REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CHANGES IN STOCKHOLDERS' EQUITY~~COMPREHENSIVE INCOME (LOSS)

~~For the Nine Months Ended September 30, 2017~~


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

(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
December 31, 2016 76,834,663
$ 768
$ 1,676,486
$ 71,853
$ 1,149,935
$ (1,749,614 ) $ 1,149,428
Net income —
—
—
—
109,473
—
109,473
Other comprehensive income —
—
—
10,463
—
—
10,463
Employee stock purchase and incentive plans 288,024
3
(2,315 ) —
—
—
(2,312 )
Non-cash equity award compensation —
—
7,797
—
—
—
7,797
Common dividends declared —
—
—
—
—
(66,209 ) (66,209 )
September 30, 2017 77,122,687
$ 771
$ 1,681,968
$ 82,316
$ 1,259,408
$ (1,815,823 ) $ 1,208,640

~~For the Nine Months Ended September 30, 2016~~

(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
December 31, 2015 78,162,765
$ 782
$ 1,695,956
$ 91,993
$ 1,018,683
$ (1,661,149 ) $ 1,146,265
Net income —
—
—
—
105,897
—
105,897
Other comprehensive loss —
—
—
(37,278 ) —
—
(37,278 )
Employee stock purchase and incentive plans 437,441
4
(4,183 ) —
—
—
(4,179 )
Non-cash equity award compensation —
—
10,595
—
—
—
10,595
Share repurchases (1,917,873 ) (19 ) (24,745 ) —
—
—
(24,764 )
Common dividends declared —
—
—
—
—
(66,406 ) (66,406 )
September 30, 2016 76,682,333
$ 767
$ 1,677,623
$ 54,715
$ 1,124,580
$ (1,727,555 ) $ 1,130,130

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended September 30, 2021


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
June 30, 2021	113,052,780	$	1,131	$	2,287,412	$	9,740	$	1,184,559	$	(2,187,700)	$	1,295,142
Net income	—	—		—		—		88,286		—		88,286
Other comprehensive loss	—	—		—		(7,817)		—		—		(7,817)
Issuance of common stock	1,585,709	16		19,810		—		—		—		19,826

Employee stock purchase and incentive plans	23,273	—		153		—		—		—		153
Non-cash equity award compensation	—	—		4,897		—		—		—		4,897

Common dividends declared ($0.21 per share)	—	—		—		—		—		(24,664)		(24,664)
September 30, 2021	114,661,762	$	1,147	$	2,312,272	$	1,923	$	1,272,845	$	(2,212,364)	$	1,375,823

For the Nine Months Ended September 30, 2021


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
December 31, 2020	112,090,006	$	1,121	$	2,264,874	$	(4,221)	$	997,277	$	(2,148,152)	$	1,110,899
Net income	—	—		—		—		275,568		—		275,568
Other comprehensive income	—	—		—		6,144		—		—		6,144
Issuance of common stock	2,391,777	24		33,176		—		—		—		33,200

Employee stock purchase and incentive plans	179,979	2		(536)		—		—		—		(534)
Non-cash equity award compensation	—	—		14,758		—		—		—		14,758

Common dividends declared ($0.55 per share)	—	—		—		—		—		(64,212)		(64,212)
September 30, 2021	114,661,762	$	1,147	$	2,312,272	$	1,923	$	1,272,845	$	(2,212,364)	$	1,375,823

For the Three Months Ended September 30, 2020


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
June 30, 2020	114,940,197	$	1,149	$	2,279,625	$	(29,391)	$	801,170	$	(2,115,977)	$	936,576
Net income	—	—		—		—		141,812		—		141,812
Other comprehensive income	—	—		—		8,831		—		—		8,831


Employee stock purchase and incentive plans	11,460	—		9		—		—		—		9
Non-cash equity award compensation	—	—		3,906		—		—		—		3,906
Share repurchases	(3,047,335)	(30)		(21,629)		—		—		—		(21,659)
Common dividends declared ($0.14 per share)	—	—		—		—		—		(16,011)		(16,011)
September 30, 2020	111,904,322	$	1,119	$	2,261,911	$	(20,560)	$	942,982	$	(2,131,988)	$	1,053,464

(In Thousands)
(Unaudited) Nine Months Ended September 30,
2017 2016
Cash Flows From Operating Activities:
Net income $ 109,473
$ 105,897
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net (14,246 ) (20,251 )
Depreciation and amortization of non-financial assets 909
849
Purchases of held-for-sale loans (3,760,110 ) (3,817,445 )
Proceeds from sales of held-for-sale loans 3,079,877
2,930,641
Principal payments on held-for-sale loans 38,500
55,694
Net settlements of derivatives (10,570 ) (13,914 )
Provision for loan losses —
(7,102 )
Non-cash equity award compensation expense 7,797
10,595
Market valuation adjustments (50,352 ) 9,238
Realized gains, net (8,809 ) (26,037 )
Net change in:
Accrued interest receivable and other assets (19,868 ) 7,983
Accrued interest payable and accrued expenses and other liabilities (1,677 ) 7,728
Net cash used in operating activities (629,076 ) (756,124 )
Cash Flows From Investing Activities:
Purchases of loans held-for-investment —
—
Proceeds from sales of loans held-for-investment —
219,639
Principal payments on loans held-for-investment 370,595
574,037
Purchases of real estate securities (396,721 ) (212,364 )
Proceeds from sales of real estate securities 142,931
482,716
Principal payments on real estate securities 55,544
60,978
Purchase of mortgage servicing rights (574 ) (15,286 )
Proceeds from sales of mortgage servicing rights 51,279
35,717
Net change in restricted cash (17,635 ) 3,523
Net cash provided by investing activities 205,419
1,148,960
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt 3,126,949
3,156,642
Repayments on short-term debt (2,968,050 ) (3,894,240 )
Proceeds from issuance of asset-backed securities 286,898
—
Repayments on asset-backed securities issued (146,357 ) (208,801 )
Proceeds from issuance of long-term debt 245,000
771,287
Deferred long-term debt issuance costs (7,380 ) —
Repayments on long-term debt —
(118,146 )
Net settlements of derivatives (115 ) (119 )
Net proceeds from issuance of common stock 224
220
Net payments on repurchase of common stock —
(27,731 )
Taxes paid on equity award distributions (2,536 ) (4,399 )
Dividends paid (66,209 ) (66,406 )
Net cash provided by (used in) financing activities 468,424
(391,693 )
Net increase in cash and cash equivalents 44,767
1,143
Cash and cash equivalents at beginning of period 212,844
220,229
Cash and cash equivalents at end of period $ 257,611
$ 221,372
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 67,339
$ 62,053
Taxes 1,476
826
Supplemental Noncash Information:
Real estate securities retained from loan securitizations $ 67,083
$ 3,673
Retention of mortgage servicing rights from loan securitizations and sales 7,387
7,679
Transfers from loans held-for-sale to loans held-for-investment 643,876
877,744
Transfers from loans held-for-investment to loans held-for-sale 98,853
359,005
Transfers from residential loans to real estate owned 3,177
8,479
REDWOOD TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Nine Months Ended September 30, 2020


(In Thousands, except Share Data)	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
(Unaudited)	Shares	Amount
December 31, 2019	114,353,036	$	1,144	$	2,269,617	$	41,513	$	1,579,124	$	(2,064,167)	$	1,827,231
Net loss	—	—		—		—		(636,142)		—		(636,142)
Other comprehensive loss	—	—		—		(62,073)		—		—		(62,073)
Issuance of common stock	350,088	3		5,544		—		—		—		5,547

Employee stock purchase and incentive plans	248,533	2		(2,767)		—		—		—		(2,765)
Non-cash equity award compensation	—	—		11,146		—		—		—		11,146
Share repurchases	(3,047,335)	(30)		(21,629)		—		—		—		(21,659)
Common dividends declared ($0.585 per share)	—	—		—		—		—		(67,821)		(67,821)
September 30, 2020	111,904,322	$	1,119	$	2,261,911	$	(20,560)	$	942,982	$	(2,131,988)	$	1,053,464

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

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


(In Thousands) (Unaudited)	Nine Months Ended September 30,
	2021		2020
Cash Flows From Operating Activities:
Net income (loss)	$	275,568	$	(636,142)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of premiums, discounts, and securities issuance costs, net	300		6,213
Depreciation and amortization of non-financial assets	12,674		13,166
Originations of held-for-sale loans	(960,419)		(654,820)
Purchases of held-for-sale loans	(9,902,028)		(2,893,246)
Proceeds from sales of held-for-sale loans	6,948,264		3,224,526
Principal payments on held-for-sale loans	49,619		53,677
Net settlements of derivatives	27,412		(187,130)

Non-cash equity award compensation expense	14,758		11,146
Goodwill impairment expense	—		88,675
Market valuation adjustments	(292,056)		606,764
Realized gains, net	(17,803)		(30,419)
Net change in:
Accrued interest receivable and other assets	(9,680)		304,147
Accrued interest payable and accrued expenses and other liabilities	73,120		(82,489)
Net cash used in operating activities	(3,780,271)		(175,932)
Cash Flows From Investing Activities:
Originations of loan investments	(557,327)		(327,494)
Purchases of loan investments	(35,713)		—
Proceeds from sales of loan investments	9,484		1,574,160
Principal payments on loan investments	1,950,151		1,652,418
Purchases of real estate securities	(29,342)		(106,422)


Sales of securities held in consolidated securitization trusts	8,197		142,990
Proceeds from sales of real estate securities	37,500		634,709
Principal payments on real estate securities	46,904		19,446
Purchases of servicer advance investments	—		(179,419)
Principal repayments from servicer advance investments	58,248		83,124






Purchases of home equity investment contracts	(109,174)		(986)
Other investing activities, net	(15,915)		22,019
Net cash provided by investing activities	1,363,013		3,514,545
Cash Flows From Financing Activities:
Proceeds from borrowings on short-term debt	9,847,178		3,981,572
Repayments on short-term debt	(8,443,664)		(5,828,972)
Proceeds from issuance of asset-backed securities	2,822,785		1,343,845
Repayments on asset-backed securities issued	(1,549,766)		(1,037,546)

Proceeds from borrowings on long-term debt	948,674		1,251,850

Repayments on long-term debt	(1,055,475)		(2,640,007)
Net settlements of derivatives	—		(84,336)
Net proceeds from issuance of common stock	20,248		5,791
Net payments on repurchase of common stock	—		(21,659)
Taxes paid on equity award distributions	(957)		(3,009)
Dividends paid	(64,212)		(67,821)
Other financing activities, net	(6,297)		(4,876)
Net cash provided by (used in) financing activities	2,518,514		(3,105,168)
Net increase in cash, cash equivalents and restricted cash	101,256		233,445
Cash, cash equivalents and restricted cash at beginning of period (1)	544,450��		290,833
Cash, cash equivalents and restricted cash at end of period (1)	$	645,706	$	524,278

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


(In Thousands) (Unaudited)	Nine Months Ended September 30,
	2021		2020
























































Supplemental Cash Flow Information:
Cash paid during the period for:
Interest	$	298,507	$	364,875
Taxes	28,092		218
Supplemental Noncash Information:
Real estate securities retained from loan securitizations	$	9,375	$	46,560
Retention of mortgage servicing rights from loan securitizations and sales	7,065		—


Deconsolidation of multifamily loans held in securitization trusts	—		(3,849,779)
Deconsolidation of multifamily ABS	—		(3,706,789)
Transfers from loans held-for-sale to loans held-for-investment	3,005,041		770,754
Transfers from loans held-for-investment to loans held-for-sale	44,922		—
Transfers from residential loans to real estate owned	21,655		12,547
Transfers from long-term debt to short-term debt	93,150		—
Right-of-use asset obtained in exchange for operating lease liability	1,135		5,362
Reduction in operating lease liability due to lease modification	—		1,466
Issuance of common stock for 5 Arches acquisition	13,375		3,375

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note 1. Organization

Redwood Trust, Inc., together with its subsidiaries, ~~focuses~~is a specialty finance company focused on ~~investing~~several distinct areas of housing credit. Our operating platforms occupy a unique position in ~~mortgages and other real estate-related assets and engaging in mortgage banking activities.~~the housing finance value chain, providing liquidity to growing segments of the U.S. housing market not served by government programs. We ~~seek~~deliver customized housing credit investments to ~~invest in real estate-related assets that have the potential to generate attractive cash flow returns over time and to generate income~~a diverse mix of investors, through our ~~mortgage banking activities.~~best-in-class securitization platforms; whole-loan distribution activities; and our publicly-traded shares. Our consolidated investment portfolio has evolved to incorporate a diverse mix of residential, business purpose and multifamily investments. Our goal is to provide attractive returns to shareholders through a stable and growing stream of earnings and dividends, capital appreciation, and a commitment to technological innovation that facilitates risk-minded scale. We operate our business in ~~two~~3 segments: ~~Investment Portfolio~~Residential Lending, Business Purpose Lending, and ~~Residential Mortgage Banking. Redwood was incorporated in~~Third-Party Investments.

Our primary sources of income are net interest income from our investments and non-interest income from our mortgage banking activities. Net interest income primarily consists of the ~~State~~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 ~~Maryland on April 11, 1994,~~loans, and ~~commenced operations on August 19, 1994. References herein~~their subsequent sale, securitization, or transfer to ~~“Redwood,” the “company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated subsidiaries, unless the context otherwise requires.~~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 ~~operating subsidiaries” or “our~~ taxable REIT subsidiaries” or “TRS.”

~~We sponsor our Sequoia securitization program, which we use for~~Redwood was incorporated in the ~~securitization~~State of ~~residential mortgage loans.~~Maryland on April 11, 1994, and commenced operations on August 19, 1994. References herein to ~~Sequoia with respect to any time or period generally refer collectively to all~~“Redwood,” the ~~then~~“company,” “we,” “us,” and “our” include Redwood Trust, Inc. and its consolidated ~~Sequoia securitization entities for~~subsidiaries, unless the ~~periods presented. We have also engaged in securitization transactions in order to obtain financing for certain of our securities and commercial loans.~~context otherwise requires.

Note 2. Basis of Presentation

The consolidated financial statements presented herein are at September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, and for the three and nine months ended September 30, ~~2017~~2021 and ~~2016.~~2020. These interim unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in our annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") — as prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) — have been condensed or omitted in these interim financial statements according to these SEC rules and regulations. Management believes that the disclosures included in these interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020. In the opinion of management, all normal and recurring adjustments to present fairly the financial condition of the ~~company~~Company at September 30, ~~2017~~2021 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, ~~2017~~2021 should not be construed as indicative of the results to be expected for the full year.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 2. Basis of Presentation - (continued)

Principles of Consolidation

In accordance with GAAP, we determine whether we must consolidate transferred financial assets and variable interest entities (“VIEs”) for financial reporting purposes. We currently consolidate the assets and liabilities of certain Sequoia securitization entities issued prior to 2012 ~~where we maintain an ongoing involvement~~ ("Legacy Sequoia"), ~~as well as an entity~~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 ~~Redwood Choice expanded-prime~~CoreVest single-family rental and bridge loans ~~during~~("CAFL"), and beginning in the third quarter of ~~2017~~2021, an entity ("~~Sequoia Choice"~~Point HEI") formed in connection with the securitization of home equity investment contracts ("HEIs"). We also consolidate the assets and liabilities of certain Freddie Mac K-Series and Freddie Mac Seasoned Loans Structured Transaction ("SLST") securitizations in which we have invested. Each securitization entity is independent of Redwood and of each other and the assets and liabilities are not owned by and are not legal obligations of Redwood Trust, Inc. Our exposure to these entities is primarily through the financial interests we have purchased or retained, although for certain entities we are exposed to ~~certain~~ financial risks associated with our role as a sponsor or co-sponsor, servicing administrator, collateral administrator, or depositor of these entities or as a result of our having sold assets directly or indirectly to these entities.

For financial reporting purposes, the underlying loans owned at the consolidated Sequoia and Freddie Mac SLST entities are shown under Residential loans held-for-investment at fair value, the underlying loans at the consolidated Freddie Mac K-Series entity are shown under Multifamily loans held-for-investment at fair value, the underlying single-family rental and bridge loans at the consolidated CAFL entities are shown under Business purpose loans held-for-investment at fair value, and the underlying HEIs at the consolidated Point HEI entity are shown under Other investments at fair value on our consolidated balance sheets. The asset-backed securities (“ABS”) issued to third parties by these entities are shown under ABS issued. In our consolidated statements of income (loss), we recorded interest income on the loans owned at these entities and interest expense on the ABS issued by these entities as well as fair value changes, other income and expenses associated with these entities' activities. See Note 1214 for further discussion on ABS issued.

We also consolidate 2 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.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~(Unaudited)~~

~~Note 2. Basis of Presentation - (continued)~~

Use of Estimates

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

Acquisitions

Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information regarding the acquisitions of 5 Arches, LLC ("5 Arches") and CoreVest American Finance Lender, LLC and certain affiliated entities ("CoreVest"), including purchase price allocations.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 2. Basis of Presentation - (continued)

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

Table 2.1 – Intangible Assets – Activity


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

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

Table 2.2 – Intangible Asset Amortization Expense by Year



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

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

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

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

Included in Note 3 to the Consolidated Financial Statements of our ~~2016~~ Annual Report on Form 10-K for the year ended December 31, 2020 is a summary of our significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the ~~company’s~~company's consolidated financial ~~condition~~position and results of operations for the three and nine months ended September 30, ~~2017.~~2021.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

Other Investments

Strategic Investments

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

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

Recent Accounting Pronouncements

Newly Adopted Accounting Standards Updates ("ASUs")

In ~~January 2017,~~August 2021, the FASB issued ASU ~~2017-03, "Accounting Changes~~2021-06, "Presentation of Financial Statements (Topic 205), Financial Services—Depository and ~~Error Corrections~~Lending (Topic ~~250)~~942), and ~~Investments - Equity Method~~Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and ~~Joint Ventures (Topic 323)~~Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update)." This new guidance ~~requires that companies evaluate ASUs that have not been adopted~~aligns certain SEC paragraphs in the codification with new SEC rules issued in May 2020 related to ~~determine~~changes to the ~~appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. This new guidance was effective immediately.~~disclosure requirements for acquired and disposed businesses. We adopted this guidance ~~as required,~~upon issuance in the ~~first~~third quarter of ~~2017,~~2021, which did not have a material impact on our consolidated financial statements.

In ~~March 2016,~~October 2020, the FASB issued ASU ~~2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.~~2020-10, "Codification Improvements." This new guidance ~~provides simplifications~~updates various codification topics by clarifying or improving disclosure requirements. This new guidance is effective for fiscal years ending after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.

In October 2020, the FASB issued ASU 2020-09, "Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762." This new guidance aligns certain SEC paragraphs in the codification with new SEC rules issued in March 2020 related to changes to the disclosure requirements for registered debt securities. This new guidance became effective January 4, 2021. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.

In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs." This new guidance clarifies that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. This new guidance is effective for fiscal years ending after December 15, 2020. We adopted this guidance, as required, in the first quarter of 2021, which did not have a material impact on our consolidated financial statements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." This new guidance clarifies the interaction of the accounting for ~~share-based payment transactions, including related income tax accounting, classification of awards,~~equity securities, equity method investments, and classification on the statement of cash flows. In addition, this guidance permits the withholding of employee taxes related to the distribution of equity awards up to the maximum individual employee statutory tax rates.certain forward contracts and purchased options. This new guidance is effective for fiscal years beginning after December 15, ~~2016 and early adoption is permitted. In~~2020. We adopted this guidance, as required, in the ~~second~~first quarter of ~~2016, we~~2021, which did not have a material impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance. This new guidance is effective for fiscal years beginning after December 15, 2020. We adopted this ~~new guidance. Upon adoption, we elected to account for forfeitures on employee equity awards~~guidance, as ~~they occur, rather than estimating expected forfeitures. The adoption~~required, in the first quarter of ~~this guidance~~2021, which did not have a material impact on our consolidated financial statements.

Other Recent Accounting Pronouncements

In August ~~2017,~~2020, the FASB issued ASU ~~2017-12, "Derivatives~~2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging ~~(Topic 815): Targeted Improvements to Accounting for Hedging Activities.~~- Contracts in Entity's Own Equity (Subtopic 815-40)." This new guidance ~~amends previous guidance~~simplifies the accounting for convertible debt by reducing the number of accounting models to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.separately present certain conversion features in equity. This new guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We plan to adopt this new guidance by the required date and we are currently evaluating the impact that this update will have on our consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, "Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception." This new guidance changes the classification analysis of certain equity-linked financial instruments (or embedded conversion options) with down round features. This new guidance is effective for fiscal years beginning after December 15, 2018. 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.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~(Unaudited)~~

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

In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20)." This new guidance shortens the amortization period for certain callable debt securities purchased at a premium by requiring the premium to be amortized to the earliest call date. This new guidance is effective for fiscal years beginning after December 15, 2018.31, 2021. Early adoption is permitted. We plan to adopt this new guidance by the required date and do not anticipate that this update will have a material impact on our consolidated financial statements.

In ~~November 2016,~~March 2020, the FASB issued ASU ~~2016-18, "Statement~~2020-04, "Reference Rate Reform (Topic 848): Facilitation of ~~Cash Flows (Topic 230): Restricted Cash.~~the Effects of Reference Rate Reform on Financial Reporting." This new guidance ~~amends previous~~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 ~~on how~~clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to ~~classify and present changes in restricted cash on~~derivatives that are affected by the ~~statement of cash flows.~~discounting transition. This new guidance is effective for ~~fiscal years beginning after~~all entities as of March 12, 2020 through December ~~15, 2017. Early adoption is permitted. We plan to adopt this new guidance by the required date and we will modify the presentation of our cash flow statement as required.~~

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This new guidance allows an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. It also eliminates the exceptions for an intra-entity transfer of assets other than inventory. This new guidance is effective for fiscal years beginning after December 15, 2017. 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 August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This new guidance provides guidance on how to present and classify certain cash receipts and cash payments in the statement of cash flows. This new guidance is effective for fiscal years beginning after December 15, 2017. 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 June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses." This new guidance provides a new impairment model that is based on expected losses rather than incurred losses to determine the allowance for credit losses. This new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning December 15, 2018. Currently, a significant portion of our financial instruments are measured at fair value, for which we do not maintain any allowances for loan losses in accordance with fair value accounting. As such, based on our initial evaluation of this new guidance, we do not believe the provisions in this guidance will have a material impact to how we account for these instruments. Separately, we account for our available-for-sale securities under the other-than-temporary impairment ("OTTI") model for debt securities. This new guidance changes the accounting for available-for-sale securities, including AFS securities purchased with credit deterioration.31, 2022. We are currently evaluating the impact ~~that~~the adoption of this ~~update will~~standard would have on our consolidated financial ~~statements in regard to our available-for-sale securities. We plan to adopt this new guidance by the required date.~~

In February 2016, the FASB issued ASU 2016-02, "Leases." This new guidance requires lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. This new guidance retains a dual lease accounting model, which requires leases to be classified as either operating or capital leases for lessees, for purposes of income statement recognition. This new guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. As discussed in ~~Note 14, our only material leases are those related to our leased office space, for which future payments under these leases total $18 million at~~statements. Through September 30, ~~2017. Upon adoption of this standard in~~2021, we have not elected to apply the ~~first quarter of 2019, we will record a right-of-use asset~~optional expedients and ~~lease liability equal~~exceptions to the present value of these future lease payments discounted at our incremental borrowing rate. Based on our initial evaluation of this new guidance, and taking into consideration our current in-place leases, we do not expect that its adoption will have a material impact on our consolidated financial statements. We will continue evaluating this new standard and caution that any ~~changes in our business or additional leases we may enter into could change our initial assessment.~~

In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This new guidance amends accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. This new guidance also amends certain disclosure requirements associated with the fair value of financial instruments and it is effective for fiscal years beginning after December 15, 2017. 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.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~(Unaudited)~~

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

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The update modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. In July 2015, the FASB approved a one year deferral of the effective date. Accordingly, the update is effective for us in the first quarter of 2018 with retrospective application to prior periods presented or as a cumulative effect adjustment in the period of adoption. Early adoption is permitted in the first quarter of 2017. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)." This new guidance provides additional implementation guidance on how an entity should identify the unit of accounting for the principal versus agent evaluations. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," and in December 2016, the FASB issued ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." These new ASUs provide more specific guidance on certain aspects of Topic 606. In September 2017, the FASB issued ASU 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update). This new ASU allows certain public business entities to use the nonpublic business entity effective dates for adoption of the new revenue standard. Based on our initial evaluation of these new accounting standards, we do not expect that their adoption will have a material impact on our consolidated financial statements, as financial instruments are explicitly scoped out of the standards and nearly all of our ~~income is generated from financial instruments. We will continue evaluating these new standards and caution that any changes in our business~~existing contracts, hedging relationships, or ~~additional amendments to these standards could change our initial assessment.~~other transactions.

Balance Sheet Netting

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

The table below presents financial assets and liabilities that are subject to master netting arrangements or similar agreements categorized by financial instrument, together with corresponding financial instruments and corresponding collateral received or pledged at September 30, ~~2017~~2021 and December 31, ~~2016.~~2020.

Table 3.1 – Offsetting of Financial Assets, Liabilities, and Collateral


																												Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in Consolidated Balance Sheet		Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet			Gross Amounts Not Offset in Consolidated Balance Sheet (1)								Net Amount
	Gross Amounts of Recognized Assets (Liabilities)				Gross Amounts Offset in Consolidated Balance Sheet				Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet				Gross Amounts Not Offset in Consolidated Balance Sheet ⁽¹⁾								Net Amount
September 30, 2017 (In Thousands)				Financial Instruments								Cash Collateral (Received) Pledged
September 30, 2021 (In Thousands)																								September 30, 2021 (In Thousands)						Gross Amounts of Recognized Assets (Liabilities)					Gross Amounts Offset in Consolidated Balance Sheet				Net Amounts of Assets (Liabilities) Presented in Consolidated Balance Sheet				Financial Instruments				Cash Collateral (Received) Pledged			Net Amount
Assets ⁽²⁾																											Assets (2)
Interest rate agreements	$	3,942					$	—			$	3,942			$	(3,644	)		$	(298			)		$	—	Interest rate agreements				$	33,628	$	—			$	33,628			$	(74)			$	(32,408)		$	1,146

TBAs	2,875				—				2,875				(2,806		)		—				69			TBAs				8,213				—		8,213			(4,278)				(3,117)				818
Futures	135				—				135				—				—				135

Total Assets	$	6,952			$	—			$	6,952			$	(6,450	)		$	(298	)		$	204		Total Assets				$	41,841		$	—	$	41,841		$	(4,352)			$	(35,525)			$	1,964

Liabilities⁽²⁾																								Liabilities (2)
Interest rate agreements	$	(57,994	)		$	—			$	(57,994	)		$	3,644			$	54,350			$	—		Interest rate agreements				$	(74)		$	—	$	(74)		$	74			$	—			$	—
TBAs	(3,946		)		—				(3,946		)		2,807				976				(163		)	TBAs				(7,599)			—		(7,599)			4,278				3,321				—
Futures	(423		)		—				(423		)		—				423				—			Futures				(749)			—		(749)			—				749				—
Loan warehouse debt	(438,243		)		—				(438,243		)		438,243				—				—			Loan warehouse debt				(1,335,464)			—		(1,335,464)			1,335,464				—				—
Security repurchase agreements	(549,811		)		—				(549,811		)		549,811				—				—			Security repurchase agreements				(79,766)			—		(79,766)			79,766				—				—
Total Liabilities	$	(1,050,417	)		$	—			$	(1,050,417	)		$	994,505			$	55,749			$	(163	)	Total Liabilities				$	(1,423,652)		$	—	$	(1,423,652)		$	1,419,582			$	4,070			$	—

September 30, 2017 December 31, 2016

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value
(In Thousands)
Assets
Residential loans, held-for-sale
At fair value $ 924,594
$ 924,594
$ 834,193
$ 834,193
At lower of cost or fair value 1,087
1,227
1,206
1,365
Residential loans, held-for-investment
At fair value 3,259,239
3,259,239
3,052,652
3,052,652
Trading securities 820,134
820,134
445,687
445,687
Available-for-sale securities 536,138
536,138
572,752
572,752
MSRs 62,928
62,928
118,526
118,526
Cash and cash equivalents 257,611
257,611
212,844
212,844
Restricted cash 26,258
26,258
8,623
8,623
Accrued interest receivable 21,256
21,256
18,454
18,454
Derivative assets 11,948
11,948
36,595
36,595
REO ⁽¹⁾
3,020
3,441
5,533
5,560
Margin receivable⁽¹⁾
93,679
93,679
68,038
68,038
FHLBC stock ⁽¹⁾
43,393
43,393
43,393
43,393
Guarantee asset⁽¹⁾
3,049
3,049
4,092
4,092
Commercial loans ⁽¹⁾
—
—
2,700
2,700
Pledged collateral⁽¹⁾
42,933
42,933
42,875
42,875
Liabilities
Short-term debt facilities $ 988,054
$ 988,054
$ 791,539
$ 791,539
Accrued interest payable 18,836
18,836
9,608
9,608
Margin payable 841
841
12,783
12,783
Guarantee obligation 20,101
19,682
21,668
22,181
Derivative liabilities 65,238
65,238
66,329
66,329
ABS issued at fair value, net 944,288
944,288
773,462
773,462
FHLBC long-term borrowings 1,999,999
1,999,999
1,999,999
1,999,999
Convertible notes, net 686,058
705,703
482,195
493,365
Trust preferred securities and subordinated notes, net 138,524
101,138
138,489
96,255


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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

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

During the three and nine months ended September 30, ~~2017,~~2021, we elected the fair value option for ~~$16~~$11 million and ~~$32~~$37 million of ~~residential senior~~ securities, ~~$167 million and $412 million of subordinate securities, $1.43~~respectively, $3.17 billion and ~~$3.72~~$9.75 billion of residential loans (principal balance), ~~and $0.3~~respectively, $637 million and $8$1.55 billion of business purpose loans (principal balance), respectively, $5 million and $9 million of MSRs, respectively, and $11 million and $15 million of other financial instruments, respectively. Additionally, during the three months ended September 30, 2021, we elected the fair value option for $122 million of HEIs. We anticipate electing the fair value option for all future purchases of residential and business purpose loans that we ~~may~~intend to sell to third parties or transfer to securitizations, for business purpose bridge loans, HEIs, MSRs ~~purchased or~~ retained from sales of residential loans, and for certain securities we purchase, including IO securities and fixed-rate securities rated investment grade or higher.

The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

Table 5.2 – Assets and Liabilities Measured at Fair Value on a Recurring Basis


September 30, 2017	Carrying Value			Fair Value Measurements Using
September 30, 2021												September 30, 2021					Carrying Value				Fair Value Measurements Using
(In Thousands)			Carrying Value				Level 1				Level 2				Level 3			(In Thousands)						Level 1			Level 2			Level 3
Assets														Assets
Residential loans	$	4,183,833			$	—			$	—			$	4,183,833		Residential loans			$	6,216,433			$	—		$	—		$	6,216,433
Trading securities	820,134			—				—				820,134
Available-for-sale securities	536,138			—				—				536,138
Business purpose loans															Business purpose loans				4,693,555				—			—			4,693,555
Multifamily loans															Multifamily loans			482,791				—			—			482,791
Real estate securities															Real estate securities			353,286				—			—			353,286
Servicer advance investments															Servicer advance investments			170,062				—			—			170,062
MSRs															MSRs			12,389				—			—			12,389
Excess MSRs															Excess MSRs			29,185				—			—			29,185
HEIs															HEIs			167,856				—			—			167,856
Other investments															Other investments			17,574				—			—			17,574
Derivative assets	11,948			3,010				3,942				4,996			Derivative assets			51,103				8,213			33,628			9,262
MSRs	62,928			—				—				62,928
Pledged collateral	42,933			42,933				—				—
FHLBC stock	43,393			—				43,393				—
Guarantee asset	3,049			—				—				3,049


Liabilities															Liabilities
Non-controlling interest in consolidated Point HEI entity															Non-controlling interest in consolidated Point HEI entity			$	16,722			$	—		$	—		$	16,722
Derivative liabilities	$	65,238		$	4,369			$	57,994			$	2,875		Derivative liabilities			10,972				8,348			74			2,550
ABS issued	944,288			—				—				944,288			ABS issued			7,756,101				—			—			7,756,101

December 31, 2016
Carrying
Value
Fair Value Measurements Using
(In Thousands) Level 1 Level 2 Level 3
Assets
Residential loans $ 3,886,845
$ —
$ —
$ 3,886,845
Trading securities 445,687
—
—
445,687
Available-for-sale securities 572,752
—
—
572,752
Derivative assets 36,595
8,300
24,980
3,315
MSRs 118,526
—
—
118,526
Pledged collateral 42,875
42,875
—
—
FHLBC stock 43,393
—
43,393
—
Guarantee asset 4,092
—
—
4,092

Liabilities
Derivative liabilities $ 66,329
$ 5,609
$ 56,919
$ 3,801
ABS issued 773,462
—
—
773,462

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

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


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

Liabilities
Derivative liabilities	$	16,072	$	15,495	$	—	$	577
ABS issued	6,900,362		—		—		6,900,362

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, ~~2017.~~2021.

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


	Assets																						Liabilities						Assets
	Residential Loans				Trading Securities				AFS Securities				MSRs			Guarantee Asset			Derivatives⁽¹⁾				ABS Issued						Residential Loans			Business Purpose Loans					Multifamily Loans			Trading Securities		AFS Securities		Servicer Advance Investments		Excess MSRs		HEIs		Other
(In Thousands)								(In Thousands)
Beginning balance - December 31, 2016				$			3,886,845				$	445,687										$				572,752	$	118,526			$	4,092		$	(486	)		$	773,462
Beginning balance - December 31, 2020																										Beginning balance - December 31, 2020			$	4,249,014		$	4,136,353				$	492,221		$	125,667	$	218,458	$	231,489	$	34,418	$	42,440	$	27,662

Acquisitions	3,791,471				444,073				31,654				7,957			—			—				286,898			Acquisitions			9,926,335			38,176					—			37,117		1,600		—		—		122,373		14,615
Originations																										Originations			—			1,515,262					—			—		—		—		—		—		—
Sales	(3,147,707		)		(87,092		)		(60,801		)		(52,966		)	—			—				—			Sales			(6,958,669)			(9,484)					—			(32,704)		(4,785)		—		—		—		—
Principal paydowns	(405,888		)		(13,219		)		(42,325		)		—			—			—				(146,358		)	Principal paydowns			(1,051,390)			(942,096)					(5,685)			(1,783)		(45,120)		(58,248)		—		(10,220)		(9,224)
Gains (losses) in net income, net	62,290				30,685				24,011				(10,589		)	(1,043		)	33,686				30,286

Gains (losses) in net income (loss), net																										Gains (losses) in net income (loss), net			53,549			(25,658)					(3,745)			24,713		26,998		(3,179)		(5,233)		13,263		(2,974)
Unrealized losses in OCI, net	—				—				10,847				—			—			—				—			Unrealized losses in OCI, net			—			—					—			—		3,125		—		—		—		—
Other settlements, net ⁽²⁾	(3,178		)		—				—				—			—			(31,079		)		—
Ending Balance - September 30, 2017	$	4,183,833			$	820,134			$	536,138			$	62,928		$	3,049		$	2,121			$	944,288
Other settlements, net (1)																										Other settlements, net (1)			(2,406)			(18,998)					—			—		—		—		—		—		(116)
Ending balance - September 30, 2021																										Ending balance - September 30, 2021			$	6,216,433		$	4,693,555				$	482,791		$	153,010	$	200,276	$	170,062	$	29,185	$	167,856	$	29,963


~~(1)~~	~~For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments, are presented on a net basis.~~


~~(2)~~	~~Other settlements, net for derivatives represents the transfer of the fair value of loan purchase commitments at the time loans are acquired to the basis of residential loans.~~


	Liabilities
		Derivatives (2)		Point HEI Non-Controlling Interest		ABS Issued
(In Thousands)
Beginning balance - December 31, 2020		$	14,450	$	—	$	6,900,362

Acquisitions		—		16,639		2,552,785

Principal paydowns		—		—		(1,500,357)

Gains (losses) in net income (loss), net		17,806		83		(196,689)

Other settlements, net (1)		(25,544)		—		—
Ending balance - September 30, 2021		$	6,712	$	16,722	$	7,756,101

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

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

The following table presents the portion of gains or losses included in our consolidated statements of income (loss) that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at September 30, ~~2017~~2021 and ~~2016.~~2020. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 are not included in this presentation.

Table 5.4 – Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at September 30, ~~2017~~2021 and ~~2016~~2020 Included in Net Income


	Included in Net Income
	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020
Assets
Residential loans at Redwood	$	6,553	$	(107)	$	9,371	$	(865)
Business purpose loans	18,810		21,155		19,829		17,901
Net investments in consolidated Sequoia entities (1)	2,885		7,700		11,779		(22,802)
Net investments in consolidated Freddie Mac SLST entities (1)	13,781		82,209		54,006		(33,087)
Net investments in consolidated Freddie Mac K-Series entity (1)	555		2,165		11,330		(11,014)
Net investments in consolidated CAFL SFR entities (1)	2,943		9,673		5,500		(41,048)
Net investment in consolidated Point HEI entity (1)	47		—		129		—
Trading securities	1,547		(3,549)		3,824		(80,358)

Servicer advance investments	(2,079)		25		(3,179)		(6,172)
MSRs	(235)		(2,376)		(49)		(16,798)
Excess MSRs	(803)		(1,127)		(5,233)		(7,650)
HEIs at Redwood	(41)		2,384		21		(4,286)
Loan purchase and interest rate lock commitments	9,021		10,791		9,261		10,773



Liabilities
Non-controlling interest in consolidated Point HEI entity	$	(83)	$	—	$	(83)	$	—
Loan purchase commitments	(2,570)		420		(2,550)		(1,334)

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

Included in Net Income
Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Assets
Residential loans at Redwood $ 14,359
$ 3,818
$ 24,227
$ 32,202
Residential loans at consolidated Sequoia entities 3,497
9,200
22,949
(18,864 )
Trading securities (36 ) 8,646
24,452
978
Available-for-sale securities (3 ) —
(248 ) (305 )
MSRs 317
6,549
(1,005 ) (36,738 )
Loan purchase commitments 2,117
5,381
2,121
5,896
Other assets - Guarantee asset (239 ) 307
(1,043 ) (2,070 )

Liabilities
ABS issued $ (7,771 ) $ 10,522
$ (30,286 ) $ (14,419 )

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, ~~2017.~~2021. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our consolidated balance ~~sheet~~sheets at September 30, ~~2017.~~2021.

Table 5.5 – Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, ~~2017~~2021


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


REO	$	622	$	—	$	—	$	622	$	(1)	$	(4)

Gain (Loss) for
September 30, 2017
Carrying
Value
Fair Value Measurements Using Three Months Ended Nine Months Ended
(In Thousands) Level 1 Level 2 Level 3 September 30, 2017 September 30, 2017
Assets
Residential loans, at lower of cost or fair value $ 866
$ —
$ —
$ 866
$ 18
$ 21
REO 1,725
—
—
1,725
—
(81 )

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~(Unaudited)~~

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

The following table presents the net market valuation gains and losses recorded in each line item of our consolidated statements of income for the three and nine months ended September 30, ~~2017~~2021 and ~~2016.~~

~~Table 5.6 – Market Valuation Gains and Losses, Net~~2020.

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Mortgage Banking Activities, Net
Residential loans held-for-sale, at fair value $ 14,859
$ 650
$ 29,175
$ 11,948
Residential loan purchase commitments 13,276
12,021
33,947
35,508
Commercial loans, at fair value —
—
—
433
Sequoia securities —
—
—
1,455
Risk management derivatives, net (7,077 ) (3,287 ) (13,787 ) (25,281 )
Total mortgage banking activities, net ⁽¹⁾
$ 21,058
$ 9,384
$ 49,335
$ 24,063
Investment Fair Value Changes, Net
Residential loans held-for-investment, at Redwood $ 2,881
$ (655 ) $ 8,902
$ 22,161
Trading securities 607
8,898
30,676
3,728
Valuation adjustments on commercial loans
held-for-sale
—
(307 ) 300
(307 )
Net investments in Legacy Sequoia entities ⁽²⁾
(1,045 ) (255 ) (3,842 ) (2,086 )
Net investment in Sequoia Choice entity ⁽²⁾
(256 ) —
(256 ) —
Risk sharing investments (267 ) 15
(985 ) (689 )
Risk management derivatives, net (1,592 ) 4,222
(24,557 ) (41,188 )
Impairments on AFS securities (4 ) —
(248 ) (305 )
Total investment fair value changes, net $ 324
$ 11,918
$ 9,990
$ (18,686 )
MSR Income (Loss), Net
MSRs $ (1,351 ) $ 1,380
$ (10,842 ) $ (70,489 )
Risk management derivatives, net (422 ) (6,336 ) 1,869
55,874
Total MSR loss, net ⁽³⁾
$ (1,773 ) $ (4,956 ) $ (8,973 ) $ (14,615 )
Total Market Valuation Gains (Losses), Net $ 19,609
$ 16,346
$ 50,352
$ (9,238 )


~~(1)~~	Mortgage banking activities, net presented above does not include fee income or provisions for repurchases that are components of Mortgage banking activities, net presented on our consolidated statements of income, as these amounts do not represent market valuation changes.


~~(2)~~	Includes changes in fair value of the residential loans held-for-sale, REO and the ABS issued at the entities, which netted together represent the change in value of our retained investments at the consolidated VIEs.


~~(3)~~	MSR income (loss), net presented above does not include net fee income or provisions for repurchases that are components of MSR income, net on our consolidated statements of income, as these amounts do not represent market valuation adjustments.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

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

Table 5.6 – Market Valuation Gains and Losses, Net


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

Total other income (4)	$	(989)	$	(4,783)	$	(3,236)	$	(13,380)
Total Market Valuation Gains (Losses), Net	$	78,415	$	158,883	$	292,056	$	(606,764)

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

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

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

At September 30, ~~2017,~~2021, our valuation policy and processes had not changed from those described in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020. The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.

Table 5.7 – Fair Value Methodology for Level 3 Financial Instruments


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

Jumbo fixed-rate loans	$	624,477	Prepayment rate (annual CPR)	20		-	20		%	20		%
			Whole loan spread to TBA price	$	3.00	-	$	3.00		$	3.00
			Whole loan spread to swap rate	202		-	202		bps	202		bps





Jumbo loans committed to sell	870,568		Whole loan committed sales price	$	101.90	-	$	103.32		$	102.46






Loans held by Legacy Sequoia (2)	242,234		Liability price				N/A			N/A

Loans held by Sequoia (2)	2,479,750		Liability price				N/A			N/A

Loans held by Freddie Mac SLST (2)	1,999,405		Liability price				N/A			N/A

Business purpose loans:
Single-family rental loans	466,346		Senior credit spread	65		-	65		bps	65		bps
			Subordinate credit spread	110		-	1,523		bps	401		bps
			Senior credit support	35		-	35		%	35		%
			IO discount rate	9		-	9		%	9		%
			Prepayment rate (annual CPR)	3		-	3		%	3		%
			Non-securitizable loan dollar price	$	76	-	$	111		$	101

Single-family rental loans held by CAFL (2)	3,402,410		Liability price				N/A			N/A

Bridge loans	824,799		Discount rate	4		-	15		%	6		%




Multifamily loans held by Freddie Mac K-Series (2)	482,791		Liability price				N/A			N/A



Trading and AFS securities	353,286		Discount rate	2		-	38		%	7		%
			Prepayment rate (annual CPR)	8		-	58		%	27		%
			Default rate	—		-	25		%	4		%
			Loss severity	—		-	50		%	24		%
			CRT dollar price	$	96	-	$	116		$	104

Servicer advance investments	170,062		Discount rate	2		-	3		%	2		%
			Prepayment rate (annual CPR)	20		-	30		%	21		%
			Expected remaining life (3)	5		-	5		years	5		years
			Mortgage servicing income	2		-	11		bps	9		bps

MSRs	12,389		Discount rate	12		-	15		%	13		%
			Prepayment rate (annual CPR)	6		-	80		%	28		%
			Per loan annual cost to service	$	95	-	$	95		$	95

Excess MSRs	29,185		Discount rate	13		-	16		%	15		%
			Prepayment rate (annual CPR)	21		-	30		%	25		%
			Excess mortgage servicing income	8		-	17		bps	11		bps

September 30, 2017
Fair
Value
Input Values
(Dollars in Thousands, except Input Values) Unobservable Input Range
Weighted
Average
Assets
Residential loans, at fair value:
Jumbo fixed-rate loans $ 2,450,845
Whole loan spread to TBA price $ 2.13
- $ 3.15
$ 3.13

Whole loan spread to swap rate 180
- 270
bps 265
bps

Jumbo hybrid loans 168,138
Prepayment rate (annual CPR) 15
- 15
% 15
%
Whole loan spread to swap rate 100
- 190
bps 163
bps

Jumbo loans committed to sell 574,413
Whole loan committed sales price $ 102.42
- $ 103.08
$ 102.89

Loans held by Legacy
Sequoia ⁽¹⁾
673,134
Liability price N/A
N/A

Loans held by Sequoia
Choice ⁽¹⁾
317,303
Liability price N/A
N/A

Residential loans, at lower of cost or fair value 866
Loss severity 13
- 30
% 18
%

Trading and AFS securities 1,356,272
Discount rate 2
- 25
% 5
%
Prepayment rate (annual CPR) —
- 50
% 10
%
Default rate —
- 32
% 3
%
Loss severity —
- 40
% 22
%

MSRs 62,928
Discount rate 10
- 35
% 11
%
Prepayment rate (annual CPR) 5
- 31
% 9
%
Per loan annual cost to service $ 82
- $ 84
$ 82

Guarantee asset 3,049
Discount rate 11
- 11
% 11
%
Prepayment rate (annual CPR) 14
- 14
% 14
%

REO 1,725
Loss severity 4
- 39
% 18
%

Loan purchase commitments, net ⁽²⁾
2,121
MSR multiple 1.9
- 5.1
x 3.8
x
Pull-through rate 13
- 100
% 72
%
Whole loan spread to TBA price $ 2.13
- $ 3.10
$ 3.07

Whole loan spread to swap rate - fixed rate 180
- 270
bps 268
bps
Prepayment rate (annual CPR) 15
- 15
% 15
%
Whole loan spread to swap rate - hybrid 100
- 190
bps 133
bps

Liabilities
ABS issued:⁽¹⁾
944,288
Discount rate 3
- 15
% 4
%
Prepayment rate (annual CPR) 11
- 20
% 18
%
Default rate —
- 12
% 5
%
Loss severity 20
- 32
% 26
%


~~(1)~~	The fair value of the loans held by consolidated Sequoia entities was based on the fair value of the ABS issued by these entities, which we determined were more readily observable, in accordance with accounting guidance for collateralized financing entities.


~~(2)~~	~~For the purpose of this presentation, loan purchase commitment assets and liabilities are presented net.~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

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

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


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
















































HEIs at Redwood	$	414	Dollar Price	$	92	-	$	124		$	105




HEIs held by Point HEI entity	167,442		Liability price				N/A			N/A

REO	622		Loss severity	11		-	40		%	22		%

Residential loan purchase commitments, net	6,712		Committed sales price	$	102.11	-	$	102.77		$	102.54
			Pull-through rate	4		-	100		%	71		%
			Whole loan spread to TBA price	$	3.00	-	$	3.00		$	3.00
			Whole loan spread to swap rate	185		-	202		bps	201		bps
			Prepayment rate (annual CPR)	20		-	20		%	20		%









Liabilities
ABS issued (2):
At consolidated Sequoia entities	2,482,746		Discount rate	1		-	18		%	3		%
			Prepayment rate (annual CPR)	7		-	55		%	33		%
			Default rate	—		-	36		%	2		%
			Loss severity	25		-	50		%	32		%

At consolidated CAFL SFR entities (4)	3,126,405		Discount rate	1		-	13		%	3		%
			Prepayment rate (annual CPR)	3		-	3		%	3		%
			Default rate	2		-	18		%	9		%
			Loss severity	30		-	30		%	30		%

At consolidated Freddie Mac SLST entities	1,550,111		Discount rate	2		-	7		%	3		%

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

At consolidated Freddie Mac K-Series entities (4)	451,402		Discount rate	1		-	8		%	2		%





At consolidated Point HEI entity (4)	145,437		Discount rate	3		-	15		%	4		%
			Prepayment rate (annual CPR)	20		-	20		%	20		%
			Default rate	6		-	6		%	6		%
			Loss severity	25		-	25		%	25		%
			Home price appreciation	3		-	4		%	3		%

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

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

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

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

Determination of Fair Value

~~A description of the instruments measured at fair value as well as the general classification of such instruments pursuant to the Level 1, Level 2, and Level 3 valuation hierarchy is listed herein.~~ 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.

~~Residential loans at Redwood~~

Estimated fair values for residential loans are determined using models that incorporate various observable inputs, including pricing information from whole loan sales and securitizations. Certain significant inputsIncluded in ~~these models are considered unobservable and are therefore Level 3 in nature. Pricing inputs obtained from market whole loan transaction activity include indicative spreads~~ Note 5 to indexed to be announced ("TBA") prices and indexed swap rates for fixed-rate loans and indexed swap rates for hybrid loans (Level 3). Pricing inputs obtained from market securitization activity include indicative spreads to indexed TBA prices for senior residential mortgage-backed securities ("RMBS") and indexed swap rates for subordinate RMBS, and credit support levels (Level 3). Other unobservable inputs also include assumed future prepayment rates. Observable inputs include benchmark interest rates, swap rates, and TBA prices. At September 30, 2017,the Consolidated Financial Statements of our jumbo fixed-rate loans that were not committed to sell were priced using whole loan sale inputs. These assets would generally decrease in value based upon an increase in the credit spread, prepayment speed, or credit support assumptions.

~~Residential loans at Consolidated Sequoia entities~~

~~We have elected to account~~Annual Report on Form 10-K for the ~~consolidated Sequoia securitization entities as collateralized financing entities ("CFEs") in accordance with GAAP. A CFE~~year ended December 31, 2020 is a ~~variable interest entity that holds~~more detailed description of our 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 allow companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of theinstruments measured at fair value of the financial assets or fair value of the financial liabilities. Pursuant to this guidance, we use the fair value of the ABS issued by the Sequoia CFEs (which we determined to be more observable) to determine the fair value of the loans held at these entities, whereby the net assets we consolidate in our financial statements related to these entities represent the estimated fair value of our retained interests in the Sequoia CFEs.

~~Real estate securities~~

~~Real estate securities include residential, commercial,~~ and ~~other asset-backed securities that are generally illiquid in nature and trade infrequently. Significant~~their significant inputs, in the valuation analysis are predominantly Level 3 in nature, due to the lack of readily available market quotes and related inputs. For real estate securities, we utilize both market comparable pricing and discounted cash flow analysis valuation techniques. Relevant market indicators that are factored into the analysis include bid/ask spreads, the amount and timing of credit losses, interest rates, and collateral prepayment rates. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3). These cash flow models use significant unobservable inputs such as a discount rate, prepayment rate, default rate, loss severity and credit support. The estimated fair value of our securities would generally decrease based upon an increase in default rates, serious delinquencies, or a decrease in prepayment rates or credit support.

As part of our securities valuation process, we request and consider indications of value from third-party securities dealers. For purposes of pricing our securities at September 30, 2017, we received dealer price indications on 73% of our securities, representing 81% of our carrying value. In the aggregate, our internal valuations of the securities for which we received dealer price indications were within 1% of the aggregate average dealer valuations. Once we receive the price indications from dealers, they are compared to other relevant market inputs, such as actual or comparable trades, and the results of our discounted cash flow analysis. In circumstances where relevant market inputs cannot be obtained, increased reliance on discounted cash flow analysis and management judgment are required to estimate fair value.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~(Unaudited)~~

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

~~Derivative assets and liabilities~~

Our derivative instruments include swaps, swaptions, TBAs, financial futures, and loan purchase commitments ("LPCs"). Fair values of derivative instruments are determined using quoted prices from active markets, when available, or from valuation models and are supported by valuations provided by dealers active in derivative markets. Fair values of TBAs and financial futures are generally obtained using quoted prices from active markets (Level 1). Our derivative valuation models for swaps and swaptions require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates, and correlations of certain inputs. Model inputs can generally be verified and model selection does not involve significant management judgment (Level 2).

~~LPC fair values for jumbo loans are estimated based on the estimated fair values of the underlying loans (as described in "Residential loans" above)~~ as well as the ~~probability that the mortgage loan will be purchased (the "Pull-through rate") (Level 3).~~

~~For other derivatives, valuations are based on various factors such as liquidity, bid/ask spreads, and credit considerations for which we rely on available market inputs. In the absence~~general classification of such ~~inputs, management’s best estimate is used (Level 3).~~

~~MSRs~~

~~MSRs include~~instruments pursuant to the ~~rights to service jumbo~~Level 1, Level 2, and ~~conforming residential mortgage loans. Significant inputs in the valuation analysis are predominantly~~ Level 3 ~~due~~valuation hierarchy.

In addition to the ~~nature~~Level 3 financial instruments included in Table 5.7 above, certain of ~~these~~our Other investments (comprised of strategic investments in early-stage start-up companies) are Level 3 financial instruments ~~and the lack of readily available market quotes. Changes in~~that we account for under the fair value option. These investments generally take the form of ~~MSRs occur primarily due to the collection/realization of expected cash flows, as well as changes in valuation inputs~~equity or debt with conversion features and ~~assumptions. Estimated~~do not have readily determinable fair ~~values are~~values. We generally value these assets based on ~~applying~~our original investment price until there is an observable price change in an orderly transaction for the inputs to generate the net present value of estimated future MSR income (Level 3). These discounted cash flow models utilize certain significant unobservable inputs including market discount rates, assumed future prepayment rates of serviced loans, and the market cost of servicing. An increase in these unobservable inputs would generally reduce the estimated fair valueidentical or similar investment of the ~~MSRs.~~same issuer.

As part of our MSR valuation process, we received a valuation estimate from a third-party valuations firm. In the aggregate, our internal valuation of the MSRs were within 2% of the third-party valuation.

~~FHLBC Stock~~

Our Federal Home Loan Bank ("FHLB") member subsidiary is required to purchase Federal Home Loan Bank of Chicago ("FHLBC") stock under a borrowing agreement between our FHLB-member subsidiary and the FHLBC. Under this agreement, the stock is redeemable at face value, which represents the carrying value and fair value of the stock (Level 2).

~~Guarantee Asset~~

The guarantee asset represents the estimated fair value of cash flows we are contractually entitled to receive related to a risk sharing arrangement with Fannie Mae. Significant inputs in the valuation analysis are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset.

~~Pledged Collateral~~

Pledged collateral consists of cash and U.S. Treasury securities held by a custodian in association with certain agreements we have entered into. Treasury securities are carried at their fair value, which is determined using quoted prices in active markets (Level 1).

~~Cash and cash equivalents~~

~~Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. Fair values equal carrying values (Level 1).~~

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~(Unaudited)~~

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

~~Restricted cash~~

Restricted cash primarily includes interest-earning cash balances related to risk sharing transactions with the Agencies, cash held in association with borrowings from the FHLBC, and cash held at consolidated Sequoia entities for the purpose of distribution to investors and reinvestment. Due to the short-term nature of the restrictions, fair values approximate carrying values (Level 1).

~~Accrued interest receivable and payable~~

Accrued interest receivable and payable includes interest due on our assets and payable on our liabilities. Due to the short-term nature of when these interest payments will be received or paid, fair values approximate carrying values (Level 1).

~~REO~~

REO includes properties owned in satisfaction of foreclosed loans. Fair values are determined using available market quotes, appraisals, broker price opinions, comparable properties, or other indications of value (Level 3).

~~Margin receivable~~

Margin receivable reflects cash collateral we have posted with our various derivative and debt counterparties as required to satisfy margin requirements. Fair values approximate carrying values (Level 2).

~~Guarantee Obligations~~

In association with our risk sharing transactions with the Agencies, we have made certain guarantees. These obligations are initially recorded at fair value and subsequently carried at amortized cost. Fair values of guarantee obligations are determined using internal models that incorporate certain significant inputs that are considered unobservable and are therefore Level 3 in nature. Pricing inputs include assumed future prepayment rates, credit losses, and market discount rates. A decrease in future prepayment rates or discount rates, or an increase in credit losses, would generally cause the fair value of the guarantee obligations to decrease (become a larger liability).

~~Short-term debt~~

Short-term debt includes our credit facilities that mature within one year. As these borrowings are secured and subject to margin calls and as the rates on these borrowings reset frequently to market rates, we believe that carrying values approximate fair values (Level 2). Additionally, at September 30, 2017, short-term debt included unsecured convertible senior notes with a maturity of less than one year. The fair value of the convertible notes is determined using quoted prices in generally active markets (Level 2).

~~ABS issued~~

ABS issued includes asset-backed securities issued through the Legacy Sequoia and Sequoia Choice securitization entities. These instruments are generally illiquid in nature and trade infrequently. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. For ABS issued, we utilize both market comparable pricing and discounted cash flow analysis valuation techniques. Relevant market indicators factored into the analysis include bid/ask spreads, the amount and timing of collateral credit losses, interest rates, and collateral prepayment rates. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3). A decrease in credit losses or discount rate, or an increase in prepayment rates, would generally cause the fair value of the ABS issued to decrease (become a larger liability).

~~FHLBC Borrowings~~

FHLBC borrowings include amounts borrowed from the FHLBC that are secured, generally by residential mortgage loans. As these borrowings are secured and subject to margin calls and as the rates on these borrowings reset frequently to market rates, we believe that carrying values approximate fair values (Level 2).

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~(Unaudited)~~

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

~~Convertible notes~~

~~Convertible notes include unsecured convertible and exchangeable senior notes. Fair values are determined using quoted prices in generally active markets (Level 2).~~

~~Trust preferred securities and subordinated notes~~

Estimated fair values of trust preferred securities and subordinated notes are determined using discounted cash flow analysis valuation techniques. Significant inputs in the valuation analysis are predominantly Level 3, due to the nature of these instruments and the lack of readily available market quotes. Estimated fair values are based on applying the market indicators to generate discounted cash flows (Level 3).

Note 6. Residential Loans

We acquire ~~jumbo~~ residential loans from third-party ~~originators.~~originators and may sell or securitize these loans or hold them for investment. The following table summarizes the classifications and carrying values of the residential loans owned at Redwood and at consolidated Sequoia and Freddie Mac SLST entities at September 30, ~~2017~~2021 and December 31, ~~2016.~~2020.

Table 6.1 – Classifications and Carrying Values of Residential Loans


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

September 30, 2017 Legacy Sequoia
(In Thousands) Redwood Sequoia Choice Total
Held-for-sale
At fair value $ 924,594
$ —
$ —
$ 924,594
At lower of cost or fair value 1,087
—
—
1,087
Total held-for-sale 925,681
—

—
925,681
Held-for-investment at fair value 2,268,802
673,134
317,303
3,259,239
Total Residential Loans $ 3,194,483
$ 673,134

$ 317,303
$ 4,184,920

December 31, 2016 Legacy Sequoia
(In Thousands) Redwood Sequoia Choice Total
Held-for-sale
At fair value $ 834,193
$ —
$ —
$ 834,193
At lower of cost or fair value 1,206
—
—
1,206
Total held-for-sale 835,399
—
—
835,399
Held-for-investment at fair value 2,261,016
791,636
—
3,052,652
Total Residential Loans $ 3,096,415
$ 791,636
$ —
$ 3,888,051


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

At September 30, ~~2017,~~2021, we owned mortgage servicing rights associated with ~~$2.41~~$1.40 billion (principal balance) of ~~consolidated~~ 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~~

~~At Fair Value~~

At September 30, 2017, we owned 1,233 loans held-for-sale at fair value with an aggregate unpaid principal balance of $0.90 billion and a fair value of $0.92 billion, compared to 1,114 loans with an aggregate unpaid principal balance of $0.83 billion and a fair value of $0.83 billion at December 31, 2016. At September 30, 2017 and December 31, 2016, none of these loans were greater than 90 days delinquent or in foreclosure.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note 6. Residential Loans - (continued)

Residential Loans Held-for-Sale

~~During~~At Fair Value

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

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


(Dollars in Thousands)	September 30, 2021		December 31, 2020
Number of loans	1,958		198
Unpaid principal balance	$	1,464,767	$	172,748
Fair value of loans	$	1,495,079	$	176,641
Market value of loans pledged as collateral under short-term borrowing agreements	$	1,478,424	$	156,355

Delinquency information
Number of loans with 90+ day delinquencies	4		1
Unpaid principal balance of loans with 90+ day delinquencies	$	3,159	$	1,882
Fair value of loans with 90+ day delinquencies	$	2,490	$	1,223
Number of loans in foreclosure	—		—

The following table provides the activity of residential loans held-for-sale during the three and nine months ended September 30, ~~2017, we purchased $1.43 billion~~2021 and ~~$3.72 billion (principal balance)~~2020.

Table 6.3 – Activity of ~~loans, respectively, for which we elected the fair value option, and we sold $1.05 billion and $3.08 billion (principal balance) of loans, respectively, for which we recorded net~~Residential Loans Held-for-Sale


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

(1)Net market valuation gains ~~of $15 million and $29 million, respectively,~~(losses) on residential loans held-for-sale are recorded primarily through Mortgage banking activities, net on our consolidated statements of ~~income. At~~ income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017, loans held-for-sale with a market value of $493 million were pledged as collateral under short-term borrowing agreements.~~2021

During the three and nine months ended September 30, 2016, we purchased $1.22 billion and $3.73 billion (principal balance) of loans, respectively, for which we elected the fair value option, and we sold $0.76 billion and $2.80 billion (principal balance) of loans, respectively, for which we recorded net market valuation gains of $1 million and $12 million, respectively, through Mortgage banking activities, net on our consolidated statements of income.(Unaudited)

~~At Lower of Cost or Fair Value~~

At September 30, 2017 and December 31, 2016, we held six and seven residential loans, respectively, at the lower of cost or fair value with $1 million and $2 million in outstanding principal balance, respectively, and a carrying value of $1 million for both periods. At both September 30, 2017 and December 31, 2016, one of these loans with an unpaid principal balance of $0.3 million was greater than 90 days delinquent and none of these loans were in foreclosure.Note 6. Residential Loans - (continued)

Residential Loans Held-for-Investment at Fair Value

~~At Redwood~~

AtWe invest in residential subordinate securities issued by Legacy Sequoia, Sequoia, and Freddie Mac SLST securitization trusts and consolidate the underlying residential loans owned by these entities for financial reporting purposes in accordance with GAAP. The following tables summarize the characteristics of the residential loans owned at consolidated Sequoia and Freddie Mac SLST entities at September 30, ~~2017, we owned 3,081 held-for-investment loans at Redwood with an aggregate unpaid principal balance of $2.23 billion~~2021 and ~~a fair value of $2.27 billion, compared to 3,068 loans with an aggregate unpaid principal balance of $2.23 billion and a fair value of $2.26 billion at~~ December 31, ~~2016. At September 30, 2017, none~~2020.

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


September 30, 2021	Legacy				Freddie Mac
(Dollars in Thousands)	Sequoia		Sequoia		SLST
Number of loans	1,653		3,022		12,444
Unpaid principal balance	$	278,815	$	2,447,402	$	2,022,724
Fair value of loans	$	242,234	$	2,479,750	$	1,999,405

Delinquency information
Number of loans with 90+ day delinquencies (1)	40		30		1,168
Unpaid principal balance of loans with 90+ day delinquencies	$	14,038	$	24,438	$	209,913
Fair value of loans with 90+ day delinquencies (2)	N/A		N/A		N/A
Number of loans in foreclosure	18		4		305
Unpaid principal balance of loans in foreclosure	$	4,416	$	2,863	$	52,319


December 31, 2020	Legacy				Freddie Mac
(Dollars in Thousands)	Sequoia		Sequoia		SLST
Number of loans	1,908		2,177		13,605
Unpaid principal balance	$	333,474	$	1,550,454	$	2,247,771
Fair value of loans	$	285,935	$	1,565,322	$	2,221,153

Delinquency information
Number of loans with 90+ day delinquencies (1)	52		94		2,110
Unpaid principal balance of loans with 90+ day delinquencies	$	17,285	$	74,742	$	389,245
Fair value of loans with 90+ day delinquencies (2)	N/A		N/A		N/A
Number of loans in foreclosure	21		3		245
Unpaid principal balance of loans in foreclosure	$	4,939	$	2,251	$	38,610

(1)For loans ~~were~~held at consolidated entities, the number of loans greater than 90 days delinquent orincludes loans in foreclosure. ~~At December 31, 2016, one of these loans with an unpaid principal balance of $0.2 million was greater than 90 days delinquent and none of these loans were in foreclosure.~~

~~During the three and nine months ended September 30, 2017, we transferred loans with a~~(2)The fair value of ~~$78 million and $326 million, respectively, from held-for-sale to held-for-investment. During both~~ the ~~three and nine months ended September 30, 2017, we transferred~~ loans ~~with a~~held by consolidated entities was based on the fair value of ~~$98 million from held-for-investment to held-for-sale. During~~ the ~~three and nine months ended September 30, 2017,~~ABS issued by these entities, including securities we recorded net market valuation gains of $3 million and $9 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income. At September 30, 2017, loansown, which we determined were more readily observable, in accordance with ~~a fair value of $2.26 billion were pledged as collateral under a borrowing agreement with the FHLBC.~~

During the three and nine months ended September 30, 2016, we transferred loans with a fair value of $152 million and $878 million, respectively, from held-for-sale to held-for-investment. During the three and nine months ended September 30, 2016, we transferred loans with a fair value of zero and $56 million, respectively, from held-for-investment to held-for-sale. During the three and nine months ended September 30, 2016, we recorded a net market valuation loss of $1 million and a net market valuation gain of $22 million, respectively, on residential loans held-for-investment at fair value through Investment fair value changes, net on our consolidated statements of income.

At September 30, 2017, the outstanding loans held-for-investment at Redwood were prime-quality, first lien loans, of which 95% were originated between 2013 and 2017, and 5% were originated in 2012 and prior years. The weighted average FICO score of borrowers backing these loans was 772 (at origination) and the weighted average loan-to-value ("LTV") ratio of these loans was 65% (at origination). At September 30, 2017, these loans were comprised of 94% fixed-rate loans with a weighted average coupon of 4.08%, and the remainder were hybrid or ARM loans with a weighted average coupon of 4.00%.

~~At Consolidated Legacy Sequoia Entities~~

At September 30, 2017, we owned 3,308 held-for-investment loans at consolidated Legacy Sequoia entities, with an aggregate unpaid balance of $738 million and a fair value of $673 million, as compared to 3,735 loans at December 31, 2016, with an aggregate unpaid principal balance of $887 million and a fair value of $792 million. At origination, the weighted average FICO score of borrowers backing these loans was 728, the weighted average LTV ratio of these loans was 66%, and the loans were nearly all first lien and prime-quality.accounting guidance for collateralized financing entities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note 6. Residential Loans - (continued)

~~At September 30, 2017 and December 31, 2016,~~The following table provides the ~~unpaid principal balance~~activity of residential loans held-for-investment at consolidated Legacy Sequoia entities delinquent greater than 90 days was $14 million and $19 million, respectively, and the unpaid principal balance of loans in foreclosure was $12 million and $11 million, respectively. DuringRedwood during the three and nine months ended September 30, ~~2017, we recorded~~2021 and 2020.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020


Fair value of loans transferred from HFS to HFI	$	—	$	—	$	—	$	13,258
Fair value of loans transferred from HFI to HFS	—		—		—		1,870,986
Net market valuation gains (losses) recorded (1)	—		218		—		(93,314)

(1)Subsequent to the transfer of these loans to our investment portfolio, net market valuation gains ~~of $4 million and $24 million, respectively,~~(losses) on ~~these~~residential loans held-for-investment at Redwood are recorded through Investment fair value changes, net on our consolidated statements of ~~income. During~~income (loss).

The following table provides the activity of residential loans held-for-investment at consolidated entities during the three and nine months ended September 30, ~~2016,~~2021 and 2020.

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

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

464,189

N/A

—

N/A

Net market valuation gains (losses) recorded (2)

(2,580)

(11,663)

(13,836)

21,938

(5,175)

159,687

Nine Months Ended September 30, 2021

Nine Months Ended September 30, 2020

Legacy

Freddie Mac

Legacy

Freddie Mac

(In Thousands)

Sequoia

SLST

Sequoia

SLST

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

N/A

1,669,683

N/A

270,506

N/A

Net market valuation gains (losses) recorded (2)

9,896

(27,076)

5,177

(38,996)

(21,727)

15,254

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans

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

Table 7.1 – Classifications and Carrying Values of Business Purpose Loans


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


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

Single-Family Rental Loans

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

Bridge Loans

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans - (continued)

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

Table 7.2 – Activity of Business Purpose Loans at Redwood


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


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

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

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

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loans Held-for-Investment at CAFL

We invest in securities issued by CAFL securitizations sponsored by CoreVest and consolidate the underlying single-family rental loans and bridge loans owned by these entities. During the nine months ended September 30, 2021, we transferred 3 CAFL loans with a fair value of ~~$19~~$12 million ~~respectively,~~to REO, which is included in Other assets on our consolidated balance sheets.

The following table provides the activity of business purpose loans held-for-investment at CAFL during the three and nine months ended September 30, 2021 and 2020.

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


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


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

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

REO

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 7. Business Purpose Loans - (continued)

Business Purpose Loan Characteristics

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

Table 7.4 – Characteristics of Business Purpose Loans


September 30, 2021	SFR at Redwood			SFR at CAFL			Bridge at Redwood			Bridge at CAFL
(Dollars in Thousands)
Number of loans	123			1,157			1,092			1,589
Unpaid principal balance	$	451,295		$	3,207,118		$	550,711		$	272,243
Fair value of loans	$	466,346		$	3,402,411		$	548,445		$	276,354
Weighted average coupon	4.57		%	5.27		%	7.48		%	7.19		%
Weighted average remaining loan term (years)	7			6			1			1
Market value of loans pledged as collateral under short-term debt facilities	$	127,930		N/A			$	126,725		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	298,014		N/A			$	373,597		N/A

Delinquency information
Number of loans with 90+ day delinquencies (1)	7			15			35			—
Unpaid principal balance of loans with 90+ day delinquencies	$	5,067		$	39,423		$	30,132		$	—
Fair value of loans with 90+ day delinquencies (2)	$	2,664		N/A			$	26,525		$	—
Number of loans in foreclosure	6			10			34			—
Unpaid principal balance of loans in foreclosure	$	4,978		$	22,004		$	26,177		$	—
Fair value of loans in foreclosure (2)	$	2,619		N/A			$	22,570		$	—


December 31, 2020	SFR at Redwood			SFR at CAFL			Bridge at Redwood			Bridge at CAFL
(Dollars in Thousands)
Number of loans	65			1,094			1,725			—
Unpaid principal balance	$	234,475		$	3,017,137		$	649,532		$	—
Fair value of loans	$	245,394		$	3,249,194		$	641,765		$	—
Weighted average coupon	4.84		%	5.44		%	8.09		%	—		%
Weighted average remaining loan term (years)	8			5			1			—
Market value of loans pledged as collateral under short-term debt facilities	$	34,098		N/A			$	92,931		N/A
Market value of loans pledged as collateral under long-term debt facilities	$	154,774		N/A			$	544,151		N/A

Delinquency information
Number of loans with 90+ day delinquencies (1)	10			22			31			—
Unpaid principal balance of loans with 90+ day delinquencies	$	7,127		$	61,440		$	39,415		$	—
Fair value of loans with 90+ day delinquencies (2)	$	6,143		N/A			$	33,605		$	—
Number of loans in foreclosure	—			10			25			—
Unpaid principal balance of loans in foreclosure	$	—		$	24,745		$	38,552		$	—
Fair value of loans in foreclosure (2)	$	—		N/A			$	33,066		$	—

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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 8. Multifamily Loans

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

Table 8.1 – Characteristics of Multifamily Loans


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

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


Number of loans in foreclosure	—			—

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

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


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

(1)Net market valuation gains (losses) on multifamily loans held-for-investment are recorded through Investment fair value changes, net on our consolidated statements of ~~income. Pursuant to the collateralized financing~~income (loss). For loans held at our consolidated Freddie Mac K-Series entity, ~~guidelines, the~~ market ~~valuation~~value changes ~~of these loans is~~are based on the estimated fair value of the associated ABS ~~issued.~~issued, including securities we own, pursuant to collateralized financing entity guidelines. The net impact to our income statement associated with our ~~retained~~ economic investment in ~~the Legacy Sequoia~~these securitization entities is presented in ~~Note 5.~~Table 4.2.

~~At Consolidated Sequoia Choice Entity~~

~~At September 30, 2017, we owned 409 held-for-investment loans at the consolidated Sequoia Choice entity, with an aggregate unpaid balance of $308 million and a fair value of $317 million.~~ ~~There were no loans held at the Sequoia Choice entity a~~t December 31, 2016. At origination, the weighted average FICO score of borrowers backing these loans was 744, the weighted average LTV ratio of these loans was 75%, and the loans were all first lien and prime-quality. At September 30, 2017, none of these loans were greater than 90 days delinquent or in foreclosure.

During both the three and nine months ended September 30, 2017, we transferred loans with a fair value of $318 million from held-for-sale to held-for-investment, associated with this transaction. During both the three and nine months ended September 30, 2017, we recorded a net market valuation loss of $1 million on these loans through Investment fair value changes, net on our consolidated statements of income. Pursuant to the collateralized financing entity guidelines, the market valuation changes of these loans is based on the estimated fair value of the ABS issued associated with this transaction. ~~The net impact to our income statement associated with our retained economic investment in the Sequoia Choice securitization entity is presented in~~ ~~Note 5.~~

Note 7.9. Real Estate Securities

We invest in real estate ~~securities.~~securities that we create and retain from our Sequoia securitizations or acquire from third parties. The following table presents the fair values of our real estate securities by type at September 30, ~~2017~~2021 and December 31, ~~2016.~~2020.

Table ~~7.1~~9.1 – Fair Values of Real Estate Securities by Type


(In Thousands)	September 30, 2017		December 31, 2016		(In Thousands)	September 30, 2021		December 31, 2020
Trading	$	820,134	$	445,687	Trading	$	153,010	$	125,667
Available-for-sale	536,138		572,752		Available-for-sale	200,276		218,458
Total Real Estate Securities	$	1,356,272	$	1,018,439	Total Real Estate Securities	$	353,286	$	344,125

Our real estate securities include mortgage-backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. ~~Re-REMIC securities, as presented herein, were created through the resecuritization of certain senior security interests to provide additional credit support to those interests. These re-REMIC~~Mezzanine securities are ~~therefore~~interests that are generally subordinate to ~~the remaining~~ senior ~~security interests, but senior~~securities in their rights to ~~any~~receive cash flows, and have subordinate ~~tranches of the securitization from which they were created.~~securities below them that are first to absorb losses. Subordinate securities are all interests below ~~senior and re-REMIC interests. We further separate~~mezzanine. Exclusive of our ~~subordinate~~re-performing loan securities, ~~into mezzanine and subordinate, where mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later. Nearly~~nearly all of our residential securities are supported by collateral that was designated as prime asat the time of issuance.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note 7.9. Real Estate Securities - (continued)

Trading Securities

~~The following table presents the fair value of trading securities by position and collateral type at September 30, 2017 and December 31, 2016.~~

~~Table 7.2 – Trading Securities by Position and Collateral Type~~

(In Thousands) September 30, 2017 December 31, 2016
Senior Securities $ 62,767
$ 37,067
Subordinate Securities
Mezzanine 458,299
256,226
Subordinate 299,068
152,394
Total Subordinate Securities 757,367
408,620
Total Trading Securities $ 820,134
$ 445,687

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and ~~commercial/~~multifamily ~~securities. At~~mortgage-backed securities, and our residential securities also include securities backed by re-performing loans ("RPL"). The following table presents the fair value of trading securities by position and collateral type at September 30, ~~2017, trading securities with a carrying value of $435 million were pledged as collateral under short-term borrowing agreements. See~~ ~~Note 11~~ ~~for additional information on short-term debt.~~

~~At September 30, 2017~~2021 and December 31, ~~2016, our~~2020.

Table 9.2 – Fair Value of Trading Securities by Position


(In Thousands)	September 30, 2021		December 31, 2020
Senior
Interest-only securities (1)	$	22,494	$	28,464


Total Senior	22,494		28,464
Mezzanine
Sequoia securities	—		3,649


Total Mezzanine	—		3,649
Subordinate
RPL securities	64,845		47,448
Multifamily securities	11,298		5,592
Other third-party residential securities	54,373		40,514
Total Subordinate	130,516		93,554
Total Trading Securities	$	153,010	$	125,667

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

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

Table 9.3 – Unpaid Principal Balance of Trading Securities by Position


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

(1)Our senior trading securities ~~were comprised of~~include interest-only securities, for which there is no principal ~~balance, and our subordinate~~balance.

The following table provides the activity of trading securities ~~had an unpaid principal balance of $767 million and $434 million, respectively.~~

At September 30, 2017 and December 31, 2016, subordinate trading securities included $287 million and $152 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities, $60 million and $15 million, respectively, of Sequoia securities, $167 million and $149 million, respectively, of other third-party residential securities, and $243 million and $92 million, respectively, of third-party commercial/multifamily securities.

~~During~~during the three and nine months ended September 30, ~~2017, we acquired $171 million~~2021 and $432 million (principal balance), respectively, of senior and subordinate securities for which we elected the fair value option and classified as trading, and sold $25 million and $85 million, respectively, of such securities. During the three and nine months ended September 30, 2016, we acquired $65 million and $198 million (principal balance), respectively, of senior and subordinate securities for which we elected the fair value option and classified as trading, and sold $2 million and $238 million, respectively, of such securities.2020.

~~During the three and nine months ended September 30, 2017, we recorded net~~Table 9.4 – Trading Securities Activity


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

(1)Net market valuation gains ~~of $1 million and $31 million, respectively,~~(losses) on trading securities ~~included in~~are recorded through Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income. During the three and nine months ended September 30, 2016, we recorded net market valuation gains of $9 million and $5 million, respectively, on trading securities, included in Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income.income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note 7.9. Real Estate Securities - (continued)

AFS Securities

The following table presents the fair value of our available-for-sale securities by position and collateral type at September 30, ~~2017~~2021 and December 31, ~~2016.~~2020.

Table ~~7.3~~9.5 – Fair Value of Available-for-Sale Securities by Position ~~and Collateral Type~~


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



Mezzanine


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

(In Thousands) September 30, 2017 December 31, 2016
Senior Securities $ 153,232
$ 136,546
Re-REMIC Securities 39,033
85,479
Subordinate Securities
Mezzanine 119,687
163,715
Subordinate 224,186
187,012
Total Subordinate Securities 343,873
350,727
Total AFS Securities $ 536,138
$ 572,752

~~At September 30, 2017 and December 31, 2016, all~~The following table provides the activity of ~~our~~ available-for-sale securities were comprised of residential mortgage-backed securities. At September 30, 2017, AFS securities with a carrying value of $229 million were pledged as collateral under short-term borrowing agreements. See ~~Note 11~~ ~~for additional information on short-term debt.~~

~~During~~during the three and nine months ended September 30, ~~2017, we purchased $4 million~~2021 and $32 million of AFS securities, respectively, and sold $23 million and $61 million of AFS securities, respectively, which resulted in net realized gains of $2 million and $9 million, respectively. During the three and nine months ended September 30, 2016, we purchased $11 million and $29 million of AFS securities, respectively, and sold $26 million and $241 million of AFS securities, respectively, which resulted in net realized gains of $2 million and $20 million, respectively. In addition, during the nine months ended September 30, 2017, we exchanged our interests in three Re-REMICs, which together had a fair value of $47 million, for the senior securities underlying the Re-REMICs, and reclassified our interests from Re-REMIC to Senior.2020.

Table 9.6 – Available-for-Sale Securities Activity


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

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

At September 30, ~~2017, there were $0.1~~2021, we had $28 million of AFS securities with contractual maturities less than five years, ~~$0.4~~$4 million with contractual maturities greater than five years but less than 10ten years, and the remainder of our AFS securities had contractual maturities greater than 10ten years.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note 7.9. Real Estate Securities - (continued)

The following table presents the components of carrying value (which equals fair value) of AFS securities at September 30, ~~2017~~2021 and December 31, ~~2016.~~2020.

Table ~~7.4~~9.7 – Carrying Value of AFS Securities


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

September 30, 2017
(In Thousands) Senior Re-REMIC Subordinate Total
Principal balance $ 156,936
$ 44,896
$ 442,219
$ 644,051
Credit reserve (3,024 ) (5,810 ) (38,041 ) (46,875 )
Unamortized discount, net (36,575 ) (10,412 ) (142,405 ) (189,392 )
Amortized cost 117,337

28,674
261,773
407,784
Gross unrealized gains 37,155
10,359
83,185
130,699
Gross unrealized losses (1,260 ) —
(1,085 ) (2,345 )
Carrying Value $ 153,232

$ 39,033
$ 343,873
$ 536,138


December 31, 2016
December 31, 2020													December 31, 2020
(In Thousands)	Senior			Re-REMIC			Subordinate			Total			(In Thousands)	Mezzanine		Subordinate		Total
Principal balance	$	148,862		$	95,608		$	456,359		$	700,829		Principal balance	$	2,000	$	281,284	$	283,284
Credit reserve	(4,814		)	(6,857		)	(35,802		)	(47,473		)	Credit reserve	—		(44,967)		(44,967)
Unamortized discount, net	(41,877		)	(19,613		)	(136,622		)	(198,112		)	Unamortized discount, net	—		(95,718)		(95,718)
Amortized cost	102,171			69,138			283,935			455,244			Amortized cost	2,000		140,599		142,599
Gross unrealized gains	36,304			16,341			68,032			120,677			Gross unrealized gains	14		77,280		77,294
Gross unrealized losses	(1,929		)	—			(1,240		)	(3,169		)	Gross unrealized losses	—		(1,047)		(1,047)
CECL allowance													CECL allowance	—		(388)		(388)
Carrying Value	$	136,546		$	85,479		$	350,727		$	572,752		Carrying Value	$	2,014	$	216,444	$	218,458

The following table presents the changes for the three and nine months ended September 30, ~~2017,~~2021, in unamortized discount and designated credit reserves on residential AFS securities.

Table ~~7.5~~9.8 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities


	Three Months Ended September 30, 2021				Nine Months Ended September 30, 2021
	Credit Reserve		Unamortized Discount, Net		Credit Reserve		Unamortized Discount, Net
(In Thousands)
Beginning balance	$	40,349	$	90,216	$	44,967	$	95,718
Amortization of net discount	—		(6,437)		—		(9,620)
Realized credit losses	(184)		—		(433)		—
Acquisitions	—		—		2,825		1,208
Sales, calls, other	(320)		(6,068)		(1,312)		(15,797)

Transfers to (release of) credit reserves, net	(10,397)		10,397		(16,599)		16,599
Ending Balance	$	29,448	$	88,108	$	29,448	$	88,108

Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017

Credit
Reserve

Unamortized
Discount, Net
Credit
Reserve Unamortized
Discount, Net
(In Thousands)
Beginning balance $ 47,588
$ 192,063
$ 47,473
$ 198,112
Amortization of net discount —
(4,631 ) —
(14,697 )
Realized credit losses (795 ) —
(3,232 ) —
Acquisitions 1,665
2,732
8,256
11,375
Sales, calls, other (144 ) (2,214 ) (3,405 ) (7,863 )
Impairments 3
—
248
—
Transfers to (release of) credit reserves, net (1,442 ) 1,442
(2,465 ) 2,465
Ending Balance $ 46,875
$ 189,392
$ 46,875
$ 189,392

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note 7.9. Real Estate Securities - (continued)

AFS Securities with Unrealized Losses

The following table presents the components comprising the total carrying value of residential AFS securities that were in a gross unrealized loss position at September 30, ~~2017~~2021 and December 31, ~~2016.~~2020.

Table ~~7.6~~9.9 – Components of Fair Value of ~~Residential~~ AFS Securities by Holding Periods

Less Than 12 Consecutive Months 12 Consecutive Months or Longer

Amortized
Cost

Unrealized
Losses

Fair
Value

Amortized
Cost

Unrealized
Losses
Fair
Value
(In Thousands)
September 30, 2017 $ 10,164
$ (694 ) $ 9,470
$ 31,001
$ (1,651 ) $ 29,350
December 31, 2016 15,772
(330 ) 15,442
60,035
(2,839 ) 57,196


	Less Than 12 Consecutive Months						12 Consecutive Months or Longer
	Amortized Cost		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Losses		Fair Value
(In Thousands)
September 30, 2021	$	—	$	—	$	—	$	1,600	$	(33)	$	1,567
December 31, 2020	9,129		(1,047)		7,920		—		—		—

At September 30, ~~2017,~~2021, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included ~~173~~84 AFS securities, of which ~~14 were in an unrealized loss position and six were~~1 was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, ~~2016,~~2020, our consolidated balance sheet included ~~186~~96 AFS securities, of which 195 were in an unrealized loss position and 10zero were in a continuous unrealized loss position for 12 consecutive months or longer.

Evaluating AFS Securities for ~~Other-than-Temporary Impairments~~Credit Losses

Gross unrealized losses on our AFS securities were ~~$2 million~~$33 thousand at September 30, ~~2017.~~2021. We evaluate all securities in an unrealized loss position to determine if the impairment is ~~temporary or other-than-temporary~~credit-related (resulting in an ~~OTTI)~~allowance for credit losses recorded in earnings) or non-credit-related (resulting in an unrealized loss through other comprehensive income). At September 30, ~~2017,~~2021, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses ~~that are other-than-temporary~~ 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.

~~For the nine months ended~~At September 30, ~~2017, other-than-temporary impairments~~2021, our current expected credit loss ("CECL") allowance related to our AFS securities were $0.6 million, of which $0.2 million were recognized through our consolidated statements of income and $0.4 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet.was zero. AFS securities for which ~~OTTI~~an allowance is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the ~~OTTI~~ 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 ~~the~~security credit ~~loss component of OTTI.~~losses.

The table below summarizes the weighted average of the significant ~~valuation assumptions~~credit quality indicators we used for the credit loss allowance on our AFS securities ~~in unrealized loss positions~~ at September 30, ~~2017.~~2021.

Table ~~7.7~~9.10 – Significant ~~Valuation Assumptions~~Credit Quality Indicators

September 30, 2021

Subordinate Securities

Default rate

N/A

Loss severity

N/A

September 30, 2017 Range for Securities
Prepayment rates 8% - 15%
Projected losses 0.25% - 8%

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note 7.9. Real Estate Securities - (continued)

The following table details the activity related to the allowance for credit ~~loss component of OTTI (i.e., OTTI recognized through earnings)~~losses for AFS securities ~~held at~~for the three and nine months ended September 30, ~~2017 and 2016, for which a portion of an OTTI was recognized in other comprehensive income.~~2021.

Table ~~7.8~~9.11 – ~~Activity~~Rollforward of ~~the~~Allowance for Credit ~~Component of Other-than-Temporary Impairments~~Losses

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Balance at beginning of period $ 25,802
$ 28,198
$ 28,261
$ 28,277
Additions
Initial credit impairments —
—
178
291
Subsequent credit impairments —
—
47
—
Reductions
Securities sold, or expected to sell —
—
(2,282 ) (261 )
Securities with no outstanding principal at period end (42 ) —
(444 ) (109 )
Balance at End of Period $ 25,760
$ 28,198
$ 25,760
$ 28,198


	Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021
(In Thousands)
Beginning balance allowance for credit losses	$	—	$	388

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

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of ~~income.~~income (loss). The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and nine months ended September 30, ~~2017~~2021 and ~~2016.~~2020.

Table ~~7.9~~9.12 – Gross Realized Gains and Losses on AFS Securities


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2021		2020		2021		2020
Gross realized gains - sales	$	—	$	—	$	1,507	$	8,779
Gross realized gains - calls	6,389		—		15,484		—
Gross realized losses - sales	—		—		—		(4,144)

Total Realized Gains on Sales and Calls of AFS Securities, net	$	6,389	$	—	$	16,991	$	4,635

During the three months ended September 30, 2021, we called 2 of our unconsolidated Sequoia entities, and purchased $66 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $6 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss). During the nine months ended September 30, 2021, we called 6 of our unconsolidated Sequoia entities, and purchased $167 million (unpaid principal balance) of loans from the securitization trusts. In association with these calls, we realized a $15 million gain on the securities we owned from these securitizations, which was recognized through Realized gains, net on our consolidated statements of income (loss).

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Gross realized gains - sales $ 1,734
$ 1,990
$ 9,381
$ 22,395
Gross realized gains - calls —
—
677
1,210
Gross realized losses - sales —
—
—
(2,293 )
Gross realized losses - calls —
—
(497 ) —
Total Realized Gains on Sales and Calls of AFS
Securities, net
$ 1,734
$ 1,990
$ 9,561
$ 21,312

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note 8. 10. Other Investments

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

Table 10.1 – Components of Other Investments


(In Thousands)	September 30, 2021		December 31, 2020
Servicer advance investments	$	170,062	$	231,489
HEIs	167,856		42,440
Strategic investments	31,108		4,449
Excess MSRs	29,185		34,418
Mortgage servicing rights	12,389		8,815

Other	11,766		26,564
Total Other Investments	$	422,366	$	348,175

Servicer advance investments

We and a third-party co-investor, through 2 partnerships (“SA Buyers”) consolidated by us, purchased the outstanding servicer advances and excess MSRs related to a portfolio of legacy residential mortgage-backed securitizations serviced by the co-investor (Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information regarding the transactions). At September 30, 2021, we had funded $94 million of total capital to the SA Buyers (see Note 16 for additional detail).

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

Table 10.2 – Components of Servicer Advance Receivables


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

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 10. Other Investments - (continued)

HEIs

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

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

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

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

Strategic Investments

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

Excess MSRs

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

Mortgage Servicing Rights

We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The ~~following table presents~~majority of our investments in MSRs were made through the ~~fair value~~retention of ~~MSRs~~servicing rights associated with the residential jumbo mortgage loans that we acquired and ~~the aggregate principal amounts of associated loans as of September 30, 2017 and December 31, 2016.~~

~~Table 8.1 – Fair Value of MSRs and Aggregate Principal Amounts of Associated Loans~~

September 30, 2017 December 31, 2016
(In Thousands) MSR Fair Value Associated Principal MSR Fair Value Associated Principal
Mortgage Servicing Rights
Conforming Loans $ 1,125
$ 107,298
$ 58,523
$ 4,989,720
Jumbo Loans 61,803
5,639,708
60,003
5,467,169
Total Mortgage Servicing Rights $ 62,928
$ 5,747,006
$ 118,526
$ 10,456,889

~~The following table presents activity for MSRs for~~subsequently sold to third parties. During the three and nine months ended September 30, ~~2017~~2021, we retained $5 million and ~~2016.~~$9 million of MSRs, respectively, from sales of residential loans to third parties. We hold our MSR investments at our taxable REIT subsidiaries.

~~Table 8.2 – Activity for MSRs~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Balance at beginning of period $ 63,770
$ 110,046
$ 118,526
$ 191,976
Additions 256
3,443
7,957
22,941
Sales —
(8,860 ) (52,966 ) (38,419 )
Changes in fair value due to:
Changes in assumptions ⁽¹⁾
563
7,085
(3,450 ) (52,723 )
Other changes ⁽²⁾
(1,661 ) (5,705 ) (7,139 ) (17,766 )
Balance at End of Period $ 62,928
$ 106,009
$ 62,928
$ 106,009


~~(1)~~	~~Primarily reflects changes in prepayment assumptions due to changes in market interest rates.~~


~~(2)~~	~~Represents changes due to receipt of expected cash flows.~~

~~During the three months ended September 30, 2017, we did not sell any MSRs. During the nine months ended September 30, 2017, we sold conforming MSRs with a fair value of $53 million.~~

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note ~~8. Mortgage Servicing Rights~~10. Other Investments - (continued)

~~We make investments in~~At September 30, 2021 and December 31, 2020, our MSRs ~~through the retention~~had a fair value of ~~servicing rights~~$12 million and $9 million, respectively, and were associated with ~~the residential mortgage~~ loans ~~that we acquire~~with an aggregate principal balance of $2.29 billion and subsequently transfer to third parties or through the direct acquisition of MSRs sold by third parties. We hold our MSR investments at our taxable REIT subsidiary. The following table details the retention and purchase of MSRs during$2.59 billion, respectively. During the three and nine months ended September 30, ~~2017.~~

~~Table 8.3 – MSR Additions~~

Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
(In Thousands) MSR Fair Value Associated Principal MSR Fair Value Associated Principal
Jumbo MSR additions:
From securitization $ —
$ —
$ 7,123
$ 654,605
From loan sales —
—
263
31,658
Total jumbo MSR additions —
—
7,386
686,263
Conforming MSR additions:
From purchases 256
41,263
571
95,595
Total MSR Additions $ 256
$ 41,263
$ 7,957
$ 781,858

~~The following table presents the components~~2021, including net market valuation gains and losses on our MSRs and related risk management derivatives, we recorded net income of $0.3 million and $1 million, respectively, through Other income on our ~~MSR~~consolidated statements of income ~~for~~(loss). During the three and nine months ended September 30, ~~2017~~2020, we recorded net losses of $2 million and ~~2016.~~$6 million, respectively, through Other income on our consolidated statements of income (loss).

~~Table 8.4 – Components of MSR Income, net~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Servicing income $ 3,872
$ 9,943
$ 17,290
$ 32,199
Cost of sub-servicer (476 ) (1,217 ) (2,515 ) (4,958 )
Net servicing fee income 3,396
8,726
14,775
27,241
Market valuation changes of MSRs (1,351 ) 1,380
(10,842 ) (70,489 )
Market valuation changes of associated derivatives (422 ) (6,336 ) 1,869
55,874
MSR provision for repurchases (8 ) —
304
208
MSR Income, Net $ 1,615
$ 3,770
$ 6,106
$ 12,834

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~(Unaudited)~~

Note 9.11. Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at September 30, ~~2017~~2021 and December 31, ~~2016.~~2020.

Table ~~9.1~~11.1 – Fair Value and Notional Amount of Derivative Financial Instruments


	September 30, 2017							December 31, 2016									September 30, 2021									December 31, 2020
	Fair Value				Notional Amount			Fair Value				Notional Amount					Fair Value					Notional Amount				Fair Value				Notional Amount
(In Thousands)				(In Thousands)

Assets - Risk Management Derivatives																			Assets - Risk Management Derivatives
Interest rate swaps	$	3,645				$	509,000				$	19,859		$	1,009,000	Interest rate swaps				$	3,213			$	293,200			$	224			$	42,000
TBAs	2,875				985,000			8,300				850,000		TBAs			8,213					2,205,000				18,260				3,520,000
Futures	135				7,500			—				—

Swaptions	297				300,000			5,121				345,000		Swaptions			30,415					1,335,000				19,727				1,585,000

Assets - Other Derivatives														Assets - Other Derivatives
Loan purchase commitments	4,996				802,550			3,315				352,981
Loan purchase and interest rate lock commitments														Loan purchase and interest rate lock commitments			9,262					1,687,314				15,027				2,617,254

Total Assets	$	11,948			$	2,604,050		$	36,595			$	2,556,981	Total Assets			$	51,103				$	5,520,514			$	53,238			$	7,764,254

Liabilities - Cash Flow Hedges
Interest rate swaps	$	(45,093	)		$	139,500		$	(44,822	)		$	139,500

Liabilities - Risk Management Derivatives														Liabilities - Risk Management Derivatives
Interest rate swaps	(12,901		)		1,838,500			(12,097		)		1,101,500		Interest rate swaps			$	(74)				$	40,500			$	—			$	—
TBAs	(3,946		)		950,000			(4,681		)		510,000		TBAs			(7,599)					2,190,000				(15,495)				3,105,000
Futures	(423		)		29,000			(928		)		87,500
Interest rate futures														Interest rate futures			(749)					133,200				—				—
Liabilities - Other Derivatives														Liabilities - Other Derivatives
Loan purchase commitments	(2,875		)		683,709			(3,801		)		584,862		Loan purchase commitments			(2,550)					1,084,579				(577)				477,153

Total Liabilities	$	(65,238	)		$	3,640,709		$	(66,329	)		$	2,423,362	Total Liabilities			$	(10,972)				$	3,448,279			$	(16,072)			$	3,582,153
Total Derivative Financial Instruments, Net	$	(53,290	)		$	6,244,759		$	(29,734	)		$	4,980,343	Total Derivative Financial Instruments, Net			$	40,131				$	8,968,793			$	37,166			$	11,346,407

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At September 30, ~~2017,~~2021, we were party to swaps and swaptions with an aggregate notional amount of ~~$2.65~~$1.67 billion, TBA agreements ~~sold~~ with an aggregate notional amount of ~~$1.94~~$4.40 billion, and ~~financial~~interest rate futures contracts with an aggregate notional amount of ~~$37~~$133 million. At December 31, ~~2016,~~2020, we were party to swaps and swaptions with an aggregate notional amount of ~~$2.46~~$1.63 billion and TBA agreements ~~sold~~ with an aggregate notional amount of ~~$1.36 billion, and financial futures contracts with an aggregate notional amount of $88 million.~~$6.63 billion.

During the three and nine months ended September 30, ~~2017,~~2021, risk management derivatives had net market valuation ~~losses~~gains of $9$4 million and ~~$36~~$38 million, respectively. During the three and nine months ended September 30, ~~2016,~~2020, risk management derivatives had net market valuation losses of ~~$5 million~~0 and ~~$11~~$98 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net, and ~~MSR~~Other income ~~net~~ on our consolidated statements of ~~income.~~income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note 9.11. Derivative Financial Instruments - (continued)

Loan Purchase and Interest Rate Lock Commitments

LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. ~~Net market valuation gains on LPCs were $13 million and $34 million for~~For both the three and nine months ended September 30, ~~2017, respectively,~~2021, LPCs and ~~were $12 million and $36 million for the three and nine months ended September 30, 2016, respectively. The~~IRLCs had net market valuation gains ~~and losses~~of $18 million that were recorded in Mortgage banking activities, net on our consolidated statements of ~~income.~~income (loss). For the three and nine months ended September 30, 2020, LPCs and IRLCs had net market valuation gains of $13 million and $35 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss).

Derivatives Designated as Cash Flow Hedges

To manage the variability in interest expense related to ~~portions~~a portion of our long-term debt ~~and certain adjustable-rate securitization entity liabilities~~ that ~~are~~is included in our consolidated balance sheets for financial reporting purposes, we designated certain interest rate swaps as cash flow ~~hedges with an aggregate notional balance~~hedges.

During the first quarter of ~~$140 million.~~

~~For the three~~2020, we terminated and ~~nine months ended September 30, 2017, changes in the values~~settled all of our outstanding derivatives that had been designated as cash flow hedges ~~were positive $0.3 million and negative $0.4 million, respectively, and were recorded in Accumulated other comprehensive income,~~for our long-term debt, with a ~~component~~payment of equity. For the three and nine months ended September 30, 2016, changes in the values of designated cash flow hedges were positive $1 million and negative $23 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity.$84 million. For interest rate agreements ~~currently or~~ previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was ~~$44~~$77 million and $81 million at ~~both~~ September 30, ~~2017~~2021 and December 31, ~~2016.~~2020, respectively. We are amortizing this loss into interest expense over the remaining term of the debt they were originally hedging. As of September 30, 2021, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

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

The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three and nine months ended September 30, ~~2017~~2021 and ~~2016.~~2020.

Table ~~9.2~~11.2 – Impact on Interest Expense of Interest Rate Agreements Accounted for as Cash Flow Hedges


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2017			2016			2017			2016			(In Thousands)	2021		2020		2021		2020
Net interest expense on cash flows hedges	$	(1,119	)	$	(1,314	)	$	(3,516	)	$	(4,049	)	Net interest expense on cash flows hedges	$	—	$	—	$	—	$	(860)

Realized net losses reclassified from other comprehensive income	(14		)	(18		)	(42		)	(55		)	Realized net losses reclassified from other comprehensive income	(1,041)		(1,040)		(3,086)		(2,148)
Total Interest Expense	$	(1,133	)	$	(1,332	)	$	(3,558	)	$	(4,104	)	Total Interest Expense	$	(1,041)	$	(1,040)	$	(3,086)	$	(3,008)

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2020, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At September 30, ~~2017,~~2021, we assessed this risk as remote and did not record aan associated specific valuation adjustment.

At September 30, ~~2017,~~2021, we ~~had outstanding derivative agreements with three counterparties (other than clearinghouses) and~~ were in compliance with our derivative counterparty ISDA ~~agreements governing our open derivative positions.~~agreements.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note ~~10.~~12. Other Assets and Liabilities

Other assets at September 30, ~~2017~~2021 and December 31, ~~2016,~~2020 are summarized in the following table.

Table ~~10.1~~12.1 – Components of Other Assets


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



Pledged collateral	—		1,177


Other	9,254		13,533
Total Other Assets	$	162,193	$	130,588

(In Thousands) September 30, 2017 December 31, 2016
Margin receivable $ 93,679
$ 68,038
FHLBC stock 43,393
43,393
Pledged collateral 42,933
42,875
MSR holdback receivable 9,754
1,862
Investment receivable 6,095
1,068
Guarantee asset 3,049
4,092
REO 3,020
5,533
Fixed assets and leasehold improvements ⁽¹⁾
2,852
2,750
Other 4,731
12,334
Total Other Assets $ 209,506
$ 181,945
(1)Fixed assets and leasehold improvements had a basis of $17 million and accumulated depreciation of $7 million at September 30, 2021.


~~(1)~~	~~Fixed assets and leasehold improvements had a basis of $6 million and accumulated depreciation of $3 million at September 30, 2017.~~

Accrued expenses and other liabilities at September 30, ~~2017~~2021 and December 31, ~~2016~~2020 are summarized in the following table.

Table ~~10.2~~12.2 – Components of Accrued Expenses and Other Liabilities


(In Thousands)	September 30, 2021		December 31, 2020
Accrued compensation	$	64,354	$	24,393
Margin payable	48,298		14,728
Accrued interest payable	34,545		34,858
Payable to non-controlling interests (1)	31,781		16,941
Operating lease liabilities	15,771		16,687



Accrued income taxes payable	11,336		5,614
Residential loan and MSR repurchase reserve	9,003		8,631
Guarantee obligations	7,902		10,039

Accrued operating expenses	4,068		5,509
Bridge loan holdbacks	3,784		5,708



Deferred consideration	—		14,579
Other	20,734		21,653
Total Accrued Expenses and Other Liabilities	$	251,576	$	179,340

(In Thousands) September 30, 2017 December 31, 2016
Guarantee obligations $ 20,101
$ 21,668
Accrued compensation 18,978
18,830
Accrued taxes payable 15,835
525
Unsettled trades 12,005
24
Residential loan and MSR repurchase reserve 4,755
5,432
Legal reserve 2,000
2,000
Current accounts payable 1,920
1,151
Accrued operating expenses 1,097
4,493
Deferred tax liability 898
898
Margin payable 841
12,783
Other 2,632
4,624
Total Other Liabilities $ 81,062
$ 72,428
(1)Includes $11 million and $17 million of payables to non-controlling interest holders in our consolidated Servicing Investment and Point HEI entities, respectively, as September 30, 2021. Includes $17 million payable to a non-controlling interest holder in our consolidated Servicing Investment entities at December 31, 2020.

~~Margin Receivable and Payable~~Deferred Consideration

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.

~~FHLB Stock~~

~~In accordance with our FHLB-member subsidiary's borrowing agreement with the FHLBC, our subsidiary is required to purchase and hold stock~~The deferred consideration presented in the ~~FHLBC. See~~ ~~Note 13~~ ~~for additional detail.~~table above is related to our acquisition of 5 Arches in 2019. During the first quarter of 2021, we distributed 806,068 shares of Redwood common stock and paid $1 million in cash in full settlement of the remaining deferred consideration associated with this acquisition.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note ~~10.~~12. Other Assets and Liabilities - (continued)

~~Guarantee Asset, Pledged Collateral, and Guarantee Obligations~~

The pledged collateral, guarantee asset, and guarantee obligations presented in the tables above are related to our risk sharing arrangements with Fannie Mae and Freddie Mac. In accordance with these arrangements, we are required to pledge collateral to secure our guarantee obligations. See ~~Note 14~~ ~~for additional information on our risk sharing arrangements.~~

~~Investment Receivable and Unsettled Trades~~

In accordance with our policy to record purchases and sales of securities on the trade date, if the trade and settlement of a purchase or sale crosses over a quarterly reporting period, we will record an investment receivable for sales and an unsettled trades liability for purchases.

~~MSR Holdback Receivable~~

~~MSR holdback receivable represents amounts owed to us from third parties related to the sale of MSRs.~~

REO

The following table summarizes the activity and carrying ~~value~~values of REO assets held at ~~September 30, 2017 was $3 million, which includes the net effect of $3 million related to transfers into REO~~Redwood and at consolidated Legacy Sequoia, Freddie Mac SLST, and CAFL SFR entities during the nine months ended September 30, ~~2017, offset by $9~~2021.

Table 12.3 – REO Activity


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

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

(2)For the nine months ended September 30, 2021, REO liquidations resulted in $0.3 million of ~~REO liquidations, and $3 million of unrealized gains resulting from market valuation adjustments. At September 30, 2017 and December 31, 2016, there~~realized losses, which were ~~12 and 23 REO properties, respectively,~~ recorded in Investment fair value changes, net on our consolidated ~~balance sheets, all~~statements of ~~which were owned~~income (loss).

The following table provides the detail of REO assets at Redwood and at consolidated Legacy Sequoia, ~~entities.~~

~~Accrued Taxes Payable~~

~~Accrued taxes payable~~Freddie Mac SLST, and CAFL SFR entities at September 30, ~~2017 represents the interim period current~~2021 and ~~deferred tax provisions, less any estimated tax payments made during the interim period. Annually, we record separate current and deferred tax provisions and at~~ December 31, ~~2016,~~2020.

Table 12.4 – REO Assets


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

Refer to our Annual Report on Form 10-K for the ~~accrued taxes payable represents income taxes currently payable to federal and state tax authorities.~~

~~Legal and Repurchase Reserves~~

~~See~~ ~~Note 14~~year ended December 31, 2020 for additional ~~information on the legal~~descriptions of our other assets and ~~residential repurchase reserves.~~liabilities.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note ~~11.~~13. Short-Term Debt

We enter into repurchase agreements ~~bank~~("repo"), loan warehouse agreements, and other forms of collateralized (and generally uncommitted) short-term borrowings with several banks and major investment banking firms. At September 30, ~~2017,~~2021, we had outstanding agreements with several counterparties and we were in compliance with all of the related covenants. ~~For additional information about these financial covenants and our short-term debt, see Part I, Item 2 –~~ ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~ ~~of this Quarterly Report on Form 10-Q and Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.~~

The table below summarizes our short-term debt, including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at September 30, ~~2017~~2021 and December 31, ~~2016.~~2020.

Table ~~11.1~~13.1 – Short-Term Debt


	September 30, 2017										September 30, 2021
(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate		Maturity	Weighted Average Days Until Maturity	(Dollars in Thousands)	Number of Facilities	Outstanding Balance		Limit		Weighted Average Interest Rate (1)		Maturity	Weighted Average Days Until Maturity
Facilities										Facilities
Residential loan warehouse	4	$	438,243	$	1,325,000	2.80	%	12/2017-8/2018	150	Residential loan warehouse	7	$	1,335,464	$	2,700,000	1.89	%	11/2021-8/2022	156

Business purpose loan warehouse										Business purpose loan warehouse	2	183,800		350,000		3.39	%	3/2022-7/2022	201
Real estate securities repo	8	549,811		—		2.46	%	10/2017-12/2017	28	Real estate securities repo	3	79,766		—		1.23	%	10/2021-12/2021	34

Total Short-Term Debt Facilities	12	988,054								Total Short-Term Debt Facilities	12	1,599,030
Convertible notes, net	N/A	250,142		—		4.63	%	4/2018	197
Servicer advance financing										Servicer advance financing	1	151,911		260,000		1.89	%	11/2021	61

Total Short-Term Debt		$	1,238,196							Total Short-Term Debt		$	1,750,941

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(Unaudited)

Note 14. Asset-Backed Securities Issued

- (continued)

September 30, 2017
Legacy
Sequoia
Sequoia
Choice Total
(Dollars in Thousands)
Certificates with principal balance $ 730,312
$ 276,873
$ 1,007,185
Interest-only certificates 2,829
4,153
6,982
Market valuation adjustments (75,181 ) 5,302
(69,879 )
ABS Issued, Net $ 657,960
$ 286,328
$ 944,288
Range of weighted average interest rates, by series 1.20% to 2.56%
4.53%

Stated maturities 2024 - 2036
2047

Number of series 20
1

December 31, 2016
Legacy
Sequoia
Sequoia
Choice Total
(Dollars in Thousands)
Certificates with principal balance $ 880,517
$ —
$ 880,517
Interest-only certificates 3,774
—
3,774
Market valuation adjustments (110,829 ) —
(110,829 )
ABS Issued, Net $ 773,462
$ —
$ 773,462
Range of weighted average interest rates, by series 0.74% to 2.23%
— %
Stated maturities 2024 - 2036
N/A

Number of series 20
—

The actual maturity of each class of ABS issued is primarily determined by the rate of principal prepayments on the assets of the issuing entity. Each series is also subject to redemption prior to the stated maturity according to the terms of the respective governing documents of each ABS issuing entity. As a result, the actual maturity of ABS issued may occur earlier than its stated maturity. At September 30, ~~2017, all~~2021, the majority of the ABS issued and outstanding had contractual maturities beyond five years.

~~At both September 30, 2017~~ See Note 4 for detail on the carrying value components of the collateral for ABS issued and ~~December 31, 2016,~~outstanding. The following table summarizes the accrued interest payable on ABS issued ~~by the Legacy Sequoia entities was $1 million. At~~at September 30, ~~2017, accrued interest payable on ABS issued by the Sequoia Choice entity was $1 million.~~2021 and December 31, 2020. Interest due on consolidated ABS issued is payable monthly.

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


(In Thousands)	September 30, 2021		December 31, 2020
Legacy Sequoia	$	107	$	141
Sequoia	5,918		4,697
CAFL	10,760		10,122
Freddie Mac SLST (1)	4,925		5,656
Freddie Mac K-Series	1,195		1,177
Total Accrued Interest Payable on ABS Issued	$	22,905	$	21,793

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

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

~~Note 12. Asset-Backed Securities Issued - (continued)~~

~~The following table summarizes the carrying value components of the collateral for ABS issued and outstanding at September 30, 2017 and December 31, 2016.~~

~~Table 12.2 – Collateral for Asset-Backed Securities Issued~~

September 30, 2017
Legacy
Sequoia

Sequoia
Choice
Total
(In Thousands)
Residential loans $ 673,134
$ 317,303
$ 990,437
Restricted cash 147
—
147
Accrued interest receivable 898
1,266
2,164
REO 3,020
—
3,020
Total Collateral for ABS Issued $ 677,199
$ 318,569
$ 995,768

December 31, 2016
Legacy
Sequoia
Sequoia
Choice Total
(In Thousands)
Residential loans $ 791,636
$ —
$ 791,636
Restricted cash 148
—
148
Accrued interest receivable 1,000
—
1,000
REO 5,533
—
5,533
Total Collateral for ABS Issued $ 798,317
$ —
$ 798,317

Note ~~13.~~15. Long-Term Debt

~~FHLBC Borrowings~~

~~In July 2014,~~The table below summarizes our FHLB-member subsidiary entered into a borrowing agreement with the Federal Home Loan Bank of Chicago. At September 30, 2017, under this agreement, our subsidiary could incur borrowings up to $2.00 billion, also referred to as “advances,” from the FHLBC secured by eligible collateral, including residential mortgage loans. During the three and nine months ended September 30, 2017, our FHLB-member subsidiary made no additional borrowings under this agreement. Under a final rule published by the Federal Housing Finance Agency in January 2016, our FHLB-member subsidiary will remain an FHLB member through the five-year transition period for captive insurance companies. Our FHLB-member subsidiary's existing $2.00 billion of FHLB debt, which matures beyond this transition period, is permitted to remain outstanding until its stated maturity. As residential loans pledged as collateral for this debt pay down, we are permitted to pledge additional loans or other eligible assets to collateralize this debt; however, we do not expect to be able to increase our subsidiary's FHLB debt above the existing $2.00 billion maximum.

~~At September 30, 2017, $2.00 billion of advances were outstanding under this agreement, which were classified as~~ long-term debt, ~~with a~~including the facilities that are available to us, the outstanding balances, the weighted average interest rate, and the maturity information at September 30, 2021.

Table 15.1 – Long-Term Debt


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

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

Recourse Subordinate Securities Financing

In the third quarter of ~~1.3% and~~2021, a ~~weighted average maturity~~subsidiary of ~~approximately eight years. At December 31, 2016, $2.00 billion~~Redwood entered into a repurchase agreement providing non-marginable recourse debt financing of ~~advances were outstanding under this agreement, which were classified as long-term debt,~~certain securities retained from our consolidated CAFL securitizations. The financing is guaranteed by Redwood, with ~~a weighted average~~an interest rate of ~~0.64%~~approximately 4.75% through June 2024. The financing facility may be terminated, at our option, in June 2023, and has a ~~weighted average~~final maturity ~~of nine years. Advances~~in June 2026, provided that the interest rate on amounts outstanding under the facility increases between June 2024 and June 2026. See "Facility B" above for details on borrowings and securities pledged as collateral under this agreement incur interest charges based on a specified margin over the FHLBC’s 13-week discount note rate, which resets every 13 weeks. Total advances under this agreement were secured by residential mortgage loans with a fair value of $2.26 billionfacility at September 30, ~~2017.~~ 2021.

Non-Recourse BPL Financing Facilities

In ~~addition, cash~~the third quarter of ~~$24 million served~~2021, we reclassified one of our non-recourse facilities from long-term to short-term debt as ~~collateral for these borrowings~~the maturity of this facility was less than one year at September 30, 2017, and is presented as restricted cash on our consolidated balance sheet. This agreement also requires our subsidiary to purchase and hold stock in the FHLBC in an amount equal to a specified percentage of outstanding advances. At September 30, 2017, our subsidiary held $43 million of FHLBC stock that is included in Other assets in our consolidated balance sheets.2021.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note ~~13.~~15. Long-Term Debt - (continued)

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

Recourse BPL Financing Facilities

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

The following table below presents ~~maturities~~the value of loans, securities, and other assets pledged as collateral under our ~~FHLBC borrowings by year~~long-term debt at September 30, ~~2017.~~2021 and December 31, 2020.

Table ~~13.1~~15.2 – ~~Maturities of FHLBC Borrowings by Year~~

Collateral for Long-Term Debt

(In Thousands) September 30, 2017
2024 $ 470,171
2025 887,639
2026 642,189
Total FHLBC Borrowings $ 1,999,999


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

(1)Represents securities we have retained from consolidated securitization entities. For ~~additional information about our FHLBC borrowings, see Part I, Item 2 of Quarterly Report on Form 10-Q under~~GAAP purposes, we consolidate the ~~heading “Risks Relating to Debt Incurred under Short-~~loans and ~~Long-Term Borrowing Facilities.~~”non-recourse ABS debt issued from these securitizations.

~~Convertible Notes~~

In August 2017, we issued $245 million principal amount of 4.75% convertible senior notes due 2023. These convertible notes require semi-annual interest payments at a fixed coupon rate of 4.75% until maturity or conversion, which will be no later than August 15, 2023. After deducting the underwriting discount and offering costs, we received $238 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 5.3% per annum. At September 30, 2017, these notes were convertible at the option of the holder at a conversion rate of 53.8394 common shares per $1,000 principal amount of convertible senior notes (equivalent to a conversion price of $18.57 per common share). Upon conversion of these notes by a holder, the holder will receive shares of our common stock. At September 30, 2017, the outstanding principal amount of these notes was $245 million. At September 30, 2017,The following table summarizes the accrued interest payable ~~balance~~ on ~~this~~long-term debt ~~was $1 million~~at September 30, 2021 and December 31, 2020.

Table 15.3 – Accrued Interest Payable on Long-Term Debt


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

Refer to our Annual Report on Form 10-K for the ~~unamortized deferred issuance costs were $7 million.~~year ended December 31, 2020 for a full description of our long-term debt.

In November 2014, RWT Holdings, Inc., a wholly-owned subsidiary of Redwood Trust, Inc., issued $205 million principal amount of 5.625% exchangeable senior notes due 2019. These exchangeable notes require semi-annual interest payments at a fixed coupon rate of 5.625% until maturity or exchange, which will be no later than November 15, 2019. After deducting the underwriting discount

Note 16. Commitments and offering costs, we received $198 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these exchangeable notes is approximately 6.3% per annum. Contingencies

Lease Commitments

At September 30, ~~2017, these notes~~2021, we were ~~exchangeable at the option~~obligated under 7 non-cancelable operating leases with expiration dates through 2031 for $18 million of the holder at an exchange rate of 46.1798 common shares per $1,000 principal amount of exchangeable senior notes (equivalent to an exchange price of $21.65 per common share). Upon exchange of these notes by a holder, the holder will receive shares of our common stock. During the nine monthscumulative lease payments. Our operating lease expense was $3 million for both nine-month periods ended September 30, ~~2017, we did not repurchase any of these notes. During the nine months ended September 30, 2016, we repurchased $4 million par value of these notes at a discount~~2021 and recorded a gain on extinguishment of debt of $0.3 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $201 million. At September 30, 2017, the accrued interest payable balance on this debt was $4 million and the unamortized deferred issuance costs were $3 million.

In March 2013, we issued $288 million principal amount of 4.625% convertible senior notes due 2018. These convertible notes require semi-annual interest payments at a fixed coupon rate of 4.625% until maturity or conversion, which will be no later than April 15, 2018. After deducting the underwriting discount and offering costs, we received $279 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 4.8% per annum. At September 30, 2017, these notes were convertible at the option of the holder at a conversion rate of 41.1320 common shares per $1,000 principal amount of convertible senior notes (equivalent to a conversion price of $24.31 per common share). Upon conversion of these notes by a holder, the holder will receive shares of our common stock. During the three months ended June 30, 2017, $288 million principal amount of these convertible notes and $2 million of unamortized deferred issuance costs were reclassified from long-term debt to short-term debt, as the maturity of the notes was less than one year as of April 2017. Additionally, during the three months ended June 30, 2017, we repurchased $37 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $250 million. At September 30, 2017, the accrued interest payable balance on this debt was $5 million and the unamortized deferred issuance costs were $0.3 million.2020.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note ~~13. Long-Term Debt~~16. Commitments and Contingencies - (continued)

~~Trust Preferred Securities and Subordinated Notes~~

At September 30, 2017, we had trust preferred securities and subordinated notes outstanding of $100 million and $40 million, respectively. This debt requires quarterly interest payments at a floating rate equal to three-month LIBOR plus 2.25% until the notes are redeemed. The $100 million trust preferred securities will be redeemed no later than January 30, 2037, and the $40 million subordinated notes will be redeemed no later than July 30, 2037. Prior to 2014, we entered into interest rate swaps with aggregate notional values totaling $140 million to hedge the variability in this long-term debt interest expense. Including hedging costs and amortization of deferred securities issuance costs, the weighted average interest expense yield on our trust preferred securities and subordinated notes is approximately 6.8% per annum. At both September 30, 2017 and December 31, 2016, the accrued interest payable balance on our trust preferred securities and subordinated notes was $1 million.

Under the terms of this debt, we covenant, among other things, to use our best efforts to continue to qualify as a REIT. If an event of default were to occur in respect of this debt, we would generally be restricted under its terms (subject to certain exceptions) from making dividend distributions to stockholders, from repurchasing common stock or repurchasing or redeeming any other then-outstanding equity securities, and from making any other payments in respect of any equity interests in us or in respect of any then-outstanding debt that is pari passu or subordinate to this debt.

~~Note 14. Commitments and Contingencies~~

~~Lease Commitments~~

At September 30, 2017, we were obligated under four non-cancelable operating leases with expiration dates through 2028 for $18 million of cumulative lease payments. Our operating lease expense was $2 million for both nine-month periods ended September 30, 2017 and 2016.

The following table presents our future lease commitments at September 30, ~~2017.~~2021.

Table ~~14.1~~16.1 – Future Lease Commitments by Year


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

(In Thousands) September 30, 2017
2017 (3 months) $ 387
2018 1,948
2019 1,987
2020 1,965
2021 and thereafter 11,691
Total Lease Commitments $ 17,978
During the nine months ended September 30, 2021, we did not enter into any new office leases. During the nine months ended September 30, 2021, we increased our operating lease right-of-use assets and liabilities by $1 million as the result of an amendment to one of our existing leases. At September 30, 2021, our operating lease liabilities were $16 million, which were a component of Accrued expenses and other liabilities, and our operating lease right-of-use assets were $14 million, which were a component of Other assets.

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

Commitment to Fund Bridge Loans

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

Commitment to Fund Partnerships

In 2018, we invested in 2 partnerships created to acquire and manage certain mortgage servicing related assets (see Note 10 for additional detail). In connection with this investment, we are required to fund future net servicer advances related to the underlying mortgage loans. The actual amount of net servicer advances we may fund in the future is subject to significant uncertainty and will be based on the credit and prepayment performance of the underlying loans.

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note ~~14.~~16. Commitments and Contingencies - (continued)

Commitment to Acquire HEIs

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

Loss Contingencies — ~~Risk Sharing~~Risk-Sharing

~~At September 30, 2017,~~During 2015 and 2016, we ~~had~~ sold conforming loans to the Agencies with an original unpaid principal balance of $3.19 billion, subject to our ~~risk sharing~~risk-sharing arrangements with the Agencies. At September 30, ~~2017,~~2021, the maximum potential amount of future payments we could be required to make under these arrangements was $44 million and this amount was ~~fully~~partially collateralized by assets we transferred to pledged accounts and is presented as pledged collateral in Other assets on our consolidated balance sheets. We have no recourse to any third parties that would allow us to recover any amounts related to our obligations under the arrangements. At September 30, ~~2017,~~2021, we had ~~not~~ incurred ~~any~~less than $0.1 million of losses under these arrangements. For the three and nine months ended September 30, ~~2017,~~2021, other income related to these arrangements was $1 million and $2 million, respectively, and net market valuation losses related to these investments were less than $0.1 million and $0.1 million, respectively. For the three and nine months ended September 30, ~~2016,~~2020, other income related to these arrangements was $1 million and $3 million, ~~respectively. For the three~~respectively, and ~~nine months ended September 30, 2017,~~ net market valuation losses related to these investments were $0.3 million ~~and $1 million, respectively. For the three and nine months ended September 30, 2016, net market valuation losses related to these investments were zero~~ and $1 million, respectively.

All of the loans in the reference pools subject to these ~~risk sharing~~risk-sharing arrangements were originated in 2014 and 2015, and at September 30, ~~2017,~~2021, the loans had an unpaid principal balance of ~~$2.19 billion~~$618 million and a weighted average FICO score of ~~758~~756 (at origination) and LTV ratio of ~~77%~~74% (at origination). At September 30, ~~2017, $3~~2021, $21 million of the loans were 90 days or more delinquent, ~~and $1~~of which one of these loans with an unpaid principal balance of $0.2 million ~~were~~was in foreclosure. At September 30, ~~2017,~~2021, the carrying value of our guarantee obligation was ~~$20~~$8 million and included ~~$10~~$5 million designated as a non-amortizing credit reserve, which we believe is sufficient to cover current expected losses under these obligations.

Our consolidated balance sheets include assets of special purpose entities ("SPEs") associated with these ~~risk sharing~~risk-sharing arrangements (i.e., the "pledged collateral" referred to above) that can only be used to settle obligations of these SPEs for which the creditors of these SPEs (the Agencies) do not have recourse to ~~Redwood Trust, Inc. or its affiliates.~~us. At September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, assets of such SPEs totaled ~~$47~~$34 million and ~~$49~~$46 million, respectively, and liabilities of such SPEs totaled ~~$20~~$8 million and ~~$22~~$10 million, respectively.

Loss Contingencies — Residential Repurchase Reserve

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

At both ~~September��~~September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, our repurchase reserve associated with our residential loans and MSRs was $5$9 million and was recorded in Accrued expenses and other liabilities on our consolidated balance sheets. ~~We received 13 repurchase requests during the nine months ended September 30, 2017, and repurchased one loan during this period.~~

During the nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, we received 3 and 8 repurchase requests, respectively, and repurchased 1 and zero loans, respectively. During the nine months ended September 30, 2021 and 2020, we recorded ~~$0.5~~repurchase provisions of $0.6 million ~~of reversal of provision for repurchases~~ and ~~$0.3~~$4 million, ~~of provision for repurchases,~~ respectively, that were recorded in Mortgage banking activities, ~~net~~net; Investment fair value changes, net; and ~~MSR~~Other income ~~net~~ on our consolidated statements of ~~income.~~income (loss).

REDWOOD TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~2021

(Unaudited)

Note ~~14.~~16. Commitments and Contingencies - (continued)

Loss Contingencies — Litigation, Claims and Demands

~~On or about December 23, 2009,~~There is no significant update regarding the ~~Federal Home Loan Bank of Seattle (the “FHLB-Seattle”) filed a complaint~~litigation matters described in Note 16 within the ~~Superior Court~~financial statements included in Redwood’s Annual Report on Form 10-K for the State of Washington (case number 09-2-46348-4 SEA) against Redwood Trust, Inc., our subsidiary, Sequoia Residential Funding, Inc. (“SRF”), Morgan Stanley & Co., and Morgan Stanley Capital I, Inc. (collectively, the “FHLB-Seattle Defendants”) alleging that the FHLB-Seattle Defendants made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Seattle Certificate”) issued in the Sequoia Mortgage Trust 2005-4 securitization transaction (the “2005-4 RMBS”) and purchased by the FHLB-Seattle. Specifically, the complaint alleged that the alleged misstatements concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Seattle Certificate. The FHLB-Seattle alleges claimsyear ended December 31, 2020 under the Securities Act of Washington (Section 21.20.005, et seq.) and sought to rescind the purchase of the Seattle Certificate and to collect interest on the original purchase price at the statutory interest rate of 8% per annum from the date of original purchase (net of interest received) as well as attorneys’ fees and costs. The Seattle Certificate was issued with an original principal amount of approximately $133 million, and, at September 30, 2017, the FHLB-Seattle has received approximately $125 million of principal and $11 million of interest payments in respect of the Seattle Certificate. The matter was subsequently resolved and the claims were dismissed by the FHLB Seattle as to all the FHLB Seattle Defendants. At the time the Seattle Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, we could incur a loss as a result of these indemnities.

On or about July 15, 2010, The Charles Schwab Corporation (“Schwab”) filed a complaint in the Superior Court for the State of California in San Francisco (case number CGC-10-501610) against SRF and 26 other defendants (collectively, the “Schwab Defendants”) alleging that the Schwab Defendants made false or misleading statements in offering materials for various residential mortgage-backed securities sold or issued by the Schwab Defendants. Schwab alleged only a claim for negligent misrepresentation under California state law against SRF and sought unspecified damages and attorneys’ fees and costs from SRF. Schwab claimed that SRF made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Schwab Certificate”) issued in the 2005-4 RMBS and purchased by Schwab. Specifically, the complaint alleged that the misstatements for the 2005-4 RMBS concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Schwab Certificate. The Schwab Certificate was issued with an original principal amount of approximately $15 million, and, at September 30, 2017, approximately $14 million of principal and $1 million of interest payments have been made in respect of the Schwab Certificate. On November 14, 2014, Schwab voluntarily dismissed with prejudice its negligent misrepresentation claim, which resulted in the dismissal with prejudice of SRF from the action. Subsequently, the matter was resolved and Schwab dismissed its claims against the lead underwriter of the 2005-4 RMBS. At the time the Schwab Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were also named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, Redwood could incur a loss as a result of these indemnities.

Through certain of our wholly-owned subsidiaries, we have in the past engaged in, and expect to continue to engage in, activities relating to the acquisition and securitization of residential mortgage loans. In addition, certain of our wholly-owned subsidiaries have in the past engaged in activities relating to the acquisition and securitization of debt obligations and other assets through the issuance of collateralized debt obligations (commonly referred to as CDO transactions). Because of this involvement in the securitization and CDO businesses, we could become the subject of litigation relating to these businesses, including additional litigation of the type described above, and we could also become the subject of governmental investigations, enforcement actions, or lawsuits, and governmental authorities could allege that we violated applicable law or regulation in the conduct of our business. As an example, in July 2016 we became aware of a complaint filed by the State of California on April 1, 2016 against Morgan Stanley & Co. and certain of its affiliates alleging, among other things, that there were misleading statements contained in offering materials for 28 different mortgage pass-through certificates purchased by various California investors, including various California public pension systems, from Morgan Stanley and alleging that Morgan Stanley made false or fraudulent claims in connection with the sale of those certificates. Of the 28 mortgage pass-through certificates that are the subject of the complaint, two are Sequoia mortgage pass-through certificates issued in 2004 and two are Sequoia mortgage pass-through certificates issued in 2007. With respect to each of those certificates our wholly-owned subsidiary, RWT Holdings, Inc., was the sponsor and our wholly-owned subsidiary, Sequoia Residential Funding, Inc., was the depositor. At the time these

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~(Unaudited)~~

~~Note 14. Commitments and~~heading “Loss Contingencies - ~~(continued)~~

four Sequoia mortgage pass-through certificates were issued, Sequoia Residential Funding, Inc. and Redwood Trust agreed to indemnify the underwriters of these certificates for certain losses and expenses they might incur as a result of claims made against them relating to these certificates, including, without limitation, certain legal expenses. Regardless of the outcome of this litigation, we could incur a loss as a result of these indemnities.

In accordance with GAAP, we review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in a liability and the amount of loss, if any, can be reasonably estimated. Additionally, we record receivables for insurance recoveries relating to litigation-related losses and expenses if and when such amounts are covered by insurance and recovery of such losses or expenses are due.Litigation.” At September 30, ~~2017,~~2021, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described ~~above~~in our Annual Report on Form 10-K for the year ended December 31, 2020 was $2 million. We review our litigation matters each quarter to assess these loss contingency reserves and make adjustments in these reserves, upwards or downwards, as appropriate, in accordance with GAAP based on our review.

In the ordinary course of any litigation matter, including certain of the above-referenced matters, we have engaged and may continue to engage in formal or informal settlement communications with the plaintiffs or co-defendants. Settlement communications we have engaged in relating to certain of the above-referenced litigation matters are one of the factors that have resulted in our determination to establish the loss contingency reserves described above. We cannot be certain that any of these matters will be resolved through a settlement prior to trial and we cannot be certain that the resolution of these matters, whether through trial or settlement, will not have a material adverse effect on our financial condition or results of operations in any future period.

Future developments (including resolution of substantive pre-trial motions relating to these matters, receipt of additional information and documents relating to these matters (such as through pre-trial discovery), new or additional settlement communications with plaintiffs relating to these matters, or resolutions of similar claims against other defendants in these matters) could result in our concluding in the future to establish additional loss contingency reserves or to disclose an estimate of reasonably possible losses in excess of our established reserves with respect to these matters. Our actual losses with respect to the above-referenced litigation matters may be materially higher thanAt September 30, 2021, the aggregate amount of ~~loss contingency reserves~~our accrual for estimated costs associated with the "Residential Loan Seller Demands" described in our Annual Report on Form 10-K for the year ended December 31, 2020 was $2 million, a portion of which is contingent on the successful completion of future residential loan purchase and sale transactions with certain counterparties. We believe we have ~~established in respect of these litigation matters, including in the event~~either resolved or adequately accrued for any unresolved Residential Loan Seller Demands and that ~~any of these matters proceeds~~there are no other Residential Loan Seller Demands that are reasonably possible to ~~trial and the plaintiff prevails. Other factors that could~~ result in our concluding to establish additional loss contingency reserves or estimate additional reasonably possible losses, or could result in our actual losses with respect to the above-referenced litigation matters being materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters include that: there are significant factual and legal issues to be resolved; information obtained or rulings made during the lawsuits could affect the methodology for calculation of the available remedies; and we may have additional obligations pursuant to indemnity agreements, representations and warranties, and other contractual provisions with other parties relating to these litigation matters that could increase our potential losses.

a material loss.

~~REDWOOD TRUST, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2017~~

~~(Unaudited)~~

Note ~~15.~~17. Equity

The following table provides a summary of changes to accumulated other comprehensive income by component for the three and nine months ended September 30, ~~2017~~2021 and ~~2016.~~2020.

Table ~~15.1~~17.1 – Changes in Accumulated Other Comprehensive Income (Loss) by Component


	Three Months Ended September 30, 2021				Three Months Ended September 30, 2020
(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period	$	88,251	$	(78,511)	$	53,246	$	(82,637)
Other comprehensive (loss) income before reclassifications	(2,658)		—		8,236		—
Amounts reclassified from other accumulated comprehensive income (loss)	(6,200)		1,041		(445)		1,040
Net current-period other comprehensive (loss) income	(8,858)		1,041		7,791		1,040
Balance at End of Period	$	79,393	$	(77,470)	$	61,037	$	(81,597)


	Three Months Ended September 30, 2017						Three Months Ended September 30, 2016							Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020
(In Thousands)	Net Unrealized Gains on Available-for-Sale Securities			Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges			Net Unrealized Gains on Available-for-Sale Securities			Net Unrealized Losses on Interest Rate Agreements Accounted for as Cash Flow Hedges			(In Thousands)	Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges		Available-for-Sale Securities		Interest Rate Agreements Accounted for as Cash Flow Hedges
Balance at beginning of period	$	114,364		$	(44,688	)	$	116,849		$	(70,518	)	Balance at beginning of period	$	76,336	$	(80,557)	$	92,452	$	(50,939)
Other comprehensive income (loss) before reclassifications ⁽¹⁾	13,158			321			9,038			647
Amounts reclassified from other accumulated comprehensive income	(853		)	14			(1,319		)	18
Other comprehensive income (loss) before reclassifications													Other comprehensive income (loss) before reclassifications	19,552		—		(19,890)		(32,806)
Amounts reclassified from other accumulated comprehensive income (loss)													Amounts reclassified from other accumulated comprehensive income (loss)	(16,495)		3,087		(11,525)		2,148
Net current-period other comprehensive income (loss)	12,305			335			7,719			665			Net current-period other comprehensive income (loss)	3,057		3,087		(31,415)		(30,658)
Balance at End of Period	$	126,669		$	(44,353	)	$	124,568		$	(69,853	)	Balance at End of Period	$	79,393	$	(77,470)	$	61,037	$	(81,597)

~~For additional discussion on short-term debt, including information regarding margin requirements and financial covenants, see “Risks Relating to Debt Incurred under Short-Term and Long-Term Borrowing Facilities" in the~~ ~~Liquidity and Capital Resources~~ ~~section of this MD&A.~~

Net Interest Income

The increase in net interest income during the three-month periods was primarily due to higher average asset balances during the third quarter of 2021, as well as a higher net interest margin, driven by the combination of a lower average cost of funds and higher discount accretion on our available-for-sale securities. For the nine-month periods, the decrease in net interest expense was primarily related to higher average asset balances during the first half of 2020, as we repositioned our portfolio during the second quarter of 2020, selling a significant amount of assets.

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

Mortgage Banking Activities, Net

The increase in income from mortgage banking activities during the three- and nine-month periods was primarily due to an increase in loan acquisition and origination volumes at both our residential and business purpose mortgage banking businesses during 2021, due to pandemic-related disruptions in 2020, which adversely impacted our origination volumes in 2020.

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

Investment Fair Value Changes, Net

Investment fair value changes, net, is primarily comprised of the change in fair values of our portfolio investments accounted for under the fair value option and, prior to the second quarter of 2020, interest rate hedges associated with these investments. During the three and nine months ended September 30, 2021, positive investment fair value changes reflected continuing improvement in credit performance and spread tightening across our investment portfolio, particularly in our third-party re-performing loan ("RPL") and retained CAFL SFR securities. Additional detail on our investment fair value changes during 2021 is included in the “Results of Operations bySegment” section that follows.

~~As discussed~~During the three months ended September 30, 2020, investment fair value changes reflected increases in the ~~Introduction section~~fair value of ~~this MD&A, we changed~~ our ~~reportable segments~~investment assets from improved credit performance and spread tightening. During the nine months ended September 30, 2020, the negative investment fair value changes reflected significant declines in the value of our investments in the first quarter of ~~2017~~2020 resulting from market dislocations caused by the pandemic.

Other Income

The increase in other income for the three- and ~~now report~~nine-month periods was primarily the result of an increase in income from our MSR investments, which generally benefited from a stabilization in prepayment speeds during 2021.

Realized Gains, Net

During the three and nine months ended September 30, 2021, we realized gains of $7 million and $18 million, respectively, primarily resulting from the call of two and six seasoned Sequoia securitizations, respectively. During the three and nine months ended September 30, 2020, we realized gains of $1 million and $30 million, respectively, primarily resulting from the sale of AFS securities, and for the nine-month period, a $25 million gain from the repurchase of $125 million of convertible debt during the second quarter of 2020.

General and Administrative Expenses

The increase in general and administrative expenses for the three- and nine-month periods primarily resulted from increased accruals of variable compensation expense associated with improved financial results in 2021 as compared to 2020, as well as long-term incentive award expense from awards granted in the second half of 2020.

Loan Acquisition Costs

The increase in loan acquisition costs for the three- and nine-month periods was primarily due to higher loan origination volumes throughout 2021 as compared to 2020.

Other Expenses

The decrease in other expenses for the nine-month periods was primarily due to $89 million of goodwill impairment expense at our Business Purpose Lending segment recorded in the first quarter of 2020 that was taken as a result of the onset of pandemic- and liquidity-related disruptions.

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. For the three-month periods, our income tax provision decreased as we realized a $19 million benefit from the release of valuation allowance on a portion of our ~~business using two distinct segments: Investment Portfolio~~deferred tax assets. This decrease was partially offset by an increase in GAAP income recorded at our TRS and ~~Residential Mortgage Banking. Our segments are based on~~state taxes during 2021. For the nine-month periods, the tax provision in 2021 is reflective of the positive income earned at our ~~organizational~~taxable subsidiaries, partially offset by the benefit from the release of valuation allowance and ~~management structure, which aligns with how our results are monitored and performance is assessed.~~ higher state taxes, as compared to a tax benefit in 2020 reflective of a net loss incurred in that period.

For additional ~~information~~detail on ~~our segments, refer to~~ ~~Note 21~~ ~~of our~~ ~~Notes to Consolidated Financial Statements~~ ~~in Part I, Item I of this Quarterly Report on Form 10-Q.~~ income taxes, see the “Taxable Income and Tax Provision” section that follows.

Net Interest Income

The following table presents the ~~segment contribution from our two segments, reconciled to our consolidated~~components of net interest income for the three and nine months ended September 30, ~~2017~~2021 and ~~2016.~~2020.

Table 83 – ~~Segment Results Summary~~Net Interest Income


	Three Months Ended September 30,
	2021						2020
(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield
Interest Income
Residential loans, held-for-sale	$	15,377	$	1,936,882	3.2	%	$	434	$	53,297	3.3	%
Residential loans - HFI at Redwood (2)	—		—		—	%	77		—		—	%
Residential loans - HFI at Legacy Sequoia (2)	1,042		248,791		1.7	%	1,795		285,077		2.5	%
Residential loans - HFI at Sequoia (2)	18,867		2,104,357		3.6	%	20,919		1,910,771		4.4	%
Residential loans - HFI at Freddie Mac SLST (2)	18,707		2,043,813		3.7	%	21,696		2,153,447		4.0	%
Business purpose loans at Redwood	18,192		1,019,393		7.1	%	19,456		1,149,171		6.8	%
Single-family rental loans - HFI at CAFL	48,723		3,455,645		5.6	%	36,181		2,663,541		5.4	%
Bridge loans - HFI at CAFL	214		12,015		7.1	%	—		—		—	%
Multifamily loans - HFI at Freddie Mac K-Series	4,846		483,930		4.0	%	4,918		489,736		4.0	%
Trading securities	5,710		147,925		15.4	%	6,539		140,892		18.6	%
Available-for-sale securities	8,532		120,183		28.4	%	3,596		135,942		10.6	%
Other interest income	5,512		769,308		2.9	%	6,371		859,808		3.0	%
Total interest income	145,722		12,342,242		4.7	%	121,982		9,841,682		5.0	%
Interest Expense
Short-term debt facilities	(10,808)		1,982,726		(2.2)	%	(3,558)		313,190		(4.5)	%
Short-term debt - servicer advance financing	(1,018)		149,450		(2.7)	%	(1,587)		218,885		(2.9)	%

ABS issued - Legacy Sequoia (2)	(641)		245,910		(1.0)	%	(1,058)		280,954		(1.5)	%
ABS issued - Sequoia (2)	(15,368)		1,872,636		(3.3)	%	(17,828)		1,708,687		(4.2)	%
ABS issued - Freddie Mac SLST (2)	(15,774)		1,765,465		(3.6)	%	(16,819)		1,892,967		(3.6)	%
ABS issued - Freddie Mac K-Series	(4,460)		453,031		(3.9)	%	(4,426)		464,693		(3.8)	%
ABS issued - CAFL	(37,489)		3,118,792		(4.8)	%	(26,383)		2,509,828		(4.2)	%
Long-term debt facilities	(8,715)		881,669		(4.0)	%	(19,198)		1,094,608		(7.0)	%
Long-term debt - FHLBC	—		—		—	%	(1)		1,000		(0.4)	%
Long-term debt - corporate	(9,481)		651,468		(5.8)	%	(9,553)		648,923		(5.9)	%
Total interest expense	(103,754)		11,121,147		(3.7)	%	(100,411)		9,133,735		(4.4)	%
Net Interest Income	$	41,968					$	21,571

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 Change 2017 2016 Change
Segment Contribution from:
Investment Portfolio $ 41,739
$ 63,743
$ (22,004 ) $ 137,185
$ 155,863
$ (18,678 )
Residential Mortgage Banking 16,755
8,724
8,031
35,643
23,250
12,393
Corporate/Other (22,314 ) (19,914 ) (2,400 ) (63,355 ) (73,216 ) 9,861
Net Income $ 36,180
$ 52,553
$ (16,373 ) $ 109,473
$ 105,897
$ 3,576


	Nine Months Ended September 30,
	2021						2020
(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield
Interest Income
Residential loans, held-for-sale	$	35,308	$	1,568,966	3.0	%	$	17,220	$	599,609	3.8	%
Residential loans - HFI at Redwood (2)	—		—		—	%	21,003		659,998		4.2	%
Residential loans - HFI at Legacy Sequoia (2)	3,559		262,007		1.8	%	7,673		327,460		3.1	%
Residential loans - HFI at Sequoia (2)	48,842		1,644,256		4.0	%	68,566		1,957,484		4.7	%
Residential loans - HFI at Freddie Mac SLST (2)	58,372		2,110,555		3.7	%	64,869		2,203,677		3.9	%
Business purpose loans	48,982		945,899		6.9	%	62,541		1,266,493		6.6	%
Single-family rental loans - HFI at CAFL	152,444		3,349,828		6.1	%	99,169		2,411,312		5.5	%
Bridge loans - HFI at CAFL	214		4,049		7.0	%	—		—		—	%
Multifamily loans - HFI at Freddie Mac K-Series	14,492		488,804		4.0	%	49,960		1,711,123		3.9	%
Trading securities	17,133		140,241		16.3	%	26,789		336,151		10.6	%
Available-for-sale securities	16,051		128,564		16.6	%	11,682		139,487		11.2	%
Other interest income	17,325		790,499		2.9	%	20,537		763,898		3.6	%
Total interest income	412,722		11,433,668		4.8	%	450,009		12,376,692		4.8	%
Interest Expense
Short-term debt facilities	(27,380)		1,609,295		(2.3)	%	(40,158)		1,415,975		(3.8)	%
Short-term debt - servicer advance financing	(3,414)		166,605		(2.7)	%	(4,961)		199,517		(3.3)	%

ABS issued - Legacy Sequoia (2)	(2,271)		258,915		(1.2)	%	(5,099)		322,829		(2.1)	%
ABS issued - Sequoia (2)	(38,848)		1,419,153		(3.6)	%	(58,455)		1,757,851		(4.4)	%
ABS issued - Freddie Mac SLST (2)	(49,756)		1,859,559		(3.6)	%	(48,840)		1,861,309		(3.5)	%
ABS issued - Freddie Mac K-Series	(13,294)		459,648		(3.9)	%	(47,154)		1,614,333		(3.9)	%
ABS issued - CAFL	(118,543)		3,041,714		(5.2)	%	(72,768)		2,247,583		(4.3)	%
Long-term debt facilities	(32,518)		776,846		(5.6)	%	(29,789)		641,094		(6.2)	%
Long-term debt - FHLBC	(2)		374		(0.7)	%	(10,411)		786,790		(1.8)	%
Long-term debt - corporate	(28,345)		650,828		(5.8)	%	(32,113)		708,708		(6.0)	%
Total interest expense	(314,371)		10,242,937		(4.1)	%	(349,748)		11,555,989		(4.0)	%
Net Interest Income	$	98,351					$	100,261

~~The following sections provide a detailed discussion of the results of operations at each of our two~~(1)Average balances for residential loans held-for-sale, residential loans held-for-investment, business ~~segments~~purpose loans, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for ~~the three~~available-for-sale securities and ~~nine months ended September 30, 2017 and 2016.~~debt are calculated based upon amortized historical cost, except for ABS issued, which is based upon fair value.

~~The $2 million decrease in net~~(2)Interest income from ~~Corporate/Other for~~residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia or Freddie Mac SLST entities. Interest income from residential loans - HFI at Legacy Sequoia and the ~~three-month periods was primarily due to a $1 million increase in~~ interest expense from ~~convertible debt~~ABS issued ~~in the third quarter of 2017, a $1 million decrease in income~~- Legacy Sequoia represent activity from our consolidated Legacy Sequoia ~~entities (the details of which are discussed in the "Results of Consolidated Legacy Sequoia Entities"~~ ~~section that follows), and $2 million of upfront costs associated with the hiring of a new executive in the third quarter of 2017. The $10 million improvement~~entities. Interest income from Corporate/Other for the nine-month periods was primarily due to the $11 million of costs incurred in association with the restructuring of our residential conforming and commercial mortgage banking operations during the first quarter of 2016. In addition, $3 million of net losses related to our commercial mortgage banking operations were included in Corporate/Other for the first quarter of 2016, prior to those operations being wound down.

~~Investment Portfolio Segment~~

Our Investment Portfolio segment is primarily comprised of our portfolio of residential mortgage loans held-for-investment and financed through the FHLBC and our real estate securities portfolio. Additionally, beginning in the third quarter of 2017, this segment includes residential loans ~~held-for-investment~~- HFI at Sequoia and the interest expense from ABS issued - Sequoia represent activity from our consolidated Sequoia ~~Choice entity.~~

For segment reporting purposes, certain of our Sequoia senior trading securities were included in our Residential Mortgage Banking segment. As such, they are excluded from any amounts and tables in this section and may not agree with similarly titled amounts and tables in our consolidated financial statements and footnotes.

~~The following table presents the components of segment contribution for the Investment Portfolio segment for the three and nine months ended September 30, 2017 and 2016.~~

~~Table 9 – Investment Portfolio Segment Contribution~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 Change 2017 2016 Change
Interest income $ 47,023
$ 47,176
$ (153 ) $ 135,106
$ 149,985
$ (14,879 )
Interest expense (9,445 ) (5,013 ) (4,432 ) (21,940 ) (18,679 ) (3,261 )
Net interest income 37,578
42,163
(4,585 ) 113,166
131,306
(18,140 )
Reversal of provision for loan losses —
859
(859 ) —
7,102
(7,102 )
Net Interest Income after Provision 37,578
43,022
(5,444 ) 113,166
138,408
(25,242 )
Non-interest income
MSR income, net 1,615
3,770
(2,155 ) 6,106
12,834
(6,728 )
Investment fair value changes, net 1,372
12,176
(10,804 ) 13,846
(16,505 ) 30,351
Other income 1,197
1,643
(446 ) 3,367
4,157
(790 )
Realized gains, net 1,734
6,615
(4,881 ) 9,561
25,745
(16,184 )
Total non-interest income, net 5,918
24,204
(18,286 ) 32,880
26,231
6,649
Direct operating expenses (1,324 ) (2,751 ) 1,427
(4,371 ) (7,689 ) 3,318
Segment contribution before income taxes 42,172
64,475
(22,303 ) 141,675
156,950
(15,275 )
Provision for income taxes (433 ) (732 ) 299
(4,490 ) (1,087 ) (3,403 )
Total Segment Contribution $ 41,739
$ 63,743
$ (22,004 ) $ 137,185
$ 155,863
$ (18,678 )

~~The following table presents our primary portfolios of investment assets in our Investment Portfolio segment at September 30, 2017 and December 31, 2016.~~

~~Table 10 – Investment Portfolio~~

(In Thousands) September 30, 2017 December 31, 2016 Change
Residential loans held-for-investment at Redwood $ 2,268,802
$ 2,261,016
$ 7,786
Residential securities 1,113,201
926,669
186,532
Commercial/Multifamily securities 243,071
91,770
151,301
Residential loans held-for-investment at Sequoia Choice 317,303
—
317,303
Mortgage servicing rights 62,928
118,526
(55,598 )
Other assets 230,718
217,554
13,164
Total Assets at Investment Portfolio $ 4,236,023
$ 3,615,535
$ 620,488

~~Overview~~

The increase in our total investments in the first nine months of 2017 was primarily attributable to the deployment of $230 million of capital into new residential and multifamily securities investments. Additionally, we consolidated $317 million of residential Sequoia Choice loans from a securitization we completed during the third quarter. At September 30, 2017, our economic investment in the Sequoia Choice entity was $31 million, representing subordinate securities we retained in the securitization. For the nine months ended September 30, 2017, the segment contribution from our Investment Portfolio was comprised of $43 millionentities. Interest income from residential loans ~~$73 million~~- HFI at Freddie Mac SLST and the interest expense from ~~residential securities, $18 million~~ABS issued - Freddie Mac SLST represent activity from ~~commercial/multifamily securities, and $4 million from MSRs.~~our consolidated Freddie Mac SLST entities.

Net Interest Income

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

Mortgage Banking Activities, Net

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

Investment Fair Value Changes, Net

During the three months ended September 30, 2020, investment fair value changes reflected increases in the fair value of our investment assets from improved credit performance and spread tightening. During the nine months ended September 30, 2020, the negative investment fair value changes reflected significant declines in the value of our investments in the first quarter of 2020 resulting from market dislocations caused by the pandemic.

Other Income

The increase in other income for the three- and nine-month periods was primarily the result of an increase in income from our ~~Investment Portfolio~~MSR investments, which generally benefited from a stabilization in prepayment speeds during 2021.

Realized Gains, Net

During the three and nine months ended September 30, 2021, we realized gains of $7 million and $18 million, respectively, primarily ~~includes interest income~~resulting from ~~our residential loans held-for-investment~~the call of two and ~~our~~six seasoned Sequoia securitizations, respectively. During the three and nine months ended September 30, 2020, we realized gains of $1 million and $30 million, respectively, primarily resulting from the sale of AFS securities, and for the nine-month period, a $25 million gain from the repurchase of $125 million of convertible debt during the second quarter of 2020.

General and Administrative Expenses

The increase in general and administrative expenses for the three- and nine-month periods primarily resulted from increased accruals of variable compensation expense associated with improved financial results in 2021 as compared to 2020, as well as ~~the associated interest~~long-term incentive award expense from ~~short-term debt, FHLBC borrowings,~~awards granted in the second half of 2020.

Loan Acquisition Costs

The increase in loan acquisition costs for the three- and ~~ABS issued.~~ nine-month periods was primarily due to higher loan origination volumes throughout 2021 as compared to 2020.

Other Expenses

Provision for Income Taxes

Our provision for income taxes is almost entirely related to activity at our taxable REIT subsidiaries, which primarily includes our mortgage banking activities and MSR investments, as well as certain other investment and hedging activities. For the three-month periods, our income tax provision decreased as we realized a $19 million benefit from the release of valuation allowance on a portion of our deferred tax assets. This decrease was partially offset by an increase in GAAP income recorded at our TRS and state taxes during 2021. For the nine-month periods, the tax provision in 2021 is reflective of the positive income earned at our taxable subsidiaries, partially offset by the benefit from the release of valuation allowance and higher state taxes, as compared to a tax benefit in 2020 reflective of a net loss incurred in that period.

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

Net Interest Income

The following table presents the components of net interest income for the three and nine months ended September 30, 2021 and 2020.

Table 3 – Net Interest Income


	Three Months Ended September 30,
	2021						2020
(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield
Interest Income
Residential loans, held-for-sale	$	15,377	$	1,936,882	3.2	%	$	434	$	53,297	3.3	%
Residential loans - HFI at Redwood (2)	—		—		—	%	77		—		—	%
Residential loans - HFI at Legacy Sequoia (2)	1,042		248,791		1.7	%	1,795		285,077		2.5	%
Residential loans - HFI at Sequoia (2)	18,867		2,104,357		3.6	%	20,919		1,910,771		4.4	%
Residential loans - HFI at Freddie Mac SLST (2)	18,707		2,043,813		3.7	%	21,696		2,153,447		4.0	%
Business purpose loans at Redwood	18,192		1,019,393		7.1	%	19,456		1,149,171		6.8	%
Single-family rental loans - HFI at CAFL	48,723		3,455,645		5.6	%	36,181		2,663,541		5.4	%
Bridge loans - HFI at CAFL	214		12,015		7.1	%	—		—		—	%
Multifamily loans - HFI at Freddie Mac K-Series	4,846		483,930		4.0	%	4,918		489,736		4.0	%
Trading securities	5,710		147,925		15.4	%	6,539		140,892		18.6	%
Available-for-sale securities	8,532		120,183		28.4	%	3,596		135,942		10.6	%
Other interest income	5,512		769,308		2.9	%	6,371		859,808		3.0	%
Total interest income	145,722		12,342,242		4.7	%	121,982		9,841,682		5.0	%
Interest Expense
Short-term debt facilities	(10,808)		1,982,726		(2.2)	%	(3,558)		313,190		(4.5)	%
Short-term debt - servicer advance financing	(1,018)		149,450		(2.7)	%	(1,587)		218,885		(2.9)	%

ABS issued - Legacy Sequoia (2)	(641)		245,910		(1.0)	%	(1,058)		280,954		(1.5)	%
ABS issued - Sequoia (2)	(15,368)		1,872,636		(3.3)	%	(17,828)		1,708,687		(4.2)	%
ABS issued - Freddie Mac SLST (2)	(15,774)		1,765,465		(3.6)	%	(16,819)		1,892,967		(3.6)	%
ABS issued - Freddie Mac K-Series	(4,460)		453,031		(3.9)	%	(4,426)		464,693		(3.8)	%
ABS issued - CAFL	(37,489)		3,118,792		(4.8)	%	(26,383)		2,509,828		(4.2)	%
Long-term debt facilities	(8,715)		881,669		(4.0)	%	(19,198)		1,094,608		(7.0)	%
Long-term debt - FHLBC	—		—		—	%	(1)		1,000		(0.4)	%
Long-term debt - corporate	(9,481)		651,468		(5.8)	%	(9,553)		648,923		(5.9)	%
Total interest expense	(103,754)		11,121,147		(3.7)	%	(100,411)		9,133,735		(4.4)	%
Net Interest Income	$	41,968					$	21,571


	Nine Months Ended September 30,
	2021						2020
(Dollars in Thousands)	Interest Income/ (Expense)		Average Balance (1)		Yield		Interest Income/ (Expense)		Average Balance (1)		Yield
Interest Income
Residential loans, held-for-sale	$	35,308	$	1,568,966	3.0	%	$	17,220	$	599,609	3.8	%
Residential loans - HFI at Redwood (2)	—		—		—	%	21,003		659,998		4.2	%
Residential loans - HFI at Legacy Sequoia (2)	3,559		262,007		1.8	%	7,673		327,460		3.1	%
Residential loans - HFI at Sequoia (2)	48,842		1,644,256		4.0	%	68,566		1,957,484		4.7	%
Residential loans - HFI at Freddie Mac SLST (2)	58,372		2,110,555		3.7	%	64,869		2,203,677		3.9	%
Business purpose loans	48,982		945,899		6.9	%	62,541		1,266,493		6.6	%
Single-family rental loans - HFI at CAFL	152,444		3,349,828		6.1	%	99,169		2,411,312		5.5	%
Bridge loans - HFI at CAFL	214		4,049		7.0	%	—		—		—	%
Multifamily loans - HFI at Freddie Mac K-Series	14,492		488,804		4.0	%	49,960		1,711,123		3.9	%
Trading securities	17,133		140,241		16.3	%	26,789		336,151		10.6	%
Available-for-sale securities	16,051		128,564		16.6	%	11,682		139,487		11.2	%
Other interest income	17,325		790,499		2.9	%	20,537		763,898		3.6	%
Total interest income	412,722		11,433,668		4.8	%	450,009		12,376,692		4.8	%
Interest Expense
Short-term debt facilities	(27,380)		1,609,295		(2.3)	%	(40,158)		1,415,975		(3.8)	%
Short-term debt - servicer advance financing	(3,414)		166,605		(2.7)	%	(4,961)		199,517		(3.3)	%

ABS issued - Legacy Sequoia (2)	(2,271)		258,915		(1.2)	%	(5,099)		322,829		(2.1)	%
ABS issued - Sequoia (2)	(38,848)		1,419,153		(3.6)	%	(58,455)		1,757,851		(4.4)	%
ABS issued - Freddie Mac SLST (2)	(49,756)		1,859,559		(3.6)	%	(48,840)		1,861,309		(3.5)	%
ABS issued - Freddie Mac K-Series	(13,294)		459,648		(3.9)	%	(47,154)		1,614,333		(3.9)	%
ABS issued - CAFL	(118,543)		3,041,714		(5.2)	%	(72,768)		2,247,583		(4.3)	%
Long-term debt facilities	(32,518)		776,846		(5.6)	%	(29,789)		641,094		(6.2)	%
Long-term debt - FHLBC	(2)		374		(0.7)	%	(10,411)		786,790		(1.8)	%
Long-term debt - corporate	(28,345)		650,828		(5.8)	%	(32,113)		708,708		(6.0)	%
Total interest expense	(314,371)		10,242,937		(4.1)	%	(349,748)		11,555,989		(4.0)	%
Net Interest Income	$	98,351					$	100,261

(1)Average balances for residential loans held-for-sale, residential loans held-for-investment, business purpose loans, multifamily loans held-for-investment, and trading securities are calculated based upon carrying values, which represent estimated fair values. Average balances for available-for-sale securities and debt are calculated based upon amortized historical cost, except for ABS issued, which is based upon fair value.

(2)Interest income from residential loans held-for-investment ("HFI") at Redwood exclude loans HFI at consolidated Sequoia or Freddie Mac SLST entities. Interest income from residential loans - HFI at Legacy Sequoia and the interest expense from ABS issued - Legacy Sequoia represent activity from our ~~Investment Portfolio~~consolidated Legacy Sequoia entities. Interest income from residential loans - HFI at Sequoia and the interest expense from ABS issued - Sequoia represent activity from our consolidated Sequoia entities. Interest income from residential loans - HFI at Freddie Mac SLST and the interest expense from ABS issued - Freddie Mac SLST represent activity from our consolidated Freddie Mac SLST entities.

Results of Operations by Segment

We report on our business using three distinct segments: Residential Lending, Business Purpose Lending, and Third-Party Investments. For additional information on our segments, refer to Note 23 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following table presents the segment contribution from our three segments reconciled to our consolidated net income for the three and nine months ended September 30, ~~2017~~2021 and ~~2016.~~2020.

Table ~~11 - Net Interest Income ("NII") from Investment Portfolio~~4 – Segment Results Summary


	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2021		2020		Change		2021		2020		Change
Segment Contribution from:
Residential Lending	$	38,796	$	8,526	$	30,270	$	122,435	$	(152,270)	$	274,705
Business Purpose Lending	32,066		53,418		(21,352)		86,321		(123,895)		210,216
Third-Party Investments	30,466		101,054		(70,588)		133,994		(318,146)		452,140
Corporate/Other	(13,042)		(21,186)		8,144		(67,182)		(41,831)		(25,351)
Net Income (Loss)	$	88,286	$	141,812	$	(53,526)	$	275,568	$	(636,142)	$	911,710

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 Change 2017 2016 Change
Net interest income from:
HFI residential loans at Redwood $ 16,826
$ 19,031
$ (2,205 ) $ 53,466
$ 54,920
$ (1,454 )
HFI residential loans at Sequoia Choice 23
—
23
23
—
23
Residential securities 19,105
16,279
2,826
53,969
51,013
2,956
Commercial/Multifamily securities 1,298
742
556
4,388
1,093
3,295
Commercial mezzanine loans —
5,911
(5,911 ) 345
23,477
(23,132 )
Other interest income 326
200
126
975
803
172
NII from Investment Portfolio $ 37,578
$ 42,163
$ (4,585 ) $ 113,166
$ 131,306
$ (18,140 )

The following sections provide a discussion of the results of operations at each of our three business segments for the three and nine months ended September 30, 2021.

The decrease in net ~~interest income~~expense from Corporate/Other for the three-month periods was primarily due to the reversal of $19 million of valuation allowance on our ~~Investment Portfolio segment during~~deferred tax assets in the ~~three- and~~third quarter of 2021. This decrease was partially offset by higher accruals of variable compensation expense associated with improved financial results in 2021. The increase in net expense for the nine-month periods was primarily due to ~~the sale of our commercial mezzanine loans during 2016, as well as from higher interest costs on our FHLB borrowings during 2017 and higher interest expense~~a $25 million gain associated with ~~securities that were financed~~the repurchase of $125 million of convertible debt in the second quarter of 2020.

Residential Lending Segment

Overview

Our Residential Lending segment generated $39 million of net income during the ~~second~~third quarter of 2021, driven primarily by $40 million of mortgage banking income and ~~third quarters~~$12 million of ~~2017. These decreases were partially offset by higher~~ net interest income from ~~real estate securities, primarily resulting from higher average balances of these investments~~investments. Mortgage banking income increased from the ~~redeployment~~second quarter of ~~capital.~~2021, as loan purchase commitments of $3.3 billion in the third quarter were 20% higher than the second quarter and margins improved from the second quarter. Net interest income from investments increased approximately $5 million in the third quarter of 2021 from the second quarter of 2021, due to increased discount amortization on our available-for-sale securities.

~~Investment fair value changes,~~Our Residential Lending segment generated $31 million of net income during the second quarter of 2021, driven primarily by $27 million of mortgage banking income and $6 million of net interest income from investments. Mortgage banking income decreased from the first quarter of 2021, as loan purchase commitments of $2.7 billion in the second quarter were 22% lower than the first quarter and margins normalized towards the high end of our historic target range.

~~Market valuation changes included~~Our Residential Lending segment generated $53 million of net income during the first quarter of 2021, driven primarily by $64 million of mortgage banking income and $6 million of net interest income from investments. Mortgage banking income increased significantly during the quarter, as loan purchase commitments increased 41% from the fourth quarter of 2020 to $3.51 billion, and gross margins nearly doubled.

Mortgage Banking

The following table provides the activity of residential loans held in ~~Investment fair value changes, net, result from changes in~~inventory for sale at our mortgage banking business during the three and nine months ended September 30, 2021.

Table 5 – Loan Inventory for Residential Mortgage Banking Operations — Activity


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2021		September 30, 2021
Balance at beginning of period	$	1,063,722	$	176,641
Acquisitions	3,176,004		9,758,766
Sales	(2,426,858)		(6,958,670)
Transfers between portfolios (1)	(464,189)		(1,669,683)
Principal repayments	(15,280)		(26,155)
Changes in fair value, net	10,630		63,130
Balance at End of Period	$	1,344,029	$	1,344,029

(1)Represents the fair value of ~~investments~~the net transfers of loans from held-for-sale to held-for-investment within our Residential Lending investment portfolio, associated with securitizations we sponsored that we consolidate under GAAP.

The following table presents our mortgage banking income and ~~their~~loan purchase commitments during the three and nine months ended September 30, 2021.

Table 6 – Mortgage Banking Income and Residential Loan Purchase Commitments


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2021		September 30, 2021
Mortgage banking income	$	40,121	$	131,281
Loan purchase commitments entered into	$	3,288,102	$	9,541,499

Mortgage banking income is comprised of net interest income from loans held-for-sale in inventory and mortgage banking activities. Income from mortgage banking activities is comprised of mark-to-market adjustments on loans from the time they are purchased to when they are sold, mark-to-market adjustments on new and outstanding loan purchase commitments, gains/losses from associated hedges, ~~generally due to changes in market interest rates, changes in credit spreads,~~ and ~~reductions in the basis of investments due to changes in principal balances. See~~ other miscellaneous income/expenses (see Note 18 19 of our Notes to Consolidated Financial Statements in Part I, Item I1 of this Quarterly Report on Form 10-Q for ~~additional detail regarding~~further detail).

During the ~~components~~three months ended September 30, 2021, our residential mortgage loan conduit locked $4.74 billion of ~~Investment fair value changes, net presented~~loans ($3.29 billion adjusted for expected pipeline fallout - i.e, loan purchase commitments), including $4.21 billion of Select loans and $0.53 billion of Choice loans, and purchased $3.18 billion of loans. Approximately 59% of loans locked in the third quarter were purchase-money loans and 41% were refinancings. During the three months ended September 30, 2021, we distributed $2.43 billion of loans through whole loan sales, and completed one securitization backed by $449 million of loans (unpaid principal balance).

At September 30, 2021, we had $1.34 billion of loans in inventory on our balance sheet, our loan pipeline included $2.77 billion of loans identified for purchase (locked loans, unadjusted for fallout), and we had entered into forward sale agreements for $662 million of loans.

Our gross margin (mortgage banking income earned in the period divided by loan purchase commitments entered into during the period) for the three months ended September 30, 2021 was 122 basis points, up from 98 basis points in the second quarter of 2021.

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At September 30, 2021, we had residential warehouse facilities outstanding with seven different counterparties, with $2.70 billion of total capacity and $1.36 billion of available capacity. These included non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral that is non-delinquent) facilities with $1.18 billion of total capacity and marginable facilities with $1.53 billion of total capacity.

Investment Portfolio

The following table presents details of our Residential Lending investment portfolio at September 30, 2021 and December 31, 2020.

Table 7 – Residential Lending Investments


(In Thousands)	September 30, 2021		December 31, 2020
Residential loans at Redwood (1)	$	151,050	$	—
Residential securities at Redwood (2)	145,430		155,501
Residential securities at consolidated Sequoia entities (3)	236,451		217,965
Other investments	12,389		8,815
Total Segment Investments	$	545,320	$	382,281

(1)Balance consists of loans called from Sequoia securitizations. Excludes Sequoia loans held at VIEs that we consolidated ~~statements~~for GAAP purposes.

(2)Excludes $5 million of ~~income.~~trading securities that are designated as hedges for our mortgage banking operations and are not considered part of our investment portfolio.

(3)Represents our retained economic investment in the consolidated Sequoia securitization VIEs. For GAAP purposes, we consolidated $2.48 billion of loans and $2.24 billion of ABS issued associated with these investments at September 30, 2021.

During the third quarter of 2021, we purchased $66 million of loans from Sequoia securitizations we called, and we retained $2 million of securities from one Sequoia securitization we completed during the quarter. During the second quarter of 2021, we purchased $83 million of loans from Sequoia securitizations we called, and we retained $8 million of securities from three Sequoia securitizations we completed during the quarter. During the first quarter of 2021, we sold $4 million of securities from our residential lending investment portfolio and retained $8 million of securities from two Sequoia securitizations we completed during the quarter. See the "Investments Detail" section that follows for additional details on our investments and their associated borrowings.

During the third quarter of 2021, net interest income from our residential lending investment portfolio was $12 million, which increased $5 million from the second quarter of 2021, and other income was $1 million in the third quarter of 2021, consistent with the second quarter of 2021. The increase in net interest income was primarily due to higher discount accretion income on our available-for-sale securities, driven by expectations for certain of our retained Sequoia securities to be called over the next several quarters, affecting our cash flow forecasts and effective yields for those investments.

The following table presents the components of investment fair value changes for ~~the Investment Portfolio~~our Residential Lending segment by investment type ~~inclusive of fair value changes of associated risk management derivatives,~~ for the three and nine months ended September 30, ~~2017 and 2016.~~2021.

Table ~~12 -~~8 – Investment ~~Portfolio~~ Fair Value Changes, Net ~~by Investment Type~~from Residential Lending


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2021		September 30, 2021
Investment Fair Value Changes, Net
Changes in fair value of:
Residential loans at Redwood	$	816	$	2,423
Trading securities	(1,825)		(6,553)
Net investments in Sequoia entities (1)	3,314		13,118
Risk-sharing and other investments	(20)		(63)

Recoveries (impairments) on AFS securities	—		33
Investment Fair Value Changes, Net	$	2,285	$	8,958

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 Change 2017 2016 Change
Market valuation changes:
Residential loans held-for-investment at Redwood $ 1,412
$ 3,187
$ (1,775 ) $ (11,065 ) $ (19,218 ) $ 8,153
Net investment in Sequoia Choice entity ⁽¹⁾
(256 ) —
(256 ) (256 ) —
(256 )
Residential trading securities (721 ) 8,770
(9,491 ) 13,074
3,227
9,847
Commercial/Multifamily trading securities 1,210
203
1,007
13,327
408
12,919
Other valuation changes (273 ) 16
(289 ) (1,234 ) (922 ) (312 )
Investment Portfolio Fair Value Changes, Net $ 1,372
$ 12,176
$ (10,804 ) $ 13,846
$ (16,505 ) $ 30,351


~~(1)~~	~~Includes changes in fair value of the residential loans held-for-sale and the ABS issued at the entity,~~(1)Includes changes in fair value of the loans held-for-investment and the ABS issued at the entities, which netted together represent the change in ~~value of our retained investment (subordinate securities) at the consolidated VIE.~~

During the three and nine months ended September 30, 2017, the positive investment fair value changes primarily resulted from net increases in the fair value of our trading securities and their associated hedges, which were primarily due to tightening credit spreads on these securities during these periods. In addition, for the three months ended September 30, 2017, investment fair value changes, net benefited from an increase in the fair value of residential loans, driven by tighter credit spreads on these investments during that period. In both the three and nine months ended September 30, 2017, these increases were partially offset by decreases in the fair value of our residential loans held-for-investment and their associated hedges, primarily resulting from principal paydowns and hedging costs.

~~During the three months ended September 30, 2016, the positive investment fair value changes resulted from increases in the fair~~ value of our investments (subordinate securities) at the consolidated VIEs.

Strengthening credit performance helped drive spreads tighter during the three-and nine-month periods for most of our subordinate securities, which resulted in ~~both trading securities and loans held-for-investment, which were primarily the result of tightening credit spreads. During the nine months ended September 30, 2016, the negative investment~~net positive fair value changes ~~primarily resulted from decreases in the fair value of~~for our ~~loans held for investment and their associated hedges. These decreases were primarily the result of hedging costs due to interest rate volatility~~residential lending investments. Additionally, during the first nine months of ~~the year, as well as decreases in~~2021, most of our investment securities experienced elevated prepayments, which generally benefited our subordinate securities, but negatively impacted our interest-only and certificated servicing securities, causing a net negative fair value ~~resulting~~change for our trading securities.

Business Purpose Lending Segment

Overview

Our Business Purpose Lending segment generated $32 million of net income during the third quarter of 2021, driven primarily by $32 million of mortgage banking income and $18 million of net interest income from ~~the write-off of premium from loan repayments.~~

~~The~~investments. Our business purpose investments saw an increase in interest income in the third quarter from a higher average balance of investments and lower cost of funds, compared to the second quarter of 2021, and increased positive fair ~~values from commercial/multifamily trading securities and their associated derivatives during the three- and nine-month periods primarily resulted from credit spread tightening during each period.~~

~~MSR Income, net~~

~~The following table presents the components of MSR income, net for the three and nine months ended September 30, 2017 and 2016.~~

~~Table 13 – MSR Income, net~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Net servicing fee income $ 3,396
$ 8,726
$ 14,775
$ 27,241
Changes in fair value of MSR from the receipt of expected cash flows (1,914 ) (5,705 ) (7,392 ) (17,766 )
MSR reversal of provision for repurchases (8 ) —
304
208
MSR income before the effect of changes in interest rates and other assumptions 1,474
3,021
7,687
9,683
Changes in fair value of MSRs from interest rates and other assumptions ⁽¹⁾
563
7,085
(3,450 ) (52,723 )
Changes in fair value of associated derivatives (422 ) (6,336 ) 1,869
55,874
Total net effect of changes in assumptions and rates 141
749
(1,581 ) 3,151
MSR Income, Net $ 1,615
$ 3,770
$ 6,106
$ 12,834


~~(1)~~	~~Primarily reflects~~value changes ~~in prepayment assumptions on our MSRs due to changes in benchmark interest rates.~~

~~MSR income before the effect of changes in interest rates and other assumptions declined in both the three- and nine-month periods, primarily~~ due to ~~the sale~~continued strength in credit performance and spread tightening.

Our Business Purpose Lending segment generated $33 million of ~~our conforming MSRs~~net income during the second quarter of ~~2017. The total~~2021, driven primarily by $35 million of mortgage banking income and $15 million of net ~~effect~~interest income from investments. Business purpose mortgage banking income in the second quarter of ~~changes~~2021 benefited from a 37% increase in ~~assumptions~~origination volume from the first quarter of 2021 and ~~rates decreased~~modest spread tightening on securitization execution during the ~~nine-month periods, primarily~~second quarter. Our business purpose investments saw an increase in interest income in the second quarter from a higher average balance of investments compared to the first quarter of 2021 and increased positive fair value changes due to ~~lower hedging expenses on MSRs~~continued spread tightening.

Our Business Purpose Lending segment generated $21 million of net income during the first quarter of ~~2016.~~

~~Realized Gains,~~2021, driven primarily by $22 million of mortgage banking income and $13 million of net

~~During~~ interest income from investments. Business purpose mortgage banking income normalized in the first quarter of 2021, relative to the third and fourth quarters of 2020, as more modest spread tightening on securitization execution during the quarter had a reduced impact to the valuation of our loans held in inventory at the beginning of the quarter. Net interest income from BPL investments increased from the fourth quarter of ~~2017, we realized gains of $2 million, primarily~~2020 due to higher yield maintenance income on our SFR securities resulting from ~~the sale of $23 million of AFS securities. During the third quarter of 2016, we realized gains of $7 million, which included $2 million primarily~~faster prepayments, and reduced debt costs on our bridge loan portfolio resulting from ~~the sale of $26 million of AFS securities and $5 million from the sale of $208 million of commercial mezzanine loans.~~

~~Direct Operating Expenses and Provision for Income Taxes~~

~~The~~a decrease in operating expenses at our Investment Portfolio segment for the three and nine months ended September 30, 2017 was primarily attributable to lower operating costs associated with the management of our servicing portfolio. For the three and nine months ended September 30, 2017, the provision for income taxes at our Investment Portfolio segment resulted from GAAP income earned at our TRS during those periods, primarily from MSR income and incomeleverage on ~~certain securities we hold at our TRS.~~these assets.

~~Residential Loans Held-for-Investment at Redwood Portfolio~~Mortgage Banking

The following table provides ~~the~~business purpose loans funding activity ~~of residential loans held-for-investment~~ at Redwood during the three and nine months ended September 30, ~~2017 and 2016.~~2021.

Table 149 – ~~Residential~~Business Purpose Loans ~~Held-for-Investment~~— Funding Activity


	Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
(In Thousands)	Single-Family Rental		Bridge (1)		Total		Single-Family Rental		Bridge (1)		Total
Fair value at beginning of period	$	418,442	$	—	$	418,442	$	245,394	$	—	$	245,394
Fundings	395,083		244,652		639,735		960,398		593,041		1,553,439

Sales	—		(253)		(253)		—		(2,484)		(2,484)
Transfers between portfolios (2)	(332,670)		(246,096)		(578,766)		(754,453)		(593,774)		(1,348,227)
Principal repayments	(36,970)		—		(36,970)		(47,090)		—		(47,090)
Changes in fair value, net	22,461		1,697		24,158		62,097		3,217		65,314
Fair Value at End of Period	$	466,346	$	—	$	466,346	$	466,346	$	—	$	466,346

(1)We originate bridge loans at ~~Redwood - Activity~~our TRS and then transfer them to our REIT. Origination fees and any fair value changes on these loans prior to transfer are recognized within Mortgage banking activities, net on our consolidated statements of income (loss). Once the loans are transferred to our REIT, they are classified as held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge securitization, we record any changes in fair value from the date of origination or purchase to the time of securitization as Mortgage banking activities, net on our consolidated statements of income (loss). Once loans are transferred into this securitization, any changes in fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the carrying value and activity of our bridge loans held-for-investment, see the Investments section that follows.

(2)For single-family rental loans, amounts represent the fair value of transfers of loans from held-for-sale to held-for-investment, including when loans are securitized (and consolidated for GAAP purposes). For bridge loans, represents the transfer of loans originated at our TRS to our REIT as described in preceding footnote.

Business purpose mortgage banking income was $23 million, $35 million and $32 million in the first, second and third quarters of 2021, respectively. Mortgage banking income is comprised of net interest income from single-family rental loans held-for-sale in inventory and mortgage banking activities income from single family rental and bridge loans (see Note 19 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail on mortgage banking activities).

Business purpose funding volumes increased steadily through the first nine months of 2021. These growing volumes, along with improved SFR securitization execution in the second and third quarters of 2021, drove strong mortgage banking income results for those periods. Approximately 66% of total origination volumes in the third quarter were from repeat borrowers.

We utilize a combination of capital and loan warehouse facilities to manage our inventory of single-family rental loans that we hold for sale. At September 30, 2021, we had business purpose warehouse facilities outstanding with four different counterparties, with $1.30 billion of total capacity (used for both SFR and bridge loans) and $663 million of available capacity (inclusive of capacity on non-recourse facilities). All of these facilities are non-marginable (i.e., not subject to margin calls based on the market value of the underlying collateral that is non-delinquent).

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Fair value at beginning of period $ 2,360,234
$ 2,277,561
$ 2,261,016
$ 1,791,195
Transfers between portfolios ⁽¹⁾
(20,025 ) 151,919
226,893
821,273
Principal repayments (74,550 ) (146,151 ) (228,271 ) (351,955 )
Changes in fair value, net 3,143
(655 ) 9,164
22,161
Fair Value at End of Period $ 2,268,802
$ 2,282,674
$ 2,268,802
$ 2,282,674
Investment Portfolio


~~(1)~~	~~Represents the net transfers of loans into our Investment Portfolio segment from our Residential Mortgage Banking segment and their reclassification from held-for-sale to held-for-investment.~~

~~During~~The following table presents details of our Business Purpose Lending investment portfolio at September 30, 2021 and December 31, 2020.

Table 10 – Business Purpose Lending Investments


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

Bridge loans	$	824,799	$	641,765
Single-family rental securities at consolidated CAFL entities (1)	287,813		238,630

Other investments	6,767		21,627
Total Segment Investments	$	1,119,379	$	902,022

(1)Represents our economic investment in securities issued by consolidated CAFL securitization VIEs. For GAAP purposes, we consolidated $3.40 billion of loans and $3.13 billion of ABS issued associated with these investments at September 30, 2021.

In September 2021, we completed a CAFL securitization backed by $272 million (principal balance) of bridge loans. See the "Investments Detail" section that follows for additional details on our investments and their associated borrowings.

The following table presents the components of investment fair value changes for our Business Purpose Lending segment by investment type for the three and nine months ended September 30, ~~2017,~~2021.

Table 11 – Investment Fair Value Changes, Net from Business Purpose Lending


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2021		September 30, 2021
Investment Fair Value Changes, Net
Changes in fair value of:

Bridge loans held-for-investment	$	900	$	4,142
REO	108		536
Net investments in CAFL SFR entities (1)	2,943		6,354
Other	(481)		(481)

Investment Fair Value Changes, Net	$	3,470	$	10,551

(1)Includes changes in fair value of the loans held-for-investment and the ABS issued at the entities, which netted together represent the change in value of our investments (subordinate securities) at the consolidated VIEs.

Spreads tightened throughout 2021 for our CAFL subordinate securities, with positive fair value changes for these assets more than offsetting the decline in the value of our CAFL interest-only securities from a reduction in their basis through the receipt of regular cash flows. We also had positive resolutions on several previously delinquent bridge loans during 2021, resulting in positive fair value changes for recoveries in excess of carrying values.

Third-Party Investments Segment

Overview

Our Third-Party Investments segment generated $30 million of net income during the third quarter of 2021, driven primarily by $21 million of positive investment fair value changes and $12 million of net interest income. Our Third-Party Investments segment generated $54 million of net income during the second quarter of 2021, driven primarily by $42 million of positive investment fair value changes and $12 million of net interest income, and generated $50 million of net income during the first quarter of 2021, driven primarily by $40 million of positive investment fair value changes and $12 million of net interest income. Positive investment fair value changes in 2021 reflected continuing improvement in credit performance and spread tightening, particularly for our RPL and multifamily securities.

Investment Portfolio

The following table presents details of the investments in our Third-Party Investments segment at September 30, 2021 and December 31, 2020.

Table 12 – Third-Party Investments


(In Thousands)	September 30, 2021		December 31, 2020
Residential securities at Redwood	$	160,300	$	134,090
Residential securities at consolidated Freddie Mac SLST entities (1)	451,252		428,179
Multifamily securities at Redwood	42,618		49,255
Multifamily securities at consolidated Freddie Mac K-Series entity (2)	31,389		28,255
Other investments (3)	379,102		317,282
Total Segment Investments	$	1,064,661	$	957,061

(1)Represents our economic investment in securities issued by consolidated Freddie Mac SLST securitization entities. For GAAP purposes, we ~~had net transfers~~consolidated $2.00 billion of ~~$20~~loans and $1.55 billion of ABS issued associated with these investments at September 30, 2021.

(2)Represents our economic investment in securities issued by a consolidated Freddie Mac K-Series securitization entity. For GAAP purposes, we consolidated $483 million of loans and ~~$227~~$451 million ~~respectively,~~ of ~~residential loans from our Residential Mortgage Banking segment to our Investment Portfolio segment.~~ ABS issued associated with this investment at September 30, 2021.

(3)At September 30, 2017, $2.26 billion of loans were held by our FHLB-member subsidiary and were financed with $2.00 billion of borrowings from the FHLBC. In connection with these borrowings, our FHLB-member subsidiary is required to hold $432021, Other investments presented in this table includes $188 million of ~~FHLB stock.~~

servicing investments owned in our consolidated Servicing Investment entities. At September 30, ~~2017, the weighted average maturity~~2021, our economic investment in these entities was $60 million (for GAAP purposes, we consolidated $188 million of ~~these FHLB borrowings was approximately eight years and they had a weighted average cost~~servicing investments, $152 million of 1.3% per annum. This interest cost resets every 13 weeks and we seek to fix the interest cost of these FHLB borrowings over their weighted average maturity by using a combination of swaps, TBAs and other derivatives.

In October 2017, the FHLB increased the capital requirement on our borrowing facility, which effectively increases the portion of loans we finance with equity relative to what was required previously. This change will result in additional capital being allocated to these investmentsnon-recourse short-term securitization debt, as well as ~~a lower return on the capital~~other assets and liabilities for these entities). Additionally, at September 30, 2021, Other investments presented in this table includes $167 million of HEIs owned in our consolidated Point HEI entity. At September 30, 2021, our economic investment in this entity was $10 million (for GAAP purposes, we consolidated $167 million of HEIs and $145 million of ABS issued, as ~~leverage on this portfolio will be reduced.~~

Under a final rule published by the Federal Housing Finance Agency in January 2016, our FHLB-member subsidiary will remain an FHLB member through the five-year transition period for captive insurance companies. Our FHLB-member subsidiary's existing $2.00 billion of FHLB debt, which matures beyond this transition period, is permitted to remain outstanding until its stated maturity. As residential loans pledgedwell as ~~collateral~~other assets and liabilities for this ~~debt pay down,~~entity).

During the third quarter of 2021, in conjunction with co-sponsoring a securitization of HEIs, we ~~are permitted~~purchased $122 million of additional HEIs from other contributors to ~~pledge~~the securitization, then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS. We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity.

Additionally, during the third quarter of 2021, we purchased $11 million of other third-party investments. During the second quarter, we purchased $3 million of third-party investments and sold $11 million of third-party investments. During the first quarter, we purchased $16 million of third-party investments and sold $34 million of third-party investments.

See the "Investments Detail" section that follows for additional ~~loans or other eligible assets to collateralize this debt; however, we do not expect to be able to increase our subsidiary's FHLB debt above the existing $2.00 billion.~~details on these investments and their associated borrowings.

The following table presents the ~~unpaid principal balances~~components of investment fair value changes for ~~residential real estate~~our Third-Party Investments segment by investment type for the three and nine months ended September 30, 2021.

Table 13 – Investment Fair Value Changes, Net from Third-Party Investments


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2021		September 30, 2021
Investment Fair Value Changes, Net
Changes in fair value of:
Residential securities	$	3,371	$	31,620
Net investments in Freddie Mac SLST entities (1)	13,849		54,282
Net investment in Freddie Mac K-Series entity (1)	554		11,330
Net investment in Point HEI entity (1)	47		47
Servicer advance investments	(2,079)		(3,179)
Excess MSRs	(803)		(5,233)
HEIs at Redwood	5,622		13,017

Other	8		65
Recoveries (impairments) on AFS securities	—		354
Investment Fair Value Changes, Net	$	20,569	$	102,303

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

Continued strengthening of credit and elevated prepayment speeds helped drive credit spreads tighter on our third-party assets in 2021, in particular for our investments in re-performing loan assets (primarily represented by ~~product type at~~our net investment in Freddie Mac SLST entities in the table above). HEI valuations benefited from our securitization of HEIs in the third quarter of 2021. The decline in value of our Servicer advance investments and excess MSRs is primarily attributable to a reduction in their basis through the receipt of regular cash flows.

Investments Detail

This section presents additional details on our investment assets and their activity during the three and nine months ended September 30, ~~2017.~~2021.

~~Table 15 – Characteristics of Residential Real Estate Loans Held-for-Investment at Redwood~~

September 30, 2017
(Dollars in Thousands) Principal Balance Weighted Average Coupon
Fixed - 30 year $ 2,031,944
4.10 %
Fixed - 15, 20, & 25 year 71,138
3.64 %
Hybrid 128,343
4.00 %
Total Outstanding Principal $ 2,231,425

The outstanding loans held-for-investment at Redwood at September 30, 2017 were prime-quality, first lien loans, of which 95% were originated between 2013 and 2017 and 5% were originated in 2012 and prior years. The weighted average FICO score of borrowers backing these loans was 772 (at origination) and the weighted average loan-to-value ("LTV") ratio was 65% (at origination). At September 30, 2017, none of these loans were greater than 90 days delinquent or in foreclosure.

Real Estate Securities Portfolio

The following table ~~sets forth~~presents activity of our real estate securities ~~activity~~on balance sheet by collateral type for the three and nine months ended September 30, 2021.

Table 14 – Activity of Real Estate Securities at Redwood by Collateral Type


Three Months Ended September 30, 2021	Residential						Multifamily		Total
(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine
Beginning fair value	$	25,267	$	—	$	287,140	$	42,479	$	354,886
Transfers	—		—		—		—		—
Acquisitions	—		—		6,750		4,000		10,750
Sales	—		—		(755)		—		(755)
Gains on sales and calls, net	—		—		6,389		—		6,389
Effect of principal payments (1)	—		—		(13,204)		(3,261)		(16,465)
Change in fair value, net	(2,773)		—		1,854		(600)		(1,519)
Ending Fair Value	$	22,494	$	—	$	288,174	$	42,618	$	353,286


Nine Months Ended September 30, 2021	Residential						Multifamily		Total
(In Thousands)	Senior		Mezzanine		Subordinate		Mezzanine
Beginning fair value	$	28,464	$	5,663	$	260,743	$	49,255	$	344,125

Acquisitions	8,737		—		21,050		8,930		38,717
Sales	—		(5,724)		(31,765)		—		(37,489)
Gains on sales and calls, net	—		60		16,931		—		16,991
Effect of principal payments (1)	—		(26)		(30,751)		(14,064)		(44,841)
Change in fair value, net	(14,707)		27		51,966		(1,503)		35,783
Ending Fair Value	$	22,494	$	—	$	288,174	$	42,618	$	353,286

(1)The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.

At September 30, 2021, our securities at Redwood (exclusive of securities owned in consolidated entities) consisted of fixed-rate assets (86%), adjustable-rate assets (11%), and hybrid assets that reset within the next year (3%).

The following table sets forth activity in our ~~Investment Portfolio~~entire real estate securities portfolio by segment for the three and nine months ended September 30, ~~2017.~~2021. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.

Table 15 – Activity of Real Estate Securities at Redwood and in Consolidated Entities by Segment


Three Months Ended September 30, 2021	Residential(1)				BPL		Third-Party Investments						Total
	Sequoia Securities on Balance Sheet		Consolidated Sequoia Securities		Consolidated CAFL Securities		Consolidated SLST Securities		Consolidated Multifamily Securities		Other Third-Party Securities(1)
(In Thousands)
Beginning fair value	$	160,847	$	232,005	$	268,131	$	450,173	$	30,834	$	194,039	$	1,336,029
Acquisitions	—		1,965		16,646		—		—		10,750		29,361
Sales	—		—		—		—		—		(755)		(755)
Gains on sales and calls, net	6,389		—		—		—		—		—		6,389
Effect of principal payments (2)	(12,212)		(832)		—		(12,769)		—		(4,253)		(30,066)
Change in fair value, net	(7,770)		3,313		2,943		13,849		554		6,251		19,140
Ending Fair Value	147,254		236,451		287,720		451,253		31,388		206,032		1,360,098


Nine Months Ended September 30, 2021	Residential				BPL		Third-Party Investments						Total
	Sequoia Securities on Balance Sheet		Consolidated Sequoia Securities		Consolidated CAFL Securities		Consolidated SLST Securities		Consolidated Multifamily Securities		Other Third-Party Securities
(In Thousands)
Beginning fair value	$	157,456	$	217,965	$	238,630	$	428,178	$	28,255	$	186,669	$	1,257,153
Acquisitions	9,375		7,746		53,846		—		—		29,342		100,309
Sales	(3,664)		—		—		—		(8,197)		(33,825)		(45,686)
Gains on sales and calls, net	15,484		—		—		—		—		1,507		16,991
Effect of principal payments (2)	(28,928)		(2,377)		(11,110)		(31,207)		—		(15,913)		(89,535)
Change in fair value, net	(2,469)		13,117		6,354		54,282		11,330		38,252		120,866
Ending Fair Value	147,254		236,451		287,720		451,253		31,388		206,032		1,360,098

(1)At September 30, 2021, $3 million of securities used as hedges for our residential mortgage banking operations are included within the "Other third-party securities" column of this table. These same securities are presented as a component of securities within our residential lending segment on our segment balance sheet.

(2)The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.

The following table summarizes the credit characteristics of our entire real estate securities portfolio by collateral type at September 30, 2021. This table includes both our securities held on balance sheet and our economic interest in securities we own in securitizations we consolidate in accordance with GAAP.

Table 16 – Real Estate Securities ~~Activity~~Credit Statistics


September 30, 2021							Weighted Average Values for Non-IO Securities
	Market Value - IO Securities		Market Value - Non-IO Securities		Principal Balance - Non-IO Securities		Coupon		90+ Delinquency		3-Month Prepayment Rate		Investment Thickness(1)
(Dollars in Thousands)
Sequoia securities on balance sheet	$	18,380	$	128,874	$	153,388	3.7	%	0.66	%	42	%	7	%
Consolidated Sequoia securities	9,329		227,122		243,524		4.6	%	2.84	%	51	%	31	%
Total Sequoia Securities	27,709		355,996		396,912		4.3	%	2.05	%	48	%	22	%
Consolidated Freddie Mac SLST securities	17,714		433,539		547,393		3.1	%	10.98	%	14	%	28	%
RPL securities on balance sheet	998		64,845		143,877		3.6	%	5.11	%	16	%	7	%
Total RPL Securities	18,712		498,384		691,270		3.2	%	10.21	%	14	%	25	%
Consolidated Freddie Mac K-Series securities	—		31,388		36,468		4.1	%	—	%	—	%	20	%
Multifamily securities on balance sheet	2,039		40,579		41,241		3.2	%	0.02	%	15	%	8	%
Total Multifamily Securities	2,039		71,967		77,709		3.6	%	0.01	%	8	%	13	%
Consolidated CAFL securities	49,828		237,892		354,319		5.1	%	1.87	%	15	%	13	%
Other third-party securities	3,164		94,407		116,725		4.5	%	2.03	%	34	%	5	%
Total Securities	$	101,452	$	1,258,646	$	1,636,935

(1)Investment thickness represents the average size of the subordinate securities we own as investments in securitizations, relative to the average overall size of the securitizations. For example, if our investment thickness (of first-loss securities) with respect to a particular securitization is 10%, we have exposure to the first 10% of credit losses resulting from loans underlying that securitization. We generally own first loss positions in Sequoia, RPL and CAFL securities. We own both first loss and mezzanine positions (positions credit enhanced by ~~Collateral Type~~

Three Months Ended September 30, 2017 Senior Re-REMIC Subordinate Total
(In Thousands) Residential
Residential ⁽¹⁾
Residential
Commercial ⁽²⁾

Beginning fair value $ 176,962
$ 73,337
$ 797,895
$ 170,309
$ 1,218,503
Transfers 34,375
(34,375 ) —
—
—
Acquisitions
Sequoia securities 5,908
—
23,125
—
29,033
Third-party securities 10,475
—
74,507
74,123
159,105
Sales
Sequoia securities —
—
—
—
—
Third-party securities (3,324 ) —
(45,486 ) —
(48,810 )
Gains on sales and calls, net 824
—
910
—
1,734
Effect of principal payments ⁽³⁾
(7,324 ) (1,745 ) (7,944 ) (2,484 ) (19,497 )
Change in fair value, net (1,897 ) 1,816
15,162
1,123
16,204
Ending Fair Value $ 215,999
$ 39,033
$ 858,169
$ 243,071
$ 1,356,272

Nine Months Ended September 30, 2017 Senior Re-REMIC Subordinate Total
(In Thousands) Residential
Residential ⁽¹⁾
Residential
Commercial ⁽²⁾

Beginning fair value $ 173,613
$ 85,479
$ 667,577
$ 91,770
$ 1,018,439
Transfers 46,604
(46,604 ) —
—
—
Acquisitions
Sequoia securities 11,555
—
55,529
—
67,084
Third-party securities 20,901
—
231,494
156,248
408,643
Sales
Sequoia securities —
—
(26,601 ) —
(26,601 )
Third-party securities (13,399 ) —
(92,035 ) (15,858 ) (121,292 )
Gains on sales and calls, net 5,327
—
4,234
—
9,561
Effect of principal payments ⁽³⁾
(21,399 ) (3,099 ) (22,592 ) (3,172 ) (50,262 )
Change in fair value, net (7,203 ) 3,257
40,563
14,083
50,700
Ending Fair Value $ 215,999
$ 39,033
$ 858,169
$ 243,071
$ 1,356,272


~~(1)~~	~~Re-REMIC securities, as presented herein, were created by third parties through the resecuritization of certain senior RMBS.~~


~~(2)~~	~~Our commercial securities are primarily comprised of Agency~~subordinate securities) in multifamily ~~securities.~~


~~(3)~~	The effect of principal payments reflects the change in fair value due to principal payments, which is calculated as the cash principal received on a given security during the period multiplied by the prior quarter ending price or acquisition price for that security.

~~At September 30, 2017, our securities consisted of fixed-rate assets (78%), adjustable-rate assets (5%), hybrid assets that reset within the next year (9%),~~ and ~~hybrid assets that reset between 12 and 36 months (8%).~~

other third-party securities.

We directly finance our holdings of real estate securities with a combination of capital and collateralized debt in the form of repurchase (or “repo”) financing. ~~The following table presents the fair value of our real estate securities that were financed with repurchase debt at September 30, 2017.~~

~~Table 17 – Real Estate Securities Financed with Repurchase Debt~~

September 30, 2017 Real Estate Securities Repurchase Debt Allocated Capital
Weighted Average
Price⁽¹⁾

Financing Haircut⁽²⁾
(Dollars in Thousands, except Weighted Average Price)
Residential Securities
Senior $ 102,697
$ (90,205 ) $ 12,492
$ 98
13 %
Subordinate - Mezzanine 337,153
(280,633 ) 56,520
99
17 %
Total Residential Securities 439,850
(370,838 ) 69,012
99
16 %
Commercial/Multifamily Securities 223,269
(178,973 ) 44,296
96
20 %
Total $ 663,119
$ (549,811 ) $ 113,308


~~(1)~~	~~GAAP fair value per $100 of principal.~~


~~(2)~~	~~Allocated capital divided by GAAP fair value.~~

At September 30, ~~2017,~~2021, we had short-term debt incurred through repurchase facilities of ~~$550~~$80 million with three different counterparties, which was secured by ~~$663~~$108 million of real estate ~~securities.~~securities (including securities owned in consolidated securitization entities).

At September 30, 2021, real estate securities with a fair value of $504 million (including securities owned in consolidated Sequoia and CAFL securitization entities), were financed with long-term, non-mark-to-market recourse debt through our subordinate securities financing facilities. Additionally, at September 30, 2021, we had $451 million of re-performing loan securities financed with $161 million of non-recourse securitization debt. The remaining ~~$693~~$297 million of our securities, including certain securities we own that were issued by consolidated securitization entities, were financed with capital. Our repo borrowings were made under facilities with eight different counterparties, and the weighted average cost of funds for these facilities during the third quarter of 2017 was approximately 2.48% per annum.

At September 30, 2017, the securities we financed through repurchase facilities had no material credit issues. In addition to the allocated capital listed in the table above that directly supports our repurchase facilities (the "financing haircut”), we continue to hold a designated amount of supplemental risk capital available for potential margin calls or future obligations relating to these facilities.

The majority of the $103 million of senior securities noted in the table above are supported by seasoned residential loans originated prior to 2008. The $337 million of mezzanine securities financed through repurchase facilities at September 30, 2017 carry investment grade credit ratings and are supported by residential loans originated between 2012 and 2017. The loans underlying these securities have experienced minimal delinquencies to date. The $223 million of multifamily securities financed through repurchase facilities at September 30, 2017 carry investment grade credit ratings with 7%-8% of structural credit enhancement.

Bridge Loans Held-for-Investment

The following table ~~presents our residential securities at September 30, 2017 and December 31, 2016, categorized by portfolio vintage (the years~~provides the ~~securities were issued), and by priority~~activity of ~~cash flows (senior, re-REMIC, and subordinate). We have additionally separated securities issued through our Sequoia platform or by third parties, including the Agencies.~~

~~Table 18 – Residential Securities by Vintage and Type~~

September 30, 2017 Sequoia 2012-2017 Third Party 2013-2017 Agency CRT 2013-2017 Third Party <=2008 Total Residential Securities % of Total Residential Securities
(Dollars in Thousands)
Senior $ 34,276
$ 24,574
$ —
$ 157,149
$ 215,999
19 %
Re-REMIC —
—
—
39,033
39,033
4 %
Subordinate
Mezzanine ⁽¹⁾
157,050
177,865
—
—
334,915
30 %
Subordinate
131,929
77,625
286,780
26,920
523,254
47 %
Total Subordinate 288,979
255,490
286,780
26,920
858,169
77 %
Total Securities ⁽²⁾
$ 323,255
$ 280,064
$ 286,780
$ 223,102
$ 1,113,201
100 %

December 31, 2016 Sequoia 2012-2016 Third Party 2013-2016 Agency CRT 2013-2016 Third Party <=2008 Total Residential Securities % of Total Residential Securities
(Dollars in Thousands)
Senior $ 26,618
$ 5,611
$ —
$ 141,384
$ 173,613
19 %
Re-REMIC —
—
—
85,479
85,479
9 %
Subordinate
Mezzanine ⁽¹⁾
136,007
179,390
—
—
315,397
34 %
Subordinate
113,310
64,450
152,126
22,294
352,180
38 %
Total Subordinate 249,317
243,840
152,126
22,294
667,577
72 %
Total Securities $ 275,935
$ 249,451
$ 152,126
$ 249,157
$ 926,669

100 %


~~(1)~~	~~Mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later.~~


~~(2)~~	Excludes $31 million of securities retained from our consolidated Sequoia Choice securitization. For GAAP purposes we consolidated $317 million of residential loans and $286 million of non-recourse ABS debt associated with these retained securities.

At September 30, 2017 and December 31, 2016, we held $243 million and $92 million, respectively, of commercial securities that were all classified as subordinate securities and issued from 2015 through 2017. At September 30, 2017 and December 31, 2016, commercial securities included $223 million and $74 million, respectively, of multifamily securities issued by Agencies and the remainder were third-party CMBS.

At both September 30, 2017 and December 31, 2016, our available-for-sale securities were entirely comprised of residential securities. The following tables present the components of the interest income we earned on AFS securities for the three and nine months ended September 30, 2017 and 2016.

~~Table 19 – Interest Income — AFS Securities~~

Three Months Ended September 30, 2017 Yield as a Result of
Interest Income Discount (Premium) Amortization Total Interest Income Average Amortized Cost Interest Income Discount (Premium) Amortization Total Interest Income
(Dollars in Thousands)
Residential
Senior $ 1,374
$ 1,928
$ 3,302
$ 103,781
5.30 % 7.43 % 12.73 %
Re-REMIC 696
734
1,430
46,646
5.97 % 6.29 % 12.26 %
Subordinate
Mezzanine 1,136
509
1,645
115,565
3.93 % 1.76 % 5.69 %
Subordinate 2,897
1,460
4,357
154,904
7.48 % 3.77 % 11.25 %
Total AFS Securities $ 6,103
$ 4,631
$ 10,734
$ 420,896
5.80 % 4.40 % 10.20 %

Three Months Ended September 30, 2016 Yield as a Result of
Interest Income Discount (Premium) Amortization Total Interest Income Average Amortized Cost Interest Income Discount (Premium) Amortization Total Interest Income
(Dollars in Thousands)
Residential
Senior $ 609
$ 529
$ 1,138
$ 68,219
3.57 % 3.10 % 6.67 %
Re-REMIC 1,799
3,596
5,395
113,638
6.33 % 12.66 % 18.99 %
Subordinate
Mezzanine 1,764
665
2,429
180,108
3.92 % 1.48 % 5.40 %
Subordinate 2,473
1,334
3,807
126,877
7.80 % 4.21 % 12.01 %
Total AFS Securities $ 6,645
$ 6,124
$ 12,769
$ 488,842
5.44 % 5.01 % 10.45 %

Nine Months Ended September 30, 2017 Yield as a Result of
Interest Income Discount (Premium) Amortization Total Interest Income Average Amortized Cost Interest Income Discount (Premium) Amortization Total Interest Income
(Dollars in Thousands)
Residential
Senior $ 3,976
$ 5,971
$ 9,947
$ 100,808
5.26 % 7.90 % 13.16 %
Re-REMIC 2,476
2,619
5,095
57,283
5.76 % 6.10 % 11.86 %
Subordinate
Mezzanine 3,818
1,777
5,595
131,460
3.87 % 1.80 % 5.67 %
Subordinate 8,479
4,330
12,809
151,487
7.46 % 3.81 % 11.27 %
Total AFS Securities $ 18,749
$ 14,697
$ 33,446
$ 441,038
5.67 % 4.44 % 10.11 %

Nine Months Ended September 30, 2016 Yield as a Result of
Interest Income Discount (Premium) Amortization Total Interest Income Average Amortized Cost Interest Income Discount (Premium) Amortization Total Interest Income
(Dollars in Thousands)
Residential
Senior $ 3,594
$ 3,832
$ 7,426
$ 126,592
3.79 % 4.04 % 7.83 %
Re-REMIC 5,484
10,400
15,884
112,029
6.53 % 12.38 % 18.91 %
Subordinate
Mezzanine 5,745
2,038
7,783
193,643
3.96 % 1.40 % 5.36 %
Subordinate 7,119
4,261
11,380
121,014
7.84 % 4.69 % 12.53 %
Total AFS Securities $ 21,942
$ 20,531
$ 42,473
$ 553,278
5.29 % 4.95 % 10.24 %

During the fourth quarter of 2016 and the first nine months of 2017, several Re-REMIC securities we held were exchanged for the underlying senior securities. Several of these exchanged investments had higher relative yields and, as such, the balance of our investments in Re-REMICs and their associated yields declined and the yields of our senior securities increasedbridge loans held-for-investment during the three and nine months ended September 30, ~~2017,~~2021.

Table 17 – Bridge Loans Held-for-Investment - Activity


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2021		September 30, 2021
Fair value at beginning of period	$	726,569	$	641,765


Sales	—		(7,000)
Transfers between portfolios (1)	246,096		593,775
Transfers to REO	(4,785)		(7,074)
Principal repayments	(145,975)		(402,701)
Changes in fair value, net	2,894		6,034
Fair Value at End of Period	$	824,799	$	824,799

(1)We originate bridge loans at our TRS and then transfer them to our REIT. Origination fees and any fair value changes on these loans prior to transfer are recognized within Mortgage banking activities, net on our consolidated statements of income (loss). Once the loans are transferred to our REIT, they are classified as ~~compared~~held-for-investment, with subsequent fair value changes generally recorded through Investment fair value changes, net on our consolidated statements of income (loss). For bridge loans held at our REIT that are transferred into our CAFL bridge securitization, we record any changes in fair value from the date of origination or purchase to the ~~same periods~~time of securitization as Mortgage banking activities, net on our consolidated statements of income (loss). Once loans are transferred into this securitization, any changes in ~~2016.~~

~~The following tables present~~fair value are recorded through Investment fair value changes, net on our consolidated statements of income (loss). For the ~~components of~~ carrying value and activity of our bridge loans held-for-investment, see the Investments section that follows.

Our $825 million of bridge loans held-for-investment at September 30, ~~2017 and December 31, 2016 for our AFS securities.~~

~~Table 20 – Carrying Value of AFS Securities~~

September 30, 2017 Senior Re-REMIC Subordinate Total
(In Thousands)
Principal balance $ 156,936
$ 44,896
$ 442,219
$ 644,051
Credit reserve (3,024 ) (5,810 ) (38,041 ) (46,875 )
Unamortized discount, net (36,575 ) (10,412 ) (142,405 ) (189,392 )
Amortized cost 117,337
28,674
261,773
407,784
Gross unrealized gains 37,155
10,359
83,185
130,699
Gross unrealized losses (1,260 ) —
(1,085 ) (2,345 )
Carrying Value $ 153,232
$ 39,033
$ 343,873
$ 536,138

December 31, 2016 Senior Re-REMIC Subordinate Total
(In Thousands)
Principal balance $ 148,862
$ 95,608
$ 456,359
$ 700,829
Credit reserve (4,814 ) (6,857 ) (35,802 ) (47,473 )
Unamortized discount, net (41,877 ) (19,613 ) (136,622 ) (198,112 )
Amortized cost 102,171
69,138
283,935
455,244
Gross unrealized gains 36,304
16,341
68,032
120,677
Gross unrealized losses (1,929 ) —
(1,240 ) (3,169 )
Carrying Value $ 136,546
$ 85,479
$ 350,727
$ 572,752

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 each security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method.

At September 30, 2017, credit reserves for our AFS securities totaled $47 million, or 7.3% of the principal balance of our AFS securities, as compared to $47 million, or 6.8%, at December 31, 2016. During the nine months ended September 30, 2017, increases resulting from acquisitions and impairments2021 were partially offset by reductions in the credit reserve from realized losses, sales and transfers out of credit reserve to accretable discount. During the three and nine months ended September 30, 2017, realized credit losses on our residential securities totaled $1 million and $3 million, respectively. During the three and nine months ended September 30, 2016, realized credit losses on our residential securities totaled $0.3 million and $3 million, respectively.

~~Residential Loans Held-for-Investment at Sequoia Choice Portfolio~~

~~During the third quarter of 2017, we issued our first securitization primarily~~ comprised of ~~expanded-prime Choice loans. We consolidate this Sequoia Choice securitization entity for financial reporting purposes in accordance~~first-lien, interest-only loans with GAAP. This entity is independent of Redwood and the assets and liabilities of this entity are not, respectively, owned by us or legal obligations of ours. We record the assets and liabilities of the consolidated Sequoia Choice entity at fair value, based on the estimated fair value of the debt securities (ABS) issued from the securitizations, in accordance with GAAP provisions for collateralized financing entities. At September 30, 2017, the estimated fair value of our economic investment in the consolidated Sequoia Choice entity was $31 million, and was comprised of retained subordinate securities.

~~The following table presents the balance sheets of the consolidated Sequoia Choice entity at September 30, 2017 and December 31, 2016.~~

~~Table 21 – Consolidated Sequoia Choice Entity Balance Sheets~~

(In Thousands) September 30, 2017 December 31, 2016
Residential loans, held-for-investment, at fair value $ 317,303
$ —
Other assets 1,266
—
Total Assets $ 318,569

$ —
Other liabilities $ 1,045
$ —
Asset-backed securities issued, at fair value 286,328
—
Total liabilities 287,373

—
Equity (fair value of Redwood's retained investments in entity) 31,196
—
Total Liabilities and Equity $ 318,569

$ —

~~The following table provides details of residential loan activity at the consolidated Sequoia Choice entity for the three and nine months ended September 30, 2017 and 2016.~~

~~Table 22 – Residential Loans Held-for-Investment at Sequoia Choice - Activity~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Balance at beginning of period $ —
$ —
$ —
$ —
New securitization issuance 318,129
318,129

Changes in fair value, net (826 ) —
(826 ) —
Balance at End of Period $ 317,303

$ —

$ 317,303

$ —

~~The outstanding loans held-for-investment at our Sequoia Choice entity at September 30, 2017 were prime-quality, first lien, 30-year, fixed-rate loans and were originated in 2014 or later. The gross~~a weighted average ~~coupon~~coupon of ~~these loans was 4.98%,~~7.48% and original maturities of six to 24 months. At origination, the weighted average FICO score of borrowers backing these loans was ~~744 (at origination)~~741 and the weighted average ~~original~~ LTV ratio of these loans was ~~75% (at origination)~~68%. At September 30, ~~2017, none~~2021, of the 1,092 loans in this portfolio, 34 of these loans with an aggregate fair value of $23 million and an aggregate unpaid principal balance of $26 million were in foreclosure, of which 35 loans with an aggregate fair value of $27 million and an unpaid principal balance of $30 million were greater than 90 days ~~delinquent or~~delinquent.

We finance our bridge loans with a combination of recourse, non-marginable warehouse facilities and non-recourse, non-marginable warehouse facilities. At September 30, 2021, we had $83 million of debt incurred through short-term warehouse facilities with one different counterparty, which was secured by $127 million of loans, and $279 million of debt incurred through long-term facilities with three different counterparties, which was secured by $374 million of loans. Additionally, in ~~foreclosure.~~the third quarter of 2021, we completed a securitization of CoreVest bridge loans. The ABS issued by this securitization were backed by assets including $276 million of bridge loans and $28 million of restricted cash at September 30, 2021. The securitization is structured with $300 million of total funding capacity and a feature to allow reinvestment of loan payoffs for the first 30 months of the transaction (through March 2024).

~~Mortgage Servicing Rights Portfolio~~

Our MSRs are held and managed at our taxable REIT subsidiary and typically are acquired together with loans from originators and then separately recognized under GAAP when the MSR is retained and the associated loan is sold to a third party or transferred to a Sequoia residential securitization sponsored by us that meets the GAAP criteria for sale. In addition, we have also purchased MSRs on a flow basis from third parties that sold the associated loans directly to the Agencies. Although we own the rights to service loans, we contract with sub-servicers to perform these activities. Our receipt of MSR income is not subject to any covenants other than customary performance obligations associated with servicing residential loans. If a sub-servicer we contract with was to fail to perform these obligations, our servicing rights could be terminated and we would evaluate our MSR asset for impairment at that time.Other Investments

The following table ~~provides the~~sets forth our other investments activity ~~for MSRs~~ by ~~portfolio for the three and nine months ended September 30, 2017.~~

~~Table 23 – MSR Activity by Portfolio~~

Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
(In Thousands) Jumbo Conforming Total MSRs Jumbo Conforming Total MSRs
Balance at beginning of period $ 63,084
$ 686
$ 63,770
$ 60,003
$ 58,523
$ 118,526
Additions
MSRs retained from Sequoia securitizations —
—
—
7,123
—
7,123
MSRs retained from third-party loan sales —
—
—
263
—
263
Purchased MSRs —
256
256
—
571
571
Sold MSRs —
—
—
—
(52,966 ) (52,966 )
Market valuation adjustments (1,281 ) 183
(1,098 ) (5,586 ) (5,003 ) (10,589 )
Balance at End of Period $ 61,803
$ 1,125
$ 62,928
$ 61,803
$ 1,125
$ 62,928

During the nine months ended September 30, 2017, we sold conforming MSRs with a fair value of $53 million. The remaining $63 million of MSRs are primarily associated with loans transferred to Sequoia securitizations we completed over the past several years.

~~The following table presents characteristics of our MSR investments and their associated loans at September 30, 2017.~~

~~Table 24 – Characteristics of MSR Investments Portfolio~~

(Dollars In Thousands) September 30, 2017
Unpaid principal balance $ 5,747,006
Fair value of MSRs $ 62,928
MSR values as percent of unpaid principal balance 1.09 %
Gross cash yield ⁽¹⁾
0.26 %
Number of loans 8,900
Average loan size $ 646
Average coupon 3.96 %
Average loan age (months) 38
Average original loan-to-value 67 %
Average original FICO score 770
60+ day delinquencies 0.08 %


~~(1)~~	Gross cash yield is calculated by dividing the annualized quarterly gross servicing fees we received for the three months ended September 30, 2017, by the weighted average notional balance of loans associated with MSRs we owned during that period.

At September 30, 2017, nearly all of our MSRs were comprised of base MSRs and we did not own any portion of a servicing right related to any loan where we did not own the entire servicing right. At September 30, 2017 and December 31, 2016, we had $0.5 million and $1 million of servicer advances outstanding related to our MSRs, respectively, which are presented in Other assets on our consolidated balance sheets.

~~Residential Mortgage Banking Segment~~

~~The following table presents the components of segment contribution for the Residential Mortgage Banking~~ segment for the three and nine months ended September 30, ~~2017 and 2016.~~2021.

Table 2518 – ~~Residential Mortgage Banking~~Other Investments by Segment ~~Contribution~~- Activity


Three Months Ended September 30, 2021	Residential		BPL		Third-Party Investments(1)		Corporate/Other		Total
(In Thousands)
Balance at beginning of period	$	8,721	$	13,168	$	267,850	$	18,992	$	308,731
New/additional investments	4,782		—		125,373		5,050		135,205

Reductions in investments	—		(6,959)		(17,116)		—		(24,075)
Changes in fair value, net	(1,047)		482		2,995		66		2,496
Other	(67)		76		—		—		9
Balance at End of Period	$	12,389	$	6,767	$	379,102	$	24,108	$	422,366

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 Change 2017 2016 Change
Interest income
Loans $ 10,626
$ 8,831
$ 1,795
$ 26,515
$ 24,038
$ 2,477
Sequoia securities —
—
—
—
572
(572 )
Total interest income 10,626
8,831
1,795
26,515
24,610
1,905
Interest expense (4,135 ) (3,826 ) (309 ) (11,462 ) (10,719 ) (743 )
Net interest income 6,491
5,005
1,486
15,053
13,891
1,162
Mortgage banking activities, net 21,200
9,766
11,434
50,850
26,774
24,076
Direct operating expenses (6,107 ) (5,807 ) (300 ) (18,009 ) (17,175 ) (834 )
Segment contribution before income taxes 21,584
8,964
12,620
47,894
23,490
24,404
Provision for income taxes (4,829 ) (240 ) (4,589 ) (12,251 ) (240 ) (12,011 )
Segment Contribution $ 16,755
$ 8,724
$ 8,031
$ 35,643
$ 23,250
$ 12,393


Nine Months Ended September 30, 2021	Residential		BPL		Third-Party Investments		Corporate/Other		Total
(In Thousands)
Balance at beginning of period	$	8,815	$	21,627	$	317,283	$	451	$	348,176
New/additional investments	7,065		—		125,373		23,550		155,988

Reductions in investments	—		(16,012)		(68,470)		—		(84,482)
Changes in fair value, net	(3,299)		1,076		4,916		106		2,799
Other	(192)		76		—		1		(115)
Balance at End of Period	$	12,389	$	6,767	$	379,102	$	24,108	$	422,366

~~The following tables provide the activity of unsecuritized residential loans during the three and nine months ended~~(1)At September 30, ~~2017~~2021 (our "Balance at End of Period"), Third-party investments presented in this table includes $188 million of servicing investments owned in our consolidated Servicing Investment entities. At September 30, 2021, our economic investment in these entities was $60 million (for GAAP purposes, we consolidated $188 million of servicing investments, $152 million of non-recourse short-term securitization debt, as well as other assets and ~~2016.~~liabilities for these entities). Additionally, At September 30, 2021, Third-party investments presented in this table includes $167 million of HEIs owned in our consolidated Point HEI entity. At September 30, 2021, our economic investment in this entity was $10 million (for GAAP purposes, we consolidated $167 million of HEIs and $145 million of ABS issued, as well as other assets and liabilities for this entity).

~~Table 26 – Residential Loans Held-for-Sale — Activity~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Balance at beginning of period $ 837,371
$ 882,380
$ 835,399
$ 1,115,738
Acquisitions 1,462,116
1,252,135
3,791,471
3,812,863
Sales ⁽¹⁾
(1,393,323 ) (774,106 ) (3,465,835 ) (2,874,215 )
Transfers between portfolios ⁽²⁾
20,025
(151,919 ) (226,893 ) (821,273 )
Principal repayments (16,436 ) (20,574 ) (38,704 ) (56,495 )
Changes in fair value, net 15,928
598
30,243
11,896
Balance at End of Period $ 925,681
$ 1,188,514
$ 925,681
$ 1,188,514


~~(1)~~	Includes $318 million of Choice loans securitized during the third quarter of 2017, which were not treated as sales for GAAP purposes and continue to be reported on our consolidated balance sheets within our Investment Portfolio segment.


~~(2)~~	~~Represents the net transfers of loans out of our Residential Mortgage Banking segment into our Investment Portfolio segment and their reclassification from held-for-sale to held-for-investment.~~

~~Overview~~During the third quarter of 2021, in conjunction with co-sponsoring a securitization of HEIs, we purchased $122 million of additional HEIs from other contributors to the securitization (included within "Third-Party Investments" in the table above), then transferred $170 million of HEIs to the Point HEI securitization entity and issued $146 million of ABS. We retained subordinate certificates from the entity valued at $10 million as of September 30, 2021, representing our economic interest in the entity.

During the first nine months of ~~2017, we purchased $3.79 billion of predominately prime residential jumbo loans, sold $874 million of jumbo loans~~2021, in addition to third parties and securitized $2.59 billion of jumbo loans through our Sequoia platform. In addition, we had net transfers of $227 million of jumbo loans to our Investment Portfolio segment and financed them with borrowings from the ~~FHLBC. Our pipeline of loans identified for purchase at September 30, 2017 included $1.49 billion of jumbo loans.~~

We utilize a combination of capital and our residential loan warehouse facilities to manage our inventory of residential loans held-for-sale. At September 30, 2017, we had $438 million of warehouse debt outstanding to fund our residential loans held-for-sale. The weighted average cost of the borrowings outstanding under these facilities duringHEIs acquired in the third quarter ~~of 2017 was 2.86% per annum. Our warehouse capacity~~described above, other new/ additional investments included MSRs retained from whole loan sales at ~~September 30, 2017 totaled $1.33 billion across four separate counterparties, which should continue to provide sufficient liquidity to fund~~ our ~~residential mortgage banking operations in the near-term.~~Residential Segment and strategic investments through our RWT Horizons venture investment strategy within Corporate/Other.

~~Our residential mortgage banking operations created investments that allowed us to deploy $57 million of capital into our investment portfolio during~~During the first nine months of ~~2017. At September 30, 2017, we had 446 loan sellers, up from 406 at~~2021, reductions in investments for Third-Party Investments was primarily attributable to the ~~end~~recovery of ~~2016. This included 187 jumbo sellers and 259 sellers from various FHLB districts participating in the FHLB's MPF Direct program.~~

~~Net Interest Income~~

Net interest income from residential mortgage banking is primarily comprised of interest income earned on residential loans from the time we purchase the loans to when we sell or securitize them, offset by interest expense incurred on short-term warehouse debt used in part to finance the loans while we hold them onservicing advances within our consolidated ~~balance sheet.~~

Net interest income from residential mortgage banking increased for both the three- and nine-month periods, primarily due to lower loan warehouse borrowings used to finance our residential loans held-for-sale for each periodservicing VIEs. Our economic investment in ~~2017, as compared to 2016.~~

The amount of net interest income we earn on loans held-for-sale is dependent on many variables, including the amount of loans and the time they are outstanding on our consolidated balance sheet and their interest rates, as well as the amount of leverage we employ through the use of short-term debt to finance the loans and the interest rates on that debt. These factors will impact net interest income in future periods.

~~Mortgage Banking Activities, Net~~

Mortgage banking activities, net, includes the changes in market value of both the loans we hold for sale and commitments for loans we intend to purchase (collectively, our loan pipeline), as well as the effect of hedges we utilize to manage risks associated with our loan pipeline. Our loan sale profit margins are measured over the period from when we commit to purchase a loan and subsequently sell or securitize the loan. Accordingly, these profit margins may encompass positive or negative market valuation adjustments on loans, hedging gains or losses associated with our loan pipeline, and any other related transaction expenses, and may be realized over the course of one or more quarters for financial reporting purposes.

The following table presents the components of residential mortgage banking activities, net. Amounts presented include both the changes in market values for loans that were sold and associated derivative positions that were settled during the periods presented, as well as changes in market values of loans, derivatives and hedges outstanding at the end of each period.

~~Table 27 – Components of Residential Mortgage Banking Activities, Net~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 Change 2017 2016 Change
Changes in fair value of:
Residential loans, at fair value ⁽¹⁾
$ 28,135
$ 12,671
$ 15,464
$ 63,122
$ 47,456
$ 15,666
Sequoia securities —
—
—
—
1,455
(1,455 )
Risk management derivatives ⁽²⁾
(7,077 ) (3,287 ) (3,790 ) (13,787 ) (22,743 ) 8,956
Other income, net⁽³⁾
142
382
(240 ) 1,515
606
909
Total Residential Mortgage Banking Activities, Net $ 21,200
$ 9,766
$ 11,434
$ 50,850
$ 26,774
$ 24,076


~~(1)~~	~~Includes changes in fair value for loan purchase commitments.~~


~~(2)~~	~~Represents market valuation changes of derivatives that are used to manage risks associated with our accumulation of residential loans.~~


~~(3)~~	~~Amounts in this line include other fee income from loan acquisitions and the provision for repurchase expense, presented net.~~

The increases in mortgage banking activities, net for both the three- and nine-month periods were primarily due to higher loan purchase volume and higher gross margins primarily due to improved securitization execution in 2017 as compared to 2016.

Loan purchase commitments ("LPCs"), adjusted for fallout expectations, were $1.57 billion and $4.07 billion for the three and nine months ended September 30, 2017, respectively. Our gross margins for our jumbo loans, which we define as net interest income plus income from mortgage banking activities, divided by LPCs, benefited from tightening credit spreads for both securitizations and whole loans during the first nine months of 2017 and remained above our long-term expectations.

~~At both September 30, 2017 and December 31, 2016, we had repurchase reserves of $4~~entities was $60 million outstanding related to residential loans sold through this segment. For the nine months ended September 30, 2017 and 2016, we recorded $0.2 million of reversal of provision for repurchases and $0.5 million of provision for repurchases, respectively, that was included in income from mortgage banking activities, net, in this segment. We review our loan repurchase reserves each quarter and adjust them as necessary based on current information available at each reporting date.

~~The following table details outstanding principal balances for residential loans held-for-sale by product type~~ at September 30, ~~2017.~~

~~Table 28 – Characteristics of Residential Loans Held-for-Sale~~2021 and $68 million at December 31, 2020.

September 30, 2017 Principal Value Weighted Average Coupon
(Dollars in Thousands)
First Lien Prime
Fixed - 30 year $ 771,172
4.34 %
Fixed - 10, 15, 20, & 25 year 28,869
3.75 %
Hybrid 102,843
3.50 %
ARM 703
2.53 %
Total Outstanding Principal $ 903,587

~~Operating Expenses and~~Income Taxes

~~Operating expenses~~Taxable Income, REIT Status and Dividend Characterization

As a REIT, under the Internal Revenue Code, Redwood is required to distribute to shareholders at least 90% of its annual REIT taxable income, excluding net capital gains, and meet certain other requirements that relate to, among other matters, the assets it holds, the income it generates, and the composition of its stockholders. To the extent Redwood retains REIT taxable income, including net capital gains, it is taxed at corporate tax rates. Redwood also earns taxable income at its taxable REIT subsidiaries (TRS), which it is not required to distribute under the Internal Revenue Code.

In September 2021, our Board of Directors declared a regular dividend of $0.21 per share for ~~this segment primarily include costs associated~~the third quarter of 2021, which was paid on September 30, 2021 to shareholders of record on September 23, 2021. As of September 30, 2021, our year-to-date dividend distributions of $0.55 per share exceeded our minimum distribution requirements and we believe that we have met all requirements for qualification as a REIT for federal income tax purposes. Many requirements for qualification as a REIT are complex and require analysis of particular facts and circumstances. Often there is only limited judicial or administrative interpretive guidance and as such there can be no assurance that the Internal Revenue Service or courts would agree with our various tax positions. If we were to fail to meet all the ~~underwriting, purchase~~requirements for qualification as a REIT and ~~sale of jumbo residential loans. Operating expenses were relatively consistent~~the requirements for ~~both the three- and nine-month periods.~~

~~All residential mortgage banking activities are performed at~~statutory relief, we would be subject to federal corporate income tax on our taxable ~~REIT subsidiary and the provision for income taxes is generally correlated to the amount of this segment's contribution before income taxes in relation to the TRS's overall GAAP~~ income and ~~associated tax provision. The increase in provision~~we would not be able to elect to be taxed as a REIT for income taxes in both the three- and nine-month periods primarily resulted from higher segment contribution before income taxes for both periods in 2017. In addition, during 2016 we reversed our valuation allowancefour years thereafter. Such an outcome could have a material adverse impact on ~~certain deferred tax assets, which further reduced our tax provision in those periods.~~

~~Results of Consolidated Legacy Sequoia Entities~~

We sponsored Sequoia securitization entities prior to 2012 that are reported on our consolidated balance sheets for financial reporting purposes in accordance with GAAP. Each of these entities is independent of Redwood and of each other and the assets and liabilities of these entities are not, respectively, owned by us or legal obligations of ours. We record the assets and liabilities of the consolidated Legacy Sequoia entities at fair value, based on the estimated fair value of the debt securities (ABS) issued from the securitizations, in accordance with GAAP provisions for collateralized financing entities. At September 30, 2017, the estimated fair value of our investments in the consolidated Legacy Sequoia entities was $19 million.

The following tables present the statements of income for the three and nine months ended September 30, 2017, and the balance sheets of the consolidated Legacy Sequoia entities at September 30, 2017 and December 31, 2016. All amounts in the statements of income and balance sheets presented below are included in our consolidated financial statements.

~~Table 29 – Consolidated Legacy Sequoia Entities Statements~~While our minimum REIT dividend requirement is generally 90% of ~~Income~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 Change
2017 2016 Change
Interest income $ 4,875
$ 4,837
$ 38
$ 14,576
$ 14,525
$ 51
Interest expense (3,838 ) (3,274 ) (564 ) (11,046 ) (9,842 ) (1,204 )
Net interest income 1,037
1,563
(526 ) 3,530
4,683
(1,153 )
Investment fair value changes, net (1,045 ) (255 ) (790 ) (3,842 ) (2,086 ) (1,756 )
Net Income from Consolidated Legacy Sequoia Entities $ (8 ) $ 1,308
$ (1,316 ) $ (312 ) $ 2,597
$ (2,909 )

~~Table 30 – Consolidated Legacy Sequoia Entities Balance Sheets~~

(In Thousands) September 30, 2017 December 31, 2016
Residential loans, held-for-investment, at fair value $ 673,134
$ 791,636
Other assets 4,065
6,681
Total Assets $ 677,199
$ 798,317
Other liabilities $ 540
$ 518
Asset-backed securities issued, at fair value 657,960
773,462
Total liabilities 658,500
773,980
Equity (fair value of Redwood's retained investments in entities) 18,699
24,337
Total Liabilities and Equity $ 677,199
$ 798,317

~~Net Interest Income~~our annual REIT taxable income, we carried a $37 million federal net operating loss carry forward (NOL) into 2021 at ~~Consolidated Legacy Sequoia Entities~~

~~The decreases in net interest~~our REIT that affords us the ability to retain REIT taxable income ~~for the three- and nine-month periods were primarily attributable~~up to the ~~continued pay down~~NOL amount, tax free, rather than distributing it as dividends. Federal income tax rules require the dividends paid deduction to be applied to reduce REIT taxable income before the applicability of ~~loans at the consolidated entities.~~

~~Investment Fair Value Changes, net at Consolidated Legacy Sequoia Entities~~

Investment fair value changes, net at consolidated Legacy Sequoia entities includes the change in fair value of the residential loans held-for-investment, REO, and the ABS issued at the entities, which netted together represent the change in valueNOLs is considered; therefore, REIT taxable income must exceed our dividend distribution for us to utilize a portion of our ~~retained investments in the consolidated Legacy Sequoia entities. The negative investment fair value changes in both three-~~NOL and ~~nine-month periods were primarily related to the reduction in basis of retained IO securities as the loans underlying these securities continued to pay down.~~

~~Residential Loans at Consolidated Legacy Sequoia Entities~~

~~The following table provides details of residential loan activity at consolidated Legacy Sequoia entities for the three and nine months ended September 30, 2017 and 2016.~~

~~Table 31 – Residential Loans at Consolidated Legacy Sequoia Entities — Activity~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Balance at beginning of period $ 707,686
$ 880,197
$ 791,636
$ 1,021,870
Principal repayments (37,742 ) (46,810 ) (139,099 ) (147,748 )
Transfers to REO (1,133 ) (2,612 ) (3,177 ) (8,412 )
Deconsolidation adjustments —
—
—
(6,871 )
Changes in fair value, net 4,323
9,201
23,774
(18,863 )
Balance at End of Period $ 673,134
$ 839,976
$ 673,134
$ 839,976

~~Characteristics of Loans at Consolidated Legacy Sequoia Entities~~

~~The following table highlights unpaid principal balances for loans at consolidated Legacy Sequoia entities by product type at September 30, 2017.~~

~~Table 32 – Characteristics of Loans at Consolidated Legacy Sequoia Entities~~

September 30, 2017
(Dollars in Thousands) Principal Balance Weighted Average Coupon
First Lien
Hybrid ⁽¹⁾
$ 15,709
3.29 %
ARM 722,133
2.62 %
Total Outstanding Principal $ 737,842


~~(1)~~	~~All of these loans have reached the initial interest rate reset date and are currently adjustable rate mortgages.~~

First lien adjustable rate mortgage ("ARM") and hybrid loans comprise all of the loans in the consolidated Legacy Sequoia entities and were primarily originated in 2006 or prior. For outstanding loans at consolidated Legacy Sequoia entities at September 30, 2017, the weighted average FICO score of borrowers backing these loans was 728 (at origination) and the weighted average original LTV ratio was 66% (at origination). At September 30, 2017 and December 31, 2016, the unpaid principal balance of loans at consolidated Legacy Sequoia entities delinquent greater than 90 days was $14 million and $19 million, respectively, and the unpaid principal balance of loans in foreclosure was $12 million and $11 million, respectively.

~~Taxable Income and Tax Provision~~

~~Taxable Income~~

The following table summarizes our taxable income and distributions to shareholders for the three and nine months ended September 30, 2017 and 2016. For each of these periods, we had no undistributed REIT taxable income.

~~Table 33 – Taxable Income~~

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands, except per Share Data)
2017 est. ⁽¹⁾
2016
2017 est. ⁽¹⁾
2016
REIT taxable income $ 19,923
$ 26,001
$ 56,042
$ 71,169
Taxable REIT subsidiary income 17,781
10,896
36,528
41,010
Total Taxable Income $ 37,704
$ 36,897
$ 92,570
$ 112,179

REIT taxable income per share $ 0.26
$ 0.34
$ 0.73
$ 0.93
Total taxable income per share $ 0.49
$ 0.48
$ 1.21
$ 1.46

Distributions to shareholders $ 21,593
$ 21,536
$ 64,753
$ 64,759
Distributions to shareholders per share $ 0.28
$ 0.28
$ 0.84
$ 0.84


~~(1)~~	~~Our tax results for the three and nine months ended September 30, 2017 are estimates until we file our tax return for 2017.~~

any remaining NOL amount will carry forward into future years.

We currently expect all or nearly all of ~~the dividends we distribute in 2017 will~~our 2021 dividend distributions to be taxable ~~to shareholders~~ as ordinary income ~~and a smaller portion, if any, will~~for federal income tax purposes. Any remaining amount is currently expected to be characterized as a return of capital, which in general is ~~generally non-taxable. Based on~~nontaxable (provided it does not exceed a shareholder's tax basis in Redwood shares) and reduces a shareholder's basis in Redwood shares (but not below zero). To the extent such distributions exceed a shareholder's basis in Redwood shares, such excess amount would be taxable as capital gain. Under the federal income tax rules ~~related~~applicable to ~~capital loss carryforwards,~~REITs, none of ~~our 2017~~Redwood’s 2021 dividend distributions are currently expected to be characterized as long-term capital ~~gains for federal~~gain dividends. The income or loss generated at our TRS will not directly affect the tax ~~purposes.~~characterization of our 2021 dividends; however, any dividends paid from our TRS to our REIT would allow a portion of our REIT’s dividends to be classified as qualified dividends.

Tax Provision under GAAP

For the three and nine months ended September 30, ~~2017,~~2021, we recorded a tax ~~provisions~~benefit of $5$4 million and ~~$17 million, respectively, compared to~~ a tax provision of $1$14 million, ~~for both~~respectively. For the three and nine months ended September 30, ~~2016.~~2020, we recorded a tax provision of $9 million and a tax benefit of $13 million, respectively. Our tax provision is primarily derived from the activities at our TRS as we do not book a material tax provision associated with income generated at our REIT. ~~The change in~~For the nine-month periods, the switch to a tax provision from a tax benefit year-over-year was primarily the result of ~~us benefiting~~GAAP income being recorded at our TRS during this period in 2021 versus GAAP losses being recorded at our TRS during this period in 2020. For the three-month periods, the switch to a tax benefit from a tax provision year-over-year was due to the ~~reversal~~release of ~~the~~ valuation allowance ~~recorded against~~on a portion of our ~~federal net~~ deferred tax assets, ~~("DTAs")~~partially offset by an increase in ~~2016. As the federal valuation allowance was fully released in 2016,~~state taxes. While our TRS effective tax rate in ~~2017 is expected to be approximately equal to~~the prior year approximated the federal statutory ~~rate. The income or~~corporate tax rate (due to state NOL carryforwards), for 2021 and 2022 we expect it to increase (exclusive of the valuation allowance release) due to California’s temporary suspension of net operating loss ~~generated at our TRS will not affect the tax characterization of our 2017 dividends.~~

carryforwards.

Realization of our ~~DTAs~~deferred tax assets ("DTAs") is dependent on many factors, including generating sufficient taxable income prior to the expiration of NOL carryforwards and generating sufficient capital gains in future periods prior to the expiration of capital loss carryforwards. We determine the extent to which realization of our DTAs is not assured and establish a valuation allowance accordingly. At December 31, ~~2016,~~2020, we reported net federal ordinary and capital DTAs with a full valuation allowance of $17 million recorded against our net federal ordinary DTAs based on our determination that their realization was not assured. However, no valuation allowance was recorded against our net federal capital DTAs as we currently expect to utilize these DTAs due to our ability to recognize capital losses and carry them back to prior years. At December 31, 2020, we reported a valuation allowance of $134 million recorded against our net state DTAs.

For the three months ended September 30, 2021, we reassessed the valuation allowance noting the increase in positive evidence related to our ability to utilize certain deferred tax ~~liabilities ("DTLs"),~~assets. The positive evidence includes significant revenue growth and expectations regarding future profitability at our TRS. After assessing both the positive evidence and negative evidence, we determined it was more likely than not that we will realize all of our federal deferred tax assets. Therefore, we reversed our federal valuation allowance of $17 million as a discrete benefit in the third quarter of 2021. In addition to the federal valuation allowance release, we determined it was more likely than not that we will realize a portion of our state deferred assets and, as such, ~~had no associated valuation allowance. As a result~~reversed $3 million of ~~GAAP income at our TRS, we forecast that we will report net federal ordinary and capital DTLs at December 31, 2017 and consequently no~~state valuation allowance ~~is expected to be recorded against any federal DTA.~~as a discrete item in the third quarter of 2021. Consistent with prior periods, we continued to maintain a valuation allowance against the majority of our net state ~~DTAs. Our estimate~~DTAs as realization of ~~net deferred tax assets could change in future periods to the extent that actual or revised estimates of future~~our state DTAs is dependent on generating sufficient taxable income ~~during the carryforward periods change from current expectations.~~

~~Differences between Estimated Total Taxable Income and GAAP Income~~

Differences between estimated taxable income and GAAP income are largely due to the following: (i) we cannot establish loss reserves for future anticipated events for tax but we can for GAAP, as realized credit losses are expensed when incurred for tax and these losses are anticipated through lower yields on assets or through loss provisions for GAAP; (ii) the timing, and possibly the amount, of some expenses (e.g., certain compensation expenses) are different for tax than for GAAP; (iii) since amortization and impairments differ for tax and GAAP, the tax and GAAP gains and losses on sales may differ, resulting in differences in realized gains on sale; (iv) at the REIT and certain TRS entities, unrealized gains and losses on market valuation adjustments of securities and derivatives are not recognized for tax until the instrument is sold or extinguished; (v) for tax, basis may not be assigned to mortgage servicing rights retained when whole loans are sold resulting in lower tax gain on sale; (vi) for tax, we do not consolidate securitization entities as we do under GAAP; and, (vii) dividend distributions to our REIT from our TRS are included in REIT taxable income, but not GAAP income. As a result of these differences in accounting, our estimated taxable income can vary significantly from our GAAP income during certain reporting periods.

~~The table below reconciles our estimated total taxable income to our GAAP income for the nine months ended September 30, 2017.~~

~~Table 34 – Differences between Estimated Total Taxable Income and GAAP Net Income~~

Nine Months Ended September 30, 2017
(In Thousands, except per Share Data) REIT (Est.) TRS (Est.) Total Tax (Est.) GAAP Differences
Interest income $ 137,254
$ 27,299
$ 164,553
$ 176,589
$ (12,036 )
Interest expense (41,251 ) (21,038 ) (62,289 ) (72,708 ) 10,419
Net interest income 96,003
6,261
102,264
103,881
(1,617 )
Realized credit losses (2,865 ) —
(2,865 ) —
(2,865 )
Mortgage banking activities, net —
41,905
41,905
50,850
(8,945 )
MSR income, net —
5,149
5,149
6,106
(957 )
Investment fair value changes, net (14,476 ) 5,213
(9,263 ) 9,990
(19,253 )
Operating expenses (32,883 ) (22,684 ) (55,567 ) (56,789 ) 1,222
Other income 11,021
779
11,800
3,367
8,433
Realized gains, net (736 ) —
(736 ) 8,809
(9,545 )
Provision for income taxes (22 ) (95 ) (117 ) (16,741 ) 16,624
Net Income $ 56,042
$ 36,528
$ 92,570
$ 109,473
$ (16,903 )

Income per basic common share $ 0.73
$ 0.48
$ 1.21
$ 1.39
$ (0.18 )

~~Potential Taxable Income Volatility~~

~~We expect period-to-period volatility in our estimated taxable income. A description of the factors that can cause this volatility is described~~ in the ~~Taxable Income portion of~~same jurisdictions in which the ~~Results of Operations~~ ~~section in the MD&A included in Part II, Item 7,~~DTAs exist and we project most of our ~~Annual Report on Form 10-K.~~state DTAs will expire prior to their utilization.

LIQUIDITY AND CAPITAL RESOURCES

Summary

~~Our~~In addition to the proceeds from equity and debt capital-raising transactions, our principal sources of cash consist of borrowings under mortgage loan warehouse facilities, securities repurchase agreements, payments of principal and interest we receive from our investment portfolios, proceeds from the sale of portfolio assets, and cash generated from our operating activities. Our most significant uses of cash are to purchase and originate mortgage loans for our mortgage banking operations, to ~~fund investments in residential loans, to~~ purchase investment securities and make other investments, to repay principal and interest on our ~~warehouse facilities, repurchase agreements,~~debt, to meet margin calls associated with our debt and ~~long-term debt,~~other obligations, to make dividend payments on our capital stock, and to fund our operations.

~~Our~~At September 30, 2021, our total capital was ~~$1.78~~$2.03 billion ~~at September 30, 2017,~~ and included ~~$1.21~~$1.38 billion of equity capital and ~~$0.57 billion~~$652 million of ~~the total $2.57 billion of~~convertible notes and long-term debt on our consolidated balance ~~sheet. This portion~~sheet, including $199 million of convertible debt ~~included $201~~due in 2023, $150 million of convertible debt due in 2024, $172 million of exchangeable debt due in ~~2019, $245 million of convertible debt due in 2023,~~2025, and $140 million of trust-preferred securities due in 2037.

As of September 30, ~~2017,~~2021, our unrestricted cash was $557 million, and we estimate ~~that~~we had approximately $350 million of available capital. While we believe our available cash is sufficient to fund our operations, we may raise equity or debt capital from time to time to increase our unrestricted cash and liquidity, to repay existing debt, to make long-term portfolio investments, to fund strategic acquisitions and investments, or for other purposes. To the extent we seek to raise additional capital, our approach will continue to be based on what we believe to be in the best interests of the company.

In the discussion that follows and throughout this document, we distinguish between marginable and non-marginable debt. When we refer to non-marginable debt and marginable debt, we are referring to whether or not such debt is subject to market value-based margin calls on underlying collateral that is non-delinquent. If a mortgage loan is financed under a marginable warehouse facility, to the extent the market value of the loan declines (which market value is generally determined by the counterparty under the facility), we will be subject to a margin call, meaning we will be required to either immediately reacquire the loan or meet a margin requirement to pledge additional collateral, such as cash or additional residential loans, in an amount at least equal to the decline in value. Non-marginable debt may be subject to a margin call due to delinquency of the mortgage or security being financed, or a decline in the value of the underlying asset securing the collateral. For example, we could be subject to a margin call on non-marginable debt if an appraisal or broker price opinion indicates a decline in the value of the property securing the mortgage loan that is financed by us under a loan warehouse facility.

We also distinguish between recourse and non-recourse debt. When we refer to non-recourse debt, we mean debt that is payable solely from the assets pledged to secure such debt, and under which debt no creditor or lender has direct or indirect recourse to us, or any other entity or person (except for customary exceptions for fraud, acts of insolvency, or other "bad acts"), if such assets are inadequate or unavailable to pay off such debt.

We are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential loan warehouse facilities, securities repurchase facilities, and other short- and long-term debt facilities and other risks relating to our use of derivatives. A further discussion of these risks is set forth below under the heading “Risks Relating to Debt Incurred under Short-and Long-Term Borrowing Facilities."

Cash Flows and Liquidity for the Nine Months Ended September 30, 2021

Cash flows from our mortgage banking activities and our investments can be volatile from quarter to quarter depending on many factors, including the profitability of mortgage banking activities, the timing and amount of securities acquisitions, sales and repayments, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these investments or activities.

Cash Flows from Operating Activities

Cash flows from operating activities were negative $3.78 billion during the nine months ended September 30, 2021. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans and the origination and sale of our business purpose loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term and long-term debt, for which changes in cash are included as a component of financing activities. Excluding cash flows from the purchase, origination, sale, and principal payments of loans classified as held-for-sale, cash flows from operating activities were positive $84 million and positive $94 million during the first nine months of 2021 and 2020, respectively.

100

Cash Flows from Investing Activities

During the nine months ended September 30, 2021, our net cash provided by investing activities was ~~approximately $330 million.~~$1.36 billion and primarily resulted from proceeds from principal payments on loans held-for-investment. Although we ~~continue~~generally intend to ~~evaluate~~hold our ~~options with regard~~loans and investment securities as long-term investments, we may sell certain of these assets in order to manage our ~~upcoming $250 million convertible debt maturity, at current~~liquidity needs and interest rate risk, to meet other operating objectives, and to adapt to market prices the excess cost to retire this debt prior to maturity is unattractive relative to alternative short-term uses of cash. In addition, we believe we can source incremental capital on an as-needed basis for redeployment through continued optimizationconditions.

Because many of our investment ~~portfolio.~~securities and loans are financed through various borrowing agreements, a significant portion of the proceeds from any sales or principal payments of these assets are generally used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans at consolidated securitization entities would generally be used to repay ABS issued by those entities.

As presented in the "Supplemental Noncash Information" subsection of our consolidated statements of cash flows, during the nine months ended September 30, 2021, we transferred loans between held-for-sale and held-for-investment classification and retained securities from securitizations we sponsored, which represent significant non-cash transactions that were not included in cash flows from investing activities.

Cash Flows from Financing Activities

During the nine months ended September 30, 2021, our net cash provided by financing activities was $2.52 billion. This primarily resulted from $1.40 billion of proceeds from net short-term debt borrowings used to finance higher levels of loan inventory for our mortgage banking businesses, particularly for residential loans held-for-sale, as that business has seen a sustained increase in acquisition volumes. Additionally, $1.27 billion of net proceeds were generated from ABS issued. These cash inflows were partially offset by $107 million of net repayments of long-term debt.

During the nine months ended September 30, 2021, we declared dividends of $0.55 per common share. On September 13, 2021, the Board of Directors declared a regular dividend of $0.21 per share for the third quarter of 2021, which was paid on September 30, 2021 to shareholders of record on September 23, 2021.

In accordance with the terms of our outstanding deferred stock units, cash-settled deferred stock units, and restricted stock units, which are generally long-term compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent cash payment in that same per share amount on each outstanding deferred stock unit, cash-settled deferred stock unit, and restricted stock unit.

Repurchase Authorization

In February ~~2016,~~2018, our Board of Directors approved an authorization for the repurchase of upour common stock, increasing the total amount authorized for repurchases of common stock to $100 million, ~~of our common stock~~ and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization ~~replaced all~~increased the previous share repurchase ~~plans~~authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, ~~2017, there were no shares acquired under this authorization.~~2021, we did not repurchase any shares. At September 30, ~~2017, approximately $86~~2021, $78 million of ~~this~~the current authorization remained available for the ~~repurchases~~repurchase of shares of our common ~~stock.~~stock and we also continued to be authorized to repurchase outstanding debt securities. Like other investments we may make, any repurchases of our common stock or debt securities under this authorization would reduce our available capital and unrestricted cash described above.

While we believe our available capital is sufficient to fund our currently contemplated investment activities, we may raise capital from time-to-time to make long-term investments or for other purposes. To the extent we seek additional capital to fund our operations and investment activities or repay existing debt, our approach to raising capital will continue to be based on what we believe to be in the best long-term interests of shareholders.Loan Warehouse Facilities

We ~~are subject to risks relating to our liquidity and capital resources, including risks relating to incurring debt under residential and commercial~~maintain loan warehouse facilities ~~securities repurchase~~to finance our residential jumbo loan inventory, SFR loan inventory and for our bridge loan investments. These facilities can be classified as short-term or long-term depending on their specific terms and ~~other short-~~provisions. At September 30, 2021, we had residential warehouse facilities outstanding with seven different counterparties, with $2.70 billion of total capacity and ~~long-term debt~~$1.36 billion of available capacity. These included non-marginable facilities with $1.18 billion of total capacity and ~~other risks relating to our use~~marginable facilities with $1.53 billion of ~~derivatives. A further discussion~~total capacity. At September 30, 2021, we had business purpose warehouse facilities outstanding with four different counterparties, with $1.30 billion of total capacity and $663 million of available capacity. All $1.30 billion of these ~~risks is set forth below under the heading “Risks Relating to Debt Incurred under Short-and Long-Term Borrowing Facilities.~~"facilities are non-marginable.

~~Cash Flows and Liquidity for the Nine Months Ended September 30, 2017~~

Cash flows from our mortgage banking activities and our investments can be volatile from quarter to quarter depending on many factors, including the timing and amount of loan and securities acquisitions and sales and repayments, the profitability of mortgage banking activities, as well as changes in interest rates, prepayments, and credit losses. Therefore, cash flows generated in the current period are not necessarily reflective of the long-term cash flows we will receive from these investments or activities.

101

~~Cash Flows from Operating Activities~~

Cash flows from operating activities were negative $629 million during the nine months ended September 30, 2017. This amount includes the net cash utilized during the period from the purchase and sale of residential mortgage loans associated with our mortgage banking activities. Purchases of loans are financed to a large extent with short-term debt, for which changes in cash are included as a component of financing activities. Excluding cash flows from the purchase, sale, and principal payments of loans classified as held-for-sale, cash flows from operating activities were positive $13 million and positive $75 million during the first nine months of 2017 and 2016, respectively. Contributing to the negative cash flows from operating activities during the first nine months of 2017 were $38 million of net cash outflows associated with margin funding requirements for our derivatives and short-term debt, which are presented as Other assets on our consolidated balance sheets.

~~Cash Flows from Investing Activities~~

During the nine months ended September 30, 2017, our net cash provided by investing activities was $205 million and primarily resulted from principal payments on loans held-for-investment at Redwood and at our consolidated Sequoia entities, proceeds from sales of MSRs, and principal payments from, and proceeds from net sales of, real estate securities. Although we generally intend to hold our investment securities as long-term investments, we may sell certain of these securities in order to manage our interest rate risk and liquidity needs, to meet other operating objectives, and to adapt to market conditions. We cannot predict the timing and impact of future sales of investment securities, if any.

Because many of our investment securities are financed through repurchase agreements, a significant portion of the proceeds from any sales or principal payments of our investment securities would generally be used to repay balances under these financing sources. Similarly, all or a significant portion of cash flows from principal payments of loans at consolidated Sequoia entities (as detailed in the subsection titled "~~Residential Loans at Consolidated Sequoia Entities"~~ ~~in the~~ ~~Results of Operations~~ ~~section of this MD&A) would generally be used to repay ABS issued by those entities.~~

In addition, during the nine months ended September 30, 2017, we had transfers of residential loans with a carrying value of $644 million from held-for-sale to held-for-investment, and we retained MSRs with a carrying value of $7 million from the sale of residential loans. These non-cash transactions were not included in cash flows from investing activities.

~~Cash Flows from Financing Activities~~

During the nine months ended September 30, 2017, our net cash provided by financing activities was $468 million. This primarily resulted from the issuance of asset-backed securities from our Sequoia Choice securitization in the third quarter of 2017, the issuance of convertible debt in August 2017, and $159 million of net borrowings of short-term debt, which were partially offset by $146 million of repayments of ABS issued.

In December 2016, our Board of Directors announced its intention to pay a regular dividend of $0.28 per share per quarter in 2017. During the nine months ended September 30, 2017, we paid $66 million of cash dividends on our common stock, representing cumulative dividends of $0.84 per share. Additionally, in November 2017, the Board of Directors declared a regular dividend of $0.28 per share for the fourth quarter of 2017, which is payable on December 28, 2017 to shareholders of record on December 15, 2017.

In accordance with the terms of our outstanding deferred stock units, which are stock-based compensation awards, each time we declare and pay a dividend on our common stock, we are required to make a dividend equivalent payment in that same per share amount on each outstanding deferred stock unit.

Short-Term Debt

In the ordinary course of our business, we ~~use recourse debt through~~utilize several different types of borrowing facilities and use cash borrowings under these facilities to, among other things, fund the acquisition of ~~residential~~ loans (including those we acquire and originate in anticipation of securitization), finance investments in securities, BPL bridge loans and other investments, and otherwise fund our business and operations.

At September 30, ~~2017,~~2021, we had four short-term residential loan warehouse facilities with a total outstanding debt balance of $438 million (secured by residential loans with an aggregate fair value of $493 million) and a total uncommitted borrowing limit of $1.33 billion. In addition, at September 30, 2017, we had an aggregate outstanding short-term debt balance of $550 million under eight securities repurchase facilities, which were secured by securities with a fair market value of $663 million. We also had a secured line of credit with no outstanding debt balance and a total borrowing limit of $10 million (secured by securities with a fair market value of $6 million) at September 30, 2017.

During the three months ended June 30, 2017, $288 million principal amount of our convertible notes due in 2018 and $2 million of associated unamortized deferred issuance costs were reclassified from long-term debt to short-term debt, as the maturity of the notes was less than one year as of April 2017. Additionally, during the three months ended June 30, 2017, we repurchased $37 million par value of these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $250 million.

~~At September 30, 2017, we had $1.24~~$1.75 billion of short-term debt outstanding. During the first nine months of ~~2017,~~2021, the highest balance of our short-term debt outstanding was ~~$1.60~~$2.66 billion.

For further detail on our short-term debt, see Note 13 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Long-Term Debt

~~FHLBC Borrowings~~The following discusses significant activity related to our long-term debt during the first nine months of 2021. For further detail on our long-term debt, see Note 15 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Recourse Subordinate Securities Financing

In ~~July 2014, our FHLB-member~~the third quarter of 2021, a subsidiary of Redwood entered into a ~~borrowing~~repurchase agreement providing non-marginable recourse debt financing of certain securities retained from our consolidated CAFL securitizations. The financing is guaranteed by Redwood, with the Federal Home Loan Bank of Chicago. At September 30, 2017, under this agreement, our subsidiary could incur borrowings up to $2.00 billion, also referred to as “advances,” from the FHLBC secured by eligible collateral, including, but not limited to residential mortgage loans. During the nine months ended September 30, 2017, our FHLB-member subsidiary made no additional borrowings under this agreement. Under a final rule published by the Federal Housing Finance Agency in January 2016, our FHLB-member subsidiary will remain an FHLB member through a five-year transition period for captive insurance companies. Our FHLB-member subsidiary's existing $2.00 billion of FHLB debt, which matures beyond this transition period, is permitted to remain outstanding until stated maturity. As residential loans pledged as collateral for this debt pay down, we are permitted to pledge additional loans or other eligible assets to collateralize this debt; however, we do not expect to be able to increase our subsidiary's FHLB debt above the existing $2.00 billion maximum.

~~At September 30, 2017, $2.00 billion of advances were outstanding under this agreement, which were classified as long-term debt, with a weighted average~~ interest rate of ~~1.26% per annum~~approximately 4.75% through June 2024. The financing facility may be terminated, at our option, in June 2023, and has a ~~weighted average~~final maturity ~~of eight years. At September 30, 2017, accrued~~in June 2026, provided that the interest ~~payable~~rate on ~~these borrowings was $4 million. Advances~~amounts outstanding under ~~this agreement are charged interest based on a specified margin over~~ the FHLBC’s 13-week discount note rate, which resets every 13 weeks. Our total advances under this agreement were secured by residential mortgage loans with a fair value of $2.26 billion at September 30, 2017. In addition, cash of $24 million served as collateral for these borrowings at September 30, 2017,facility increases between June 2024 and is presented as restricted cash on our consolidated balance sheet. This agreement also requires our subsidiary to purchase and hold stock in the FHLBC in an amount equal to a specified percentage of outstanding advances. At September 30, 2017, our subsidiary held $43 million of FHLBC stock that is included in Other assets on our consolidated balance sheets.June 2026.

~~Convertible Notes~~Non-Recourse BPL Financing Facilities

In ~~August 2017,~~the third quarter of 2021, we issued $245 million principal amount of 4.75% convertible senior notes due 2023. After deducting the underwriting discount and issuance costs, we received approximately $238 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 5.3% per annum. At September 30, 2017, the outstanding principal amount of these notes was $245 million. At September 30, 2017, the accrued interest payable balance on this debt was $1 million.

~~In November 2014,~~reclassified one of our taxable subsidiaries issued $205 million principal amount of 5.625% exchangeable senior notes due 2019. After deducting the underwriting discount and issuance costs, we received approximately $198 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these exchangeable notes is approximately 6.3% per annum. During the nine months ended September 30, 2016, we repurchased $4 million par value of these notes at a discount and recorded a gain on extinguishment of debt of $0.3 million in Realized gains, net on our consolidated statements of income. At September 30, 2017, the outstanding principal amount of these notes was $201 million. At September 30, 2017, the accrued interest payable balance on this debt was $4 million.

In March 2013, we issued $288 million principal amount of 4.625% convertible senior notes due 2018. After deducting the underwriting discount and issuance costs, we received approximately $279 million of net proceeds. Including amortization of deferred securities issuance costs, the weighted average interest expense yield on these convertible notes is approximately 4.8% per annum. During the three months ended June 30, 2017, $288 million principal amount of these convertible notes and $2 million of unamortized deferred issuance costs were reclassifiednon-recourse facilities from long-term ~~debt~~ to short-term debt as the maturity of ~~the notes~~this facility was less than one year at September 30, 2021.

Recourse BPL Financing Facilities

In the second quarter of 2021, we reclassified one of our recourse facilities with a borrowing capacity of $450 million from short-term to long-term debt as we amended the terms of ~~April 2017.~~this facility, including an extension of its maturity.

Asset-Backed Securities Issued

During the three and nine months ended September 30, 2021, we issued $1.19 billion and $2.82 billion of ABS through our consolidated securitization entities, respectively. This included $583 million and $1.01 billion of CAFL ABS issued during the three and nine months ended September 30, 2021, respectively, and $462 million and $1.66 billion of Sequoia ABS issued during the three and nine months ended September 30, 2021, respectively. Additionally, during the three months ended ~~June~~September 30, ~~2017,~~2021, we ~~repurchased $37~~issued $146 million ~~par value~~ of ~~these notes at a premium and recorded a loss on extinguishment of debt of $1 million in Realized gains, net~~Point ABS. For further detail on our ~~consolidated statements~~Asset-backed Securities Issued, see Note 14 of ~~income. At September 30, 2017, the outstanding principal amount of these notes was $250 million. At September 30, 2017, the accrued interest payable balance on this debt was $5 million.~~

~~Trust Preferred Securities and Subordinated~~ our Notes

~~At September 30, 2017, we had trust preferred securities and subordinated notes outstanding of $100 million and $40 million, respectively, issued by us~~ to Consolidated Financial Statements in 2006 and 2007. This debt requires quarterly interest payments at a floating rate equal to three-month LIBOR plus 2.25% and must be redeemed no later than 2037. Prior to 2014, we entered into interest rate swaps with aggregate notional values totaling $140 million to hedge the variability in this long-term debt interest expense. Including hedging costs and amortization of deferred securities issuance costs, the weighted average interest expense yield on our trust preferred securities and subordinated notes is approximately 6.8% per annum. These swaps are accounted for as cash flow hedges with all interest recorded as a component of net interest income and other valuation changes recorded as a component of equity.

~~Asset-Backed Securities~~

At September 30, 2017, there were $738 million (principal balance) of loans owned at consolidated Legacy Sequoia securitization entities, which were funded with $730 million (principal balance) of ABS issued at these entities. In addition, at September 30, 2017, there were $308 million (principal balance) of loans owned at the consolidated Sequoia Choice securitization entity, which was funded with $277 million (principal balance) of ABS issued at this entity. The loans and ABS issued from these entities are reported at estimated fair value. See the subsections titled "~~Residential Loans at Sequoia Choice"~~ ~~and "Results of Consolidated Legacy Sequoia Entities~~"~~in the~~ ~~Results of Operations~~ ~~section~~Part I, Item 1 of this ~~MD&A~~Quarterly Report on Form 10-Q.

Other Commitments and Contingencies

For additional information on commitments and contingencies that could impact our liquidity and capital resources, see Note 16 of our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which supplements the disclosures included in Note 16 to the Financial Statements included in our Annual Report on Form 10-K for ~~additional details on these entities.~~the year ended December 31, 2020.

102

Risks Relating to Debt Incurred ~~under~~Under Short- and Long-Term Borrowing Facilities

As described above under the heading “Results of Operations,” in the ordinary course of our business, we use debt financing obtained through several different types of borrowing facilities to, among other things, finance the acquisition and origination of residential and business purpose mortgage loans (including those we acquire and originate in anticipation of sale or securitization), and finance investments in securities and other investments. We may also use short- and long-term borrowings to fund other aspects of our business and operations, including the repurchase of shares of our common stock. ~~Debt~~Recourse debt incurred under these facilities is generally either the direct obligation of Redwood Trust, Inc., or the direct obligation of subsidiaries of Redwood Trust, Inc. and guaranteed by Redwood Trust, Inc. Risks relating to debt incurred under these facilities are described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2020, under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing ~~Facilities.~~Facilities,” and under the caption “Our use of financial leverage exposes us to increased risks, including liquidity risks from margin calls and potential breaches of the financial covenants under our borrowing facilities, which could result in our being required to immediately repay all outstanding amounts borrowed under these facilities and these facilities being unavailable to use for future financing needs, as well as triggering cross-defaults under other debt agreements” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020. Many of the risks described above materialized during the first quarter of 2020 as a result of pandemic- and liquidity-related disruptions and their impacts on the economy and financial markets, as described under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” within our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Our sources of debt financing include ~~short-term~~ secured borrowings under residential and business purpose mortgage loan warehouse facilities (including recourse and non-recourse warehouse facilities), short-term securities repurchase facilities, a $10 million committed line of short-term secured credit from a bank, short-term servicer advance financing, a secured, revolving debt facility collateralized by mortgage servicing rights, and ~~secured borrowings by our wholly-owned subsidiary, RWT Financial, LLC, under its borrowing facility with the FHLBC.~~subordinate securities financing facilities.

Aggregate borrowing limits are stated under certain of these facilities, and certain other facilities have no stated borrowing limit, but ~~each~~many of the facilities ~~(with the exception of the $10 million committed line of short-term secured credit) is~~are uncommitted, which means that any request we make to borrow funds under these uncommitted facilities may be declined for any reason, even if at the time of the borrowing request we have then-outstanding borrowings that are less than the borrowing limits under these facilities. In general, financing under these facilities is obtained by transferring or pledging mortgage loans or securities to the counterparty in exchange for cash proceeds (in an amount less than 100% of the principal amount of the transferred or pledged assets). ~~While~~

Under many of our mortgage loan warehouse facilities, our short-term securities repurchase facilities, and our secured, revolving debt facility collateralized by mortgage service rights, while transferred or pledged assets are financed under athe facility, to the extent the ~~market~~ value of the assets, or the collateral underlying those assets, declines, we are generally required to either immediately reacquire the assets or meet a margin requirement to transfer or pledge additional assets or cash in an amount at least equal to the decline in value. During the second quarter of 2020, we amended several of our mortgage loan warehouse facilities to revise these margin call provisions to remove obligations to make margin calls for changes in the market value of transferred or pledged assets, which determinations of market value were generally within the sole discretion of the lending counterparty. Under these revised agreements, if the estimated value of a property securing a financed mortgage loan declines, based on, for example, an appraisal or broker-price opinion, then the creditor may demand that we transfer additional collateral to the creditor (in the form of cash, U.S. Treasury obligations (in certain cases), or additional residential mortgage loans) with a value equal to the amount of the decline. Of our active financing arrangements with outstanding balances at September 30, 2021, only our short-term securities repurchase facilities (with $80 million of borrowings outstanding at September 30, 2021), and four of our residential mortgage loan warehouse facilities (with $618 million of borrowings outstanding at September 30, 2021) retain market-value based margin call provisions.

Margin call provisions under these facilities are further described in Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Margin Call Provisions Associated with Short-Term Debt and Other Debt Financing.” Financial covenants included in these facilities are further described Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities - Financial Covenants Associated with Short-Term Debt and Other Debt Financing.” ~~Financial covenants included in~~

103

Because many of these ~~facilities are further described Part I, Item 2 of our Annual Report on Form 10-K for the year ended December 31, 2016 under the caption “Risks Relating to Debt Incurred under Short- and Long-Term Borrowing Facilities~~ - ~~Financial Covenants Associated with Short-Term Debt and Other Debt Financing~~.”

~~Because these warehouse~~borrowing facilities are uncommitted, at any given time we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 under the heading “Market Risks.” In addition, with respect to ~~residential~~mortgage loans that at any given time are already being financed through these warehouse facilities, we are exposed to market, credit, liquidity, and other risks of the types described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 under the heading “Risk Factors,” and in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020 under the heading “Market Risks,” if and when those loans or securities become ineligible to be financed, decline in value, or have been financed for the maximum term permitted under the applicable facility. ~~Additionally, our access to financing under the borrowing facility with the FHLBC is subject to the risks described under the heading~~ “Risk Factors - Recently adopted Federal regulations may limit, eliminate, or reduce the attractiveness of our subsidiary’s ability to use borrowings from the Federal Home Loan Bank of Chicago to finance the mortgage loans and securities it holds and acquires, which could negatively impact our business and operating results” ~~in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.~~

At September 30, ~~2017,~~2021, and through the date of this Quarterly Report on Form 10-Q, we were in compliance with the financial covenants associated with our short-term debt and other debt financing facilities. In particular, with respect to: (i) financial covenants that require us to maintain a minimum dollar amount of stockholders’ equity or tangible net worth at Redwood, at September 30, ~~2017~~2021 our level of stockholders’ equity and tangible net worth resulted in our being in compliance with these covenants by more than $200 million; and (ii) financial covenants that require us to maintain recourse indebtedness below a specified ratio at Redwood, at September 30, ~~2017~~2021 our level of recourse indebtedness resulted in our being in compliance with these covenants at a level such that we could incur at least $600 million in additional recourse indebtedness.

~~OFF BALANCE~~

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OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

~~Off Balance Sheet Arrangements~~

~~We do not have any material off~~In the normal course of business, we enter into transactions that may require future cash payments. As required by GAAP, some of these obligations are recorded on the balance sheet, ~~arrangements.~~while others are off-balance sheet or recorded on the balance sheet in amounts different from the full contract or notional amount of the transaction.

~~Contractual Obligations~~

~~The following table presents~~For additional information on our contractual obligations, see the Off-Balance Sheet Arrangements and Contractual Obligations section in the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

For additional information on our commitments atand contingencies as of September 30, ~~2017, as well as the obligations~~ 2021, see Note 16 of ~~the securitization entities that we consolidate for financial reporting purposes.~~our Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

~~Table 35 – Contractual Obligations and Commitments~~

September 30, 2017 Payments Due or Commitment Expiration by Period
(In Millions)
Less Than
1 Year

1 to 3
Years

3 to 5
Years

After 5
Years
Total
Obligations of Redwood
Short-term debt $ 988
$ —
$ —
$ —
$ 988
Convertible notes 250
201
—
245
696
Anticipated interest payments on convertible notes 35
40
23
12
110
FHLBC borrowings —
—
—
2,000
2,000
Anticipated interest payments on FHLBC borrowings 36
88
98
154
376
Other long-term debt —
—
—
140
140
Anticipated interest payments on other long-term debt ⁽¹⁾
9
19
19
136
183
Accrued interest payable 17
—
—
—
17
Operating leases 2
4
3
9
18
Total Redwood Obligations and Commitments $ 1,337
$ 352
$ 143
$ 2,696
$ 4,528
Obligations of Consolidated Entities for Financial Reporting Purposes
Consolidated ABS ⁽²⁾
$ —
$ —
$ —
$ 1,007
$ 1,007
Anticipated interest payments on ABS⁽³⁾
28
57
55
249
389
Accrued interest payable 2
—
—
—
2
Total Obligations of Entities Consolidated for Financial Reporting Purposes 30
57
55
1,256
1,398
Total Consolidated Obligations and Commitments $ 1,367
$ 409
$ 198
$ 3,952
$ 5,926


~~(1)~~	~~Includes anticipated interest payments related to hedges.~~


~~(2)~~	All consolidated ABS issued are collateralized by real estate loans. Although the stated maturity is as shown, the ABS obligations will pay down as the principal balances of these real estate loans or securities pay down. The amount shown is the principal balance of the ABS issued and not necessarily the value reported in our consolidated financial statements.


~~(3)~~	The anticipated interest payments on consolidated ABS issued is calculated based on the contractual maturity of the ABS and therefore assumes no prepayments of the principal outstanding at September 30, 2017.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A discussion of critical accounting policies ~~and the possible effects of changes in estimates on our consolidated financial statements~~ is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q and in Part I, Item 8 of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020. Management discusses the ongoing development and selection of these critical accounting policies with the audit committee of the board of directors.

We expect quarter-to-quarter GAAP earnings volatility from our business activities. This volatility can occur for a variety of reasons, including the timing and amount of purchases, sales, calls, and repayment of consolidated assets, changes in the fair values of consolidated assets and liabilities, increases or decreases in earnings from mortgage banking activities, and certain non-recurring events. In addition, the amount or timing of our reported earnings may be impacted by technical accounting issues and estimates. Our critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements are included in the"Critical Accounting Policies and Estimates" section of Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020.

In addition to the regular volatility we may experience on a quarterly basis, the ongoing impact of the pandemic on the United States economy, homeowners, renters of housing, the housing market, the mortgage finance markets and the broader financial markets, has caused additional volatility impacting many of our estimates. It is difficult to fully assess the impact of the pandemic at this time, including because of the uncertainty around the severity and duration of the pandemic domestically and internationally, as well as the uncertainty around the efficacy of Federal, State and local governments’ efforts to contain the spread of the pandemic and respond to its direct and indirect impacts on many aspects of Americans’ lives and economic activity. Continued volatility resulting from the pandemic could impact our critical estimates and lead to significant period-to-period earnings volatility.

Market Risks

We seek to manage risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, and fair value risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. Information concerning the risks we are managing, how these risks are changing over time, and potential GAAP earnings and taxable income volatility we may experience as a result of these risks is discussed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2020.

Other Risks

In addition to the market and other risks described above, our business and results of operations are subject to a variety of types of risks and uncertainties, including, among other things, those described under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, and in this Quarterly Report on Form 10-Q.~~2020.

NEW ACCOUNTING STANDARDS

A discussion of new accounting standards and the possible effects of these standards on our consolidated financial statements is included in Note 3 — Summary of Significant Accounting Policies included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

105

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information concerning market risk is incorporated herein by reference to Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016,~~2020, as supplemented by the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”and “Market Risks” within Item 2 above. Other than the developments described thereunder, including changes in the fair values of our assets, there have been no other material changes in our quantitative or qualitative exposure to market risk since December 31, ~~2016.~~2020.

Item 4. Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed on our reports under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that the information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level.

There have been no changes in our internal control over financial reporting during the third quarter of ~~2017~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

106

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~On or about December 23, 2009,~~For information on our legal proceedings, see Note 16 to the ~~Federal Home Loan Bank of Seattle (the “FHLB-Seattle”) filed a complaint~~Financial Statements within this Quarterly Report on Form 10-Q under the heading "Loss Contingencies - Litigation, Claims and Demands," which supplements the disclosures included in Note 16 to the ~~Superior Court~~Financial Statements included in our Annual Report on Form 10-K for the State of Washington (case number 09-2-46348-4 SEA) against Redwood Trust, Inc., our subsidiary, Sequoia Residential Funding, Inc. (“SRF”), Morgan Stanley & Co., and Morgan Stanley Capital I, Inc. (collectively, the “FHLB-Seattle Defendants”) alleging that the FHLB-Seattle Defendants made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Seattle Certificate”) issued in the Sequoia Mortgage Trust 2005-4 securitization transaction (the “2005-4 RMBS”) and purchased by the FHLB-Seattle. Specifically, the complaint alleged that the alleged misstatements concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Seattle Certificate. The FHLB-Seattle alleges claimsyear ended December 31, 2020 under the ~~Securities Act of Washington (Section 21.20.005, et seq.)~~heading “Loss Contingencies - Litigation, Claims and sought to rescind the purchase of the Seattle Certificate and to collect interest on the original purchase price at the statutory interest rate of 8% per annum from the date of original purchase (net of interest received) as well as attorneys’ fees and costs. The Seattle Certificate was issued with an original principal amount of approximately $133 million, and, at September 30, 2017, the FHLB-Seattle has received approximately $125 million of principal and $11 million of interest payments in respect of the Seattle Certificate. As of September 30, 2017, the Seattle Certificate had a remaining outstanding principal amount of approximately $8 million. The matter was subsequently resolved and the claims were dismissed by the FHLB Seattle as to all the FHLB Seattle Defendants. At the time the Seattle Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, we could incur a loss as a result of these indemnities.Demands.”

On or about July 15, 2010, The Charles Schwab Corporation (“Schwab”) filed a complaint in the Superior Court for the State of California in San Francisco (case number CGC-10-501610) against SRF and 26 other defendants (collectively, the “Schwab Defendants”) alleging that the Schwab Defendants made false or misleading statements in offering materials for various residential mortgage-backed securities sold or issued by the Schwab Defendants. Schwab alleged only a claim for negligent misrepresentation under California state law against SRF and sought unspecified damages and attorneys’ fees and costs from SRF. Schwab claimed that SRF made false or misleading statements in offering materials for a mortgage pass-through certificate (the “Schwab Certificate”) issued in the 2005-4 RMBS and purchased by Schwab. Specifically, the complaint alleged that the misstatements for the 2005-4 RMBS concerned the (1) loan-to-value ratio of mortgage loans and the appraisals of the properties that secured loans supporting the 2005-4 RMBS, (2) occupancy status of the properties, (3) standards used to underwrite the loans, and (4) ratings assigned to the Schwab Certificate. The Schwab Certificate was issued with an original principal amount of approximately $15 million, and, at September 30, 2017, approximately $14 million of principal and $1 million of interest payments have been made in respect of the Schwab Certificate. As of September 30, 2017, the Schwab Certificate had a remaining outstanding principal amount of approximately $1 million. On November 14, 2014, Schwab voluntarily dismissed with prejudice its negligent misrepresentation claim, which resulted in the dismissal with prejudice of SRF from the action. Subsequently, the matter was resolved and Schwab dismissed its claims against the lead underwriter of the 2005-4 RMBS. At the time the Schwab Certificate was issued, Redwood agreed to indemnify the underwriters of the 2005-4 RMBS, which underwriters were also named as defendants in the action, for certain losses and expenses they might incur as a result of claims made against them relating to this RMBS, including, without limitation, certain legal expenses. Regardless of the resolution of this litigation, Redwood could incur a loss as a result of these indemnities.

In accordance with GAAP, we review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in a liability and the amount of loss, if any, can be reasonably estimated. Additionally, we record receivables for insurance recoveries relating to litigation-related losses and expenses if and when such amounts are covered by insurance and recovery of such losses or expenses are due. At September 30, 2017, the aggregate amount of loss contingency reserves established in respect of the FHLB-Seattle and Schwab litigation matters described above was $2 million. We review our litigation matters each quarter to assess these loss contingency reserves and make adjustments in these reserves, upwards or downwards, as appropriate, in accordance with GAAP based on our review.

Future developments (including resolution of substantive pre-trial motions relating to these matters, receipt of additional information and documents relating to these matters (such as through pre-trial discovery), new or additional settlement communications with plaintiffs relating to these matters, or resolutions of similar claims against other defendants in these matters) could result in our concluding in the future to establish additional loss contingency reserves or to disclose an estimate of reasonably possible losses in excess of our established reserves with respect to these matters. Our actual losses with respect to the above-referenced litigation matters may be materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters, including in the event that any of these matters proceeds to trial and the plaintiff prevails. Other factors that could result in our concluding to establish additional loss contingency reserves or estimate additional reasonably possible losses, or could result in our actual losses with respect to the above-referenced litigation matters being materially higher than the aggregate amount of loss contingency reserves we have established in respect of these litigation matters include that: there are significant factual and legal issues to be resolved; information obtained or rulings made during the lawsuits could affect the methodology for calculation of the available remedies; and we may have additional obligations pursuant to indemnity agreements, representations and warranties, and other contractual provisions with other parties relating to these litigation matters that could increase our potential losses.

Item 1A. Risk Factors

Our risk factors are discussed under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016 and under Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. In addition, the following risk factor reflects recent developments.~~2020.

~~Risks Related to the Potential Elimination or Reduction of the Mortgage-Interest Tax Deduction~~

Proposed federal tax legislation that was released on November 2, 2017 by the Chair of the Ways and Means Committee of the U.S. House of Representatives would limit the personal income tax deduction of mortgage interest on newly originated residential mortgages in several ways. It is unclear whether this proposed tax reform proposal will be enacted into law as proposed, modified, or abandoned. Elimination of, or restrictions on, the mortgage-interest tax deduction could negatively affect the U.S. housing market, the market value of residential mortgage loans and residential mortgage-backed securities, and the volume of future originations of residential mortgage loans, particularly jumbo mortgage loans, all of which could negatively impact our business or financial results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, ~~2017,~~2021, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

In February ~~2016,~~2018, our Board of Directors approved an authorization for the repurchase of upour common stock, increasing the total amount authorized for repurchases of common stock to $100 million, ~~of our common stock~~ and also authorized the repurchase of outstanding debt securities, including convertible and exchangeable debt. This authorization ~~replaced all~~increased the previous share repurchase ~~plans~~authorization approved in February 2016 and has no expiration date. This repurchase authorization does not obligate us to acquire any specific number of shares or securities. Under this authorization, shares or securities may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three ~~and nine~~ months ended September 30, ~~2017, there were no shares acquired under this authorization.~~2021, we did not repurchase any shares. At September 30, ~~2017, approximately $86~~2021, $78 million of this current authorization remained available for the repurchase of shares of our common ~~stock.~~stock and we also continued to be authorized to repurchase outstanding debt securities.

The following table contains information on the shares of our common stock that we purchased or otherwise acquired during the three months ended September 30, ~~2017.~~2021.

Total Number of Shares Purchased or Acquired
Average
Price per
Share Paid
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the Plans or Programs
(In Thousands, except per Share Data)
July 1, 2017 - July 31, 2017 —
⁽¹
⁾
$ 17.04
—
$ —
August 1, 2017 - August 31, 2017 —
$ —
—
$ —
September 1, 2017 - September 30, 2017 —
$ —
—
$ 86,109
Total —
$ 17.04
—
$ 86,109


~~(1)~~	~~Represents fewer than 1,000 shares reacquired to satisfy tax withholding requirements related to~~	Total Number of Shares Purchased or Acquired	Average Price per Share Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or approximate dollar value) of Shares that May Yet be Purchased under the ~~vesting of restricted shares.~~Plans or Programs
(In Thousands, except per Share Data)
July 1, 2021 - July 31, 2021		—	$	—	—	$	—
August 1, 2021 - August 31, 2021		—	$	—	—	$	—
September 1, 2021 - September 30, 2021		—	$	—	—	$	78,369
Total		—	$	—	—	$	78,369

Item 3. Defaults Upon Senior Securities

None.

Item 4. Not Applicable

107

Item 5. Other Information

~~None.~~Effective November 3, 2021, our Board of Directors adopted Amended and Restated Bylaws of the Company in order to, among other things:

•Reflect changes to the Maryland General Corporation Law or Maryland law practice;

•Clarify timing of delivery with respect to electronically delivered notices of annual meetings of stockholders;

•Clarify that it is permitted for the Board to hold, or allow stockholder participation at, meetings of stockholders by remote communications technology to the extent permitted under Maryland law;

•Clarify that a stockholder be a stockholder of record, as of the record date set for determining stockholders entitled to vote at the annual meeting, for any such stockholder proponent to make nominations or proposals;

•Update the information that a stockholder proponent must provide, including information about a director nominee proposed by such stockholder proponent, information such proponent must provide relating to certain persons acting in concert with such stockholder, and certain written undertakings required from a proposed nominee;

•Require a stockholder proponent to appear in person or by proxy at the meeting set for such proponent’s proposal in order for the proposal to be considered at such meeting;

•Update the record date determination applicable to a meeting of stockholders that has been postponed or adjourned;

•Address recent developments in public company governance;

•Clarify certain corporate roles, responsibilities and procedures; and

•Clarify and conform language, style and practice.

The preceding summary of the amendment and restatement of the Bylaws of the Company is qualified in its entirety by reference to, and should be read in connection with, the complete copy of the Amended and Restated Bylaws attached hereto as Exhibit 3.2.1 and incorporated by reference herein.

108

Item 6. Exhibits



Exhibit Number		Exhibit
3.1		Articles of Amendment and Restatement of the Registrant, effective July 6, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1, filed on August 6, 2008)
3.1.1		Articles Supplementary of the Registrant, effective August 10, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.1, filed on August 6, 2008)
3.1.2		Articles Supplementary of the Registrant, effective August 11, 1995 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.2, filed on August 6, 2008)
3.1.3		Articles Supplementary of the Registrant, effective August 9, 1996 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.3, filed on August 6, 2008)
3.1.4		Certificate of Amendment of the Registrant, effective June 30, 1998 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.4, filed on August 6, 2008)
3.1.5		Articles Supplementary of the Registrant, effective April 7, 2003 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.5, filed on August 6, 2008)
3.1.6		Articles of Amendment of the Registrant, effective June 12, 2008 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.6, filed on August 6, 2008)
3.1.7		Articles of Amendment of the Registrant, effective May 19, 2009 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2009)
3.1.8		Articles of Amendment of the Registrant, effective May 24, 2011 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 20, 2011)
3.1.9		Articles of Amendment of the Registrant, effective May 18, 2012 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2012)
3.1.10		Articles of Amendment of the Registrant, effective May 16, 2013 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2013)
~~3.2.1~~3.1.11		~~Amended and Restated Bylaws~~Articles of Amendment of the Registrant, ~~as adopted~~effective May 16, 2019 (incorporated by reference to the Registrant's Current Report on ~~March 5, 2008~~Form 8-K, Exhibit 3.1, filed on May 17, 2019)
3.1.12		Articles of Amendment of the Registrant, effective June 15, 2020 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on ~~March 11, 2008)~~June 15, 2020)
~~3.2.2~~3.2.1		~~First Amendment to~~ Amended and Restated Bylaws of the Registrant, as adopted on ~~May 17, 2012 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.2,~~ November 3, 2021 (filed ~~on May 21, 2012)~~ herewith )
~~4.1~~31.1		Indenture, dated March 6, 2013, between Redwood Trust, Inc. and Wilmington Trust, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A, filed March 6, 2013).
~~4.2~~	Second Supplemental Indenture, dated August 18, 2017, between Redwood Trust, Inc. and Wilmington Trust, National Association, as Trustee (including the form of 4.75% Convertible Senior Note due 2023) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed August 18, 2017).
10.1*	~~Employment Agreement, by and between Dashiell I. Robinson and the Registrant, dated as of August 8, 2017.~~
10.2*	~~Side Letter Agreement, by and between Dashiell I. Robinson and the Registrant, dated as of August 8, 2017.~~
~~10.3~~	~~Amendment to Advances, Collateral Pledge, and Security Agreement between the Federal Home Loan Bank of Chicago and RWT Financial, LLC, dated as of October 31, 2017.~~
~~31.1~~	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, ~~2017,~~2021, is filed in inline XBRL-formatted interactive data files: (i) Consolidated Balance Sheets at September 30, ~~2017~~2021 and December 31, ~~2016;~~ 2020; (ii) Consolidated Statements of Income (Loss) for the three and nine months ended September 30, ~~2017~~2021 and ~~2016;~~ 2020; (iii) Statements of Consolidated Comprehensive Income (Loss) for the three and nine months ended September 30, ~~2017~~2021 and ~~2016;~~ 2020; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, ~~2017~~2021 and ~~2016;~~ 2020; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2021 and ~~2016;~~2020; and (vi) Notes to Consolidated Financial Statements.
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

______________________

* Indicates exhibits that include management contracts or compensatory plan or arrangements.

109

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				REDWOOD TRUST, INC.

Date:			November 4, 2021	~~REDWOOD TRUST, INC.~~
By:
~~Date:~~	~~November 7, 2017~~	~~By:~~	/s/ ~~Martin S. Hughes~~
			~~Martin S. Hughes~~
			~~Chief Executive Officer~~
			~~(Principal Executive Officer)~~

~~Date:~~	~~November 7, 2017~~	~~By:~~	~~/s/ Collin L. Cochrane~~
			~~Collin L. Cochrane~~
			~~Chief Financial Officer~~
			~~(Principal Financial and Accounting Officer)~~

~~EXHIBIT INDEX~~

Christopher J. Abate

~~Exhibit~~ ~~Number~~			~~Exhibit~~Christopher J. Abate
~~3.1~~				~~Articles of Amendment and Restatement of the Registrant, effective July 6, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1, filed on August 6, 2008)~~
~~3.1.1~~			~~Articles Supplementary of the Registrant, effective August 10, 1994 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.1, filed on August 6, 2008)~~
~~3.1.2~~	~~Articles Supplementary of the Registrant, effective August 11, 1995 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.2, filed on August 6, 2008)~~
~~3.1.3~~	~~Articles Supplementary of the Registrant, effective August 9, 1996 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.3, filed on August 6, 2008)~~
~~3.1.4~~	~~Certificate of Amendment of the Registrant, effective June 30, 1998 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.4, filed on August 6, 2008)~~
~~3.1.5~~	~~Articles Supplementary of the Registrant, effective April 7, 2003 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.5, filed on August 6, 2008)~~
~~3.1.6~~	~~Articles of Amendment of the Registrant, effective June 12, 2008 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, Exhibit 3.1.6, filed on August 6, 2008)~~
~~3.1.7~~	~~Articles of Amendment of the Registrant, effective May 19, 2009 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2009)~~
~~3.1.8~~	~~Articles of Amendment of the Registrant, effective May 24, 2011 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 20, 2011)~~
~~3.1.9~~	~~Articles of Amendment of the Registrant, effective May 18, 2012 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2012)~~
~~3.1.10~~	~~Articles of Amendment of the Registrant, effective May 16, 2013 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on May 21, 2013)~~
~~3.2.1~~	~~Amended and Restated Bylaws of the Registrant, as adopted on March 5, 2008 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.1, filed on March 11, 2008)~~
~~3.2.2~~	First Amendment to Amended and Restated Bylaws of the Registrant, as adopted on May 17, 2012 (incorporated by reference to the Registrant’s Current Report on Form 8-K, Exhibit 3.2, filed on May 21, 2012)
~~4.1~~	Indenture, dated March 6, 2013, between Redwood Trust, Inc. and Wilmington Trust, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A, filed March 6, 2013).
~~4.2~~	Second Supplemental Indenture, dated August 18, 2017, between Redwood Trust, Inc. and Wilmington Trust, National Association, as Trustee (including the form of 4.75% Convertible Senior Note due 2023) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed August 18, 2017).
10.1*	~~Employment Agreement, by and between Dashiell I. Robinson and the Registrant, dated as of August 8, 2017.~~
10.2*	~~Side Letter Agreement, by and between Dashiell I. Robinson and the Registrant, dated as of August 8, 2017.~~
~~10.3~~	~~Amendment to Advances, Collateral Pledge, and Security Agreement between the Federal Home Loan Bank of Chicago and RWT Financial, LLC, dated as of October 31, 2017.~~
~~31.1~~	~~Certification of the~~ Chief Executive Officer ~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
~~31.2~~				~~Certification of the~~	(Principal Executive Officer)

Date:		November 4, 2021		By:	/s/ Brooke E. Carillo
					Brooke E. Carillo
					Chief Financial Officer ~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
~~32.1~~				~~Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~	(Principal Financial Officer)
~~32.2~~				~~Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~
~~101~~Date:		November 4, 2021		Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, is filed in XBRL-formatted interactive data files: ~~(i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016;~~ ~~(ii) Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016;~~ ~~(iii) Statements of Consolidated Comprehensive Income for the three and nine months ended September 30, 2017 and 2016;~~ ~~(iv) Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2017 and 2016;~~ ~~(v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and~~ ~~(vi) Notes to Consolidated Financial Statements.~~ By:	/s/ Collin L. Cochrane
					Collin L. Cochrane
					Chief Accounting Officer
					(Principal Accounting Officer)

110

* Indicates exhibits that include management contracts or compensatory plan or arrangements.

~~105~~



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~~
Mill Valley,	California	94941
(Address of Principal Executive Offices)		(Zip Code)


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



	Page
PART I —	FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at September 30, ~~2017~~2021 (Unaudited) and December 31, ~~2016~~2020	2
	Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020 (Unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020 (Unaudited)	67
	Notes to Consolidated Financial Statements (Unaudited)	79
	Note 1. Organization	79
	Note 2. Basis of Presentation	79
	Note 3. Summary of Significant Accounting Policies	811
	Note 4. Principles of Consolidation	1215
	Note 5. Fair Value of Financial Instruments	1624
	Note 6. Residential Loans	2634
	Note 7. Business Purpose Loans	38
	Note 8. Multifamily Loans	42
	Note 9. Real Estate Securities	2842
	Note ~~8. Mortgage Servicing Rights~~10. Other Investments	3448
	Note 9.11. Derivative Financial Instruments	3650
	Note ~~10.~~12. Other Assets and Liabilities	3852
	Note ~~11.~~13. Short-Term Debt	4054
	Note ~~12.~~14. Asset-Backed Securities Issued	4156
	Note ~~13.~~15. Long-Term Debt	4359
	Note ~~14.~~16. Commitments and Contingencies	4560
	Note ~~15.~~17. Equity	4963
	Note ~~16.~~18. Equity Compensation Plans	5266
	Note ~~17.~~19. Mortgage Banking Activities, Net	5367
	Note ~~18. Investment Fair Value Changes, Net~~20. Other Income	5368
	Note ~~19. Operating~~21. General and Administrative Expenses, Loan Acquisition Costs, and Other Expenses	5569
	Note ~~20.~~22. Taxes	5670
	Note ~~21.~~23. Segment Information	5670
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6175
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	98106
Item 4.	Controls and Procedures	99106

PART II —	OTHER INFORMATION
Item 1.	Legal Proceedings	~~100~~107
Item 1A.	Risk Factors	~~102~~107
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~102~~107
Item 3.	Defaults Upon Senior Securities	~~102~~107
Item 4.	Mine Safety Disclosures (Not Applicable)	~~102~~107
Item 5.	Other Information	~~102~~108
Item 6.	Exhibits	~~103~~109
Signatures		~~104~~110


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

Basic earnings (loss) per common share	$	0.75	$	1.21	$	2.36	$	(5.60)
Diluted earnings (loss) per common share	$	0.65	$	1.02	$	2.03	$	(5.60)
Basic weighted average shares outstanding	112,995,847		113,403,102		112,754,691		113,952,308
Diluted weighted average shares outstanding	141,855,471		141,969,977		141,575,385		113,952,308



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



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



Common Stock, $0.01 par value per share	~~77,114,790~~ 114,674,962	shares outstanding as of November ~~3, 2017~~1, 2021



(In Thousands, except Share Data) (Unaudited)	September 30, 2017			December 31, 2016
ASSETS⁽¹⁾
Residential loans, held-for-sale, at fair value	$	925,681		$	835,399
Residential loans, held-for-investment, at fair value	3,259,239			3,052,652
Real estate securities, at fair value	1,356,272			1,018,439
Mortgage servicing rights, at fair value	62,928			118,526
Cash and cash equivalents	257,611			212,844
Total earning assets	5,861,731			5,237,860
Restricted cash	26,258			8,623
Accrued interest receivable	21,256			18,454
Derivative assets	11,948			36,595
Other assets	209,506			181,945
Total Assets	$	6,130,699		$	5,483,477

LIABILITIES AND EQUITY ⁽¹⁾
Liabilities
Short-term debt ⁽²⁾	$	1,238,196		$	791,539
Accrued interest payable	18,836			9,608
Derivative liabilities	65,238			66,329
Accrued expenses and other liabilities	81,062			72,428
Asset-backed securities issued, at fair value	944,288			773,462
Long-term debt, net	2,574,439			2,620,683
Total liabilities	4,922,059			4,334,049
Equity
Common stock, par value $0.01 per share, 180,000,000 shares authorized; 77,122,687 and 76,834,663 issued and outstanding	771			768
Additional paid-in capital	1,681,968			1,676,486
Accumulated other comprehensive income	82,316			71,853
Cumulative earnings	1,259,408			1,149,935
Cumulative distributions to stockholders	(1,815,823		)	(1,749,614		)
Total equity	1,208,640			1,149,428
Total Liabilities and Equity	$	6,130,699		$	5,483,477


~~(2)~~	~~Includes $250 million of convertible notes, which were reclassified from Long-term debt, net to Short-term debt as the maturity of the notes was less than one year as of April 2017. See~~ ~~Note 11~~ ~~for further discussion.~~


~~(1)~~	~~Amounts are presented net of tax benefit (provision) of zero and $(0.1) million~~ fo~~r the three and nine months ended September 30, 2017, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2016, respectively.~~


~~(2)~~	Interest rate agreements, TBAs, credit default index swaps, and futures are components of derivatives instruments on our consolidated balance sheets. Loan warehouse debt, which is secured by residential mortgage loans, and security repurchase agreements are components of Short-term debt on our consolidated balance sheets.


September 30, 2021	Legacy Sequoia		Sequoia		CAFL SFR		Freddie Mac SLST		Freddie Mac K-Series		Servicing Investment		Point HEI		Total Consolidated CFE VIEs
(Dollars in Thousands)
Residential loans, held-for-investment	$	242,234	$	2,479,750	$	—	$	1,999,405	$	—	$	—	$	—	$	4,721,389
Business purpose loans, held-for-investment	—		—		3,402,410		—		—		—		—		3,402,410
Multifamily loans, held-for-investment	—		—		—		—		482,791		—		—		482,791

Other investments	—		—		—		—		—		187,880		167,442		355,322
Cash and cash equivalents	—		—		—		—		—		12,977		—		12,977
Restricted cash	148		—		—		—		—		19,872		5,033		25,053
Accrued interest receivable	232		7,869		13,451		6,068		1,321		1,068		—		30,009
Other assets	275		—		13,172		1,958		—		6,283		50		21,738
Total Assets	$	242,889	$	2,487,619	$	3,429,033	$	2,007,431	$	484,112	$	228,080	$	172,525	$	9,051,689
Short-term debt	$	—	$	—	$	—	$	—	$	—	$	151,910	$	—	$	151,910
Accrued interest payable	108		5,918		10,691		4,279		1,195		97		—		22,288
Accrued expenses and other liabilities	—		—		224		—		—		15,835		16,740		32,799
Asset-backed securities issued	239,447		2,243,299		3,126,405		1,550,111		451,402		—		145,437		7,756,101
Total Liabilities	$	239,555	$	2,249,217	$	3,137,320	$	1,554,390	$	452,597	$	167,842	$	162,177	$	7,963,098

Fair value of our investments	$	3,062	$	236,451	$	287,813	$	451,252	$	31,389	$	60,238	$	10,348	$	1,080,553
Number of VIEs	20		13		15		3		1		3		1		56



September 30, 2017	Legacy Sequoia		Sequoia Choice		Total Consolidated VIEs
(Dollars in Thousands)	Legacy Sequoia		Sequoia Choice		Total Consolidated VIEs
Residential loans, held-for-investment	$	673,134	$	317,303	$	990,437
Restricted cash	147		—		147
Accrued interest receivable	898		1,266		2,164
REO	3,020		—		3,020
Total Assets	$	677,199	$	318,569	$	995,768
Accrued interest payable	$	540	$	1,045	$	1,585
Asset-backed securities issued	657,960		286,328		944,288
Total Liabilities	$	658,500	$	287,373	$	945,873

Number of VIEs	20		1		21


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



	Nine Months Ended September 30, 2017						Nine Months Ended September 30, 2016
At Date of Securitization	MSRs		Senior IO Securities		Subordinate Securities		MSRs		Subordinate Securities
Prepayment rates	9	%	10	%	10	%	20	%	15	%
Discount rates	11	%	13	%	5	%	11	%	7	%
Credit loss assumptions	N/A		0.25	%	0.25	%	N/A		0.25	%


September 30, 2017	MSRs				Senior Securities ⁽¹⁾			Subordinate Securities
September 30, 2021				September 30, 2021							MSRs			Senior Securities (1)					Subordinate Securities
(Dollars in Thousands)			MSRs				Senior Securities ⁽¹⁾					Subordinate Securities				(Dollars in Thousands)
Fair value at September 30, 2017
Fair value at September 30, 2021											Fair value at September 30, 2021			$	6,068						$	18,380					$	128,874
Expected life (in years)⁽²⁾	7				5						13		Expected life (in years) (2)				2						4						8
Prepayment speed assumption (annual CPR)⁽²⁾	9		%		10		%	11		%	Prepayment speed assumption (annual CPR) (2)		36 %					25		%				32 %
Decrease in fair value from:											Decrease in fair value from:
10% adverse change	$	1,694			$	1,575		$	667		10% adverse change		$	502				$	1,173					$	57
25% adverse change	4,278				3,734			1,683			25% adverse change		1,173					2,789						141
Discount rate assumption⁽²⁾	11		%		9		%	5		%	Discount rate assumption (2)		12 %					18		%				3.8 %
Decrease in fair value from:											Decrease in fair value from:
100 basis point increase	$	2,311			$	1,281		$	25,377		100 basis point increase		$	134				$	417					$	9,353
200 basis point increase	4,453				2,472			47,107			200 basis point increase		261					812						17,829
Credit loss assumption ⁽²⁾	N/A				0.25		%	0.25		%	Credit loss assumption (2)		N/A					0.34		%				0.34		%
Decrease in fair value from:											Decrease in fair value from:
10% higher losses	N/A				$	4		$	1,505		10% higher losses		N/A					$	—					$	2,190
25% higher losses	N/A				9			3,764			25% higher losses		N/A					—						5,473


~~(1)~~	~~Senior securities included $34 million and $27 million of interest only securities at September 30, 2017 and December 31, 2016, respectively.~~


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



September 30, 2017	Range for Securities
Prepayment rates	8%	-	15%
Projected losses	0.25%	-	8%


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

Total Short-Term Debt	$	43,800	$	466,540	$	1,240,601	$	1,750,941



(In Thousands)	September 30, 2017
2017 (3 months)	$	387
2018	1,948
2019	1,987
2020	1,965
2021 and thereafter	11,691
Total Lease Commitments	$	17,978


~~(1)~~	Amounts presented for net unrealized gains on available-for-sale securities are net of tax benefit (provision) of zero and $(0.1) million for the three and nine months ended September 30, 2017, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2016, respectively.



		Amount Reclassified From Accumulated Other Comprehensive Income								Amount Reclassified From Accumulated Other Comprehensive Income
	Affected Line Item in the	Three Months Ended September 30,							Affected Line Item in the	Three Months Ended September 30,
(In Thousands)	Income Statement	2017			2016			(In Thousands)	Income Statement	2021		2020
Net Realized (Gain) Loss on AFS Securities								Net Realized (Gain) Loss on AFS Securities
Other than temporary impairment ⁽¹⁾	Investment fair value changes, net	$	3		$	—
Decrease in allowance for credit losses on AFS securities								Decrease in allowance for credit losses on AFS securities	Investment fair value changes, net	$	—	$	(445)
Gain on sale of AFS securities	Realized gains, net	(856		)	(1,319		)	Gain on sale of AFS securities	Realized gains, net	(6,200)		—

		$	(853	)	$	(1,319	)			$	(6,200)	$	(445)
Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges								Net Realized Loss on Interest Rate Agreements Designated as Cash Flow Hedges
Amortization of deferred loss	Interest expense	$	14		$	18		Amortization of deferred loss	Interest expense	$	1,041	$	1,040
		$	14		$	18				$	1,041	$	1,040


~~(1)~~	~~Includes changes in fair value for associated loan purchase commitments.~~


~~(3)~~	~~Amounts in this line item include other fee income from loan acquisitions and the provision for repurchases expense, presented net.~~


~~(1)~~	~~Loan acquisition costs primarily includes underwriting and due diligence costs related to the acquisition of residential loans held-for-sale at fair value.~~


	September 30, 2021		September 30, 2020
Federal statutory rate	21.0	%	21.0	%
State statutory rate, net of Federal tax effect	8.6	%	8.6	%
Differences in taxable (loss) income from GAAP income	(13.1)	%	(23.6)	%
Change in valuation allowance	(6.8)	%	(4.0)	%
Dividends paid deduction (1)	(4.9)	%	—	%
Effective Tax Rate	4.8	%	2.0	%



	September 30, 2017		September 30, 2016
Federal statutory rate	34.0	%	34.0	%
State statutory rate, net of Federal tax effect	7.2	%	7.2	%
Differences in taxable (loss) income from GAAP income	(6.8	)%	(21.7	)%
Change in valuation allowance	(2.8	)%	6.6	%
Dividends paid deduction	(18.3	)%	(24.9	)%
Effective Tax Rate	13.3	%	1.2	%


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



(In Thousands)	Investment Portfolio		Residential Mortgage Banking		Corporate/ Other		Total
September 30, 2017
Residential loans	$	2,586,105	$	925,681	$	673,134	$	4,184,920
Real estate securities	1,356,272		—		—		1,356,272
Mortgage servicing rights	62,928		—		—		62,928
Total assets	4,236,023		947,503		947,173		6,130,699

December 31, 2016
Residential loans	$	2,261,016	$	835,399	$	791,636	$	3,888,051
Real estate securities	1,018,439		—		—		1,018,439
Mortgage servicing rights	118,526		—		—		118,526
Total assets	3,615,535		866,356		1,001,586		5,483,477



	Three Months Ended			Nine Months Ended
(In Dollars, per share basis)	September 30, 2017			September 30, 2017
Beginning book value per share	$	15.29		$	14.96
Net income	0.41			1.26
Changes in unrealized gains on securities, net from:
Realized gains recognized in net income	(0.03		)	(0.09		)
Amortization income recognized in net income	(0.05		)	(0.15		)
Mark-to-market adjustments, net	0.27			0.47
Total change in unrealized gains on securities, net	0.19			0.23
Dividends	(0.28		)	(0.84		)
Equity compensation, net	0.02			0.01
Changes in unrealized losses on derivatives hedging long-term debt	—			(0.01		)
Other, net	0.04			0.06
Ending Book Value per Share	$	15.67		$	15.67



At September 30, 2017
(Dollars in Thousands)	Fair Value		Collateralized Debt			Allocated Capital		% of Total Capital
Investment portfolio
Residential loans/FHLB stock	$	2,312,195	$	(1,999,999	)	$	312,196	17	%
Residential securities ⁽¹⁾	1,144,397		(370,838		)	773,559		43	%
Commercial/Multifamily securities⁽²⁾	243,071		(178,973		)	64,098		4	%
Mortgage servicing rights	62,928		—			62,928		4	%
Other assets/(other liabilities)	187,325		(53,551		)	133,774		7	%
Cash and liquidity capital						266,746		15	%
Total investment portfolio	$	3,949,916	$	(2,603,361	)	1,613,301		90	%
Residential mortgage banking						170,000		10	%
Total						$	1,783,301	100	%


~~(1)~~	Residential securities presented above includes our $31 million net economic investment in our consolidated Sequoia Choice securitization. This net investment represents the fair value of the securities we retained from this securitization.


~~(2)~~	~~Includes $223 million of multifamily securities and $20 million of investment grade CMBS.~~