,305
Interest Expense
Short-term debt	(11,488)		(7,773)
Asset-backed securities issued	(105,695)		(72,561)
Long-term debt	(19,115)		(22,218)
Total interest expense	(136,298)		(102,552)
Net Interest Income	53,102		25,753
Non-interest Income
Mortgage banking activities, net	16,315		82,607
Investment fair value changes, net	(6,120)		45,087
Other income, net	5,983		3,843
Realized gains, net	2,581		2,716
Total non-interest income, net	18,759		134,253
General and administrative expenses	(34,854)		(43,551)
Loan acquisition costs	(4,465)		(3,559)
Other expenses	(4,085)		(4,096)
Net Income before Benefit from (Provision for) Income Taxes	28,457		108,800
Benefit from (provision for) income taxes	2,458		(11,543)
Net Income	$	30,915	$	97,257

Basic earnings per common share	$	0.25	$	0.84
Diluted earnings per common share	$	0.24	$	0.72
Basic weighted average shares outstanding	119,884,172		112,276,842
Diluted weighted average shares outstanding	140,506,157		141,039,285

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(In Thousands)	Three Months Ended March 31,
(Unaudited)	2022		2021
Net Income	$	30,915	$	97,257
Other comprehensive (loss) income:
Net unrealized (loss) gain on available-for-sale securities	(17,873)		10,986
Reclassification of unrealized (gain) on available-for-sale securities to net income	(692)		(2,795)

Reclassification of unrealized loss on interest rate agreements to net income	1,018		1,018
Total other comprehensive (loss) income	(17,547)		9,209
Total Comprehensive Income	$	13,368	$	106,466

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended March 31, 2022


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
December 31, 2021	114,892,309	$	1,149	$	2,316,799	$	(8,927)	$	1,316,890	$	(2,239,824)	$	1,386,087
Net income	—	—		—		—		30,915		—		30,915
Other comprehensive (loss)	—	—		—		(17,547)		—		—		(17,547)
Issuance of common stock	5,232,869	52		67,423		—		—		—		67,475

Employee stock purchase and incentive plans	164,065	2		(1,048)		—		—		—		(1,046)
Non-cash equity award compensation	—	—		8,170		—		—		—		8,170

Common dividends declared ($0.23 per share)	—	—		—		—		—		(28,788)		(28,788)
March 31, 2022	120,289,243	$	1,203	$	2,391,344	$	(26,474)	$	1,347,805	$	(2,268,612)	$	1,445,266

For the Three Months Ended March 31, 2021


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
December 31, 2020	112,090,006	$	1,121	$	2,264,874	$	(4,221)	$	997,277	$	(2,148,152)	$	1,110,899
Net income	—	—		—		—		97,257		—		97,257
Other comprehensive income	—	—		—		9,209		—		—		9,209
Issuance of common stock	806,068	8		13,366		—		—		—		13,374

Employee stock purchase and incentive plans	102,658	1		(811)		—		—		—		(810)
Non-cash equity award compensation	—	—		4,218		—		—		—		4,218

Common dividends declared ($0.16 per share)	—	—		—		—		—		(18,572)		(18,572)
March 31, 2021	112,998,732	$	1,130	$	2,281,647	$	4,988	$	1,094,534	$	(2,166,724)	$	1,215,575

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

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


(In Thousands) (Unaudited)	Three Months Ended March 31,
	2022		2021
Cash Flows From Operating Activities:
Net income	$	30,915	$	97,257
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net	(5,451)		2,216
Depreciation and amortization of non-financial assets	3,969		4,172
Originations of held-for-sale loans	(443,289)		(254,975)
Purchases of held-for-sale loans	(2,197,570)		(3,150,432)
Proceeds from sales of held-for-sale loans	2,176,422		2,345,164
Principal payments on held-for-sale loans	46,511		4,477
Net settlements of derivatives	67,200		24,849

Non-cash equity award compensation expense	8,170		4,218

Market valuation adjustments	1,859		(119,783)
Realized gains, net	(2,581)		(2,716)
Net change in:
Accrued interest receivable and other assets	31,070		2,565
Accrued interest payable and accrued expenses and other liabilities	(8,901)		76,824
Net cash used in operating activities	(291,676)		(966,164)
Cash Flows From Investing Activities:
Originations of loan investments	(411,938)		(133,229)
Purchases of loan investments	(2,983)		—
Proceeds from sales of loan investments	—		8,877
Principal payments on loan investments	660,990		649,749
Purchases of real estate securities	(15,006)		(15,880)


Sales of securities held in consolidated securitization trusts	—		8,197
Proceeds from sales of real estate securities	—		25,747
Principal payments on real estate securities	23,050		11,746

Principal repayments from servicer advance investments	45,005		24,804






Purchases of HEIs	(40,141)		—
Principal payments on HEIs	12,671		—
Other investing activities, net	(1,151)		2,601
Net cash provided by investing activities	270,497		582,612
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt	2,153,516		2,724,508
Repayments on short-term debt	(2,684,078)		(1,993,506)
Proceeds from issuance of asset-backed securities	680,749		147,086
Repayments on asset-backed securities issued	(535,568)		(507,037)

Proceeds from borrowings on long-term debt	630,865		164,456
Deferred long-term debt issuance costs paid	(532)		—
Repayments on long-term debt	(308,578)		(154,074)

Net proceeds from issuance of common stock	67,632		115

Taxes paid on equity award distributions	(1,202)		(925)
Dividends paid	(28,788)		(18,572)
Other financing activities, net	(1,500)		(1,155)
Net cash (used in) provided by financing activities	(27,484)		360,896
Net decrease in cash, cash equivalents and restricted cash	(48,663)		(22,656)
Cash, cash equivalents and restricted cash at beginning of period (1)	531,484		544,450
Cash, cash equivalents and restricted cash at end of period (1)	$	482,821	$	521,794

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


(In Thousands) (Unaudited)	Three Months Ended March 31,
	2022		2021
























































Supplemental Cash Flow Information:
Cash paid during the period for:
Interest	$	131,419	$	99,180
Taxes (received) paid	(41)		7
Supplemental Noncash Information:
Real estate securities retained from loan securitizations	$	—	$	7,627
Retention of mortgage servicing rights from loan securitizations and sales	4,543		—




Transfers from loans held-for-sale to loans held-for-investment	1,098,459		301,298

Transfers from residential loans to real estate owned	1,319		14,684



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

(1) Cash, cash equivalents, and restricted cash includes cash and cash equivalents of $409 million and restricted cash of $74 million at March 31, 2022, and includes cash and cash equivalents of $450 million and restricted cash of $81 million at December 31, 2021.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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, business purpose and multifamily 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 portfolios.

Redwood Trust, Inc. has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable year ended December 31, 1994. We generally refer, collectively, to Redwood Trust, Inc. and those of its subsidiaries that are generally not subject to subsidiary-level corporate income tax as “the REIT” or “our REIT.” We generally refer to subsidiaries of Redwood Trust, Inc. that are subject to subsidiary-level corporate income tax as “our taxable REIT subsidiaries” or “TRS.”

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

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at March 31, 2022 and December 31, 2021, and for the three months ended March 31, 2022 and 2021. 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, 2021. In the opinion of management, all normal and recurring adjustments have been made to present fairly the financial condition of the Company at March 31, 2022 and results of operations for all periods presented. The results of operations for the three months ended March 31, 2022 should not be construed as indicative of the results to be expected for the full year.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 2. Basis of Presentation - (continued)

Principles of Consolidation

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

For financial reporting purposes, the underlying loans owned at the consolidated 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 Multifamily loans held-for-investment, at fair value, the underlying single-family rental and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment, at fair value, and the underlying HEIs at the consolidated HEI securitization entity are shown under Other investments, at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income, 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 14 for further discussion on ABS issued.

We also consolidate two partnerships ("Servicing Investment" entities) through which we have invested in servicing-related assets. We maintain an 80% ownership interest in each entity and have determined that we are the primary beneficiary of these partnerships.

See Note 4 for further discussion on principles of consolidation.

Use of Estimates

The preparation of financial statements requires us to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amounts and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported periods. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ from our estimates and the differences could be material.

Acquisitions

Refer to Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for additional information regarding the acquisitions of 5 Arches, LLC ("5 Arches") and CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), including purchase price allocations.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 2. Basis of Presentation - (continued)

In connection with the acquisitions of 5 Arches and CoreVest in 2019, we identified and recorded finite-lived intangible assets totaling $25 million and $57 million, respectively. The table below presents the amortization period and carrying value of our intangible assets, net of accumulated amortization at March 31, 2022.

Table 2.1 – Intangible Assets – Activity


	Intangible Assets at Acquisition		Accumulated Amortization at March 31, 2022		Carrying Value at March 31, 2022		Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network	$	45,300	$	(15,909)	$	29,391	7
Broker network	18,100		(11,162)		6,938		5
Non-compete agreements	9,500		(8,308)		1,192		3
Tradenames	4,000		(3,494)		506		3
Developed technology	1,800		(1,800)		—		2
Loan administration fees on existing loan assets	2,600		(2,600)		—		1
Total	$	81,300	$	(43,273)	$	38,027	6

All of our intangible assets are amortized on a straight-line basis. For each of the three months ended March 31, 2022 and 2021, we recorded intangible asset amortization expense of $4 million. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year



(In Thousands)	March 31, 2022
2022 (9 months)	$	9,266
2023	10,091
2024	7,075
2025	6,471
2026	5,124
Total Future Intangible Asset Amortization	$	38,027

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 March 31, 2022.

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, 2021 is a summary of our significant accounting policies.

Recent Accounting Pronouncements

Newly Adopted Accounting Standards Updates ("ASUs")

In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)." This new guidance simplifies the accounting for convertible debt by reducing the number of accounting models to separately present certain conversion features in equity. This new guidance was effective for fiscal years beginning after December 31, 2021. We adopted this guidance in the first quarter of 2022, which did not have a material impact on our consolidated financial statements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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

Other Recent Accounting Pronouncements

On March 28, 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 guidance is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.

On March 31, 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 guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." This new guidance clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. This new guidance is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact the adoption of this standard would have on our consolidated financial statements. Through March 31, 2022, we have not elected to apply the optional expedients and exceptions to any of our existing contracts, hedging relationships, or other transactions.

We have an established cross-functional group that has evaluated our exposure to LIBOR, reviewed relevant contracts and has monitored regulatory updates to assess the potential impact to our business, processes and technology from the ultimate full cessation of LIBOR in 2023, and has established a LIBOR transition plan to facilitate an orderly transition to alternative reference rates. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability with LIBOR exposure. At March 31, 2022, our primary LIBOR exposure included the following: $966 million of repo or warehouse debt, $381 million of interest rate swaps, $858 million of bridge loans, and $140 million of trust preferred securities and subordinated notes debt. Since December 31, 2021, certain of our contracts, such as interest rate swaps, have experienced an orderly market transition and we have transitioned a substantial portion of our derivative positions off of LIBOR-benchmarks. Other contracts, such as warehouse debt agreements, require bilateral amendments, many of which we have amended or are currently in the process of amending. We anticipate most of these facilities will be amended in 2022, with sufficient time remaining to resolve the remainder. In early 2022, we began benchmarking all newly originated bridge loans to the Secured Overnight Financing Rate (“SOFR”), and our existing portfolio of bridge loans are short-dated and we expect the vast majority to mature before the LIBOR cessation date in 2023. Additionally, as the result of recent legislation that was passed in the state of New York, our trust preferred securities and subordinated notes are expected to convert to SOFR upon the cessation of LIBOR.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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

Balance Sheet Netting

Certain of our derivatives and short-term debt are subject to master netting arrangements or similar agreements. Under GAAP, in certain circumstances we may elect to present certain financial assets, liabilities and related collateral subject to master netting arrangements in a net position on our consolidated balance sheets. However, we do not report any of these financial assets or liabilities on a net basis, and instead present them on a gross basis on our consolidated balance sheets.

The table below presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at March 31, 2022 and December 31, 2021.

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
March 31, 2022 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	11,412	$	—	$	11,412	$	(650)	$	—	$	10,762

TBAs	95,631		—		95,631		(52,993)		(41,706)		932
Futures	2,907		—		2,907		(236)		(151)		2,520
Total Assets	$	109,950	$	—	$	109,950	$	(53,879)	$	(41,857)	$	14,214

Liabilities (2)
Interest rate agreements	$	(650)	$	—	$	(650)	$	650	$	—	$	—
TBAs	(64,883)		—		(64,883)		52,993		9,628		(2,262)
Futures	(236)		—		(236)		236		—		—
Loan warehouse debt	(426,055)		—		(426,055)		426,055		—		—

Total Liabilities	$	(491,824)	$	—	$	(491,824)	$	479,934	$	9,628	$	(2,262)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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


	Gross Amounts of Recognized Assets (Liabilities)		Gross Amounts Offset in Consolidated Balance Sheet		Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet		Gross Amounts Not Offset in Consolidated Balance Sheet (1)				Net Amount
December 31, 2021 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	18,929	$	—	$	18,929	$	(1,251)	$	(16,046)	$	1,632

TBAs	2,880		—		2,880		(633)		(704)		1,543
Futures	25		—		25		(25)		—		—
Total Assets	$	21,834	$	—	$	21,834	$	(1,909)	$	(16,750)	$	3,175

Liabilities (2)
Interest rate agreements	$	(1,251)	$	—	$	(1,251)	$	1,251	$	—	$	—
TBAs	$	(658)	$	—	$	(658)	$	633	$	15	$	(10)
Futures	(905)		—		(905)		25		880		—
Loan warehouse debt	(572,720)		—		(572,720)		572,720		—		—

Total Liabilities	$	(575,534)	$	—	$	(575,534)	$	574,629	$	895	$	(10)

(1)Amounts presented in these columns are limited in total to the net amount of assets or liabilities presented in the prior column by instrument. In certain cases, there is excess cash collateral or financial assets we have pledged to a counterparty (which may, in certain circumstances, be a clearinghouse) that exceed the financial liabilities subject to a master netting arrangement or similar agreement. Additionally, in certain cases, counterparties may have pledged excess cash collateral to us that exceeds our corresponding financial assets. In each case, any of these excess amounts are excluded from the table although they are separately reported in our consolidated balance sheets as assets or liabilities, respectively.

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

For each category of financial instrument set forth in the table above, the assets and liabilities resulting from individual transactions within that category between us and a counterparty are subject to a master netting arrangement or similar agreement with that counterparty that provides for individual transactions to be aggregated and treated as a single transaction. For certain categories of these instruments, 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 4. Principles of Consolidation

GAAP requires us to consider whether securitizations we sponsor and other transfers of financial assets should be treated as sales or financings, as well as whether any VIEs that we hold variable interests in – for example, certain legal entities often used in securitization and other structured finance transactions – should be included in our consolidated financial statements. The GAAP principles we apply require us to reassess our requirement to consolidate VIEs each quarter and therefore our determination may change based upon new facts and circumstances pertaining to each VIE. This could result in a material impact to our consolidated financial statements during subsequent reporting periods.

Analysis of Consolidated VIEs

At March 31, 2022, 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 March 31, 2022, we held an 80% ownership interest in, and were responsible for the management of, each entity. See Note 10 for a further description of these entities and the investments they hold and Note 12 for additional information on the minority partner’s non-controlling interest. Additionally, we consolidated an entity that was formed to finance servicer advances that we determined was a VIE and for which we, through our control of one of the aforementioned partnerships, were the primary beneficiary. The servicer advance financing consists of non-recourse short-term securitization debt, secured by servicer advances. We consolidate the securitization entity, but the securitization entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. See Note 13 for additional information on the servicer advance financing. At March 31, 2022, the estimated fair value of our investment in the Servicing Investment entities was $99 million.

During 2021, we consolidated a HEI securitization entity formed to invest in HEIs that we determined was a VIE and for which we determined we were the primary beneficiary. At March 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 12 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.

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 securitization, Freddie Mac SLST re-securitization, and Servicing Investment entities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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

Table 4.1 – Assets and Liabilities of Consolidated VIEs


March 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	$	222,213	$	3,872,316	$	—	$	1,775,538	$	—	$	—	$	—	$	5,870,067
Business purpose loans, held-for-investment	—		—		3,330,910		—		—		—		—		3,330,910
Multifamily loans, held-for-investment	—		—		—		—		451,804		—		—		451,804

Other investments	—		—		—		—		—		336,282		153,247		489,529
Cash and cash equivalents	—		—		—		—		—		9,684		—		9,684
Restricted cash	148		4		8,260		—		—		24,170		5,086		37,668
Accrued interest receivable	194		11,945		14,763		5,584		1,362		1,029		—		34,877
Other assets	—		—		16,229		2,421		—		7,563		50		26,263
Total Assets	$	222,555	$	3,884,265	$	3,370,162	$	1,783,543	$	453,166	$	378,728	$	158,383	$	10,250,802
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	253,393	$	—	$	253,393
Accrued interest payable	106		9,598		10,342		3,888		1,232		183		—		25,349
Accrued expenses and other liabilities	—		4		1,386		—		—		26,406		23,252		51,048
Asset-backed securities issued	220,301		3,627,920		3,012,841		1,470,043		419,883		—		121,378		8,872,366
Total Liabilities	$	220,407	$	3,637,522	$	3,024,569	$	1,473,931	$	421,115	$	279,982	$	144,630	$	9,202,156

Value of our investments in VIEs(1)	$	1,912	$	244,396	$	342,343	$	307,916	$	31,921	$	98,746	$	13,753	$	1,040,987
Number of VIEs	20		17		16		3		1		3		1		61

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2021	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	$	230,455	$	3,628,465	$	—	$	1,888,230	$	—	$	—	$	—	$	5,747,150
Business purpose loans, held-for-investment	—		—		3,766,316		—		—		—		—		3,766,316
Multifamily loans, held-for-investment	—		—		—		—		473,514		—		—		473,514

Other investments	—		—		—		—		—		384,754		159,553		544,307
Cash and cash equivalents	—		—		—		—		—		6,481		—		6,481
Restricted cash	148		5		15,221		—		—		25,420		5,292		46,086
Accrued interest receivable	210		10,885		15,737		5,792		1,315		1,462		—		35,401
Other assets	61		—		32,510		2,028		—		7,177		50		41,826
Total Assets	$	230,874	$	3,639,355	$	3,829,784	$	1,896,050	$	474,829	$	425,294	$	164,895	$	10,661,081
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	294,447	$	—	$	294,447
Accrued interest payable	99		8,452		11,030		4,055		1,190		192		—		25,018
Accrued expenses and other liabilities	—		5		1,171		—		—		28,115		17,034		46,325
Asset-backed securities issued	227,881		3,383,048		3,474,898		1,588,463		441,857		—		137,410		9,253,557
Total Liabilities	$	227,980	$	3,391,505	$	3,487,099	$	1,592,518	$	443,047	$	322,754	$	154,444	$	9,619,347

Value of our investments in VIEs(1)	$	2,634	$	245,417	$	339,419	$	301,795	$	31,657	$	102,540	$	10,451	$	1,033,913
Number of VIEs	20		16		16		3		1		3		1		60

(1)Value of our investments in VIEs, as presented in this table, represent the fair value of our economic interests in the VIEs only for consolidated VIEs we account for under the CFE election. CAFL includes SFR loan securitizations we account for under the CFE election and a bridge loan securitization for which we did not make the CFE election. As of March 31, 2022 and December 31, 2021, the fair value of our interests in the CAFL SFR securitizations were $306 million and $302 million, respectively, and our net carrying value in the CAFL Bridge securitization was $37 million and $38 million, respectively. Freddie Mac SLST includes securitizations we account for under the CFE election and also includes ABS issued in relation to a resecuritization of the securities we own in the consolidated Freddie Mac SLST VIEs, that we account for at amortized historical cost. As of March 31, 2022 and December 31, 2021, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election were $437 million and $445 million, respectively, and the carrying value of the ABS issued and carried at amortized historical cost was $129 million and $143 million, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents income (loss) from these VIEs for the three months ended March 31, 2022 and 2021.

Table 4.2 – Income (Loss) from Consolidated VIEs


	Three Months Ended March 31, 2022
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,012	$	32,098	$	77,334	$	17,200	$	4,753	$	7,919	$	—	$	140,316
Interest expense	(701)		(28,171)		(58,480)		(14,085)		(4,371)		(1,662)		—		(107,470)
Net interest income	311		3,927		18,854		3,115		382		6,257		—		32,846
Non-interest income

Investment fair value changes, net	(714)		(3,822)		2,664		3,036		264		(3,468)		3,411		1,371
Other income	—		—		90		—		—		—		—		90

Total non-interest income, net	(714)		(3,822)		2,754		3,036		264		(3,468)		3,411		1,461
General and administrative expenses	—		—		—		—		—		(31)		—		(31)
Other expenses	—		—		—		—		—		(551)		—		(551)

Income (loss) from Consolidated VIEs	$	(403)	$	105	$	21,608	$	6,151	$	646	$	2,207	$	3,411	$	33,725


	Three Months Ended March 31, 2021
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,348	$	15,483	$	48,873	$	20,159	$	4,786	$	4,222	$	—	$	94,871
Interest expense	(875)		(12,106)		(39,011)		(17,371)		(4,356)		(1,286)		—		(75,005)
Net interest income	473		3,377		9,862		2,788		430		2,936		—		19,866
Non-interest income

Investment fair value changes, net	(699)		4,898		(286)		4,117		8,921		(1,246)		—		15,705


Total non-interest income, net	(699)		4,898		(286)		4,117		8,921		(1,246)		—		15,705
General and administrative expenses	—		—		—		—		—		(38)		—		(38)
Other expenses	—		—		—		—		—		(330)		—		(330)

Income (loss) from Consolidated VIEs	$	(226)	$	8,275	$	9,576	$	6,905	$	9,351	$	1,322	$	—	$	35,203

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

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 securitization 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 securitization entities in accordance with GAAP.

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

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 March 31, 2022, and accounted for these transfers as sales for financial reporting purposes, in accordance with ASC 860. We also determined we were not the primary beneficiary of these VIEs as we lacked the power to direct the activities that will have the most significant economic impact on the entities. For certain of these transfers to securitization entities, for the transferred loans where we held the servicing rights prior to the transfer and continued to hold the servicing rights following the transfer, we recorded mortgage servicing rights ("MSRs") on our consolidated balance sheets, and classified those MSRs as Level 3 assets. We also retained senior and subordinate securities in these securitizations that we classified as Level 3 assets. Our continuing involvement in these securitizations is limited to customary servicing obligations associated with retaining servicing rights (which we retain a third-party sub-servicer to perform) and the receipt of interest income associated with the securities we retained.

During the three months ended March 31, 2022, we called three of our unconsolidated Sequoia entities, and purchased $102 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $0.3 million gain on the securities we owned from these called securitizations, which was recognized through Realized gains, net on our consolidated statements of income. At March 31, 2022, we held $246 million of loans for sale at fair value that were acquired following the calls.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents information related to securitization transactions that occurred during the three months ended March 31, 2022 and 2021.

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


	Three Months Ended March 31,
(In Thousands)	2022		2021
Principal balance of loans transferred	$	—	$	875,879
Trading securities retained, at fair value	—		6,549
AFS securities retained, at fair value	—		1,078

The following table summarizes the cash flows during the three months ended March 31, 2022 and 2021 between us and the unconsolidated VIEs sponsored by us and accounted for as sales since 2012.

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


	Three Months Ended March 31,
(In Thousands)	2022		2021
Proceeds from new transfers	$	—	$	904,390
MSR fees received	864		1,607
Funding of compensating interest, net	(16)		(100)
Cash flows received on retained securities	14,126		8,629

The following table presents the key weighted-average assumptions used to value securities retained at the date of securitization for securitizations completed during the three months ended March 31, 2022 and 2021.

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

Three Months Ended March 31, 2022

Three Months Ended March 31, 2021

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

Prepayment rates

N/A

12 %

Discount rates

N/A

15 %

6 %

Credit loss assumptions

N/A

0.22 %

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents additional information at March 31, 2022 and December 31, 2021, related to unconsolidated VIEs sponsored by Redwood and accounted for as sales since 2012.

Table 4.6 – Unconsolidated VIEs Sponsored by Redwood


(In Thousands)	March 31, 2022		December 31, 2021
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	24,246	$	18,214
Subordinate securities, classified as AFS	108,768		127,542
Mortgage servicing rights	9,127		6,450
Maximum loss exposure (1)	$	142,141	$	152,206
Assets transferred:
Principal balance of loans outstanding	$	4,491,763	$	4,959,234
Principal balance of loans 30+ days delinquent	27,286		30,594

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

The following table presents key economic assumptions for assets retained from unconsolidated VIEs and the sensitivity of their fair values to immediate adverse changes in those assumptions at March 31, 2022 and December 31, 2021.

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


March 31, 2022	MSRs			Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)
Fair value at March 31, 2022	$	9,127		$	24,246		$	108,768
Expected life (in years) (2)	5			6			11
Prepayment speed assumption (annual CPR) (2)	16		%	14		%	22		%
Decrease in fair value from:
10% adverse change	$	396		$	986		$	1,228
25% adverse change	912			2,318			3,068
Discount rate assumption (2)	12 %			16		%	6		%
Decrease in fair value from:
100 basis point increase	$	282		$	656		$	9,022
200 basis point increase	547			1,273			17,064
Credit loss assumption (2)	N/A			0.03		%	0.03		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	45
25% higher losses	N/A			—			113

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)


December 31, 2021	MSRs			Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)
Fair value at December 31, 2021	$	6,450		$	18,214		$	127,542
Expected life (in years) (2)	3			4			5
Prepayment speed assumption (annual CPR) (2)	29		%	23		%	32 %
Decrease in fair value from:
10% adverse change	$	447		$	1,130		$	531
25% adverse change	1,020			2,596			1,440
Discount rate assumption (2)	12 %			16		%	5		%
Decrease in fair value from:
100 basis point increase	$	152		$	426		$	4,801
200 basis point increase	297			829			9,139
Credit loss assumption (2)	N/A			0.35		%	0.35		%
Decrease in fair value from:
10% higher losses	N/A			$	—		$	1,528
25% higher losses	N/A			—			3,819

(1)Senior securities included $24 million and $18 million of interest-only securities at March 31, 2022 and December 31, 2021, respectively.

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

Analysis of Unconsolidated Third-Party VIEs

Third-party VIEs are securitization entities in which we maintain an economic interest, but do not sponsor. Our economic interest may include several securities and other investments from the same third-party VIE, and in those cases, the analysis is performed in consideration of all of our interests. The following table presents a summary of our interests in third-party VIEs at March 31, 2022 and December 31, 2021, grouped by asset type.

Table 4.8 – Third-Party Sponsored VIE Summary


(In Thousands)	March 31, 2022		December 31, 2021
Mortgage-Backed Securities
Senior	$	9,960	$	3,572

Subordinate	215,908		228,083
Total Mortgage-Backed Securities	225,868		231,655
Excess MSR	9,579		10,400
Total Investments in Third-Party Sponsored VIEs	$	235,447	$	242,055

We determined that we are not the primary beneficiary of these third-party VIEs, as we do not have the required power to direct the activities that most significantly impact the economic performance of these entities. Specifically, we do not service or manage these entities or otherwise solely hold decision making powers that are significant. As a result of this assessment, we do not consolidate any of the underlying assets and liabilities of these third-party VIEs – we only account for our specific interests in them.

Our assessments of whether we are required to consolidate a VIE may change in subsequent reporting periods based upon changing facts and circumstances pertaining to each VIE. Any related accounting changes could result in a material impact to our financial statements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 5. Fair Value of Financial Instruments

For financial reporting purposes, we follow a fair value hierarchy established under GAAP that is used to determine the fair value of financial instruments. This hierarchy prioritizes relevant market inputs in order to determine an “exit price” at the measurement date, or the price at which an asset could be sold or a liability could be transferred in an orderly process that is not a forced liquidation or distressed sale. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices for an asset or liability that are obtained through corroboration with observable market data. Level 3 inputs are unobservable inputs (e.g., our own data or assumptions) that are used when there is little, if any, relevant market activity for the asset or liability required to be measured at fair value.

In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Our assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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 March 31, 2022 and December 31, 2021.

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


	March 31, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale at fair value	$	1,347,036	$	1,347,036	$	1,845,248	$	1,845,248
Residential loans, held-for-investment	5,870,068		5,870,068		5,747,150		5,747,150
Business purpose loans, held-for-sale	505,889		505,889		358,309		358,309
Business purpose loans, held-for-investment	4,248,889		4,248,889		4,432,680		4,432,680
Multifamily loans	451,804		451,804		473,514		473,514
Real estate securities	358,882		358,882		377,411		377,411
Servicer advance investments (1)	302,837		302,837		350,923		350,923
MSRs (1)	19,739		19,739		12,438		12,438
Excess MSRs (1)	43,023		43,023		44,231		44,231
HEIs (1)	227,133		227,133		192,740		192,740
Other investments (1)	11,824		11,824		12,663		12,663
Cash and cash equivalents	409,272		409,272		450,485		450,485
Restricted cash	73,549		73,549		80,999		80,999
Derivative assets	112,060		112,060		26,467		26,467
REO (2)	27,179		30,787		36,126		39,272
Margin receivable (2)	17,165		17,165		7,269		7,269



Liabilities
Short-term debt	$	1,647,246	$	1,647,246	$	2,177,362	$	2,177,362
Margin payable (3)	41,966		41,966		24,368		24,368
Guarantee obligation (3)	7,046		6,579		7,459		7,133
HEI securitization non-controlling interest	23,253		23,253		17,035		17,035
Derivative liabilities	80,260		80,260		3,317		3,317
ABS issued net
Fair value	8,475,868		8,475,868		8,843,147		8,843,147
Amortized cost	396,498		379,930		410,410		410,471
Other long-term debt, net (4)	1,310,683		1,307,867		988,483		989,570
Convertible notes, net (4)	514,289		518,738		513,629		537,300
Trust preferred securities and subordinated notes, net (4)	138,732		104,625		138,721		97,650

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

(4)The liabilities are included in Long-Term debt, net of our consolidated balance sheets.

During the three months ended March 31, 2022 and 2021, we elected the fair value option for $5 million and $22 million of securities, respectively, $2.12 billion and $3.10 billion of residential loans (principal balance), respectively, $920 million and $386 million of business purpose loans (principal balance), respectively. Additionally, during the three months ended March 31, 2022, we elected the fair value option for $40 million of HEIs and $6 million 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, fixed-rate securities rated investment grade or higher and HEIs.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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 March 31, 2022 and December 31, 2021, 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


March 31, 2022	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	7,217,104	$	—	$	—	$	7,217,104
Business purpose loans	4,754,778		—		—		4,754,778
Multifamily loans	451,804		—		—		451,804
Real estate securities	358,882		—		—		358,882
Servicer advance investments	302,837		—		—		302,837
MSRs	19,739		—		—		19,739
Excess MSRs	43,023		—		—		43,023
HEIs	227,133		—		—		227,133
Other investments	11,824		—		—		11,824
Derivative assets	112,060		98,538		11,412		2,110



Liabilities
HEI securitization non-controlling interest	$	23,253	$	—	$	—	$	23,253
Derivative liabilities	80,260		65,119		650		14,491
ABS issued	8,475,868		—		—		8,475,868


December 31, 2021	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	7,592,398	$	—	$	—	$	7,592,398
Business purpose loans	4,790,989		—		—		4,790,989
Multifamily loans	473,514		—		—		473,514
Real estate securities	377,411		—		—		377,411
Servicer advance investments	350,923		—		—		350,923
MSRs	12,438		—		—		12,438
Excess MSRs	44,231		—		—		44,231
HEIs	192,740		—		—		192,740
Other investments	17,574		—		—		17,574
Derivative assets	26,467		2,906		18,928		4,633



Liabilities
HEI securitization non-controlling interest	$	17,035	$	—	$	—	$	17,035
Derivative liabilities	3,317		1,563		1,251		503
ABS issued	8,843,147		—		—		8,843,147

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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 three months ended March 31, 2022.

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


	Assets
	Residential Loans		Business Purpose Loans		Multifamily Loans		Trading Securities		AFS Securities		Servicer Advance Investments		Excess MSRs		HEIs		MSRs and Other Investments
(In Thousands)
Beginning balance - December 31, 2021	$	7,592,398	$	4,790,989	$	473,514	$	170,619	$	206,792	$	350,923	$	44,231	$	192,740	$	25,101

Acquisitions	2,110,494		64,875		—		5,006		10,000		—		—		40,141		5,793
Originations	—		855,227		—		—		—		—		—		—		—
Sales	(1,849,874)		(331,750)		—		—		—		—		—		—		(1,762)
Principal paydowns	(297,480)		(407,991)		(2,029)		(485)		(22,564)		(45,005)		—		(12,671)		(30)

Gains (losses) in net income, net	(337,595)		(216,300)		(19,681)		(1,456)		10,383		(3,081)		(1,208)		6,923		3,020
Unrealized losses in OCI, net	—		—		—		—		(19,413)		—		—		—		—
Other settlements, net (1)	(839)		(272)		—		—		—		—		—		—		(559)
Ending balance - March 31, 2022	$	7,217,104	$	4,754,778	$	451,804	$	173,684	$	185,198	$	302,837	$	43,023	$	227,133	$	31,563


	Liabilities
		Derivatives (2)		HEI Securitization Non-Controlling Interest		ABS Issued
(In Thousands)
Beginning balance - December 31, 2021		$	4,130	$	17,035	$	8,843,147

Acquisitions		—		—		680,749

Principal paydowns		—		—		(520,949)

Gains (losses) in net income, net		(42,379)		6,218		(527,079)

Other settlements, net (1)		25,868		—		—
Ending balance - March 31, 2022		$	(12,381)	$	23,253	$	8,475,868

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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

The following table presents the portion of gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at March 31, 2022 and 2021. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three months ended March 31, 2022 and 2021 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at March 31, 2022 and 2021 Included in Net Income


	Included in Net Income
	Three Months Ended March 31,
(In Thousands)	2022		2021
Assets
Residential loans at Redwood	$	(35,397)	$	(9,978)
Business purpose loans	(14,647)		5,104
Net investments in consolidated Sequoia entities (1)	(4,981)		4,201
Net investments in consolidated Freddie Mac SLST entities (1)	2,940		4,088
Net investments in consolidated Freddie Mac K-Series entities (1)	264		8,921
Net investments in consolidated CAFL SFR entities (1)	4,048		370
Net investment in consolidated HEI securitization entity (1)	9,628		—
Trading securities	(1,401)		490

Servicer advance investments	(3,081)		(160)
MSRs	3,526		756
Excess MSRs	(1,208)		(1,952)
HEIs at Redwood	1,185		5,315
Loan purchase and interest rate lock commitments	2,050		1,053



Liabilities
HEI securitization non-controlling interest	$	(6,218)	$	—
Loan purchase commitments	(14,442)		(35,661)

(1) Represents the portion of net gains or losses included in our consolidated statements of income related to loans, securitized HEIs, and the associated ABS issued at our consolidated securitization entities held at March 31, 2022 and 2021, which netted together represent the change in value of our investments at the consolidated VIEs, excluding REO.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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

The following table presents information on assets recorded at fair value on a non-recurring basis at March 31, 2022. 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 March 31, 2022.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at March 31, 2022


									Gain (Loss) for
March 31, 2022	Carrying Value		Fair Value Measurements Using						Three Months Ended		Three Months Ended
(In Thousands)			Level 1		Level 2		Level 3		March 31, 2022		March 31, 2022
Assets


REO	$	646	$	—	$	—	$	646	$	—	$	—

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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 months ended March 31, 2022 and 2021.

Table 5.6 – Market Valuation Gains and Losses, Net


	Three Months Ended March 31,
(In Thousands)	2022		2021
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	(27,199)	$	23,112
Residential loan purchase commitments	(41,623)		(52,385)
Single-family rental loans held-for-sale, at fair value	(24,468)		10,248
Single-family rental loan interest rate lock commitments	(725)		—
Bridge loans	2,135		1,044
Trading securities (1)	2,786		721
Risk management derivatives, net	90,387		92,822
Total mortgage banking activities, net (2)	$	1,293	$	75,562
Investment Fair Value Changes, Net
Residential loans held-for-sale, at fair value (called Sequoia loans)	$	(4,252)	$	317

Bridge loans held-for-investment	(2,143)		3,304
Trading securities	(4,242)		20,628
Servicer advance investments	(3,081)		(160)
Excess MSRs	(1,208)		(1,953)
Net investments in Legacy Sequoia entities (3)	(714)		(699)
Net investments in Sequoia entities (3)	(3,822)		4,898
Net investments in Freddie Mac SLST entities (3)	3,036		4,117
Net investment in Freddie Mac K-Series entity (3)	264		8,921
Net investments in CAFL SFR entities (3)	4,048		(286)
Net investment in HEI securitization entity (3)	3,411		—
HEIs at Redwood	1,192		5,315
Other investments	123		310
Risk management derivatives, net	1,973		—
Credit (losses) recoveries on AFS securities	(705)		375
Total investment fair value changes, net	$	(6,120)	$	45,087
Other Income
MSRs	$	2,968	$	(866)


Total other income (4)	$	2,968	$	(866)
Total Market Valuation Gains (Losses), Net	$	(1,859)	$	119,783

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

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

(3)Includes changes in fair value of the residential loans held-for-investment, securitized HEIs, REO and the 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 for MSRs, as these amounts do not represent market valuation adjustments.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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

At March 31, 2022, 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, 2021.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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


March 31, 2022	Fair Value			Input Values
(Dollars in Thousands, except Input Values)			Unobservable Input	Range						Weighted Average(1)
Assets
Residential loans, at fair value:

Jumbo fixed-rate loans	$	772,917	Prepayment rate (annual CPR)	20		-	20		%	20		%
			Whole loan spread to TBA price	$	2.94	-	$	2.94		$	2.94
			Whole loan spread to swap rate	225		-	225		bps	225		bps
			Called loan dollar price	$	100	—	$	100		$	100





Jumbo loans committed to sell	574,119		Whole loan committed sales price	$	95.92	-	$	102.19		$	98.23






Loans held by Legacy Sequoia (2)	222,213		Liability price				N/A			N/A

Loans held by Sequoia (2)	3,872,316		Liability price				N/A			N/A

Loans held by Freddie Mac SLST (2)	1,775,539		Liability price				N/A			N/A

Business purpose loans:
Single-family rental loans	505,889		Senior credit spread	140		-	175		bps	155		bps
			Subordinate credit spread	180		-	1,434		bps	377		bps
			Senior credit support	36		-	37		%	36		%
			IO discount rate	8		-	14		%	9		%
			Prepayment rate (annual CPR)	3		-	25		%	7		%
			Non-securitizable loan dollar price	$	78	-	$	100		$	98

Single-family rental loans held by CAFL (2)	3,038,939		Liability price				N/A			N/A

Bridge loans	1,209,950		Whole loan discount rate	4		-	15		%	7		%
			Senior credit spread	180		-	180		bps	180		bps
			Subordinate credit spread	225		-	790		bps	498		bps
			Senior credit support	47		-	47		%	47		%
			Residual certificate discount rate	11		-	11		%	11		%

Multifamily loans held by Freddie Mac K-Series (2)	451,804		Liability price				N/A			N/A



Trading and AFS securities	358,882		Discount rate	—		-	18		%	8		%
			Prepayment rate (annual CPR)	8		-	55		%	20		%
			Default rate	—		-	27		%	4		%
			Loss severity	—		-	50		%	25		%
			CRT dollar price	$	88	-	$	106		$	95

Servicer advance investments	302,837		Discount rate	2		-	4		%	3		%
			Prepayment rate (annual CPR)	14		-	30		%	17		%
			Expected remaining life (3)	5		-	5		yrs	5		yrs
			Mortgage servicing income	—		-	17		bps	5		bps

MSRs	19,739		Discount rate	12		-	12		%	12		%
			Prepayment rate (annual CPR)	10		-	29		%	16		%
			Per loan annual cost to service	$	94	-	$	94		$	94

Excess MSRs	43,023		Discount rate	13		-	19		%	18		%
			Prepayment rate (annual CPR)	18		-	31		%	21		%
			Excess mortgage servicing income	10		-	17		bps	11		bps

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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

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


March 31, 2022	Fair Value		Input Values
(Dollars in Thousands, except Input Values)		Unobservable Input	Range						Weighted Average (1)
Assets (continued)









































































HEI	73,886	Discount rate	10		-	10		%	10		%
		Prepayment rate (annual CPR)	1		-	24		%	17		%
		Home price appreciation	3		-	4		%	3		%

HEIs held by HEI securitization entity	153,247	Liability price	N/A			N/A			N/A

REO	646	Loss severity	4		-	24		%	12		%

Liabilities
Residential loan purchase commitments, net	12,322	Prepayment rate (annual CPR)	20		-	20		%	20		%
		Whole loan spread to TBA price	$	2.94	-	$	2.94		$	2.94
		Whole loan spread to swap rate	225		-	225		bps	225		bps
		Pull-through rate	20		-	100		%	73		%
		Committed sales price	$	95.92	-	$	102.29		$	98.18


Single-family rental interest rate lock commitments	59	Senior credit spread	140		-	140		bps	140		bps
		Subordinate credit spread	180		-	1,434		bps	331		bps
		Senior credit support	37		-	37		%	37		%
		IO discount rate	8		-	8		%	8		%
		Prepayment rate (annual CPR)	3		-	3		%	3		%
		Pull-through rate	100			100		%	100		%
ABS issued (2):
At consolidated Sequoia entities	3,848,221	Discount rate	—		-	18		%	5		%
		Prepayment rate (annual CPR)	7		-	45		%	25		%
		Default rate	—		-	11		%	1		%
		Loss severity	25		-	50		%	32		%

At consolidated CAFL SFR entities (4)	2,745,104	Discount rate	2		-	12		%	5		%
		Prepayment rate (annual CPR)	3		-	3		%	3		%
		Default rate	5		-	20		%	6		%
		Loss severity	30		-	30		%	30		%

At consolidated Freddie Mac SLST entities	1,341,282	Discount rate	3		-	7		%	4		%
		Prepayment rate (annual CPR)	6		-	7		%	6		%
		Default rate	9		-	10		%	9		%
		Loss severity	35		-	35		%	35		%

At consolidated Freddie Mac K-Series entities (4)	419,883	Discount rate	3		-	8		%	3		%





At consolidated HEI securitization entity (4)	121,378	Discount rate	7		-	12		%	7		%
		Prepayment rate (annual CPR)	20		-	20		%	20		%
		Default rate	10		-	10		%	10		%
		Loss severity	30		-	30		%	30		%
		Home price appreciation	3		-	4		%	3		%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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

Footnotes to Table 5.7

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

(2)The fair value of the loans and HEIs held by consolidated entities was based on the fair value of the ABS issued by these entities and the securities and other investments we own in those entities, which we determined were more readily observable in accordance with accounting guidance for collateralized financing entities. At March 31, 2022, 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 $246 million, $306 million, $437 million, $32 million, and $14 million, respectively.

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

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

Determination of Fair Value

We generally use both market comparable information and discounted cash flow modeling techniques to determine the fair value of our Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, a significant increase or decrease in any of these inputs - such as anticipated credit losses, prepayment rates, interest rates, or other valuation assumptions - in isolation would likely result in a significantly lower or higher fair value measurement.

Included in Note 5 to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2021 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 start-up companies) are Level 3 financial instruments that we account for under the fair value option. These investments generally take the form of equity or debt with conversion features and do not have readily determinable fair values. We 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.

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 March 31, 2022 and December 31, 2021.

Table 6.1 – Classifications and Carrying Values of Residential Loans


March 31, 2022			Legacy				Freddie Mac
(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	$	1,347,069	$	—	$	—	$	—	$	1,347,069
Held-for-investment at fair value	—		222,213		3,872,316		1,775,539		5,870,068
Total Residential Loans	$	1,347,069	$	222,213	$	3,872,316	$	1,775,539	$	7,217,137


December 31, 2021			Legacy				Freddie Mac
(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	$	1,845,282	$	—	$	—	$	—	$	1,845,282
Held-for-investment at fair value	—		230,455		3,628,465		1,888,230		5,747,150
Total Residential Loans	$	1,845,282	$	230,455	$	3,628,465	$	1,888,230	$	7,592,432

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 6. Residential Loans - (continued)

At March 31, 2022, we owned mortgage servicing rights associated with $1.29 billion (principal balance) of residential loans owned at Redwood that were purchased from third-party originators. The value of these MSRs is included in the carrying value of the associated loans on our consolidated balance sheets. We contract with licensed sub-servicers that perform servicing functions for these loans.

Residential Loans Held-for-Sale

The following table summarizes the characteristics of residential loans held-for-sale at March 31, 2022 and December 31, 2021.

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


(Dollars in Thousands)	March 31, 2022			December 31, 2021
Number of loans	1,611			2,196
Unpaid principal balance	$	1,369,366		$	1,813,865
Fair value of loans	$	1,347,069		$	1,845,282
Market value of loans pledged as collateral under short-term borrowing agreements	$	1,334,272		$	1,838,797
Weighted average coupon	3.63		%	3.27		%

Delinquency information
Number of loans with 90+ day delinquencies	1			3
Unpaid principal balance of loans with 90+ day delinquencies	$	616		$	2,923
Fair value of loans with 90+ day delinquencies	$	615		$	2,304
Number of loans in foreclosure	—			—

The following table provides the activity of residential loans held-for-sale during the three months ended March 31, 2022 and 2021.

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


	Three Months Ended March 31,
(In Thousands)	2022		2021
Principal balance of loans acquired (1)	$	2,115,191	$	3,096,048
Principal balance of loans sold	1,827,364		2,275,832
Principal balance of loans transferred to HFI	687,192		—
Net market valuation gains (losses) recorded (2)	(31,451)		23,429

(1)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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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 March 31, 2022 and December 31, 2021.

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


March 31, 2022	Legacy						Freddie Mac
(Dollars in Thousands)	Sequoia			Sequoia			SLST
Number of loans	1,524			4,870			11,654
Unpaid principal balance	$	248,814		$	4,123,176		$	1,865,735
Fair value of loans	$	222,213		$	3,872,316		$	1,775,538
Weighted average coupon	1.88		%	3.28		%	4.52		%

Delinquency information
Number of loans with 90+ day delinquencies (1)	34			16			1,291
Unpaid principal balance of loans with 90+ day delinquencies	$	6,996		$	12,879		$	220,402
Fair value of loans with 90+ day delinquencies (2)	N/A			N/A			N/A
Number of loans in foreclosure	10			2			256
Unpaid principal balance of loans in foreclosure	$	902		$	1,484		$	43,467


December 31, 2021	Legacy						Freddie Mac
(Dollars in Thousands)	Sequoia			Sequoia			SLST
Number of loans	1,583			4,300			11,986
Unpaid principal balance	$	264,057		$	3,605,469		$	1,932,241
Fair value of loans	$	230,455		$	3,628,465		$	1,888,230
Weighted average coupon	1.87		%	3.39		%	4.51		%

Delinquency information
Number of loans with 90+ day delinquencies (1)	32			18			1,208
Unpaid principal balance of loans with 90+ day delinquencies	$	7,482		$	15,124		$	212,961
Fair value of loans with 90+ day delinquencies (2)	N/A			N/A			N/A
Number of loans in foreclosure	10			2			241
Unpaid principal balance of loans in foreclosure	$	2,188		$	1,624		$	43,637

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 6. Residential Loans - (continued)

The following table provides the activity of residential loans held-for-investment at consolidated entities during the three months ended March 31, 2022 and 2021.

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

Three Months Ended March 31, 2022

Three Months Ended March 31, 2021

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

684,491

N/A

—

N/A

Net market valuation gains (losses) recorded (2)

6,325

(270,731)

(43,768)

7,613

(2,578)

(3,566)

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

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

REO

See Note 12 for detail on residential loans transferred to REO during 2022.

Note 7. Business Purpose Loans

We originate and invest in business purpose loans, including single-family rental ("SFR") loans and bridge loans. The following table summarizes the classifications and carrying values of the business purpose loans owned at Redwood and at consolidated CAFL entities at March 31, 2022 and December 31, 2021.

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans


March 31, 2022	Single-Family Rental				Bridge
(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	$	505,889	—		$	—	$	—	$	505,889
Held-for-investment at fair value	—		3,038,939		917,979		291,971		4,248,889
Total Business Purpose Loans	$	505,889	$	3,038,939	$	917,979	$	291,971	$	4,754,778


December 31, 2021	Single-Family Rental				Bridge
(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	$	358,309	$	—	$	—	$	—	$	358,309
Held-for-investment at fair value	—		3,488,074		666,364		278,242		4,432,680
Total Business Purpose Loans	$	358,309	$	3,488,074	$	666,364	$	278,242	$	4,790,989

Nearly all of the outstanding single-family rental loans at March 31, 2022 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years, with 2% with original maturities of 30 years.

The outstanding bridge loans held-for-investment at March 31, 2022 were first-lien, interest-only loans with original maturities of six to 36 months and were comprised of 71% one-month LIBOR-indexed adjustable-rate loans, 12% one-month SOFR-indexed adjustable-rate loans, and 17% fixed-rate loans.

At March 31, 2022, we had a $792 million commitment to fund bridge loans. See Note 16 for additional information on this commitment.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

The following table provides the activity of business purpose loans at Redwood during the three months ended March 31, 2022 and 2021.

Table 7.2 – Activity of Business Purpose Loans at Redwood


	Three Months Ended March 31, 2022				Three Months Ended March 31, 2021
(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood
Principal balance of loans originated	$	442,727	$	411,938	$	253,098	$	133,229
Principal balance of loans acquired	61,892		2,983		—		—
Principal balance of loans sold to third parties	331,502		—		—		8,877
Fair value of loans transferred from HFS to HFI (1)	—		—		169,404		—

Mortgage banking activities income (loss) recorded (2)	(24,468)		2,375		10,248		542
Investment fair value changes recorded (3)	—		(759)		—		3,304

(1)Represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL SFR securitizations and the transfer of bridge loans from "Bridge at Redwood" to "Bridge at CAFL" resulting from their securitization.

(2)Represents net market valuation changes from the time a loan is originated to when it is sold or transferred to our investment portfolio. Additionally, for the three months ended March 31, 2022 and 2021, we recorded loan origination fee income of $14 million and $6 million, respectively, through Mortgage banking activities, net on our consolidated statements of income.

(3)Represents net market valuation changes for loans classified as held-for-investment and associated interest-only strip liabilities.

Business Purpose Loans Held-for-Investment at CAFL

We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying single-family rental loans and bridge loans owned by these entities. The following table provides the activity of business purpose loans held-for-investment at CAFL during the three months ended March 31, 2022 and 2021.

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


	Three Months Ended March 31, 2022				Three Months Ended March 31, 2021
(In Thousands)	SFR at CAFL		Bridge at CAFL		SFR at CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded (1)	$	(191,903)	$	(1,384)	$	(60,901)	$	—

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

REO

See Note 12 for detail on BPL loans transferred to REO during 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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 March 31, 2022 and December 31, 2021.

Table 7.4 – Characteristics of Business Purpose Loans


March 31, 2022	SFR at Redwood			SFR at CAFL			Bridge at Redwood			Bridge at CAFL
(Dollars in Thousands)
Number of loans	239			1,116			1,384			1,375
Unpaid principal balance	$	518,230		$	3,083,716		$	921,208		$	288,823
Fair value of loans	$	505,889		$	3,038,939		$	917,979		$	291,971
Weighted average coupon	4.76		%	5.15		%	6.38		%	6.77		%
Weighted average remaining loan term (years)	11			6			1			1
Market value of loans pledged as collateral under short-term debt facilities	$	66,685		N/A			$	62,494		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	376,502		N/A			$	815,580		N/A
Delinquency information
Number of loans with 90+ day delinquencies (1)	4			22			56			48
Unpaid principal balance of loans with 90+ day delinquencies	$	5,212		$	52,725		$	32,830		$	7,847
Fair value of loans with 90+ day delinquencies (2)	$	4,086		N/A			$	28,319		$	7,847
Number of loans in foreclosure (3)	5			9			37			3
Unpaid principal balance of loans in foreclosure	$	5,301		$	12,623		$	42,152		$	4,472
Fair value of loans in foreclosure (2)	$	4,153		N/A			$	37,641		$	4,472


December 31, 2021	SFR at Redwood			SFR at CAFL			Bridge at Redwood			Bridge at CAFL
(Dollars in Thousands)
Number of loans	245			1,173			1,134			1,640
Unpaid principal balance	$	348,232		$	3,340,949		$	670,392		$	274,617
Fair value of loans	$	358,309		$	3,488,074		$	666,364		$	278,242
Weighted average coupon	4.73		%	5.17		%	6.91		%	7.05		%
Weighted average remaining loan term (years)	12			6			1			1
Market value of loans pledged as collateral under short-term debt facilities	$	75,873		N/A			$	91,814		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	244,703		N/A			$	554,597		N/A
Delinquency information
Number of loans with 90+ day delinquencies (1)	6			18			31			—
Unpaid principal balance of loans with 90+ day delinquencies	$	5,384		$	41,998		$	18,032		$	—
Fair value of loans with 90+ day delinquencies (2)	$	4,238		N/A			$	14,218		$	—
Number of loans in foreclosure (3)	7			9			28			—
Unpaid principal balance of loans in foreclosure	$	5,473		$	12,648		$	18,043		$	—
Fair value of loans in foreclosure (2)	$	4,305		N/A			$	14,257		$	—

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Footnotes to Table 7.4

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

(2)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 collateralized financing entities.

(3)May include loans that are less than 90 days delinquent.

Note 8. Multifamily Loans

We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of the multifamily loans consolidated at Redwood at March 31, 2022 and December 31, 2021.

Table 8.1 – Characteristics of Multifamily Loans


(Dollars in Thousands)	March 31, 2022			December 31, 2021
Number of loans	28			28
Unpaid principal balance	$	453,140		$	455,168
Fair value of loans	$	451,804		$	473,514
Weighted average coupon	4.25		%	4.25		%
Weighted average remaining loan term (years)	3			4

Delinquency information
Number of loans with 90+ day delinquencies	—			—


Number of loans in foreclosure	—			—

The outstanding multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at March 31, 2022 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 months ended March 31, 2022 and 2021.

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


	Three Months Ended March 31,
(In Thousands)	2022		2021
Net market valuation gains (losses) recorded (1)	$	(19,681)	$	(730)

(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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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 March 31, 2022 and December 31, 2021.

Table 9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	March 31, 2022		December 31, 2021
Trading	$	173,684	$	170,619
Available-for-sale	185,198		206,792
Total Real Estate Securities	$	358,882	$	377,411

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 March 31, 2022 and December 31, 2021.

Table 9.2 – Fair Value of Trading Securities by Position


(In Thousands)	March 31, 2022		December 31, 2021
Senior
Interest-only securities (1)	$	34,206	$	21,787


Total Senior	34,206		21,787





Subordinate
RPL securities	63,164		65,140
Multifamily securities	9,008		10,549
Other third-party residential securities	67,306		73,143
Total Subordinate	139,478		148,832
Total Trading Securities	$	173,684	$	170,619

(1)Includes $20 million and $15 million of Sequoia certificated mortgage servicing rights at March 31, 2022 and December 31, 2021, respectively.

The following table presents the unpaid principal balance of trading securities by position and collateral type at March 31, 2022 and December 31, 2021.

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position


(In Thousands)	March 31, 2022		December 31, 2021
Senior (1)	$	—	$	—

Subordinate	234,732		235,306
Total Trading Securities	$	234,732	$	235,306

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table provides the activity of trading securities during the three months ended March 31, 2022 and 2021.

Table 9.4 – Trading Securities Activity


	Three Months Ended March 31,
(In Thousands)	2022		2021
Principal balance of securities acquired (1)	$	—	$	15,880
Principal balance of securities sold (1)	—		34,743
Net market valuation gains (losses) recorded (2)	(1,456)		21,349

(1)For the three months ended March 31, 2022 and 2021, excludes zero and $2 million of securities bought and sold during the same quarter, respectively.

(2)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 securities by position and collateral type at March 31, 2022 and December 31, 2021.

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


(In Thousands)	March 31, 2022		December 31, 2021








Subordinate
Sequoia securities	$	108,768	$	127,542
Multifamily securities	15,316		22,166
Other third-party residential securities	61,114		57,084
Total Subordinate	185,198		206,792
Total AFS Securities	$	185,198	$	206,792

The following table provides the activity of available-for-sale securities during the three months ended March 31, 2022 and 2021.

Table 9.6 – Available-for-Sale Securities Activity


	Three Months Ended March 31,
(In Thousands)	2022		2021
Fair value of securities acquired	$	10,000	$	1,078
Fair value of securities sold	—		2,200
Principal balance of securities called	14,486		3,444

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

At March 31, 2022, we had $12 million of AFS securities with contractual maturities less than five years, $4 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table presents the components of carrying value (which equals fair value) of AFS securities at March 31, 2022 and December 31, 2021.

Table 9.7 – Carrying Value of AFS Securities


March 31, 2022
(In Thousands)	Total
Principal balance	$	230,201
Credit reserve	(29,901)
Unamortized discount, net	(63,206)
Amortized cost	137,094
Gross unrealized gains	50,854
Gross unrealized losses	(2,045)
CECL allowance	(705)
Carrying Value	$	185,198


December 31, 2021
(In Thousands)	Total
Principal balance	$	242,852
Credit reserve	(27,555)
Unamortized discount, net	(76,023)
Amortized cost	139,274
Gross unrealized gains	67,815
Gross unrealized losses	(297)
CECL allowance	—
Carrying Value	$	206,792

The following table presents the changes for the three months ended March 31, 2022, 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 March 31, 2022
	Credit Reserve		Unamortized Discount, Net
(In Thousands)
Beginning balance	$	27,555	$	76,023
Amortization of net discount	—		(8,470)
Realized credit losses	(88)		—
Acquisitions	—		—
Sales, calls, other	(343)		(1,570)

Transfers to (release of) credit reserves, net	2,777		(2,777)
Ending Balance	$	29,901	$	63,206

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

AFS Securities with Unrealized Losses

The following table presents the components comprising the total carrying value of residential AFS securities that were in a gross unrealized loss position at March 31, 2022 and December 31, 2021.

Table 9.9 – Components of Fair Value of AFS Securities by Holding Periods


	Less Than 12 Consecutive Months						12 Consecutive Months or Longer
	Amortized Cost		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Losses		Fair Value
(In Thousands)
March 31, 2022	$	29,500	$	(1,958)	$	27,542	$	1,600	$	(87)	$	1,513
December 31, 2021	7,078		(251)		6,827		1,600		(46)		1,554

At March 31, 2022, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 82 AFS securities, of which six were in a unrealized loss position and one was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2021, our consolidated balance sheet included 85 AFS securities, of which four 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 $2 million at March 31, 2022. 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 March 31, 2022, 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 March 31, 2022, our current expected credit loss ("CECL") allowance related to our AFS securities was $0.7 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of security credit losses.

The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at March 31, 2022.

Table 9.10 – Significant Credit Quality Indicators

March 31, 2022

Subordinate Securities

Default rate

0.7%

Loss severity

20%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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 months ended March 31, 2022.

Table 9.11 – Rollforward of Allowance for Credit Losses


	Three Months Ended March 31, 2022
(In Thousands)
Beginning balance allowance for credit losses	$	—

Additions to allowance for credit losses on securities for which credit losses were not previously recorded	705
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	—
Allowance on purchased financial assets with credit deterioration	—
Reduction to allowance for securities sold during the period	—
Reduction to allowance for securities we intend to sell or more likely than not will be required to sell	—
Write-offs charged against allowance	—
Recoveries of amounts previously written off	—
Ending balance of allowance for credit losses	$	705

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 months ended March 31, 2022 and 2021.

Table 9.12 – Gross Realized Gains and Losses on AFS Securities


	Three Months Ended March 31,
(In Thousands)	2022		2021
Gross realized gains - sales	$	—	$	200
Gross realized gains - calls	1,914		2,408
Gross realized losses - sales	—		—

Total Realized Gains on Sales and Calls of AFS Securities, net	$	1,914	$	2,608

During the three months ended March 31, 2022, we called three of our unconsolidated Sequoia entities, and purchased $102 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $0.3 million gain on the securities we owned from these securitizations. The remaining realized gains were from third-party securities we owned that were called during the first quarter of 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 10. Other Investments

Other investments at March 31, 2022 and December 31, 2021 are summarized in the following table.

Table 10.1 – Components of Other Investments


(In Thousands)	March 31, 2022		December 31, 2021
Servicer advance investments	$	302,837	$	350,923
HEIs	227,133		192,740
Excess MSRs	43,023		44,231
Strategic investments	40,524		35,702
Mortgage servicing rights	19,739		12,438

Other	2,325		5,935
Total Other Investments	$	635,581	$	641,969

Servicer advance investments

We and a third-party co-investor, through two partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to a portfolio of legacy residential mortgage-backed securitizations serviced by the co-investor (Refer to Note 10 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information regarding the transactions). At March 31, 2022, we had funded $148 million of total capital to the SA Buyers (see Note 16 for additional detail).

At March 31, 2022, our servicer advance investments had a carrying value of $303 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of $12.70 billion. The outstanding servicer advance receivables associated with this investment were $266 million at March 31, 2022, which were financed with short-term non-recourse securitization debt (see Note 13 for additional detail on this debt). The servicer advance receivables were comprised of the following types of advances at March 31, 2022 and December 31, 2021.

Table 10.2 – Components of Servicer Advance Receivables


(In Thousands)	March 31, 2022		December 31, 2021
Principal and interest advances	$	87,083	$	94,148
Escrow advances (taxes and insurance advances)	138,465		172,847
Corporate advances	40,401		43,958
Total Servicer Advance Receivables	$	265,949	$	310,953

We account for our servicer advance investments at fair value and during the three months ended March 31, 2022 and 2021, we recorded $5 million and $3 million of interest income, respectively, through Other interest income, and recorded a net market valuation loss of $3 million and loss of $0.2 million, respectively, through Investment fair value changes, net in our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 10. Other Investments - (continued)

HEIs

In 2019, we began purchasing home equity investment contracts from a third party under a flow purchase agreement. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by a deed of trust or a mortgage. Our investments in HEIs allow us to share in both home price appreciation and depreciation of the associated property.

During the third quarter of 2021, we amended our original flow purchase agreement with the third party and committed to purchase $125 million of HEIs from the date of the amended agreement, and during the first quarter of 2022, we exercised an option and committed to acquire an additional $125 million of HEIs. At March 31, 2022, we had acquired $117 million of HEIs cumulatively, including $70 million of our $250 million commitment, under the third-party flow purchase agreement.

As of March 31, 2022, we owned $74 million of HEIs at Redwood and consolidated $153 million of HEIs through the HEI securitization entity. We account for these investments under the fair value option and during the three months ended March 31, 2022 and 2021, we recorded a net market valuation gain of $1 million and a net market valuation gain of $5 million, respectively, related to HEIs owned at Redwood through Investment fair value changes, net on our consolidated statements of income.

We consolidate the HEI securitization in accordance with GAAP and have elected to account for it under the CFE election. During the three months ended March 31, 2022, we recorded net market valuation gains of $3 million (including $1 million of interest expense) related to our net investment in the HEI securitization entity through Investment fair value changes, net on our consolidated statements of income.

Strategic Investments

Strategic investments represent investments we have made in companies either through our RWT Horizons venture investment platform or separately at a corporate level. At March 31, 2022, we had made a total of 21 investments in companies through RWT Horizons with a total carrying value of $25 million, and two corporate-level investments, including our strategic investment in Churchill Finance. During the three months ended March 31, 2022, we recorded $0.1 million of Other income from our strategic investments.

Excess MSRs

In association with our servicer advance investments described above, we (through our consolidated SA Buyers) invested in excess MSRs associated with the same portfolio of legacy residential mortgage-backed securitizations. Additionally, we own excess MSRs associated with specified pools of multifamily loans. We account for our excess MSRs at fair value and during the three months ended March 31, 2022 and 2021, we recognized $4 million and $3 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $1 million and $2 million, respectively, 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. During the three months ended March 31, 2022, we retained $5 million of MSRs from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

At March 31, 2022 and December 31, 2021, our MSRs had a fair value of $20 million and $12 million, respectively, and were associated with loans with an aggregate principal balance of $2.36 billion and $2.12 billion, respectively. During the three months ended March 31, 2022 and 2021, including net market valuation gains and losses on our MSRs, we recorded net income of $4.3 million and $1 million, respectively, through Other income on our consolidated statements of income related to our MSRs.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 11. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at March 31, 2022 and December 31, 2021.

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


	March 31, 2022				December 31, 2021
	Fair Value		Notional Amount		Fair Value		Notional Amount
(In Thousands)


Assets - Risk Management Derivatives
Interest rate swaps	$	11,412	$	460,000	$	611	$	161,500
TBAs	95,631		4,400,000		2,880		2,440,000
Interest rate futures	2,907		197,800		25		9,000
Swaptions	—		—		18,318		1,660,000

Assets - Other Derivatives
Loan purchase and interest rate lock commitments	2,110		187,895		4,633		971,631

Total Assets	$	112,060	$	5,245,695	$	26,467	$	5,242,131



Liabilities - Risk Management Derivatives
Interest rate swaps	$	(650)	$	66,000	$	(1,251)	$	283,100
TBAs	(64,883)		3,535,000		(658)		870,000
Interest rate futures	(236)		83,000		(905)		62,500
Liabilities - Other Derivatives
Loan purchase and interest rate lock commitments	(14,491)		912,748		(503)		404,190

Total Liabilities	$	(80,260)	$	4,596,748	$	(3,317)	$	1,619,790
Total Derivative Financial Instruments, Net	$	31,800	$	9,842,443	$	23,150	$	6,861,921

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 March 31, 2022, we were party to swaps with an aggregate notional amount of $526 million, TBA agreements with an aggregate notional amount of $7.94 billion, and interest rate futures contracts with an aggregate notional amount of $281 million. At December 31, 2021, we were party to swaps and swaptions with an aggregate notional amount of $2.10 billion, futures with an aggregate notional amount of $72 million and TBA agreements with an aggregate notional amount of $3.31 billion.

For the three months ended March 31, 2022 and 2021, risk management derivatives had a net market valuation gain of $92 million, and a net market valuation gain of $93 million, respectively. Market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net and Other income on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 11. Derivative Financial Instruments - (continued)

Loan Purchase and Interest Rate Lock Commitments

LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. For the three months ended March 31, 2022 and 2021, LPCs and IRLCs had a net market valuation loss of $42 million and loss of $52 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income.

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 income was $75 million and $76 million at March 31, 2022 and December 31, 2021, respectively. We are amortizing this loss into interest expense over the remaining term of the debt they were originally hedging. As of March 31, 2022, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three months ended March 31, 2022 and 2021.

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


	Three Months Ended March 31,
(In Thousands)	2022		2021
Net interest expense on cash flows hedges	$	—	$	—

Realized net losses reclassified from other comprehensive income	(1,018)		(1,018)
Total Interest Expense	$	(1,018)	$	(1,018)

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At March 31, 2022, we assessed this risk as remote and did not record an associated specific valuation adjustment.

At March 31, 2022, we were in compliance with our derivative counterparty ISDA agreements.

Note 12. Other Assets and Liabilities

Other assets at March 31, 2022 and December 31, 2021 are summarized in the following table.

Table 12.1 – Components of Other Assets


(In Thousands)	March 31, 2022		December 31, 2021
Investment receivable	$	49,313	$	82,781
Accrued interest receivable	48,717		47,515
REO	27,179		36,126
Deferred tax asset	20,867		20,867
Operating lease right-of-use assets	17,917		18,772
Margin receivable	17,165		7,269
Fixed assets and leasehold improvements (1)	10,105		9,019






Other	10,939		8,768
Total Other Assets	$	202,202	$	231,117

(1)Fixed assets and leasehold improvements had a basis of $18 million and accumulated depreciation of $8 million at March 31, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 12. Other Assets and Liabilities - (continued)

Accrued expenses and other liabilities at March 31, 2022 and December 31, 2021 are summarized in the following table.

Table 12.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	March 31, 2022		December 31, 2021
Payable to non-controlling interests	$	47,939	$	42,670
Margin payable	41,966		24,368
Accrued interest payable	38,647		39,297
Accrued operating expenses	30,581		4,377
Current accounts payable	21,734		8,273
Operating lease liabilities	20,218		20,960
Accrued compensation	16,990		74,636
Residential loan and MSR repurchase reserve	9,529		9,306
Guarantee obligations	7,046		7,459


Bridge loan holdbacks	2,536		3,109





Other	7,264		11,333
Total Accrued Expenses and Other Liabilities	$	244,450	$	245,788

Refer to Note 12 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional descriptions of our other assets and liabilities.

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. Through March 31, 2022, we had met all margin calls due.

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 three months ended March 31, 2022.

Table 12.3 – REO Activity


	Three Months Ended March 31, 2022
(In Thousands)	Bridge		Legacy Sequoia		Freddie Mac SLST		SFR at CAFL		Total
Balance at beginning of period	$	13,068	$	61	$	2,028	$	20,969	$	36,126
Transfers to REO	272		—		1,047		—		1,319
Liquidations (1)	(382)		(504)		(750)		(9,250)		(10,886)
Changes in fair value, net	82		443		95		—		620
Balance at End of Period	$	13,040	$	—	$	2,420	$	11,719	$	27,179

(1)For the three months ended March 31, 2022, REO liquidations resulted in $0.6 million of realized gains, which were recorded in Investment fair value changes, net on our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 12. Other Assets and Liabilities - (continued)

The following table provides the detail of REO assets at Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities at March 31, 2022 and December 31, 2021.

Table 12.4 – REO Assets


Number of REO assets	Bridge	Legacy Sequoia	Freddie Mac SLST	SFR at CAFL	Total
At March 31, 2022	4	—	25	2	31
At December 31, 2021	5	2	24	3	34

Note 13. Short-Term Debt

We enter into repurchase agreements ("repo"), loan warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At March 31, 2022, 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 March 31, 2022 and December 31, 2021.

Table 13.1 – Short-Term Debt


	March 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	$	1,223,247	$	2,750,000	2.13	%	8/2022-3/2023	288

Business purpose loan warehouse	1	95,161		350,000		3.45	%	3/2023	349
Real estate securities repo	4	75,445		—		1.25	%	4/2022-6/2022	33

Total Short-Term Debt Facilities	12	1,393,853
Servicer advance financing	1	253,393		350,000		2.25	%	11/2022	216

Total Short-Term Debt		$	1,647,246


	December 31, 2021
(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity
Facilities
Residential loan warehouse	7	$	1,669,344	$	2,900,000	1.87	%	1/2022-12/2022	153

Business purpose loan warehouse	2	138,746		350,000		3.34	%	3/2022-7/2022	105
Real estate securities repo	4	74,825		—		1.13	%	1/2022-3/2022	33
Total Short-Term Debt Facilities	13	1,882,915
Servicer advance financing	1	294,447		350,000		1.90	%	11/2022	306

Total Short-Term Debt		$	2,177,362

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 13. Short-Term Debt - (continued)

The following table below presents the value of loans, securities, and other assets pledged as collateral under our short-term debt at March 31, 2022 and December 31, 2021.

Table 13.2 – Collateral for Short-Term Debt


(In Thousands)	March 31, 2022		December 31, 2021
Collateral Type
Held-for-sale residential loans	$	1,334,272	$	1,838,797
Business purpose loans	129,179		167,687
Real estate securities
On balance sheet	5,539		5,823
Sequoia securitizations (1)	59,862		61,525

Freddie Mac K-Series securitization (1)	31,921		31,657

Total real estate securities owned	97,322		99,005
Restricted cash and other assets	1,962		1,962
Total Collateral for Short-Term Debt Facilities	1,562,735		2,107,451
Cash	9,615		6,480
Restricted cash	24,170		25,420
Servicer advances	302,837		310,953
Total Collateral for Servicer Advance Financing	336,622		342,853
Total Collateral for Short-Term Debt	$	1,899,357	$	2,450,304

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

For the three months ended March 31, 2022, the average balance of our short-term debt facilities was $1.73 billion. At March 31, 2022 and December 31, 2021, accrued interest payable on our short-term debt facilities was $2 million and $2 million, respectively.

Servicer advance financing consists of non-recourse short-term securitization debt used to finance servicer advance investments. We consolidate the securitization entity that issued the debt, but the entity is independent of Redwood and the assets and liabilities are not owned by and are not legal obligations of Redwood. At March 31, 2022, the accrued interest payable balance on this financing was $0.2 million and the unamortized capitalized commitment costs were $0.7 million.

We also maintain a $10 million committed line of credit with a financial institution that is secured by certain mortgage-backed securities with a fair market value of $1 million at March 31, 2022. At both March 31, 2022 and December 31, 2021, we had no outstanding borrowings on this facility.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 13. Short-Term Debt - (continued)

Remaining Maturities of Short-Term Debt

The following table presents the remaining maturities of our secured short-term debt by the type of collateral securing the debt at March 31, 2022.

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


	March 31, 2022
(In Thousands)	Within 30 days		31 to 90 days		Over 90 days		Total
Collateral Type
Held-for-sale residential loans	$	—	$	—	$	1,223,247	$	1,223,247
Business purpose loans	—		—		95,161		95,161
Real estate securities	43,675		31,770		—		75,445
Total Secured Short-Term Debt	43,675		31,770		1,318,408		1,393,853
Servicer advance financing	—		—		253,393		253,393

Total Short-Term Debt	$	43,675	$	31,770	$	1,571,801	$	1,647,246

Note 14. Asset-Backed Securities Issued

ABS issued represents securities issued by non-recourse securitization entities we consolidate under GAAP. The majority of our ABS issued is carried at fair value under the CFE election (see Note 4 for additional detail) with the remainder carried at amortized cost. The carrying values of ABS issued by our consolidated securitization entities at March 31, 2022 and December 31, 2021, along with other selected information, are summarized in the following table.

Table 14.1 – Asset-Backed Securities Issued


March 31, 2022	Legacy Sequoia		Sequoia		CAFL (1)		Freddie Mac SLST (2)		Freddie Mac K-Series			HEI			Total
(Dollars in Thousands)
Certificates with principal balance	$	243,879	$	3,868,206	$	2,998,376	$	1,463,505	$	416,672		$	127,904		$	9,118,542
Interest-only certificates	321		48,561		170,661		16,494		9,491			—			245,528
Market valuation adjustments	(23,899)		(288,847)		(156,196)		(9,956)		(6,280)			(6,526)			(491,704)


ABS Issued, Net	$	220,301	$	3,627,920	$	3,012,841	$	1,470,043	$	419,883		$	121,378		$	8,872,366
Range of weighted average interest rates, by series(3)	0.57% to 2.05%		2.46% to 5.03%		2.64% to 5.44%		3.50% to 4.75%		3.55		%	3.27		%
Stated maturities(3)	2024 - 2036		2047-2052		2027-2031		2028-2059		2025			2052
Number of series	20		17		16		3		1			1

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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


December 31, 2021	Legacy Sequoia		Sequoia		CAFL(1)		Freddie Mac SLST (2)		Freddie Mac K-Series			HEI			Total
(Dollars in Thousands)
Certificates with principal balance	$	259,505	$	3,353,073	$	3,264,766	$	1,535,638	$	418,700		$	138,792		$	8,970,474
Interest-only certificates	619		32,749		193,725		11,714		10,184			—			248,991
Market valuation adjustments	(32,243)		(2,774)		16,407		41,111		12,973			(1,382)			34,092


ABS Issued, Net	$	227,881	$	3,383,048	$	3,474,898	$	1,588,463	$	441,857		$	137,410		$	9,253,557
Range of weighted average interest rates, by series(3)	0.23% to 1.44%		2.40% to 5.03%		2.64% to 5.24%		3.50% to 4.75%		3.41		%	3.31		%
Stated maturities(3)	2024 - 2036		2047-2052		2027-2031		2028-2059		2025			2052
Number of series	20		16		16		3		1			1

(1)Includes $270 million (principal balance) of ABS issued by a CAFL bridge securitization trust sponsored by Redwood and accounted for at amortized cost at March 31, 2022 and December 31, 2021.

(2)Includes $131 million and $145 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at March 31, 2022 and December 31, 2021, respectively.

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

During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest bridge loans (presented within CAFL in table 14.1 above), which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $270 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At March 31, 2022, the principal balance of the ABS issued was $270 million, and the unamortized debt discount and deferred issuance costs were $2 million, for a net carrying value of $268 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 $292 million of bridge loans, $8 million of restricted cash and $6 million of other assets at March 31, 2022. 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 the HEI securitization entity formed in connection with the securitization of HEIs, which we determined was a VIE and for which we determined we are the primary beneficiary. At issuance, we sold $146 million (principal balance) of ABS issued to third parties and retained a portion of the remaining beneficial ownership interest in the trust. We elected to account for the entity under the CFE election and account for the ABS issued at fair value, with the entire change in fair value of the ABS issued (including accrued interest) recorded through Investment fair value changes, net on our consolidated statements of income. 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. At issuance, we sold $210 million (principal balance) of ABS issued to third parties and retained 100% of the remaining beneficial ownership interest in the trust through ownership of a subordinate security issued by the trust. The ABS was issued at a discount and we have elected to account for the ABS issued at amortized cost. At March 31, 2022, the principal balance of the ABS issued was $131 million, and the debt discount and deferred issuance costs were $2 million, for a net carrying value of $129 million. The stated coupon of the ABS issued was 4.75% at issuance and the final stated maturity occurs in July 2059. The ABS issued are subject to an optional redemption in July 2022 and in July 2023 the ABS interest rate steps up to 7.75%.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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

The actual maturity of each class of ABS issued is primarily determined by the rate of principal prepayments on the assets of the issuing entity. Each series is also subject to redemption prior to the stated maturity according to the terms of the respective governing documents of each ABS issuing entity. As a result, the actual maturity of ABS issued may occur earlier than the stated maturity. At March 31, 2022, 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 March 31, 2022 and December 31, 2021. Interest due on consolidated ABS issued is payable monthly.

Table 14.2 – Accrued Interest Payable on Asset-Backed Securities Issued


(In Thousands)	March 31, 2022		December 31, 2021
Legacy Sequoia	$	107	$	99
Sequoia	9,598		8,452
CAFL	10,342		11,030
Freddie Mac SLST (1)	4,405		4,630
Freddie Mac K-Series	1,232		1,190
Total Accrued Interest Payable on ABS Issued	$	25,684	$	25,401

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 15. 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 rate, and the maturity information at March 31, 2022 and December 31, 2021.

Table 15.1 – Long-Term Debt


	March 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	$	133,034	$	(208)	$	132,826	N/A		4.21	%	9/2024
CAFL
Facility B	102,351		(278)		102,073		N/A		4.21	%	2/2025
Facility G	81,995		(313)		81,682		N/A		4.75	%	6/2026
Non-Recourse BPL Financing
Facility H	430,026		(755)		429,271		$	600,000	L + 2.50%		N/A
Recourse BPL Financing
Facility F	301,200		(205)		300,995		450,000		SOFR + 2.25%		9/2023
Facility I	263,836		—		263,836		450,000		SOFR + 3.24%		6/2023
Total Long-Term Debt Facilities	1,312,442		(1,759)		1,310,683
Convertible notes
4.75% convertible senior notes	198,629		(1,571)		197,058		N/A		4.75	%	8/2023
5.625% convertible senior notes	150,200		(1,879)		148,321		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	172,092		(3,182)		168,910		N/A		5.75	%	10/2025
Trust preferred securities and subordinated notes	139,500		(768)		138,732		N/A		L + 2.25%		7/2037
Total Long-Term Debt	$	1,972,863	$	(9,159)	$	1,963,704

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 15. Long-Term Debt - (continued)


	December 31, 2021
(Dollars in Thousands)	Borrowings		Unamortized Deferred Issuance Costs / Discount		Net Carrying Value		Limit		Weighted Average Interest Rate (1)		Final Maturity
Facilities
Recourse Subordinate Securities Financing
Facility A	$	144,385	$	(313)	$	144,072	N/A		4.21	%	9/2024
CAFL
Facility B	102,351		(353)		101,998		N/A		4.21	%	2/2025
Facility G	91,707		(376)		91,331		N/A		4.75	%	6/2026
Non-Recourse BPL Financing
Facility H	307,215		(507)		306,708		$	400,000	L + 2.75%		N/A
Recourse BPL Financing
Facility F	234,349		(123)		234,226		450,000		L + 2.21%		9/2023
Facility I	110,148		—		110,148		450,000		L + 3.35%		6/2023
Total Long-Term Debt Facilities	990,155		(1,672)		988,483
Convertible notes
4.75% convertible senior notes	198,629		(1,836)		196,793		N/A		4.75	%	8/2023
5.625% convertible senior notes	150,200		(2,072)		148,128		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	172,092		(3,384)		168,708		N/A		5.75	%	10/2025
Trust preferred securities and subordinated notes	139,500		(779)		138,721		N/A		L + 2.25%		7/2037
Total Long-Term Debt	$	1,650,576	$	(9,743)	$	1,640,833

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

Refer to Note 15 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for a full description of our long-term debt.

Non-Recourse BPL Financing Facility

During the three months ended March 31, 2022, we amended facility H (see Table 15.1 above) to increase the borrowing limit from $400 million to $600 million.

Recourse BPL Financing Facilities

During the three months ended March 31, 2022, we amended the interest rate for Facilities F and I (see Table 15.1 above) to be indexed to a spread over one-month SOFR compared to a LIBOR-indexed spread at December 31, 2021.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 15. Long-Term Debt - (continued)

The following table below presents the value of loans, securities, and other assets pledged as collateral under our long-term debt at March 31, 2022 and December 31, 2021.

Table 15.2 – Collateral for Long-Term Debt


(In Thousands)	March 31, 2022		December 31, 2021
Collateral Type
Bridge loans	$	815,580	$	554,597
Single-family rental loans	376,502		244,703
Real estate securities
Sequoia securitizations (1)	226,974		247,227
CAFL securitizations (1)	264,774		260,405



Total Collateral for Long-Term Debt	$	1,683,830	$	1,306,932

(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 March 31, 2022 and December 31, 2021.

Table 15.3 – Accrued Interest Payable on Long-Term Debt


(In Thousands)	March 31, 2022		December 31, 2021
Long-term debt facilities	$	1,589	$	815
Convertible notes
4.75% convertible senior notes	1,206		3,564
5.625% convertible senior notes	1,784		3,896
5.75% exchangeable senior notes	4,948		2,474
Trust preferred securities and subordinated notes	607		581
Total Accrued Interest Payable on Long-Term Debt	$	10,134	$	11,330

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 16. Commitments and Contingencies

Lease Commitments

At March 31, 2022, we were obligated under seven non-cancelable operating leases with expiration dates through 2031 for $23 million of cumulative lease payments. Our operating lease expense was $1 million each for the three-month periods ended March 31, 2022 and 2021.

The following table presents our future lease commitments at March 31, 2022.

Table 16.1 – Future Lease Commitments by Year


(In Thousands)	March 31, 2022
2022 (9 months)	$	3,228
2023	4,428
2024	4,338
2025	3,475
2026	3,420
2027 and thereafter	4,553
Total Lease Commitments	23,442
Less: Imputed interest	(3,224)
Operating Lease Liabilities	$	20,218

During the three months ended March 31, 2022, we did not enter into any new office leases. At March 31, 2022, our operating lease liabilities were $20 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $18 million, which were a component of Other assets.

We determined that none of our leases contained an implicit interest rate and used a discount rate equal to our incremental borrowing rate on a collateralized basis to determine the present value of our total lease payments. As such, we determined the applicable discount rate for each of our leases using a swap rate plus an applicable spread for borrowing arrangements secured by our real estate loans and securities for a length of time equal to the remaining lease term on the date of adoption. At March 31, 2022, the weighted-average remaining lease term and weighted-average discount rate for our leases was 6 years and 5.1%, respectively.

Commitment to Fund Bridge Loans

As of March 31, 2022, we had commitments to fund up to $792 million of additional advances on existing bridge loans. These commitments are generally subject to loan agreements with covenants regarding the financial performance of the borrower and other terms regarding advances that must be met before we fund the commitment. At March 31, 2022, we carried a $1 million contingent liability related to these commitments to fund construction advances. During the three months ended March 31, 2022, we recorded a net market valuation loss of $0.2 million related to this liability through Mortgage banking activities, net on our consolidated statements of income. During the three months ended March 31, 2021, we recorded a net market valuation gain of $1 million related to this liability through Mortgage banking activities, 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 10 for additional detail). In connection with this investment, we are required to fund future net servicer advances related to the underlying mortgage loans. The actual amount of net servicer advances we may fund in the future is subject to significant uncertainty and will be based on the credit and prepayment performance of the underlying loans.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

Commitment to Acquire HEIs

In the third quarter of 2021, we amended an existing flow purchase agreement with a third party and committed to acquire $125 million of HEIs from the date of the amended agreement. In the first quarter of 2022, we exercised an option and committed to acquire an additional $125 million of HEIs from the third-party HEI originator. At March 31, 2022, we had acquired $70 million HEIs of our $250 million commitment under this flow purchase agreement. See Note 10 for additional detail on these investments.

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 San Francisco Bay Area urban communities. At March 31, 2022, we had funded $0.3 million of this commitment. This investment is included in Other Investments on our Consolidated Balance Sheets.

In 2021, we entered into commitments to fund $5 million to each of two different RWT Horizons investments. At March 31, 2022, we had funded $4 million of these commitments. These investments are included in Other Investments on our Consolidated Balance Sheets.

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 March 31, 2022, 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 March 31, 2022, we had incurred less than $0.1 million of losses under these arrangements. For the three months ended March 31, 2022 and 2021, other income related to these arrangements was $0.5 million and $1 million, respectively, and net market valuation changes related to these investments were less than $0.1 million of gains and $0.1 million of losses, respectively.

All of the loans in the reference pools subject to these risk-sharing arrangements were originated in 2014 and 2015, and at March 31, 2022, the loans had an unpaid principal balance of $504 million and a weighted average FICO score of 756 (at origination) and LTV ratio of 74% (at origination). At March 31, 2022, $14 million of the loans were 90 days or more delinquent, of which two of these loans with an unpaid principal balance of $0.2 million were in foreclosure. At March 31, 2022, the carrying value of our guarantee obligation was $7 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 both March 31, 2022 and December 31, 2021, assets of such SPEs totaled $34 million, and liabilities of such SPEs totaled $7 million.

Loss Contingencies — Residential Repurchase Reserve

We maintain a repurchase reserve for potential obligations arising from representation and warranty violations related to residential loans we have sold to securitization trusts or third parties and for conforming residential loans associated with MSRs that we have purchased from third parties. We do not originate residential loans and we believe the initial risk of loss due to loan repurchases (i.e., due to a breach of representations and warranties) would generally be a contingency to the companies from whom we acquired the loans. However, in some cases, for example, where loans were acquired from companies that have since become insolvent, repurchase claims may result in our being liable for a repurchase obligation. Additionally, for certain loans we sold during the second quarter of 2020 that were previously held for investment, we have a direct obligation to repurchase these loans in the event of any early payment defaults (or "EPDs") by the underlying mortgage borrowers within certain specified periods following the sales.

At March 31, 2022 and December 31, 2021, our repurchase reserve associated with our residential loans and MSRs was $10 million and $9 million, respectively, and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. During both the three months ended March 31, 2022 and 2021, we received zero repurchase requests and repurchased zero loans.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 16. Commitments and Contingencies - (continued)

During the three months ended March 31, 2022 and 2021, we recorded repurchase provisions of $0.2 million and $0.1 million, respectively, that were recorded in Mortgage banking activities, net, Investment fair value changes, net, and Other income on our consolidated statements of income.

Loss Contingencies — Litigation, Claims and Demands

There is no significant update regarding the litigation matters described in Note 16 within the financial statements included in Redwood’s Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Loss Contingencies - Litigation, Claims and Demands” At March 31, 2022, 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, 2021 was $2 million.

Note 17. Equity

The following table provides a summary of changes to accumulated other comprehensive income (loss) by component for the three months ended March 31, 2022 and 2021.

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


	Three Months Ended March 31, 2022				Three Months Ended March 31, 2021
(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	$	67,503	$	(76,430)	$	76,336	$	(80,557)
Other comprehensive (loss) income before reclassifications	(17,873)		—		10,986		—
Amounts reclassified from other accumulated comprehensive (income) loss	(692)		1,018		(2,795)		1,018
Net current-period other comprehensive (loss) income	(18,565)		1,018		8,191		1,018
Balance at End of Period	$	48,938	$	(75,412)	$	84,527	$	(79,539)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 17. Equity - (continued)

The following table provides a summary of reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021.

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



		Amount Reclassified From Accumulated Other Comprehensive (Loss)
	Affected Line Item in the	Three Months Ended March 31,
(In Thousands)	Income Statement	2022		2021
Net Realized (Gain) Loss on AFS Securities
Increase (decrease) in allowance for credit losses on AFS securities	Investment fair value changes, net	$	705	$	(374)
Gain on sale of AFS securities	Realized gains, net	(1,397)		(2,421)

		$	(692)	$	(2,795)
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Interest expense	$	1,018	$	1,018
		$	1,018	$	1,018

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 months ended March 31, 2022, we issued 5,232,869 common shares for net proceeds of $67 million under this program. During the three months ended March 31, 2022, we increased the capacity of this program to $175 million, all of which remained outstanding for future offerings under this program as of March 31, 2022.

Direct Stock Purchase and Dividend Reinvestment Plan

During the three months ended March 31, 2022, we did not issue any shares of common stock through our Direct Stock Purchase and Dividend Reinvestment Plan. At March 31, 2022, approximately 6 million shares remained outstanding for future offerings under this plan.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 17. Equity - (continued)

Earnings per Common Share

The following table provides the basic and diluted earnings per common share computations for the three months ended March 31, 2022 and 2021.

Table 17.3 – Basic and Diluted Earnings per Common Share


	Three Months Ended March 31,
(In Thousands, except Share Data)	2022		2021
Basic Earnings per Common Share:
Net income attributable to Redwood	$	30,915	$	97,257
Less: Dividends and undistributed earnings allocated to participating securities	(1,209)		(3,294)
Net income allocated to common shareholders	$	29,706	$	93,963
Basic weighted average common shares outstanding	119,884,172		112,276,842
Basic Earnings per Common Share	$	0.25	$	0.84
Diluted Earnings per Common Share:
Net income attributable to Redwood	$	30,915	$	97,257
Less: Dividends and undistributed earnings allocated to participating securities	(1,348)		(2,951)
Add back: Interest expense on convertible notes for the period, net of tax	4,582		7,007
Net income allocated to common shareholders	$	34,149	$	101,313
Weighted average common shares outstanding	119,884,172		112,276,842
Net effect of dilutive equity awards	290,831		195,568
Net effect of assumed convertible notes conversion to common shares	20,331,154		28,566,875
Diluted weighted average common shares outstanding	140,506,157		141,039,285
Diluted Earnings per Common Share	$	0.24	$	0.72

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 months ended March 31, 2022 and 2021, certain of our convertible notes were determined to be dilutive and were included in the calculation of diluted EPS under the "if-converted" method. Under this method, the periodic interest expense (net of applicable taxes) for dilutive notes is added back to the numerator and the weighted average number of shares that the notes are entitled to (if converted, regardless of whether they are in or out of the money) are included in the denominator.

For the three months ended March 31, 2021, 8,235,721 of common shares related to the assumed conversion of our convertible notes were antidilutive and were excluded in the calculation of diluted earnings per share. For the three months ended March 31, 2022 and 2021, the number of outstanding equity awards that were antidilutive totaled 17,154 and 15,460, respectively.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 17. Equity - (continued)

Stock Repurchases

Our Board of Directors previously approved an authorization for the repurchase of up to $100 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 March 31, 2022, we did not repurchase any shares. At March 31, 2022, $78 million of the current authorization remained available for the repurchase of shares of our common stock and we also continued to be authorized to repurchase outstanding debt securities.

Note 18. Equity Compensation Plans

At March 31, 2022 and December 31, 2021, 5,708,420 and 5,958,390 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 $44 million at March 31, 2022, as shown in the following table.

Table 18.1 – Activities of Equity Compensation Costs by Award Type


	Three Months Ended March 31, 2022
(In Thousands)	Restricted Stock Awards		Restricted Stock Units		Deferred Stock Units		Performance Stock Units		Employee Stock Purchase Plan		Total
Unrecognized compensation cost at beginning of period	$	84	$	3,589	$	26,473	$	12,237	$	—	$	42,383
Equity grants	—		2,484		3,850		—		323		6,657
Performance-based valuation adjustment	—		—		—		—		—		—
Equity grant forfeitures	(5)		(242)		—		—		—		(247)
Equity compensation expense	(66)		(471)		(2,949)		(1,258)		(81)		(4,825)
Unrecognized Compensation Cost at End of Period	$	13	$	5,360	$	27,374	$	10,979	$	242	$	43,968

At March 31, 2022, the weighted average amortization period remaining for all of our equity awards was less than two years.

Restricted Stock Awards ("RSAs")

At March 31, 2022 and December 31, 2021, there were 1,551 and 28,141 shares of RSAs outstanding, respectively. Restrictions on these shares lapse during 2022. During the three months ended March 31, 2022, there were no RSAs granted, restrictions on 26,249 RSAs lapsed and those shares were distributed, and 341 RSAs were forfeited.

Restricted Stock Units ("RSUs")

At March 31, 2022 and December 31, 2021, there were 498,223 and 431,072 RSUs outstanding, respectively. During the three months ended March 31, 2022, there were 206,179 RSUs granted, 117,725 RSUs distributed, and 21,303 RSUs forfeited. Unvested RSUs at March 31, 2022 vest through 2026.

Deferred Stock Units (“DSUs”)

At March 31, 2022 and December 31, 2021, there were 4,526,420 and 4,022,088 DSUs outstanding, respectively, of which 1,965,990 and 1,469,903, respectively, had vested. During the three months ended March 31, 2022, there were 645,870 DSUs granted, 141,538 DSUs distributed, and zero DSUs forfeited. Unvested DSUs at March 31, 2022 vest through 2026.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 18. Equity Compensation Plans - (continued)

Performance Stock Units (“PSUs”)

At March 31, 2022 and December 31, 2021, the target number of PSUs that were unvested was 1,267,849 and 1,473,883, 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 18 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.

For 206,034 target PSU awards that were granted in December 2018, the performance vesting period ended on January 1, 2022. These 2018 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.

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 March 31, 2022 and December 31, 2021, 586,762 and 569,728 shares had been purchased, respectively, and there remained a negligible amount of uninvested employee contributions in the ESPP at March 31, 2022.

Note 19. 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 months ended March 31, 2022 and 2021.

Table 19.1 – Mortgage Banking Activities


	Three Months Ended March 31,
(In Thousands)	2022		2021
Residential Mortgage Banking Activities, Net
Changes in fair value of:
Residential loans, at fair value (1)	$	(68,822)	$	(29,273)
Trading securities (2)	2,786		721
Risk management derivatives (3)	73,354		88,964
Other income (expense), net (4)	617		1,023
Total residential mortgage banking activities, net	7,935		61,435

Business Purpose Mortgage Banking Activities, Net:
Changes in fair value of:
Single-family rental loans, at fair value (1)	(25,193)		10,248
Risk management derivatives (3)	17,033		3,858
Bridge loans, at fair value	2,135		1,044
Other income, net (5)	14,405		6,022
Total business purpose mortgage banking activities, net	8,380		21,172
Mortgage Banking Activities, Net	$	16,315	$	82,607

(1)For residential loans, includes changes in fair value for associated loan purchase and forward sale commitments. For single-family rental loans, includes changes in fair value for associated interest rate lock commitments.

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

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

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 20. Other Income

The following table presents the components of Other income recorded in our consolidated statements of income for the three months ended March 31, 2022 and 2021.

Table 20.1 – Other Income


	Three Months Ended March 31,
(In Thousands)	2022		2021
MSR income, net (1)	$	4,303	$	697
Risk share income	460		882


Bridge loan fees	990		693


Other	230		1,571
Other Income, Net	$	5,983	$	3,843

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses

Components of our general and administrative expenses, loan acquisition costs, and other expenses for the three months ended March 31, 2022 and 2021 are presented in the following table.

Table 21.1 – Components of General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses


	Three Months Ended March 31,
(In Thousands)	2022		2021
General and Administrative Expenses
Fixed compensation expense	$	14,628	$	11,805
Annual variable compensation expense	3,357		18,669
Long-term incentive award expense (1)	5,660		4,169
Acquisition-related equity compensation expense (2)	—		1,212
Systems and consulting	3,184		2,977
Office costs	2,025		1,808
Accounting and legal	1,675		714
Corporate costs	864		691
Other	3,461		1,506
Total General and Administrative Expenses	34,854		43,551

Loan Acquisition Costs
Commissions	2,614		1,263
Underwriting costs	1,372		1,685
Transfer and holding costs	479		611

Total Loan Acquisition Costs	4,465		3,559

Other Expenses

Amortization of purchase-related intangible assets	3,534		3,873

Other	551		223
Total Other Expenses	4,085		4,096
Total General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	$	43,404	$	51,206

(1)For the three months ended March 31, 2022 and 2021, long-term incentive award expense includes $5 million and $3 million, respectively, of expense for awards settleable in shares of our common stock and $1 million and $1 million, respectively, of expense for awards settleable in cash.

(2)Acquisition-related equity compensation expense relates to 588,260 shares of restricted stock that were issued to members of CoreVest management as a component of the consideration paid to them for our purchase of their interests in CoreVest in 2019. The grant date fair value of these restricted stock awards was $10 million, which was recognized as compensation expense over the two-year vesting period on a straight-line basis in accordance with GAAP.

Long Term Cash-Based Awards

During the three months ended March 31, 2022, $2 million of long-term cash-based retention awards were granted to certain executive and non-executive employees that will vest and be paid over a three-year period, subject to continued employment through the vesting periods from 2022 through 2025. The value of long-term cash-based awards is being amortized into expense on a straight-line basis over each award's respective vesting period.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 22. Taxes

We believe that we have met all requirements for qualification as a REIT for federal income tax purposes. To qualify as a REIT, the Company must distribute at least 90% of its annual REIT taxable income and meet certain other requirements that relate to, among others, the assets it holds, the income it generates, and the composition of its stockholders.

For the three months ended March 31, 2022 and 2021, we recognized a benefit from income taxes of $2 million and a provision for income taxes of $12 million, respectively. The following is a reconciliation of the statutory federal and state tax rates to our effective tax rate at March 31, 2022 and 2021.

Table 22.1 – Reconciliation of Statutory Tax Rate to Effective Tax Rate


	March 31, 2022		March 31, 2021
Federal statutory rate	21.0	%	21.0	%
State statutory rate, net of Federal tax effect	8.6	%	8.6	%
Differences in taxable (loss) income from GAAP income	(20.4)	%	(12.5)	%
Change in valuation allowance	2.1	%	(3.7)	%
Dividends paid deduction	(19.9)	%	(2.8)	%
Effective Tax Rate	(8.6)	%	10.6	%

We assessed our tax positions for all open tax years (i.e., Federal, 2018 to 2022, and State, 2017 to 2022) at March 31, 2022 and December 31, 2021, and concluded that we had no uncertain tax positions that resulted in material unrecognized tax benefits.

Note 23. 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, 2021.

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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 23. Segment Information - (continued)

The following tables present financial information by segment for the three months ended March 31, 2022 and 2021.

Table 23.1 – Business Segment Financial Information


	Three Months Ended March 31, 2022
(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	$	12,967	$	4,841	$	170,572	$	1,020	$	189,400
Interest expense	(6,936)		(2,568)		(116,581)		(10,213)		(136,298)
Net interest income	6,031		2,273		53,991		(9,193)		53,102
Non-interest income
Mortgage banking activities, net	7,935		8,380		—		—		16,315
Investment fair value changes, net	—		—		(5,406)		(714)		(6,120)
Other income, net	—		575		5,282		126		5,983
Realized gains, net	—		—		2,581		—		2,581
Total non-interest income, net	7,935		8,955		2,457		(588)		18,759
General and administrative expenses	(6,101)		(10,472)		(3,133)		(15,148)		(34,854)
Loan acquisition costs	(1,417)		(3,048)		—		—		(4,465)
Other expenses	—		(3,534)		(551)		—		(4,085)
Benefit from (provision for) income taxes	1,007		3,281		(1,830)		—		2,458
Segment Contribution	$	7,455	$	(2,545)	$	50,934	$	(24,929)
Net Income									$	30,915
Non-cash amortization (expense) income, net	$	104	$	(3,890)	$	7,300	$	(2,033)	$	1,481

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 23. Segment Information - (continued)



	Three Months Ended March 31, 2021
(In Thousands)	Residential Mortgage Banking		Business Purpose Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
Interest income	$	7,579	$	2,855	$	116,509	$	1,362	$	128,305
Interest expense	(4,747)		(1,599)		(85,945)		(10,261)		(102,552)
Net interest income	2,832		1,256		30,564		(8,899)		25,753
Non-interest income
Mortgage banking activities, net	61,435		21,172		—		—		82,607
Investment fair value changes, net	—		—		45,761		(674)		45,087
Other income, net	—		122		3,574		147		3,843
Realized gains, net	—		—		2,716		—		2,716
Total non-interest income (loss), net	61,435		21,294		52,051		(527)		134,253
General and administrative expenses	(12,689)		(10,194)		(3,164)		(17,504)		(43,551)
Loan acquisition costs	(1,404)		(1,492)		(659)		(4)		(3,559)
Other expenses	(6)		(3,777)		(330)		17		(4,096)
Provision for income taxes	(9,486)		(1,321)		(736)		—		(11,543)
Segment Contribution	$	40,682	$	5,766	$	77,726	$	(26,917)
Net Income									$	97,257
Non-cash amortization income (expense), net	$	(3)	$	(4,098)	$	(234)	$	(1,895)	$	(6,230)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 23. Segment Information - (continued)

The following table presents the components of Corporate/Other for the three months ended March 31, 2022 and 2021.

Table 23.2 – Components of Corporate/Other


	Three Months Ended March 31,
	2022						2021
(In Thousands)	Legacy Consolidated VIEs (1)		Other		Total		Legacy Consolidated VIEs (1)		Other		Total
Interest income	$	1,012	$	8	$	1,020	$	1,348	$	14	$	1,362
Interest expense	(701)		(9,512)		(10,213)		(875)		(9,386)		(10,261)
Net interest income	311		(9,504)		(9,193)		473		(9,372)		(8,899)
Non-interest income

Investment fair value changes, net	(714)		—		(714)		(699)		25		(674)
Other income	—		126		126		—		147		147

Total non-interest income, net	(714)		126		(588)		(699)		172		(527)
General and administrative expenses	—		(15,148)		(15,148)		—		(17,504)		(17,504)
Loan acquisition costs	—		—		—		—		(4)		(4)
Other expenses	—		—		—		—		17		17

Total	$	(403)	$	(24,526)	$	(24,929)	$	(226)	$	(26,691)	$	(26,917)

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Note 23. Segment Information - (continued)

The following table presents supplemental information by segment at March 31, 2022 and December 31, 2021.

Table 23.3 – Supplemental Segment Information


(In Thousands)	Residential Mortgage Banking		Business Purpose Lending Mortgage Banking		Investment Portfolio		Corporate/ Other		Total
March 31, 2022
Residential loans	$	1,101,006	$	—	$	5,893,918	$	222,213	$	7,217,137
Business purpose loans	—		496,280		4,258,498		—		4,754,778
Multifamily loans	—		—		451,804		—		451,804
Real estate securities	7,714		—		351,168		—		358,882
Other investments	—		—		595,056		40,525		635,581
Intangible assets	—		38,027		—		—		38,027
Total assets	1,234,502		607,991		11,546,776		864,023		14,253,292

December 31, 2021
Residential loans	$	1,673,235	$	—	$	5,688,742	$	230,455	$	7,592,432
Business purpose loans	—		347,860		4,443,129		—		4,790,989
Multifamily loans	—		—		473,514		—		473,514
Real estate securities	4,927		—		372,484		—		377,411
Other investments	—		—		606,267		35,702		641,969
Intangible assets	—