rwt-20220630

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended: June 30, 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						116,765,789			shares outstanding as of August 2, 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 June 30 , 2022 (Unaudited) and December 31, 2021	2
	Consolidated Statements of Income (Loss) for the Three and S ix Months Ended June 30 , 2022 and 2021 (Unaudited)	3
	Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30 , 2022 and 2021 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three and Six Months Ended June 30 , 2022 and 2021 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30 , 2022 and 2021 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	9
	Note 1. Organization	9
	Note 2. Basis of Presentation	9
	Note 3. Summary of Significant Accounting Policies	11
	Note 4. Principles of Consolidation	15
	Note 5. Fair Value of Financial Instruments	24
	Note 6. Residential Loans	32
	Note 7. Business Purpose Loans	35
	Note 8. Consolidated Agency Multifamily Loans	39
	Note 9. Real Estate Securities	40
	Note 10. Other Investments	45
	Note 11. Derivative Financial Instruments	47
	Note 12. Other Assets and Liabilities	48
	Note 13. Short-Term Debt	50
	Note 14. Asset-Backed Securities Issued	52
	Note 15. Long-Term Debt	55
	Note 16. Commitments and Contingencies	58
	Note 17. Equity	60
	Note 18. Equity Compensation Plans	63
	Note 19. Mortgage Banking Activities, Net	64
	Note 20. Other Income, Net	65
	Note 21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	66
	Note 22. Taxes	67
	Note 23. Segment Information	67
	Note 24. Subsequent Events	71
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	72
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	103
Item 4.	Controls and Procedures	103

PART II —	OTHER INFORMATION
Item 1.	Legal Proceedings	104
Item 1A.	Risk Factors	104
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	104
Item 3.	Defaults Upon Senior Securities	104
Item 4.	Mine Safety Disclosures (Not Applicable)	104
Item 5.	Other Information	104
Item 6.	Exhibits	105
Signatures		106

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(In Thousands, except Share Data) (Unaudited)	June 30, 2022		December 31, 2021
ASSETS (1)
Residential loans, held-for-sale, at fair value	$	1,213,067	$	1,845,282
Residential loans, held-for-investment, at fair value	5,365,532		5,747,150
Business purpose loans, held-for-sale, at fair value	505,171		358,309
Business purpose loans, held-for-investment, at fair value	4,697,766		4,432,680
Consolidated Agency multifamily loans, at fair value	443,114		473,514
Real estate securities, at fair value	284,278		377,411
Other investments	679,667		641,969
Cash and cash equivalents	371,296		450,485
Restricted cash	72,558		80,999
Intangible assets	34,720		41,561
Derivative assets	36,587		26,467
Other assets	171,780		231,117
Total Assets	$	13,875,536	$	14,706,944

LIABILITIES AND EQUITY (1)
Liabilities
Short-term debt, net	$	1,869,822	$	2,177,362

Derivative liabilities	6,591		3,317
Accrued expenses and other liabilities	190,825		245,788

Asset-backed securities issued (includes $7,993,953 and $8,843,147 at fair value), net	8,584,146		9,253,557
Long-term debt, net	1,966,061		1,640,833
Total liabilities	12,617,445		13,320,857
Commitments and Contingencies (see Note 16)
Equity
Common stock, par value $0.01 per share, 395,000,000 shares authorized; 116,753,174 and 114,892,309 issued and outstanding	1,168		1,149
Additional paid-in capital	2,363,709		2,316,799
Accumulated other comprehensive loss	(57,788)		(8,927)
Cumulative earnings	1,247,839		1,316,890
Cumulative distributions to stockholders	(2,296,837)		(2,239,824)
Total equity	1,258,091		1,386,087
Total Liabilities and Equity	$	13,875,536	$	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 June 30, 2022 and December 31, 2021, assets of consolidated VIEs totaled $9,951,520 and $10,661,081, respectively. At June 30, 2022 and December 31, 2021, liabilities of consolidated VIEs totaled $8,899,020 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 (LOSS)


(In Thousands, except Share Data)	Three Months Ended June 30,				Six Months Ended June 30,
(Unaudited)	2022		2021		2022		2021
Interest Income
Residential loans	$	65,047	$	48,433	$	130,250	$	92,088
Business purpose loans	80,934		70,323		175,233		134,511
Multifamily loans	4,732		4,860		9,485		9,646
Real estate securities	7,828		9,279		23,783		18,942
Other interest income	8,914		5,800		18,104		11,813
Total interest income	167,455		138,695		356,855		267,000
Interest Expense
Short-term debt	(13,661)		(11,195)		(25,149)		(18,968)
Asset-backed securities issued	(88,859)		(76,419)		(194,554)		(148,980)
Long-term debt	(24,447)		(20,451)		(43,562)		(42,669)
Total interest expense	(126,967)		(108,065)		(263,265)		(210,617)
Net Interest Income	40,488		30,630		93,590		56,383
Non-interest (Loss) Income
Mortgage banking activities, net	(30,017)		54,419		(13,702)		137,026
Investment fair value changes, net	(87,972)		49,480		(94,092)		94,567
Other income, net	7,006		2,126		12,989		5,969
Realized gains, net	—		8,384		2,581		11,100
Total non-interest (loss) income, net	(110,983)		114,409		(92,224)		248,662
General and administrative expenses	(31,966)		(40,594)		(66,820)		(84,145)
Loan acquisition costs	(3,480)		(3,748)		(7,945)		(7,307)
Other expenses	(3,468)		(3,985)		(7,553)		(8,081)
Net (Loss) Income before Benefit from (Provision for) Income Taxes	(109,409)		96,712		(80,952)		205,512
Benefit from (provision for) income taxes	9,443		(6,687)		11,901		(18,230)
Net (Loss) Income	$	(99,966)	$	90,025	$	(69,051)	$	187,282

Basic (loss) earnings per common share	$	(0.85)	$	0.77	$	(0.60)	$	1.61
Diluted (loss) earnings per common share	$	(0.85)	$	0.66	$	(0.60)	$	1.38
Basic weighted average shares outstanding	119,660,173		112,921,070		119,771,554		112,337,984
Diluted weighted average shares outstanding	119,660,173		141,761,084		119,771,554		141,139,212

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(In Thousands)	Three Months Ended June 30,					Six Months Ended June 30,
(Unaudited)	2022		2021			2022		2021
Net (Loss) Income	$	(99,966)	$	90,025		$	(69,051)	$	187,282
Other comprehensive (loss) income:
Net unrealized (loss) gain on available-for-sale securities	(33,409)		11,224			(51,282)		22,210
Reclassification of unrealized loss (gain) on available-for-sale securities to net (loss) income	1,066		(7,500)			374		(10,295)

Reclassification of unrealized loss on interest rate agreements to net (loss) income	1,029		1,028			2,047		2,046
Total other comprehensive (loss) income	(31,314)		4,752		4752000	(48,861)		13,961
Total Comprehensive (Loss) Income	$	(131,280)	$	94,777		$	(117,912)	$	201,243

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended June 30, 2022


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
March 31, 2022	120,289,243	$	1,203	$	2,391,344	$	(26,474)	$	1,347,805	$	(2,268,612)	$	1,445,266
Net (loss)	—	—		—		—		(99,966)		—		(99,966)
Other comprehensive (loss)	—	—		—		(31,314)		—		—		(31,314)


Employee stock purchase and incentive plans	143,964	1		(135)		—		—		—		(134)
Non-cash equity award compensation	—	—		5,266		—		—		—		5,266
Share repurchases	(3,680,033)	(36)		(32,766)		—		—		—		(32,802)
Common dividends declared ($0.23 per share)	—	—		—		—		—		(28,225)		(28,225)
June 30, 2022	116,753,174	$	1,168	$	2,363,709	$	(57,788)	$	1,247,839	$	(2,296,837)	$	1,258,091

For the Six Months Ended June 30, 2022


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
December 31, 2021	114,892,309	$	1,149	$	2,316,799	$	(8,927)	$	1,316,890	$	(2,239,824)	$	1,386,087
Net (loss)	—	—		—		—		(69,051)		—		(69,051)
Other comprehensive (loss)	—	—		—		(48,861)		—		—		(48,861)
Issuance of common stock	5,232,869	52		67,423		—		—		—		67,475

Employee stock purchase and incentive plans	308,029	3		(1,183)		—		—		—		(1,180)
Non-cash equity award compensation	—	—		13,436		—		—		—		13,436
Share repurchases	(3,680,033)	(36)		(32,766)		—		—		—		(32,802)
Common dividends declared ($0.46 per share)	—	—		—		—		—		(57,013)		(57,013)
June 30, 2022	116,753,174	$	1,168	$	2,363,709	$	(57,788)	$	1,247,839	$	(2,296,837)	$	1,258,091

For the Three Months Ended June 30, 2021


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
March 31, 2021	112,998,732	$	1,130	$	2,281,647	$	4,988	$	1,094,534	$	(2,166,724)	$	1,215,575
Net income	—	—		—		—		90,025		—		90,025
Other comprehensive income	—	—		—		4,752		—		—		4,752


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

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

For the Six Months Ended June 30, 2021


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
December 31, 2020	112,090,006	$	1,121	$	2,264,874	$	(4,221)	$	997,277	$	(2,148,152)	$	1,110,899
Net income	—	—		—		—		187,282		—		187,282
Other comprehensive income	—	—		—		13,961		—		—		13,961
Issuance of common stock	806,068	8		13,366		—		—		—		13,374

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

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

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

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


(In Thousands) (Unaudited)	Six Months Ended June 30,
	2022		2021
Cash Flows From Operating Activities:
Net (loss) income	$	(69,051)	$	187,282
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net	(2,538)		3,998
Depreciation and amortization of non-financial assets	7,710		8,405
Originations of held-for-sale loans	(766,852)		(567,546)
Purchases of held-for-sale loans	(3,395,459)		(6,682,864)
Proceeds from sales of held-for-sale loans	3,376,600		4,526,370
Principal payments on held-for-sale loans	114,731		19,856
Net settlements of derivatives	112,649		39,697

Non-cash equity award compensation expense	13,436		9,861

Market valuation adjustments	132,594		(213,641)
Realized gains, net	(2,581)		(11,100)
Net change in:
Accrued interest receivable and other assets	63,829		10,260
Accrued interest payable and accrued expenses and other liabilities	(75,856)		17,327
Net cash used in operating activities	(490,788)		(2,652,095)
Cash Flows From Investing Activities:
Originations of loan investments	(954,179)		(348,389)
Purchases of loan investments	(22,006)		—
Proceeds from sales of loan investments	—		9,231
Principal payments on loan investments	1,160,403		1,312,064
Purchases of real estate securities	(15,006)		(18,593)


Sales of securities held in consolidated securitization trusts	—		8,197
Proceeds from sales of real estate securities	23,329		36,735
Principal payments on real estate securities	26,033		29,786

Principal repayments from servicer advance investments	71,401		45,838






Purchases of HEIs	(97,389)		—
Principal payments on HEIs	25,826		—
Other investing activities, net	(14,573)		(5,025)
Net cash provided by investing activities	203,839		1,069,844
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt	3,450,606		6,604,603
Repayments on short-term debt	(4,125,634)		(5,421,494)
Proceeds from issuance of asset-backed securities	1,167,711		1,629,218
Repayments on asset-backed securities issued	(954,136)		(1,088,809)

Proceeds from borrowings on long-term debt	1,424,088		487,975
Deferred long-term debt issuance costs paid	(17,363)		—
Repayments on long-term debt	(726,076)		(654,893)

Net payments on repurchase of common stock	(26,857)		—
Taxes paid on equity award distributions	(1,477)		(943)
Net proceeds from issuance of common stock	67,770		255
Dividends paid	(57,013)		(39,548)
Other financing activities, net	(2,300)		(2,292)
Net cash provided by financing activities	199,319		1,514,072
Net decrease in cash, cash equivalents and restricted cash	(87,630)		(68,179)
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)	$	443,854	$	476,271

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


(In Thousands) (Unaudited)	Six Months Ended June 30,
	2022		2021
























































Supplemental Cash Flow Information:
Cash paid during the period for:
Interest	$	247,968	$	198,364
Taxes paid	3,894		19,183
Supplemental Noncash Information:
Real estate securities retained from loan securitizations	$	—	$	9,374
Retention of mortgage servicing rights from loan securitizations and sales	4,543		—




Transfers from loans held-for-sale to loans held-for-investment	1,953,421		1,998,535
Transfers from loans held-for-investment to loans held-for-sale	—		44,922
Transfers from residential loans to real estate owned	3,132		15,827
Transfers from long-term debt to short-term debt	367,431		47,994
Right-of-use asset obtained in exchange for operating lease liability	—		1,135

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

(1) Cash, cash equivalents, and restricted cash includes cash and cash equivalents of $371 million and restricted cash of $73 million at June 30, 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

June 30, 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 Trust, Inc. was incorporated in the State of Maryland on April 11, 1994, and commenced operations on August 19, 1994. References herein to “Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires.

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at June 30, 2022 and December 31, 2021, and for the three and six months ended June 30, 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 June 30, 2022 and results of operations for all periods presented. The results of operations for the three and six months ended June 30, 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

June 30, 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 Consolidated Agency multifamily loans, 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

June 30, 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 June 30, 2022.

Table 2.1 – Intangible Assets – Activity


	Intangible Assets at Acquisition		Accumulated Amortization at June 30, 2022		Carrying Value at June 30, 2022		Weighted Average Amortization Period (in years)
(Dollars in Thousands)
Borrower network	$	45,300	$	(17,527)	$	27,773	7
Broker network	18,100		(12,067)		6,033		5
Non-compete agreements	9,500		(8,858)		642		3
Tradenames	4,000		(3,728)		272		3
Developed technology	1,800		(1,800)		—		2
Loan administration fees on existing loan assets	2,600		(2,600)		—		1
Total	$	81,300	$	(46,580)	$	34,720	6

All of our intangible assets are amortized on a straight-line basis. For each of the six months ended June 30, 2022 and 2021, we recorded intangible asset amortization expense of $7 million. Estimated future amortization expense is summarized in the table below.

Table 2.2 – Intangible Asset Amortization Expense by Year



(In Thousands)	June 30, 2022
2022 (6 months)	$	5,959
2023	10,091
2024	7,075
2025	6,471
2026	5,124
Total Future Intangible Asset Amortization	$	34,720

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

June 30, 2022

(Unaudited)

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

Other Recent Accounting Pronouncements

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 was issued to (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. We are evaluating the accounting and disclosure requirements of ASU 2022-03 and we plan to adopt this new guidance by the required date. We do not anticipate that this update will have a material impact on our financial statements.

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

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." This new guidance clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. This new guidance is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact the adoption of this standard would have on our consolidated financial statements. Through June 30, 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 June 30, 2022, our primary LIBOR exposure included the following: $868 million of repo or warehouse debt, $468 million of interest rate swaps, $740 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

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 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.

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 June 30, 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
June 30, 2022 (In Thousands)							Financial Instruments		Cash Collateral (Received) Pledged
Assets (2)
Interest rate agreements	$	29,601	$	—	$	29,601	$	(2,445)	$	(6,451)	$	20,705

TBAs	3,104		—		3,104		(530)		(2,574)		—
Futures	1,875		—		1,875		(1,615)		(2)		258
Total Assets	$	34,580	$	—	$	34,580	$	(4,590)	$	(9,027)	$	20,963

Liabilities (2)
Interest rate agreements	$	(2,445)	$	—	$	(2,445)	$	2,445	$	—	$	—
TBAs	(2,004)		—		(2,004)		530		1,474		—
Futures	(1,615)		—		(1,615)		1,615		—		—
Loan warehouse debt	(423,619)		—		(423,619)		423,619		—		—

Total Liabilities	$	(429,683)	$	—	$	(429,683)	$	428,209	$	1,474	$	—

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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

June 30, 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 June 30, 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 June 30, 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.

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 June 30, 2022 and December 31, 2021, we owned a portion of the subordinate certificates issued by the entity and had certain decision making rights for the entity. See Note 10 for a further description of this entity and the investments it holds and Note 12 for additional information on non-controlling interests in the entity. We consolidate the 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 securitizations, Freddie Mac SLST re-securitization, and Servicing Investment entities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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


June 30, 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	$	208,788	$	3,525,459	$	—	$	1,631,285	$	—	$	—	$	—	$	5,365,532
Business purpose loans, held-for-investment	—		—		3,588,428		—		—		—		—		3,588,428
Consolidated Agency multifamily loans	—		—		—		—		443,114		—		—		443,114

Other investments	—		—		—		—		—		305,379		146,215		451,594
Cash and cash equivalents	—		—		—		—		—		14,399		—		14,399
Restricted cash	143		10		8,688		—		—		26,236		4,120		39,197
Accrued interest receivable	215		11,317		14,955		5,378		1,304		403		—		33,572
Other assets	410		—		5,320		2,299		—		7,605		50		15,684
Total Assets	$	209,556	$	3,536,786	$	3,617,391	$	1,638,962	$	444,418	$	354,022	$	150,385	$	9,951,520
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	231,846	$	—	$	231,846
Accrued interest payable	171		9,232		10,610		3,720		1,178		223		—		25,134
Accrued expenses and other liabilities	—		10		6,996		—		—		25,466		25,422		57,894
Asset-backed securities issued	207,647		3,288,682		3,207,867		1,358,459		411,380		—		110,111		8,584,146
Total Liabilities	$	207,818	$	3,297,924	$	3,225,473	$	1,362,179	$	412,558	$	257,535	$	135,533	$	8,899,020

Value of our investments in VIEs(1)	$	1,552	$	236,777	$	388,849	$	275,127	$	31,732	$	96,487	$	14,852	$	1,045,376
Number of VIEs	20		17		18		3		1		3		1		63

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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
Consolidated Agency multifamily loans	—		—		—		—		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 two bridge loan securitizations for which we did not make the CFE election. As of June 30, 2022 and December 31, 2021, the fair value of our interests in the CAFL SFR securitizations were $307 million and $302 million, respectively, and the remaining values were associated with our interests in the CAFL Bridge securitizations, for which the ABS issued is carried at amortized historical cost. 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 June 30, 2022 and December 31, 2021, the fair value of our interests in the Freddie Mac SLST securitizations accounted for under the CFE election were $390 million and $445 million, respectively, with the difference from the tables above representing ABS issued and carried at amortized historical cost.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents income (loss) from these VIEs for the three and six months ended June 30, 2022 and 2021.

Table 4.2 – Income (Loss) from Consolidated VIEs


	Three Months Ended June 30, 2022
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,108	$	31,923	$	56,608	$	16,553	$	4,732	$	7,568	$	—	$	118,492
Interest expense	(967)		(28,329)		(41,923)		(13,372)		(4,351)		(1,842)		—		(90,784)
Net interest income	141		3,594		14,685		3,181		381		5,726		—		27,708
Non-interest income

Investment fair value changes, net	(336)		(5,886)		(22,109)		(35,940)		(190)		(4,505)		1,201		(67,765)
Other income	—		—		255		—		—		—		—		255

Total non-interest income, net	(336)		(5,886)		(21,854)		(35,940)		(190)		(4,505)		1,201		(67,510)
General and administrative expenses	—		—		—		—		—		(44)		—		(44)
Other expenses	—		—		—		—		—		(235)		—		(235)

Income (loss) from Consolidated VIEs	$	(195)	$	(2,292)	$	(7,169)	$	(32,759)	$	191	$	942	$	1,201	$	(40,081)


	Six Months Ended June 30, 2022
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	2,120	$	64,021	$	133,942	$	33,753	$	9,485	$	15,487	$	—	$	258,808
Interest expense	(1,668)		(56,500)		(100,403)		(27,457)		(8,722)		(3,504)		—		(198,254)
Net interest income	452		7,521		33,539		6,296		763		11,983		—		60,554
Non-interest income

Investment fair value changes, net	(1,050)		(9,708)		(19,445)		(32,904)		74		(7,973)		4,612		(66,394)
Other income	—		—		345		—		—		—		—		345

Total non-interest income, net	(1,050)		(9,708)		(19,100)		(32,904)		74		(7,973)		4,612		(66,049)
General and administrative expenses	—		—		—		—		—		(75)		—		(75)
Other expenses	—		—		—		—		—		(786)		—		(786)

Income (loss) from Consolidated VIEs	$	(598)	$	(2,187)	$	14,439	$	(26,608)	$	837	$	3,149	$	4,612	$	(6,356)

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)


	Three Months Ended June 30, 2021
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	1,169	$	14,492	$	54,849	$	19,506	$	4,860	$	4,041	$	—	$	98,917
Interest expense	(755)		(11,374)		(43,201)		(16,611)		(4,478)		(1,110)		—		(77,529)
Net interest income	414		3,118		11,648		2,895		382		2,931		—		21,388
Non-interest income

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


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

Income (loss) from Consolidated VIEs	$	198	$	8,024	$	15,345	$	39,211	$	2,237	$	447	$	—	$	65,462


	Six Months Ended June 30, 2021
	Legacy Sequoia		Sequoia		CAFL		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		HEI		Total Consolidated VIEs
(Dollars in Thousands)
Interest income	$	2,517	$	29,975	$	103,722	$	39,665	$	9,646	$	8,263	$	—	$	193,788
Interest expense	(1,630)		(23,480)		(81,054)		(33,982)		(8,834)		(2,396)		—		(151,376)
Net interest income	887		6,495		22,668		5,683		812		5,867		—		42,412
Non-interest income

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


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

Income (loss) from Consolidated VIEs	$	(28)	$	16,299	$	26,079	$	46,116	$	11,588	$	1,769	$	—	$	101,823

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 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 June 30, 2022, we did not call any of our unconsolidated Sequoia entities. During the six months ended June 30, 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 (loss). At June 30, 2022, we held $222 million of loans for sale at fair value that were acquired following the calls.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents information related to securitization transactions that occurred during the three and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Principal balance of loans transferred	$	—	$	355,924	$	—	$	1,231,803
Trading securities retained, at fair value	—		1,225		—		7,774
AFS securities retained, at fair value	—		522		—		1,600

The following table summarizes the cash flows during the three and six months ended June 30, 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 June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Proceeds from new transfers	$	—	$	361,673	$	—	$	1,266,063
MSR fees received	764		1,336		1,628		2,943
Funding of compensating interest, net	(14)		(70)		(30)		(170)
Cash flows received on retained securities	3,158		16,764		17,284		25,393

The following table presents the key weighted-average assumptions used to value securities retained at the date of securitization for securitizations completed during the three and six months ended June 30, 2022 and 2021.

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

Three Months Ended June 30, 2022

Three Months Ended June 30, 2021

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

Prepayment rates

N/A

8 %

Discount rates

N/A

15 %

7 %

Credit loss assumptions

N/A

0.25 %

Six Months Ended June 30, 2022

Six Months Ended June 30, 2021

At Date of Securitization

Senior IO Securities

Subordinate Securities

Senior IO Securities

Subordinate Securities

Prepayment rates

N/A

11 %

Discount rates

N/A

15 %

6 %

Credit loss assumptions

N/A

0.23 %

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 4. Principles of Consolidation - (continued)

The following table presents additional information at June 30, 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)	June 30, 2022		December 31, 2021
On-balance sheet assets, at fair value:
Interest-only, senior and subordinate securities, classified as trading	$	27,293	$	18,214
Subordinate securities, classified as AFS	85,269		127,542
Mortgage servicing rights	11,092		6,450
Maximum loss exposure (1)	$	123,654	$	152,206
Assets transferred:
Principal balance of loans outstanding	$	4,281,806	$	4,959,234
Principal balance of loans 30+ days delinquent	27,683		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 June 30, 2022 and December 31, 2021.

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


June 30, 2022	MSRs			Senior Securities (1)			Subordinate Securities
(Dollars in Thousands)
Fair value at June 30, 2022	$	11,092		$	27,293		$	85,269
Expected life (in years) (2)	6			6			15
Prepayment speed assumption (annual CPR) (2)	10		%	11		%	10		%
Decrease in fair value from:
10% adverse change	$	1,402		$	1,002		$	568
25% adverse change	3,405			2,406			1,323
Discount rate assumption (2)	11		%	12		%	8		%
Decrease in fair value from:
100 basis point increase	$	1,649		$	910		$	8,522
200 basis point increase	3,180			1,759			15,860
Credit loss assumption (2)	N/A			0.03		%	0.03		%
Decrease in fair value from:
10% higher losses	N/A			N/A			$	42
25% higher losses	N/A			N/A			103

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 $27 million and $18 million of interest-only securities at June 30, 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 June 30, 2022 and December 31, 2021, grouped by asset type.

Table 4.8 – Third-Party Sponsored VIE Summary


(In Thousands)	June 30, 2022		December 31, 2021
Mortgage-Backed Securities
Senior	$	4,205	$	3,572

Subordinate	167,512		228,083
Total Mortgage-Backed Securities	171,717		231,655
Excess MSR	8,633		10,400
Total Investments in Third-Party Sponsored VIEs	$	180,350	$	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

June 30, 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

June 30, 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 June 30, 2022 and December 31, 2021.

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


	June 30, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In Thousands)
Assets
Residential loans, held-for-sale, at fair value	$	1,213,067	$	1,213,067	$	1,845,248	$	1,845,248
Residential loans, held-for-investment, at fair value	5,365,531		5,365,531		5,747,150		5,747,150
Business purpose loans, held-for-sale, at fair value	505,171		505,171		358,309		358,309
Business purpose loans, held-for-investment, at fair value	4,697,766		4,697,766		4,432,680		4,432,680
Consolidated Agency multifamily loans, at fair value	443,114		443,114		473,514		473,514
Real estate securities, at fair value	284,278		284,278		377,411		377,411
Servicer advance investments (1)	273,210		273,210		350,923		350,923
MSRs (1)	23,560		23,560		12,438		12,438
Excess MSRs (1)	40,803		40,803		44,231		44,231
HEIs (1)	276,366		276,366		192,740		192,740
Other investments (1)	10,869		10,869		12,663		12,663
Cash and cash equivalents	371,296		371,296		450,485		450,485
Restricted cash	72,558		72,558		80,999		80,999
Derivative assets	36,587		36,587		26,467		26,467
REO (2)	7,813		9,170		36,126		39,272
Margin receivable (2)	11,420		11,420		7,269		7,269



Liabilities
Short-term debt	$	1,869,822	$	1,869,822	$	2,177,362	$	2,177,362
Margin payable (3)	15,023		15,023		24,368		24,368
Guarantee obligations (3)	6,768		6,241		7,459		7,133
HEI securitization non-controlling interest	25,422		25,422		17,035		17,035
Derivative liabilities	6,591		6,591		3,317		3,317
ABS issued, net
At fair value	7,993,953		7,993,953		8,843,147		8,843,147
At amortized cost	590,193		569,731		410,410		410,471
Other long-term debt, net (4)	1,104,050		1,101,622		988,483		989,570
Convertible notes, net (4)	723,267		684,922		513,629		537,300
Trust preferred securities and subordinated notes, net (4)	138,744		83,700		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)These liabilities are included in Long-Term debt, net of our consolidated balance sheets.

During the three and six months ended June 30, 2022, we elected the fair value option for zero and $5 million of securities, respectively, $1.15 billion and $3.26 billion of residential loans (principal balance), respectively, and $923 million and $1.84 billion of business purpose loans (principal balance), respectively. Additionally, during the three and six months ended June 30, 2022, we elected the fair value option for $57 million and $97 million of HEIs, respectively, and $3 million and $8 million of Other Investments, respectively. 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

June 30, 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 June 30, 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


June 30, 2022	Carrying Value		Fair Value Measurements Using
(In Thousands)			Level 1		Level 2		Level 3
Assets
Residential loans	$	6,578,566	$	—	$	—	$	6,578,566
Business purpose loans	5,202,938		—		—		5,202,938
Consolidated Agency multifamily loans	443,114		—		—		443,114
Real estate securities	284,278		—		—		284,278
Servicer advance investments	273,210		—		—		273,210
MSRs	23,560		—		—		23,560
Excess MSRs	40,803		—		—		40,803
HEIs	276,366		—		—		276,366
Other investments	10,869		—		—		10,869
Derivative assets	36,587		4,979		29,601		2,007



Liabilities
HEI securitization non-controlling interest	$	25,422	$	—	$	—	$	25,422
Derivative liabilities	6,591		3,619		2,445		527
ABS issued	7,993,953		—		—		7,993,953


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
Consolidated Agency 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

June 30, 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 six months ended June 30, 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	3,247,960		122,065		—		5,006		10,000		—		—		97,389		8,293
Originations	—		1,721,032		—		—		—		—		—		—		—
Sales	(3,050,759)		(331,750)		—		(23,329)		—		—		—		—		(2,231)
Principal paydowns	(551,470)		(719,690)		(3,971)		(1,018)		(25,015)		(71,401)		—		(25,826)		(30)

Gains (losses) in net income (loss), net	(657,601)		(378,745)		(26,429)		(17,498)		11,730		(6,312)		(3,428)		12,063		6,875
Unrealized losses in OCI, net	—		—		—		—		(53,009)		—		—		—		—
Other settlements, net (1)	(1,962)		(963)		—		—		—		—		—		—		(3,579)
Ending balance - June 30, 2022	$	6,578,566	$	5,202,938	$	443,114	$	133,780	$	150,498	$	273,210	$	40,803	$	276,366	$	34,429


	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		—		—		952,711

Principal paydowns		—		—		(925,650)

Gains (losses) in net income (loss), net		(51,265)		6,218		(876,255)

Other settlements, net (1)		48,615		—		—
Ending balance - June 30, 2022		$	1,480	$	23,253	$	7,993,953

(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 and interest rate lock commitments at the time loans are acquired to the basis of residential and single-family rental business purpose loans, and for MSRs and other investments, primarily represents an investment that was exchanged into a new instrument that is no longer measured at fair value on a recurring basis.

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

The following table presents the portion of fair value gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at June 30, 2022 and 2021. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and six months ended June 30, 2022 and 2021 are not included in this presentation.

Table 5.4 – Portion of Net Fair Value Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at June 30, 2022 and 2021 Included in Net Income (Loss)


	Included in Net Income (Loss)
	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Assets
Residential loans at Redwood	$	(15,995)	$	14,130	$	(31,858)	$	10,481
Business purpose loans	(28,385)		28,404		(36,566)		40,003
Net investments in consolidated Sequoia entities (1)	(6,222)		4,693		(11,203)		8,893
Net investments in consolidated Freddie Mac SLST entities (1)	(36,014)		36,137		(33,074)		40,225
Net investments in consolidated Freddie Mac K-Series entities (1)	(190)		1,855		74		10,776
Net investments in consolidated CAFL SFR entities (1)	(21,828)		2,908		(17,780)		2,556
Net investment in consolidated HEI securitization entity (1)	3,371		—		13,000		—
Trading securities	(17,501)		1,772		(19,884)		2,262

Servicer advance investments	(3,231)		(940)		(6,313)		(1,100)
MSRs	4,248		(330)		7,644		273
Excess MSRs	(2,220)		(2,477)		(3,428)		(4,430)
HEIs at Redwood	1,549		2,080		2,701		7,395
Loan purchase and interest rate lock commitments	2,056		14,550		2,007		14,171



Liabilities
HEI securitization non-controlling interest	$	(2,170)	$	—	$	(8,388)	$	—
Loan purchase commitments	(488)		(696)		(527)		(724)

(1) Represents the portion of net fair value gains or losses included in our consolidated statements of income (loss) related to securitized loans, securitized HEIs, and the associated ABS issued at our consolidated securitization entities held at June 30, 2022 and 2021, which netted together represent the change in value of our investments at the consolidated VIEs accounted for under CFE election, excluding REO.

The following table presents information on assets recorded at fair value on a non-recurring basis at June 30, 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 June 30, 2022.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at June 30, 2022


									Gain (Loss) for
June 30, 2022	Carrying Value		Fair Value Measurements Using						Three Months Ended		Six Months Ended
(In Thousands)			Level 1		Level 2		Level 3		June 30, 2022		June 30, 2022
Assets


REO	$	1,380	$	—	$	—	$	1,380	$	—	$	—
Strategic investments	17,240		—		—		17,240		9,990		9,990

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 and six months ended June 30, 2022 and 2021.

Table 5.6 – Market Valuation Gains and Losses, Net


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value	$	(24,517)	$	24,988	$	(51,716)	$	48,100
Residential loan purchase commitments	(8,897)		51,919		(50,520)		(466)
Single-family rental loans held-for-sale, at fair value	(40,034)		25,222		(64,502)		35,470
Single-family rental loan interest rate lock commitments	40		744		(685)		744
Bridge loans	116		2,225		2,251		3,269
Trading securities (1)	1,315		(1,095)		4,101		(374)
Risk management derivatives, net	25,387		(58,244)		115,774		34,578
Total mortgage banking activities, net (2)	$	(46,590)	$	45,759	$	(45,297)	$	121,321
Investment Fair Value Changes, Net
Residential loans held-for-sale, at fair value (called Sequoia loans)	$	(8,010)	$	1,290	$	(12,262)	$	1,607

Bridge loans held-for-investment	(9,559)		(62)		(11,702)		3,242
Trading securities	(17,358)		2,893		(21,600)		23,521
Servicer advance investments	(3,231)		(940)		(6,312)		(1,100)
Excess MSRs	(2,220)		(2,477)		(3,428)		(4,430)
Net investments in Legacy Sequoia entities (3)	(336)		(216)		(1,050)		(915)
Net investments in Sequoia entities (3)	(5,886)		4,906		(9,708)		9,804
Net investments in Freddie Mac SLST entities (3)	(35,940)		36,316		(32,904)		40,433
Net investment in Freddie Mac K-Series entity (3)	(190)		1,855		74		10,776
Net investments in CAFL SFR entities (3)	(21,828)		3,697		(17,780)		3,411
Net investment in HEI securitization entity (3)	1,201		—		4,612		—
HEIs at Redwood	1,596		2,080		2,788		7,395
Other investments	10,460		125		10,583		435
Risk management derivatives, net	4,395		—		6,368		—
Credit (losses) recoveries on AFS securities	(1,066)		13		(1,771)		388
Total investment fair value changes, net	$	(87,972)	$	49,480	$	(94,092)	$	94,567
Other Income
MSRs	$	3,827	$	(1,381)	$	6,795	$	(2,247)


Total other income (4)	$	3,827	$	(1,381)	$	6,795	$	(2,247)
Total Market Valuation Gains (Losses), Net	$	(130,735)	$	93,858	$	(132,594)	$	213,641

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

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

(3)Includes changes in fair value of the 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

June 30, 2022

(Unaudited)

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

At June 30, 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.

The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments


June 30, 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	$	714,777	Whole loan spread to swap rate	217		-	240		bps	221		bps

			Called loan dollar price	$	96	-	$	96		$	96





Jumbo loans committed to sell	498,258		Whole loan committed sales price	$	97	-	$	99		$	98






Loans held by Legacy Sequoia (2)	208,788		Liability price				N/A			N/A

Loans held by Sequoia (2)	3,525,459		Liability price				N/A			N/A

Loans held by Freddie Mac SLST (2)	1,631,285		Liability price				N/A			N/A

Business purpose loans:
Single-family rental loans	505,171		Senior credit spread	215		-	235		bps	220		bps
			Subordinate credit spread	260		-	1,099		bps	504		bps
			Senior credit support	39		-	40		%	39		%
			IO discount rate	8		-	13		%	9		%
			Prepayment rate (annual CPR)	3		-	25		%	6		%
			Non-securitizable loan dollar price	$	80	-	$	100		$	93

Single-family rental loans held by CAFL (2)	3,046,277		Liability price				N/A			N/A

Bridge loans	1,651,489		Whole loan discount rate	5		-	15		%	8		%
			Senior credit spread	325		-	325		bps	325		bps
			Subordinate credit discount rate	15		-	15		%	15		%
			Senior credit support	15		-	15		%	15		%


Multifamily loans held by Freddie Mac K-Series (2)	443,114		Liability price				N/A			N/A



Trading and AFS securities	284,278		Discount rate	4		-	18		%	9		%
			Prepayment rate (annual CPR)	6		-	65		%	13		%
			Default rate	—		-	11		%	1		%
			Loss severity	—		-	50		%	25		%
			CRT dollar price	$	74	-	$	88		$	83

Servicer advance investments	273,210		Discount rate	2		-	4		%	3		%
			Prepayment rate (annual CPR)	16		-	30		%	16		%
			Expected remaining life (3)	5		-	5		yrs	5		yrs
			Mortgage servicing income	—		-	18		bps	9		bps

MSRs	23,560		Discount rate	11		-	115		%	11		%
			Prepayment rate (annual CPR)	5		-	31		%	9		%
			Per loan annual cost to service	$	93	-	$	93		$	93

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

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


June 30, 2022	Fair Value		Input Values
(Dollars in Thousands, except Input Values)		Unobservable Input	Range						Weighted Average (1)
Assets (continued)









































































Excess MSRs	40,803	Discount rate	13		-	19		%	18		%
		Prepayment rate (annual CPR)	16		-	35		%	20		%
		Excess mortgage servicing income	8		-	18		bps	11		bps

HEI	130,151	Discount rate	10		-	10		%	10		%
		Prepayment rate (annual CPR)	1		-	24		%	17		%
		Home price appreciation	3		-	4		%	3		%

HEIs held by HEI securitization entity	146,215	Liability price	N/A			N/A			N/A

REO	1,380	Loss severity	12		-	25		%	20		%

Liabilities
Residential loan purchase commitments, net	1,500	Whole loan spread to swap rate	217		-	240		bps	224		bps

		Pull-through rate	18		-	100		%	68		%
		Committed sales price	$	97	-	$	102		$	97








ABS issued (2):
At consolidated Sequoia entities	3,496,329	Discount rate	4		-	18		%	6		%
		Prepayment rate (annual CPR)	5		-	27		%	14		%
		Default rate	—		-	22		%	1		%
		Loss severity	25		-	50		%	32		%

At consolidated CAFL SFR entities (4)	2,732,964	Discount rate	2		-	15		%	5		%
		Prepayment rate (annual CPR)	—		-	3		%	3		%
		Default rate	5		-	28		%	7		%
		Loss severity	30		-	30		%	30		%

At consolidated Freddie Mac SLST entities	1,243,167	Discount rate	4		-	7		%	5		%
		Prepayment rate (annual CPR)	6		-	8		%	6		%
		Default rate	7		-	9		%	8		%
		Loss severity	35		-	35		%	35		%

At consolidated Freddie Mac K-Series entities (4)	411,380	Discount rate	3		-	9		%	4		%





At consolidated HEI securitization entity (4)	110,111	Discount rate	8		-	13		%	9		%
		Prepayment rate (annual CPR)	20		-	20		%	20		%
		Default rate	12		-	12		%	12		%
		Loss severity	30		-	30		%	30		%
		Home price appreciation	3		-	4		%	3		%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 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 $238 million, $307 million, $390 million, $32 million, and $15 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. As of June 30, 2022, the carrying value of these investments was $9 million, which was based on the investments' original cost.

Note 6. Residential Loans

We acquire residential loans from third-party originators and may sell or securitize these loans or hold them for investment. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia and Freddie Mac SLST entities at June 30, 2022 and December 31, 2021.

Table 6.1 – Classifications and Carrying Values of Residential Loans


June 30, 2022			Legacy				Freddie Mac
(In Thousands)	Redwood		Sequoia		Sequoia		SLST		Total
Held-for-sale at fair value	$	1,213,067	$	—	$	—	$	—	$	1,213,067
Held-for-investment at fair value	—		208,788		3,525,459		1,631,285		5,365,532
Total Residential Loans	$	1,213,067	$	208,788	$	3,525,459	$	1,631,285	$	6,578,599


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

June 30, 2022

(Unaudited)

Note 6. Residential Loans - (continued)

At June 30, 2022, we owned mortgage servicing rights associated with $1.16 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 June 30, 2022 and December 31, 2021.

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


(Dollars in Thousands)	June 30, 2022			December 31, 2021
Number of loans	1,469			2,196
Unpaid principal balance	$	1,238,469		$	1,813,865
Fair value of loans	$	1,213,067		$	1,845,282
Market value of loans pledged as collateral under short-term borrowing agreements	$	1,207,185		$	1,838,797
Weighted average coupon	4.47		%	3.27		%

Delinquency information
Number of loans with 90+ day delinquencies	1			3
Unpaid principal balance of loans with 90+ day delinquencies	$	211		$	2,923
Fair value of loans with 90+ day delinquencies	$	170		$	2,304
Number of loans in foreclosure	—			—

The following table provides the activity of residential loans held-for-sale during the three and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Principal balance of loans acquired (1)	$	1,145,450	$	3,484,633	$	3,260,641	$	6,580,681
Principal balance of loans sold	1,238,327		3,324,919		3,065,691		5,600,751
Principal balance of loans transferred to HFI	—		—		687,192		—
Net market valuation gains (losses) recorded (2)	(32,527)		26,278		(63,978)		49,707

(1)For the three and six months ended June 30, 2022, includes zero and $102 million of loans acquired through calls of zero and three seasoned Sequoia securitizations, respectively.

(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 (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 2022 and December 31, 2021.

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


June 30, 2022	Legacy						Freddie Mac
(Dollars in Thousands)	Sequoia			Sequoia			SLST
Number of loans	1,447			4,738			11,285
Unpaid principal balance	$	234,213		$	3,988,148		$	1,796,594
Fair value of loans	$	208,788		$	3,525,459		$	1,631,285
Weighted average coupon	2.27		%	3.26		%	4.50		%

Delinquency information
Number of loans with 90+ day delinquencies (1)	29			14			1,370
Unpaid principal balance of loans with 90+ day delinquencies	$	5,107		$	12,008		$	236,941
Fair value of loans with 90+ day delinquencies (2)	N/A			N/A			N/A
Number of loans in foreclosure	11			5			257
Unpaid principal balance of loans in foreclosure	$	1,483		$	5,004		$	45,536


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

June 30, 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 and six months ended June 30, 2022 and 2021.

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

Three Months Ended June 30, 2022

Three Months Ended June 30, 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

—

N/A

1,205,494

N/A

Net market valuation gains (losses) recorded (2)

779

(211,486)

(76,735)

4,863

(12,835)

22,579

Six Months Ended June 30, 2022

Six Months Ended June 30, 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

1,205,494

N/A

Net market valuation gains (losses) recorded (2)

7,104

(482,217)

(120,503)

12,476

(15,413)

19,013

(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, including securities we own, pursuant to collateralized financing entity guidelines, and are recorded in Investment fair value changes, net on our consolidated statements of income (loss). 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 June 30, 2022 and December 31, 2021.

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans


June 30, 2022	Single-Family Rental				Bridge
(In Thousands)	Redwood		CAFL		Redwood		CAFL		Total
Held-for-sale at fair value	$	505,171	—		$	—	$	—	$	505,171
Held-for-investment at fair value	—		3,046,277		1,109,337		542,152		4,697,766
Total Business Purpose Loans	$	505,171	$	3,046,277	$	1,109,337	$	542,152	$	5,202,937


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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Nearly all of the outstanding single-family rental loans at June 30, 2022 were first-lien, fixed-rate loans with original maturities of five, seven, or ten years, with 3% having original maturities of 30 years. The outstanding bridge loans held-for-investment at June 30, 2022 were first-lien, interest-only loans with original maturities of six to 36 months and were comprised of 45% one-month LIBOR-indexed adjustable-rate loans, 39% one-month SOFR-indexed adjustable-rate loans, and 17% fixed-rate loans.

At June 30, 2022, we had a $835 million commitment to fund bridge loans. See Note 16 for additional information on this commitment.

The following table provides the activity of business purpose loans at Redwood during the three and six months ended June 30, 2022 and 2021.

Table 7.2 – Activity of Business Purpose Loans at Redwood


	Three Months Ended June 30, 2022				Three Months Ended June 30, 2021
(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood
Principal balance of loans originated	$	323,245	$	542,241	$	312,217	$	215,160
Principal balance of loans acquired	38,457		19,023		—		—
Principal balance of loans sold to third parties	—		—		—		354
Fair value of loans transferred (1)	295,037		306,313		297,301		—

Mortgage banking activities income (loss) recorded (2)	(40,034)		(1,136)		25,222		978
Investment fair value changes recorded (3)	—		(5,455)		—		(62)


	Six Months Ended June 30, 2022				Six Months Ended June 30, 2021
(In Thousands)	SFR at Redwood		Bridge at Redwood		SFR at Redwood		Bridge at Redwood
Principal balance of loans originated	$	765,972	$	954,179	$	565,315	$	348,389
Principal balance of loans acquired	100,349		22,006		—		—
Principal balance of loans sold to third parties	331,502		—		—		9,231
Fair value of loans transferred (1)	295,037		388,604		466,705		N/A

Mortgage banking activities income (loss) recorded (2)	(64,502)		1,239		35,470		1,520
Investment fair value changes recorded (3)	—		(6,214)		—		3,242

(1)For SFR at Redwood, represents the transfer of loans from held-for-sale to held-for-investment associated with CAFL SFR securitizations. For Bridge at Redwood, represents 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 and six months ended June 30, 2022, we recorded loan origination fee income of $12 million and $27 million, respectively, through Mortgage banking activities, net on our consolidated statements of income (loss).

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loans Held-for-Investment at CAFL

We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying single-family rental loans and bridge loans owned by these entities. The following table provides the activity of business purpose loans held-for-investment at CAFL during the three and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30, 2022				Three Months Ended June 30, 2021
(In Thousands)	SFR at CAFL		Bridge at CAFL		SFR at CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded (1)	$	(118,299)	$	(281)	$	(1,230)	$	—


	Six Months Ended June 30, 2022				Six Months Ended June 30, 2021
(In Thousands)	SFR at CAFL		Bridge at CAFL		SFR at CAFL		Bridge at CAFL
Net market valuation gains (losses) recorded (1)	$	(310,202)	$	(1,856)	$	(62,132)	$	—

(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, and are recorded through Investment fair value changes, net on our consolidated statements of income (loss). 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

June 30, 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 June 30, 2022 and December 31, 2021.

Table 7.4 – Characteristics of Business Purpose Loans


June 30, 2022	SFR at Redwood			SFR at CAFL			Bridge at Redwood			Bridge at CAFL
(Dollars in Thousands)
Number of loans	355			1,154			1,131			2,268
Unpaid principal balance	$	536,344		$	3,227,172		$	1,116,582		$	541,677
Fair value of loans	$	505,171		$	3,046,277		$	1,109,337		$	542,152
Weighted average coupon	5.31		%	5.16		%	6.73		%	6.89		%
Weighted average remaining loan term (years)	14			6			2			1
Market value of loans pledged as collateral under short-term debt facilities	$	312,732		N/A			$	265,242		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	180,482		N/A			$	779,467		N/A
Delinquency information
Number of loans with 90+ day delinquencies (1)	4			20			51			48
Unpaid principal balance of loans with 90+ day delinquencies	$	5,212		$	50,469		$	32,941		$	7,847
Fair value of loans with 90+ day delinquencies (2)	$	4,086		N/A			$	30,209		$	7,847
Number of loans in foreclosure (3)	4			7			53			3
Unpaid principal balance of loans in foreclosure	$	5,212		$	10,356		$	35,070		$	4,472
Fair value of loans in foreclosure (2)	$	4,086		N/A			$	32,338		$	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

June 30, 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. Consolidated Agency Multifamily Loans

We invest in multifamily subordinate securities issued by a Freddie Mac K-Series securitization trust and consolidate the underlying multifamily loans owned by this entity for financial reporting purposes in accordance with GAAP. The following table summarizes the characteristics of our consolidated Agency multifamily loans at June 30, 2022 and December 31, 2021.

Table 8.1 – Characteristics of Consolidated Agency Multifamily Loans


(Dollars in Thousands)	June 30, 2022			December 31, 2021
Number of loans	28			28
Unpaid principal balance	$	451,197		$	455,168
Fair value of loans	$	443,114		$	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 consolidated Agency multifamily loans held-for-investment at the consolidated Freddie Mac K-Series entity at June 30, 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 and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Net market valuation gains (losses) recorded (1)	$	(6,748)	$	(2,528)	$	(26,429)	$	(3,258)

(1)Net market valuation gains (losses) on multifamily loans held-for-investment are recorded through Investment fair value changes, net on our consolidated statements of income (loss). For loans held at our consolidated Freddie Mac K-Series entity, market value changes are based on the estimated fair value of the associated ABS issued, including securities we own, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our economic investment in these securitization entities is presented in Table 4.2.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 2022 and December 31, 2021.

Table 9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	June 30, 2022		December 31, 2021
Trading	$	133,780	$	170,619
Available-for-sale	150,498		206,792
Total Real Estate Securities	$	284,278	$	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 June 30, 2022 and December 31, 2021.

Table 9.2 – Fair Value of Trading Securities by Position


(In Thousands)	June 30, 2022		December 31, 2021
Senior
Interest-only securities (1)	$	31,498	$	21,787


Total Senior	31,498		21,787





Subordinate
RPL securities	46,607		65,140
Multifamily securities	7,960		10,549
Other third-party residential securities	47,715		73,143
Total Subordinate	102,282		148,832
Total Trading Securities	$	133,780	$	170,619

(1)Includes $24 million and $15 million of Sequoia certificated mortgage servicing rights at June 30, 2022 and December 31, 2021, respectively.

The following table presents the unpaid principal balance of trading securities by position and collateral type at June 30, 2022 and December 31, 2021.

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position


(In Thousands)	June 30, 2022		December 31, 2021
Senior (1)	$	—	$	—

Subordinate	221,473		235,306
Total Trading Securities	$	221,473	$	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

June 30, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

The following table provides the activity of trading securities during the three and six months ended June 30, 2022 and 2021.

Table 9.4 – Trading Securities Activity


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Principal balance of securities acquired (1)	$	—	$	1,750	$	—	$	17,630
Principal balance of securities sold (1)	12,716		18,068		12,716		52,811
Net market valuation gains (losses) recorded (2)	(16,042)		1,798		(17,498)		23,147

(1)For the three and six months ended June 30, 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 June 30, 2022 and December 31, 2021.

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


(In Thousands)	June 30, 2022		December 31, 2021








Subordinate
Sequoia securities	$	85,269	$	127,542
Multifamily securities	13,169		22,166
Other third-party residential securities	52,060		57,084
Total Subordinate	150,498		206,792
Total AFS Securities	$	150,498	$	206,792

The following table provides the activity of available-for-sale securities during the three and six months ended June 30, 2022 and 2021.

Table 9.6 – Available-for-Sale Securities Activity


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Fair value of securities acquired	$	—	$	522	$	10,000	$	1,600
Fair value of securities sold	—		2,585		—		4,785
Principal balance of securities called	—		1,307		14,486		1,507
Net unrealized (losses) gains on AFS securities (1)	(33,409)		11,224		(51,282)		22,210

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

At June 30, 2022, we had $10 million of AFS securities with contractual maturities less than five years, $1 million with contractual maturities greater than five years but less than ten years, and the remainder of our AFS securities had contractual maturities greater than ten years.

The following table presents the components of carrying value (which equals fair value) of AFS securities at June 30, 2022 and December 31, 2021.

Table 9.7 – Carrying Value of AFS Securities


June 30, 2022
(In Thousands)	Total
Principal balance	$	227,911
Credit reserve	(30,619)
Unamortized discount, net	(61,303)
Amortized cost	135,989
Gross unrealized gains	25,930
Gross unrealized losses	(9,650)
CECL allowance	(1,771)
Carrying Value	$	150,498


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 and six months ended June 30, 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 June 30, 2022				Six Months Ended June 30, 2022
	Credit Reserve		Unamortized Discount, Net		Credit Reserve		Unamortized Discount, Net
(In Thousands)
Beginning balance	$	29,901	$	63,206	$	27,555	$	76,023
Amortization of net discount	—		(1,347)		—		(9,817)
Realized credit recoveries (losses), net	162		—		74		—
Acquisitions	—		—		—		—
Sales, calls, other	—		—		(343)		(1,570)

Transfers to (release of) credit reserves, net	556		(556)		3,333		(3,333)
Ending Balance	$	30,619	$	61,303	$	30,619	$	61,303

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 9. Real Estate Securities - (continued)

AFS Securities with Unrealized Losses

The following table presents the total carrying value (fair value) and unrealized losses of residential AFS securities that were in a gross unrealized loss position at June 30, 2022 and December 31, 2021.

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


	Less Than 12 Consecutive Months				12 Consecutive Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(In Thousands)
June 30, 2022	$	46,369	$	(9,456)		$	1,406	$	(194)
December 31, 2021	6,827		(251)			1,554		(46)

At June 30, 2022, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 82 AFS securities, of which 21 were in an 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 $10 million at June 30, 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 June 30, 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 June 30, 2022, our current expected credit loss ("CECL") allowance related to our AFS securities was $1.8 million. AFS securities for which an allowance is recognized have experienced, or are expected to experience, adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of security credit losses.

The table below summarizes the weighted average of the significant credit quality indicators we used for the credit loss allowance on our AFS securities at June 30, 2022.

Table 9.10 – Significant Credit Quality Indicators

June 30, 2022

Subordinate Securities

Default rate

0.8%

Loss severity

20%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 and six months ended June 30, 2022.

Table 9.11 – Rollforward of Allowance for Credit Losses


	Three Months Ended June 30, 2022		Six Months Ended June 30, 2022
(In Thousands)
Beginning balance allowance for credit losses	$	705	$	—

Additions to allowance for credit losses on securities for which credit losses were not previously recorded	785		1,490
Additional increases (decreases) to the allowance for credit losses on securities that had an allowance recorded in a previous period	281		281
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	$	1,771	$	1,771

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and six months ended June 30, 2022 and 2021.

Table 9.12 – Gross Realized Gains and Losses on AFS Securities


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Gross realized gains - sales	$	—	$	1,307	$	—	$	1,507
Gross realized gains - calls	—		6,687		1,914		9,095
Gross realized losses - sales	—		—		—		—

Total Realized Gains on Sales and Calls of AFS Securities, net	$	—	$	7,994	$	1,914	$	10,602

During the six months ended June 30, 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 six months ended June 30, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 10. Other Investments

Other investments at June 30, 2022 and December 31, 2021 are summarized in the following table.

Table 10.1 – Components of Other Investments


(In Thousands)	June 30, 2022		December 31, 2021
HEIs	$	276,366	$	192,740
Servicer advance investments	273,210		350,923
Strategic investments	63,860		35,702
Excess MSRs	40,803		44,231
Mortgage servicing rights	23,560		12,438

Other	1,868		5,935
Total Other Investments	$	679,667	$	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 June 30, 2022, we had funded $148 million of total capital to the SA Buyers (see Note 16 for additional detail).

At June 30, 2022, our servicer advance investments had a carrying value of $273 million and were associated with a portfolio of residential mortgage loans with an unpaid principal balance of $12.09 billion. The outstanding servicer advance receivables associated with this investment were $240 million at June 30, 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 June 30, 2022 and December 31, 2021.

Table 10.2 – Components of Servicer Advance Receivables


(In Thousands)	June 30, 2022		December 31, 2021
Principal and interest advances	$	76,506	$	94,148
Escrow advances (taxes and insurance advances)	133,403		172,847
Corporate advances	29,643		43,958
Total Servicer Advance Receivables	$	239,552	$	310,953

We account for our servicer advance investments at fair value and during the three and six months ended June 30, 2022, we recorded $5 million and $10 million of interest income, respectively, through Other interest income, and recorded a net market valuation loss of $3 million and loss of $6 million, respectively, through Investment fair value changes, net in our consolidated statements of income.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 10. Other Investments - (continued)

HEIs

We purchase home equity investment contracts from third party originators under flow purchase agreements. Each HEI provides the owner of such HEI the right to purchase a percentage ownership interest in an associated residential property, and the homeowner's obligations under the HEI are secured by a lien (primarily second liens) on the property created by a deed of trust or a mortgage. Our investments in HEIs allow us to share in both home price appreciation and depreciation of the associated property. At June 30, 2022, we had flow purchase agreements outstanding with $225 million of cumulative commitments remaining. See Note 16 for additional information on these commitments.

As of June 30, 2022, we owned $130 million of HEIs at Redwood and consolidated $146 million of HEIs through the HEI securitization entity. We account for these investments under the fair value option and during the three and six months ended June 30, 2022, we recorded net market valuation gains of $2 million and $3 million, respectively, related to HEIs owned at Redwood through Investment fair value changes, net on our consolidated statements of income (loss).

We consolidate the HEI securitization in accordance with GAAP and have elected to account for it under the CFE election. During the three and six months ended June 30, 2022, we recorded net market valuation gains of $1 million and $5 million (including $1 million and $2 million of interest expense), respectively, related to our net investment in the HEI securitization entity through Investment fair value changes, net on our consolidated statements of income (loss).

Strategic Investments

Strategic investments represent investments we made in companies either through our RWT Horizons venture investment platform or separately at a corporate level. At June 30, 2022, we had made a total of 24 investments in companies through RWT Horizons with a total carrying value of $24 million, as well as six corporate-level investments. During the three and six months ended June 30, 2022, we recognized a mark-to-market valuation gain of $10 million on one of our strategic investments, which was recorded in Investment fair value changes, net on our consolidated statements of income (loss). During the three months ended June 30, 2022, we recorded losses of $0.3 million in 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 and six months ended June 30, 2022, we recognized $4 million and $8 million of interest income, respectively, through Other interest income, and recorded net market valuation losses of $2 million and $3 million, respectively, through Investment fair value changes, net on our consolidated statements of income (loss).

Mortgage Servicing Rights

We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The majority of our investments in MSRs were made through the retention of servicing rights associated with the residential jumbo mortgage loans that we acquired and subsequently sold to third parties. During the three and six months ended June 30, 2022, we retained zero and $5 million, respectively, of MSRs from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

At June 30, 2022 and December 31, 2021, our MSRs had a fair value of $24 million and $12 million, respectively, and were associated with loans with an aggregate principal balance of $2.28 billion and $2.12 billion, respectively. During the three and six months ended June 30, 2022, including net market valuation gains and losses on our MSRs, we recorded net income of $5 million and $10 million, respectively, through Other income on our consolidated statements of income (loss) related to our MSRs.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 11. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at June 30, 2022 and December 31, 2021.

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


	June 30, 2022				December 31, 2021
	Fair Value		Notional Amount		Fair Value		Notional Amount
(In Thousands)


Assets - Risk Management Derivatives
Interest rate swaps	$	19,113	$	644,000	$	611	$	161,500
TBAs	3,104		455,000		2,880		2,440,000
Interest rate futures	1,875		273,600		25		9,000
Swaptions	10,488		620,000		18,318		1,660,000

Assets - Other Derivatives
Loan purchase and interest rate lock commitments	2,007		235,723		4,633		971,631

Total Assets	$	36,587	$	2,228,323	$	26,467	$	5,242,131



Liabilities - Risk Management Derivatives
Interest rate swaps	$	(2,445)	$	226,000	$	(1,251)	$	283,100
TBAs	(2,004)		405,000		(658)		870,000
Interest rate futures	(1,615)		115,000		(905)		62,500
Liabilities - Other Derivatives
Loan purchase and interest rate lock commitments	(527)		50,947		(503)		404,190

Total Liabilities	$	(6,591)	$	796,947	$	(3,317)	$	1,619,790
Total Derivative Financial Instruments, Net	$	29,996	$	3,025,270	$	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 June 30, 2022, we were party to swaps and swaptions with an aggregate notional amount of $1.49 billion, TBA agreements with an aggregate notional amount of $860 million, and interest rate futures contracts with an aggregate notional amount of $389 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 and six months ended June 30, 2022, risk management derivatives had a net market valuation gain of $30 million, and a net market valuation gain of $122 million, respectively. For the three and six months ended June 30, 2021, risk management derivatives had a net market valuation loss of $58 million, and a net market valuation gain of $35 million, respectively. 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

June 30, 2022

(Unaudited)

Note 11. Derivative Financial Instruments - (continued)

Loan Purchase and Interest Rate Lock Commitments

Loan purchase commitments ("LPCs") and interest rate lock commitments ("IRLCs") that qualify as derivatives are recorded at their estimated fair values. For the three and six months ended June 30, 2022, LPCs and IRLCs had a net market valuation loss of $9 million and loss of $51 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 $74 million and $76 million at June 30, 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 June 30, 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 and six months ended June 30, 2022 and 2021.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2022		2021		2022		2021
Net interest expense on cash flows hedges	$	—	$	—	$	—	$	—

Realized net losses reclassified from other comprehensive income	(1,029)		(1,028)		(2,047)		(2,046)
Total Interest Expense	$	(1,029)	$	(1,028)	$	(2,047)	$	(2,046)

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 June 30, 2022, we assessed this risk as remote and did not record an associated specific valuation adjustment. At June 30, 2022, we were in compliance with our derivative counterparty ISDA agreements.

Note 12. Other Assets and Liabilities

Other assets at June 30, 2022 and December 31, 2021 are summarized in the following table.

Table 12.1 – Components of Other Assets


(In Thousands)	June 30, 2022		December 31, 2021
Accrued interest receivable	$	51,006	$	47,515
Investment receivable	25,688		82,781
Deferred tax asset	20,867		20,867
Operating lease right-of-use assets	17,074		18,772
Income tax receivables	15,573		22
Margin receivable	11,420		7,269
Fixed assets and leasehold improvements (1)	11,189		9,019
REO	7,813		36,126





Other	11,150		8,746
Total Other Assets	$	171,780	$	231,117

(1)Fixed assets and leasehold improvements had a basis of $20 million and accumulated depreciation of $9 million at June 30, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 12. Other Assets and Liabilities - (continued)

Accrued expenses and other liabilities at June 30, 2022 and December 31, 2021 are summarized in the following table.

Table 12.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	June 30, 2022		December 31, 2021
Payable to non-controlling interests	$	49,544	$	42,670
Accrued interest payable	42,548		39,297
Operating lease liabilities	19,448		20,960
Accrued compensation	17,765		74,636
Margin payable	15,023		24,368
Accrued operating expenses	8,743		4,377
Guarantee obligations	6,768		7,459
Residential loan and MSR repurchase reserve	5,678		9,306
Current accounts payable	5,518		8,273


Bridge loan holdbacks	3,983		3,109





Other	15,807		11,333
Total Accrued Expenses and Other Liabilities	$	190,825	$	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 June 30, 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 six months ended June 30, 2022.

Table 12.3 – REO Activity


	Six Months Ended June 30, 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	963		407		1,763		—		3,133
Liquidations (1)	(9,549)		(504)		(1,661)		(20,969)		(32,683)
Changes in fair value, net	625		443		169		—		1,237
Balance at End of Period	$	5,107	$	407	$	2,299	$	—	$	7,813

(1)For the six months ended June 30, 2022, REO liquidations resulted in $1 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

June 30, 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 June 30, 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 June 30, 2022	3	1	21	—	25
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 June 30, 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 June 30, 2022 and December 31, 2021.

Table 13.1 – Short-Term Debt


	June 30, 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	$	1,085,802	$	2,750,000	3.28	%	8/2022-3/2023	213

Business purpose loan warehouse	3	456,887		1,200,000		4.21	%	3/2023-6/2023	258
Real estate securities repo	4	95,287		—		1.91	%	7/2022-9/2022	32

Total Short-Term Debt Facilities	14	1,637,976
Servicer advance financing	1	231,846		300,000		3.40	%	11/2022	125

Total Short-Term Debt		$	1,869,822


	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

June 30, 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 June 30, 2022 and December 31, 2021.

Table 13.2 – Collateral for Short-Term Debt


(In Thousands)	June 30, 2022		December 31, 2021
Collateral Type
Held-for-sale residential loans	$	1,207,185	$	1,838,797
Business purpose loans	577,974		167,687
Real estate securities
On balance sheet	10,014		5,823
Sequoia securitizations (1)	82,636		61,525

Freddie Mac K-Series securitization (1)	31,732		31,657

Total real estate securities owned	124,382		99,005
Restricted cash and other assets	2,512		1,962
Total Collateral for Short-Term Debt Facilities	1,912,053		2,107,451
Cash	14,381		6,480
Restricted cash	26,236		25,420
Servicer advances	273,210		310,953
Total Collateral for Servicer Advance Financing	313,827		342,853
Total Collateral for Short-Term Debt	$	2,225,880	$	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 and six months ended June 30, 2022, the average balance of our short-term debt facilities was $1.64 billion and $1.66 billion, respectively. At June 30, 2022 and December 31, 2021, accrued interest payable on our short-term debt facilities was $3 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 June 30, 2022, the accrued interest payable balance on this financing was $0.2 million and the unamortized capitalized commitment costs were $0.3 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 June 30, 2022. At both June 30, 2022 and December 31, 2021, we had no outstanding borrowings on this facility.

During the three months ended June 30, 2022, a business purpose loan warehouse facility with a borrowing limit of $450 million was reclassified to short-term debt from long-term debt as the maturity of this facility was less than one year at June 30, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 2022.

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


	June 30, 2022
(In Thousands)	Within 30 days		31 to 90 days		Over 90 days		Total
Collateral Type
Held-for-sale residential loans	$	—	$	128,440	$	957,362	$	1,085,802
Business purpose loans	—		—		456,887		456,887
Real estate securities	57,323		37,964		—		95,287
Total Secured Short-Term Debt	57,323		166,404		1,414,249		1,637,976
Servicer advance financing	—		—		231,846		231,846

Total Short-Term Debt	$	57,323	$	166,404	$	1,646,095	$	1,869,822

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 June 30, 2022 and December 31, 2021, along with other selected information, are summarized in the following table.

Table 14.1 – Asset-Backed Securities Issued


June 30, 2022	Legacy Sequoia		Sequoia		CAFL (1)		Freddie Mac SLST (2)		Freddie Mac K-Series			HEI			Total
(Dollars in Thousands)
Certificates with principal balance	$	229,651	$	3,733,955	$	3,303,312	$	1,392,244	$	414,729		$	117,581		$	9,191,472
Interest-only certificates	258		60,183		149,184		14,938		8,809			—			233,372
Market valuation adjustments	(22,262)		(505,456)		(244,629)		(48,723)		(12,158)			(7,470)			(840,698)


ABS Issued, Net	$	207,647	$	3,288,682	$	3,207,867	$	1,358,459	$	411,380		$	110,111		$	8,584,146
Range of weighted average interest rates, by series(3)	1.59% to 2.88%		2.52% to 5.00%		2.34% to 5.34%		3.50% to 4.75%		3.41		%	3.74		%
Stated maturities(3)	2024 - 2036		2047-2052		2027-2032		2028-2059		2025			2052
Number of series	20		17		18		3		1			1

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 $485 million and $270 million (principal balance) of ABS issued by two CAFL bridge securitization trusts sponsored by Redwood and accounted for at amortized cost at June 30, 2022 and December 31, 2021, respectively.

(2)Includes $117 million and $145 million (principal balance) of ABS issued by a re-securitization trust sponsored by Redwood and accounted for at amortized cost at June 30, 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 second quarter of 2022, 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 $215 million (principal balance) of ABS issued to third parties and retained the remaining beneficial ownership interest in the trust. The ABS were issued at a discount and we have elected to account for the ABS issued at amortized cost. At June 30, 2022, the principal balance of the ABS issued was $215 million, and the unamortized debt discount and deferred issuance costs were $8 million in total, for a net carrying value of $207 million. The weighted average stated coupon of the ABS issued was 4.32% at issuance. The ABS issued by the CAFL bridge entity are subject to an optional redemption in May 2024, and beginning in June 2025, the interest rate on the ABS issued increases by 2% through final maturity in May 2029. The ABS issued by this securitization were backed by assets including $249 million of bridge loans and $1 million of restricted cash at June 30, 2022. The securitization is structured with $250 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 24 months of the transaction (through May 2024), unless an amortization event occurs prior to the expiration of the 24-month reinvestment period. Amortization trigger events include, among other events, delinquency rates or default rates exceeding specified thresholds for three consecutive periods, or the effective advance rate exceeding a specified threshold.

During the third quarter of 2021, we consolidated the assets and liabilities of a securitization entity formed in connection with the securitization of CoreVest 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 June 30, 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 $293 million of bridge loans, $8 million of restricted cash and $7 million of other assets at June 30, 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.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

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

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 June 30, 2022, the principal balance of the ABS issued was $117 million, and the debt discount and deferred issuance costs totaled $1 million, for a net carrying value of $115 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%.

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 June 30, 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 June 30, 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)	June 30, 2022		December 31, 2021
Legacy Sequoia	$	171	$	99
Sequoia	9,232		8,452
CAFL	10,611		11,030
Freddie Mac SLST (1)	4,182		4,630
Freddie Mac K-Series	1,178		1,190
Total Accrued Interest Payable on ABS Issued	$	25,374	$	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

June 30, 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 June 30, 2022 and December 31, 2021.

Table 15.1 – Long-Term Debt


	June 30, 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	$	132,212	$	(104)	$	132,108	N/A		4.21	%	9/2024
CAFL
Facility B	102,018		(202)		101,816		N/A		4.21	%	2/2025
Facility C	76,195		(251)		75,944		N/A		4.75	%	6/2026
Non-Recourse BPL Financing
Facility D	500,608		(1,026)		499,582		$	600,000	L + 2.50%		N/A
Recourse BPL Financing
Facility E	294,702		(103)		294,599		450,000		SOFR + 2.25%		9/2023

Total Long-Term Debt Facilities	1,105,735		(1,686)		1,104,049
Convertible notes
4.75% convertible senior notes	198,629		(1,302)		197,327		N/A		4.75	%	8/2023
5.625% convertible senior notes	150,200		(1,683)		148,517		N/A		5.625	%	7/2024
5.75% exchangeable senior notes	172,092		(2,977)		169,115		N/A		5.75	%	10/2025
7.75% convertible senior notes	215,000		(6,691)		208,309		N/A		7.75	%	6/2027
Trust preferred securities and subordinated notes	139,500		(756)		138,744		N/A		L + 2.25%		7/2037
Total Long-Term Debt	$	1,981,156	$	(15,095)	$	1,966,061

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 C	91,707		(376)		91,331		N/A		4.75	%	6/2026
Non-Recourse BPL Financing
Facility D	307,215		(507)		306,708		$	400,000	L + 2.75%		N/A
Recourse BPL Financing
Facility E	234,349		(123)		234,226		450,000		L + 2.21%		9/2023
Facility F	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 D (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 E and F (see Table 15.1 above) to be indexed to a spread over one-month SOFR compared to a LIBOR-indexed spread at March 31, 2022.

During the three months ended June 30, 2022, Facility F was reclassified to short-term debt as the maturity of this facility was less than one year at June 30, 2022.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 15. Long-Term Debt - (continued)

Convertible Notes

In June 2022, we issued $215 million principal amount of 7.75% convertible senior notes due 2027. These notes require semi-annual interest payments at a fixed annual coupon rate of 7.75% until maturity or conversion, which will be no later than June 15, 2027. After deducting the underwriting discount and offering costs, we received $208 million of net proceeds. Including amortization of deferred debt issuance costs, the effective interest expense yield on these notes was approximately 8.50% per annum. We may elect to settle conversions either entirely in cash or in a combination of cash and shares of common stock. Upon conversion, the conversion value will be paid in cash up to at least the principal amount of the notes being converted. The initial conversion rate of the notes is 95.6823 common shares per $1,000 principal amount of notes (equivalent to a conversion price of $10.45 per common share).

The following table below presents the value of loans, securities, and other assets pledged as collateral under our long-term debt at June 30, 2022 and December 31, 2021.

Table 15.2 – Collateral for Long-Term Debt


(In Thousands)	June 30, 2022		December 31, 2021
Collateral Type
Bridge loans	$	779,467	$	554,597
Single-family rental loans	180,482		244,703
Real estate securities
Sequoia securitizations (1)	198,640		247,227
CAFL securitizations (1)	247,106		260,405



Total Collateral for Long-Term Debt	$	1,405,695	$	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 June 30, 2022 and December 31, 2021.

Table 15.3 – Accrued Interest Payable on Long-Term Debt


(In Thousands)	June 30, 2022		December 31, 2021
Long-term debt facilities	$	2,775	$	815
Convertible notes
4.75% convertible senior notes	3,564		3,564
5.625% convertible senior notes	3,896		3,896
5.75% exchangeable senior notes	2,474		2,474
7.75% convertible senior notes	1,018		—
Trust preferred securities and subordinated notes	850		581
Total Accrued Interest Payable on Long-Term Debt	$	14,577	$	11,330

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(Unaudited)

Note 16. Commitments and Contingencies

Lease Commitments

At June 30, 2022, we were obligated under seven non-cancelable operating leases with expiration dates through 2031 for $22 million of cumulative lease payments. Our operating lease expense was $2 million each for the six-month periods ended June 30, 2022 and 2021.

The following table presents our future lease commitments at June 30, 2022.

Table 16.1 – Future Lease Commitments by Year


(In Thousands)	June 30, 2022
2022 (6 months)	$	2,203
2023	4,428
2024	4,338
2025	3,475
2026	3,420